By Iva Karen
KUALA LUMPUR, July 1: In Malaysia’s increasingly complex corporate and financial landscape, due diligence has become far more than a checklist — it is a frontline defence for company directors, financial institutions, and investors alike.
The failure to conduct proper due diligence not only risks financial loss but can also lead to personal liability, reputational damage, and legal consequences under the Companies Act 2016.
Corporate lawyer Datuk J. Shamesh emphasizes that directors are legally bound under Sections 213 and 218 of the Act to act in good faith, exercise reasonable care, and prioritize the best interests of their company.
He said, breaches of these duties, whether through reckless actions, poor judgment, or intentional omission of critical information, may strip directors of legal protection and expose them to personal lawsuits for damages.
While the business judgment rule under Section 214 provides a layer of protection for directors who act responsibly, it is not a free pass.
He said, the rule only applies when decisions are made with informed judgment, without conflicts of interest, and in the belief that the decision benefits the company.
“Directors who ignore legal red flags, dismiss expert advice, or pursue transactions with hidden motives may find themselves legally cornered. Such caution is especially critical in high-stakes transactions like mergers and acquisitions,” he said.
Shamesh added that key red flags, such as hidden legal liabilities, compliance issues, or undisclosed related-party dealings, can cause a deal to backfire, and directors will have little defence if they are found to have overlooked them.
Meanwhile, financial crimes investigator Muhamad Nazri Shaidon, said Malaysian banks are tightening their Enhanced Due Diligence (EDD) procedures, particularly for high-risk clients such as Politically Exposed Persons (PEPs), individuals from sanctioned jurisdictions, and those with opaque ownership structures.
He said, EDD requires more than basic KYC (Know Your Customer) compliance and banks now collect in-depth documentation, scrutinize the source of funds, and often conduct physical checks and third-party verifications before onboarding a high-risk client.
“Approval from senior management is mandatory, and frequent transaction monitoring is standard. EDD isn’t an invasion—it’s a protective measure. It prevents the banking system from being hijacked for money laundering, terrorism financing, or fraudulent schemes.
“Banks also screen accounts against international sanctions lists, with immediate action required if a client matches any listing, reinforcing Malaysia’s alignment with global anti-financial crime standards set by the Financial Action Task Force (FATF),” he said.
Meanwhile, Raymon Ram, a financial forensics expert said that fight against suspicious financial activity continues with vigilance.
He said banks no longer rely solely on large transaction thresholds to flag potential crimes.
“With AI-driven monitoring systems in place, even small or unusual transaction patterns can trigger alerts, especially when attempts are made to “structure” funds to avoid detection.
Red flags include rapid movement of money, sudden spikes in account activity, and inconsistent geolocation signals that may indicate fraud or account hijacking.
“Structuring, where large sums are split into smaller, rapid transfers across accounts, is a common tactic used to evade financial scrutiny,” he said added that banks are empowered to file a Suspicious Transaction Report (STR) even without a minimum amount—reasonable suspicion alone suffices.
He said, once a transaction is flagged, the case is escalated to internal compliance and legal teams, and if necessary, the account can be frozen pending investigation.
He said, the process is rigorous but necessary in a world of increasingly sophisticated financial crimes.
The evolution of financial and corporate due diligence in Malaysia is not just a regulatory response — it’s a reflection of a changing risk landscape. Directors, investors, and institutions must recognize that shortcuts, ignorance, or complacency can carry steep costs—not just for their companies, but for themselves personally.
Due diligence is therefore a shield—against liability, against financial fraud, and against reputational collapse.
–WE