Overseas Business Risk – Malaysia

Information on key security and political risks which UK businesses may face when operating in Malaysia

Political and Economic

Check out the latest political and economic updates on Malaysia

Malaysia is a Federation made up of 13 states and three Federal Territories. Its government system closely mirrors the Westminster model – bicameral Parliament, Prime Minister and Cabinet executive, constitutional monarchy with Agong as head of state, common law legal system. Although it has a written Federal Constitution and also practices separation of powers, the executive holds most of the power.

The 13th General Election must be held by 27 June 2013 but Prime Minister Najib is widely expected to call for an election before the end of 2012.

Ethnic politics

Since independence, Malays and other indigenous peoples (together called bumiputera) have formed the majority of the population (current racial breakdown:  Malays 50.4%, indigenous peoples 11%, Chinese 23.7%, Indians 7.1%, others 7.8%). But much of the wealth has historically been held by the Chinese. A combination of Constitutional guarantees (Article 153) and affirmative action in successive National Economic Policies sought to raise the economic wealth of the bumiputera. This has happened to a degree, but many Malays, particularly in rural areas, remain relatively poor.

Political parties in Malaysia are almost universally ethnically based. The current government Barisan Nasional (BN) is a coalition of 13 ethnic-based parties led by the country’s dominant party, the United Malays National Organization (UMNO). The President of UMNO always becomes Prime Minister. BN has governed Malaysia for the past 54 years since independence. BN has historically been able to rely on ethnic vote banks, marshalled by the respective ethnic parties, to deliver election victories, backed up by huge sums doled out in patronage through the ethnic parties. Opposition to BN has consisted largely of mirror image ethnic parties which have offered little alternative to voters other than that they are not BN. Before 2008 they had little success in elections.

But the general election held in March 2008 was unprecedented. Opposition leader Anwar Ibrahim and his coalition of Pakatan Rakyat (PR) component parties won control of five state governments and denied BN its traditional 2/3 Parliamentary majority needed for major legislative amendments including to the Federal Constitution. Peninsular Malaysia was split almost 50/50 between BN and PR. It was BN’s dominance in Sabah and Sarawak which delivered BN its overall parliamentary majority, and which makes Sabah and Sarawak significant in the balance of power.  Resulting from this is a fluid and uncertain political climate with both sides of the divide reassessing their strengths and weaknesses in advance of the elections.

The 2008 Election results showed that BN lost most of its  Chinese and Indian support and some Malay support especially in urban areas. The outcome was that BN faced a credible opposition in Parliament for almost the first time. The result has been an increasing polarisation of Malaysian politics, mainly along racial lines. Many Chinese and Indian Malaysians (and some liberal Malays) are disenchanted with BN and want a signification reduction, if not abolition, of the preferential economic treatment of bumiputera, and a meritocracy. At the other pole, there has been a rise in Malay lobby groups, notably PERKASA, demanding more protection/privileges. The challenge faced by Prime Minister Najib and his ruling coalition, is that they must appeal to both these groups in order to secure a convincing victory in the election.

State assemblies

Political power operates at two levels: federal and state. State assembly elections are traditionally held simultaneously with general elections (with the exception of Sarawak). State assemblies are subordinate to the Federal Parliament. But some powers, including authority to decide land use, are devolved to state assemblies.

Malaysia is one of South East Asia’s more successful economies and one of UK Trade and Investment’s High Growth Markets. Recent growth has raised GDP per capita income to US$14,700 (source: International Monetary Fund) in 2010 transforming a commodities-based economy into one with a large, export-orientated manufacturing sector. Following the financial crisis of 1997-1998 the economy has continued to grow robustly since then: 5.1% recorded in 2011. The services sector is increasingly important; while both commodities (palm oil and rubber) and oil and gas remain substantial sectors.

Since the Asian financial crisis, Malaysia has made good progress in reforming its banking and financial system. Local banks have been consolidated and there is phased liberalisation to allow greater competition. Malaysia has developed its Islamic Finance capability and is now a major hub in the Asia Pacific region. The Government has also progressively dismantled the exchange and other controls imposed during the Asian Financial Crisis – including abandoning the Ringgit peg to the dollar in July 2005 in favour of a managed float.

