This is the second in a series of 10 articles on cross border transactions and remittances. These articles will explore the rules and regulations that monitor these transactions, the requirements Malaysian individuals or companies must fulfill when undertaking such payments via banks. They will also look into how sufficient the existing systems are in ensuring transparency in cross border remittances and the role banks and financial institutions play in the traceabillity of the funds, and their obligations to their clients in the event of returned remittances.
Today’s article reviews pre-action discovery mechanisms and the circumstances under which banks can be compelled to disclose internal compliance policies, particularly in the event of dubious remittances by a third party. Weekly Echo speaks to legal expert Datuk J Shamesh.
Pre-action discovery and its impact on remittance transparency
At least two cases in Malaysia have set the precedent in the use of pre-action discovery in the Malaysian courts, says lawyer Datuk J.Shamesh, giving them the power to compel banks to disclose sensitive information, even involving their internal compliance procedures, when there is a legitimate legal interest. This mechanism is crucial for ensuring remittance transparency, especially in cross-border fraud investigations.
Q1. How Do Pre-Action Discovery Mechanisms Compel Banks to Disclose Internal Compliance Policies?
Pre-action discovery tools such as Norwich Pharmacal relief and Order 24 Rule 7A of the Rules of Court 2012 enable a party to compel banks (even if not directly involved in a dispute) to disclose key documents or information before a suit is filed. These tools are essential in cases of fraud, asset tracing, or suspicious remittance flows.
Case 1: First Malaysia Finance Bhd v Dato’ Mohd Fathi bin Haji Ahmad [1993] 3 CLJ 329
This case established the Norwich Pharmacal principle in Malaysia, where the court held that a third party (such as a financial institution) can be ordered to disclose information if it was innocently involved in wrongdoing.
Importantly, the court noted that the purpose of disclosure was not to implicate the third party, but to assist in identifying the real wrongdoer or enabling the enforcement of legal rights.
This set a precedent for compelling banks to produce internal policies, KYC (Know Your Customer) records, transaction details, and remittance trails, particularly when they could hold key information relating to questionable cross-border transfers or fraudulent intermediaries.
Case 2: Protasco Bhd v Tey Por Yee & Anor [2021] 6 MLJ 1
The Federal Court clarified the limits of banking secrecy under the Financial Services Act 2013, where Section 133 FSA imposes a duty of confidentiality on banks, but permits disclosure when ordered by a court.
The court reaffirmed that banks can be ordered to produce client-related records or internal documentation when there’s a legitimate need, especially in fraud or corruption investigations.
This case strengthened the ability of courts to order disclosure, even if the bank claims confidentiality. Where suspicious remittance activity is involved, internal compliance frameworks (e.g., AML (Anti-Money Laundering) policies, alerts, audit trails) can be compelled for review.
Q. What are the specific circumstances when banks can be compelled to disclosures?
Having embraced pre-action discovery under both common law (Norwich Pharmacal) and statutory rules (Order 24 r 7A), Malaysian courts can extend disclosure orders to banks, especially when there is evidence of fraud or money laundering, when funds have passed through third-party bank accounts or when internal compliance failures are suspected or doubts have been raised on internal compliance.
Q. Will Such Disclosures Raise Corporate Clients’ Confidence in Banks?
The effects are positive if banks comply transparently. Corporates may gain confidence that banks support lawful investigations. This would encourage compliance accountability and good governance by banks.
It would also reinforce the idea that banks are not safe havens for fraudulent remittances.
However, when banks resist or disclose inconsistently, the outcomes could be negative. These include the the risk of eroding trust in the banking sector’s transparency, while corporate clients may fear selective disclosures or weak internal controls.
If applied consistently, disclosures can increase corporate clients’ trust in the financial system, reinforcing that banks are not above scrutiny, and are active partners in the fight against financial crime.
— WE