A Review Paper: Anti-Money Laundering / Countering Financing of Terrorism (AML/CFT) and Its Effect on the Adoption of Online Payment in Malaysia

Abstract

Introduction: The increasing adoption of online payment systems in Malaysia has raised critical concerns about balancing financial innovation and BNM regulatory compliance. Anti-money laundering and Countering the Financing of Terrorism (AML/CFT) regulations play a significant role in protecting and securing Malaysia's banking system and the national financial ecosystem, keeping it safe from illegal activities such as money laundering (ML) and terrorism financing (TF). However, this regulatory framework can be costly for businesses to comply with and may slow the growth of digital payments. This review examines how AML/CFT regulations affect the adoption of online payments in Malaysia, focusing on challenges such as the cost of compliance, the impact on customer experience, and how financial institutions adapt through AI technology. This paper highlights the difficulties and opportunities these regulations create by examining the relationship between these factors. Using advanced technologies, such as RegTech, and introducing more flexible rules can reduce compliance challenges while encouraging the growth of online payment systems. This study applies the Diffusion of Innovation Theory (DIT), Institutional Theory (IT), and Technology Acceptance Model (TAM) to the scenario, considering BNM (Tom) as the regulator and informal financial operators as the "Hawala" operator network (Jerry) within the context of TAM and DIT. This framework analysis will recommend balancing compliance implementation with innovation.

Objectives: The current AML/CFT compliance framework in Malaysia primarily focuses on the online payment landscape, predominantly targeting large financial institutions, which overlooks small players such as bank and non-bank service providers. The existing policy needs to comprehensively examine how AML/CFT regulations uniquely affect both groups regarding compliance costs and operational challenges in corporate governance practices. Furthermore, there is a need to explore how AML/CFT requirements impact the adoption of online payments, especially concerning customer experience and retention during flight, cargo, and car service onboarding. The AML/CFT policy should be expanded to other departments, such as the Immigration Department, Customs Department, Royal Malaysia Police, and related government agencies (Bank Negara Malaysia MSB Act 2020). To fill these gaps, this research critically examines the effects of regulation, especially KYC, CDD, and Enhanced CDD, and identifies the end Beneficial Owner (BO) of the online payment process. This study will also explore how realignment or re-licensing mitigates loopholes in grey areas, particularly in the KYC process when customers approach operators to perform transactions.

Methods: This study adopts a mixed-methods approach to assess the impact of AML/CFT regulations on online payment adoption in Malaysia. The research integrates qualitative and quantitative data collection to comprehensively understand compliance challenges, financial institution adaptation strategies, and consumer behaviour.

Results: This study conducts comprehensive analyses by utilizing interviews and field studies, which can be time-consuming and require additional financial resources and costs during lunch, dinner, or tea-break interview sessions. These constraints necessitate additional timeframes and extra financial budgeting to meet the threshold throughout the survey or interview process until completed within the timeframe. Results of the survey or interview on  AML/CFT compliance require data analysis, compliance costs, customer experience, and adoption rates during the survey and interview sessions.

Conclusions: The adoption of online payments in Malaysia is significantly influenced by AML/CFT regulatory requirements, which aim to protect the financial ecosystem from illicit activities.