The chief economic reform challenges facing Malaysia now are to improve the performance of Government Linked Companies (which still account for a large part of the economy); to achieve further progress in corporate governance and transparency, and to move up the value chain in response to the economic challenge posed by China and other low-cost manufacturing economies. The administration has made some changes to improve financial and political accountability, and is seeking to improve Malaysian competitiveness in sectors such as biotechnology.

More information on political risk, including political demonstrations, is available in the FCO Travel Advice.

Human Rights

Human rights are enshrined in Malaysia’s constitution; however, certain laws limit civil rights such as the freedom of speech and assembly. Restrictions also exist on the rights of migrants, including migrant workers and refugees, and freedom of religion.

There are restrictions on freedom of expression as most media groups are government controlled or government friendly and exercise a large degree of self-censorship. Newspapers require a printing permit from the Home Affairs Minister. Malaysia does, however, have a vibrant online media and political blogging culture, and the government does not attempt to censor the internet.

Citizens have the right to assemble peaceably, but are subject to restrictions deemed necessary by the Government in the interest of public order and security. Since the Peaceful Assembly Act came into force in April 2012, police permits are no longer required for assemblies, though police must still be notified prior to the assembly and may impose conditions on organisers.

The Government has ratified six out of eight of the International Labour Organization’s Fundamental Conventions but not the Abolition of Forced Labour Convention. Although the constitution prohibits slavery and all forms of forced labour, occurrences of forced labour, particularly among migrant workers, continue to be reported in various sectors, including commercial agriculture, the fishing industry, garment production, restaurants, and domestic households. Malaysia is not party to the 1951 Refugee Convention and does not have an asylum system in place regulating status and rights of refugees in Malaysia. Refugees are unable to work legally.

Bribery and Corruption

Bribery is illegal. It is an offence for British nationals or someone who is ordinarily resident in the UK, a body incorporated in the UK or a Scottish partnership, to bribe anywhere in the world.

In addition, a commercial organisation carrying on a business in the UK can be liable for the conduct of a person who is neither a UK national or resident in the UK or a body incorporated or formed in the UK. In this case it does not matter whether the acts or omissions which form part of the offence take place in the UK or elsewhere.

The ruling coalition, the Barisan Nasional (BN), and in particular the largest component party, United Malays National Organisation (UMNO) is regularly confronted by charges of corruption from the opposition. Allegations have included the use of "money politics" to secure positions within the party, as well as the distribution of government contracts to cronies and political allies.

Many major companies in Malaysia are GLCs (Government Linked Companies). These are companies in which the government maintains equity holdings and are often the preferred vehicle for implementing government projects, albeit with foreign partners. This has resulted in accusations of anti-competitiveness from some quarters and allegations that revenue is used to fund political activities. The PM has recently addressed these allegations by announcing a programme of closer private sector collaboration and a divestment of assets.

Najib’s predecessor as Prime Minister, Abdullah Badawi, embarked on his tenure with a drive to improve the standing of his party by launching a "National Integrity Plan" in 2004. The plan consisted of 5 key objectives:

  • to reduce corruption and the abuse of power

  • to increase the efficiency of public service delivery

  • to enhance corporate governance

  • to strengthen the family

  • to improve citizens’ quality of life.

The Malaysian Anti-Corruption Commission (MACC) was formed on 1st January 2009 modelled on Hong Kong’s Independent Commission Against Corruption and replacing the previous Anti-Corruption Agency. The Commission has launched a number high profile investigations since its formation.

Malaysia was ranked 60 (of 182) in Transparency International’s corruption perception index in 2011.

The country is a signatory to the UN Convention against Corruption, the UN Convention against Transnational Organised Crime and the ABD-OECD Plan for Asia-Pacific. It was named on an OECD blacklist of uncooperative tax havens at the 2009 G20 summit but has since been removed following agreement to implement OECD recommendations.

Visit the Business Anti-Corruption portal page providing advice and guidance about corruption in Malaysia and some basic effective procedures you can establish to protect your company from them.

Read the information provided on our Bribery and corruption page.

Terrorism Threat

There is a generalised threat in Malaysia from both terrorism and kidnapping. Terrorist threats come predominantly from the al-Qa’ida-linked Islamist group Jemaah Islamiyah (JI) who remain active in Malaysia, as well as from other groups such as the Abu Sayyaf Group (ASG) who are based in the southern Philippines but operational in Malaysia. Although the Malaysian government has been effective in reducing the terrorist threat posed by JI, the threat from indiscriminate terrorist attack remains. There is also potential for spill over from the insurgency in southern Thailand to spill over the border into Malaysia.

In particular, there is a general threat from kidnapping by both terrorist and criminal groups. The threat is higher in Borneo than in peninsular Malaysia. JI regards the peninsula as an area for recruitment and fundraising as opposed to Borneo which has served as a facilitation centre and location for kidnappings. ASG also kidnaps for ransom, but its targets to date have been predominantly locals rather than expatriates.

Read the information provided on our Terrorism threat page

Protective Security Advice

The Centre for the Protection of National Infrastructure also provides protective security advice to businesses

Intellectual Property

Intellectual property protection in Malaysia comprises that of patents, trademarks, industrial designs, copyrights, geographical indications and layout designs of integrated circuits. Malaysia is a member of the World Intellectual Property Organisation (WIPO) and a signatory to the Paris Convention and Berne Convention which govern these intellectual property rights.

In addition, Malaysia is also a signatory to the Agreement on Trade Related Aspects of Intellectual Property Rights (TRIPS) signed under the auspices of the World Trade Organisation (WTO). Therefore, Malaysia’s intellectual property laws are in conformance with international standards and provide adequate protection to both local and foreign investors, although as in many countries there can be problems with enforcement.

Read the information provided on our Intellectual Property page.

Organised Crime

Cigarette smuggling in shipping containers from Malaysia’s commercial ports represents the major organised crime threat to the UK. This underpinned the UK’s  decision to post a Senior Investigator from HM Revenue & Customs to Malaysia in 2010. Malaysia also has a considerable domestic cigarette smuggling problem with market penetration of illicit brands standing at almost 40%. Recent ratification of a Mutual Legal Assistance Treaty between Malaysia and the UK provides for effective gathering of evidence in criminal matters. International co-operation on crime issues is good and expected implementation of the (currently negotiated) Memorandum on Transnational Crime will improve even further the exchange of information on a wide range of organised crime issues.

Indigenous crime syndicates are limited in size although trans-national crime networks are active in the fields of counterfeiting goods and credit cards, human trafficking, prostitution and smuggling. Piracy has effectively been eradicated in the Straits of Melaka since the establishment of the Malaysian Maritime Enforcement Agency in 2004 although there are indications that small scale activities are beginning to return, particularly off the coast of Sabah.

There is evidence of growing human trafficking into and through the country particularly into Sabah from the Philippines. Illegal immigrants frequently end up working as indentured labour or as prostitutes. The State Department’s 2011 Trafficking in Persons Report places Malaysia on the Tier 2 Watchlist. Security at the borders has been tightened by the introduction of biometric controls at entry points and the deployment of army patrols along borders. Improvements in both the numbers of personnel and the assets of the MMEA have strongly reinforced the country’s maritime borders.

The government is working hard to improve both its physical and technological capabilities in order to address a growth in transnational crime. The numbers of police on the streets in urban areas has grown visibly over the past year and the number of reported criminal incidents has fallen markedly in line with key performance indicators set by the PM. The government is reaching out to other nations to cooperatively tackle trans-border crime and signed a Memorandum of Understanding on Transnational Crime with the UK in 2011. Cybersecurity is a key issue for the government.

Read the information provided on our Organised crime page.

More information is available on overseas business risk in a range of markets.

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Countries: Malaysia
Topics: Insurance & Risk
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