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Overseas business risk for Malaysia

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Overseas business risk for Malaysia

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

1.Political

Malaysia is a Federation of 11 Peninsular states (formerly British Malaya), Sabah, Sarawak (Eastern Malaysia), and three Federal Territories, formed in September 1963. Its government system closely mirrors the UK Westminster model, with a bicameral Parliament, Prime Minister and Cabinet, a constitutional monarchy with the Agong (King) as head of state, and a common law legal system. The Agong is appointed in a 5-year rotation through a Council of Rulers made up of 9 state Sultans.

Muslims are additionally governed by Shariah laws under the purview of the Sultans at state level, while indigenous peoples in Sabah and Sarawak are additionally governed by Native (Custom) Laws. Malays are defined in the Constitution as practising the religion of Islam, habitually speaking Malay language and conforming to Malay customs (Article 160).

Since independence, Malays and other indigenous peoples (together called Bumiputera) have formed the majority of the population (currently 69.6%, with Chinese 22.6%, Indians 6.8%, other races (citizens) 1.0% and non-citizens 9.06%).

A combination of Constitutional guarantees (Article 153) and affirmative action in successive National Economic Policies has 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 mostly ethnically based.

From Malaya’s independence from the UK in 1957 until May 2018, Malaysia was governed by the Barisan Nasional (BN) coalition, which is dominated by the United Malays National Organisation (UMNO), and champions Malay rights and privileges.

However, a coalition of opposition parties and defectors from UMNO (Pakatan Harapan - PH) won the May 2018 election in a landslide.

The PH government lasted 22 months, from February 2020 to November 2022; it was brought down by a parliamentary realignment, which saw Malay nationalists withdraw their support from PH. The Prime Ministership was then held by Bersatu’s Muhyiddin Yassin (March 2020 to August 2021) and UMNO’s Ismail Sabri Yaakob (August 2021 to November 2022).

A general election was held on 19 November 2022. This resulted in Malaysia’s first-ever hung parliament, necessitating formation of a ‘unity’ government, which included PH, UMNO, and Sarawak and Sabah parties (GPS and GRS respectively), led by Anwar Ibrahim. The current opposition consists of Malay nationalists in Bersatu and the Islamist party PAS (who are the largest single party in Parliament).

2.Economy

Malaysia is the fifth largest economy in Southeast Asia (SEA) (2023: US$ 447bil), with a GDP per capita of US$ 12,364 (source: IMF). It is the third richest country in the region and has an average growth of 5.4% since 2010 (source: World Bank). Inflation has been stable, averaging around 2.0% over the past decade and unemployment rate averages around 3.3%, but Malaysia ranks 55th in the World Bank’s Human Capital Index. Malaysia’s ambition is to become a high-income economy by 2026.

The Covid-19 pandemic has affected vulnerable households, income inequality and labour market behaviours. 5.6% of Malaysian households lived in absolute poverty in July 2020 (source: DOSM). The Government is currently focused on digitalizing its economy and automating its industries to resolve challenges.

Malaysia is open to trade and investments. It ranked 32nd in the 2022 IMD World Competitiveness Report and 12th in the 2020 World Bank’s ‘Ease of Doing Business’ report. Trade to GDP ratio has averaged over 130% since 2010 (source: World Bank) and Malaysia has recently ratified the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP).

Malaysia is also a key link in the global semiconductor supply chain accounting for 13% of global chip assembly, testing and packaging, with 7% of the world’s semiconductor trade passing through the country (source: Reuters). It is also the largest rubber gloves producer, with an estimated 65% global market share (source: Business Times).

Fiscally, the space is limited and Malaysia is determined to maintain its consolidation plans. In 2022, fiscal deficit was 5% of the GDP and government’s debt stood at 60.4% of GDP (slightly above its ceiling of 60%). According to the OECD, Malaysia’s tax-to-GDP ratio of 11.4% (2020) - below the Asia Pacific average of 19.1% and OECD’s 33.5%. The Government continues to face challenges in expanding its tax base and reducing its reliance on the oil and gas sector for revenues. Analysts continue to speculate around the reimplementation of a Goods and Services Tax (GST), but action will depend on domestic political sentiment. Corporate tax is presently at 24%, and Malaysia has committed to implement the OECD’s Global Minimum Tax (GMT) by 2024.

There are growing opportunities for UK businesses to leverage their expertise in the education, digital technology, infrastructure, and healthcare sectors.

3.Human rights

Human rights are enshrined in Malaysia’s constitution; however, certain laws limit civil rights (for e.g. LGBT+ individuals and on freedom of expression). Restrictions also exist on the rights of migrant workers and refugees, and freedom of religion (e.g. against proselytisation to Muslims). Human rights have historically been viewed as ‘Western’ values that conflict with Asian/Islamic/Malaysian values.

There is discrimination against LGBT+ individuals under both federal and state Shariah Laws. Religious authorities target this community (reasoning that punishments will make them repent), and their actions are often backed by the public. Politicians periodically push for harsher sentences against LGBT individuals, but so far, these efforts have not been successful.

There are restrictions on freedom of expression as most media groups are government controlled or exercise self-censorship. Newspapers (including their digital platforms) and broadcasters require a printing permit/license from the Home Affairs Minister. Formation of new societies and political parties also requires Home Ministry approval. Malaysia does however have a vibrant online media and political blogging culture. There have been arrests and prosecutions of social media users for criticising Malaysian royalty.

Freedom of assembly is 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 5-days prior to the assembly and may impose conditions on organisers.

The Government has ratified seven out of eight of the International Labour Organization’s Fundamental Conventions. 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, manufacturing, the fishing industry, and domestic households. Malaysia remains in Tier 3 of the US State Department’s Trafficking in Persons report (TIP). Since 2020 various Malaysian companies particularly in the rubber glove manufacturing and palm oil sectors have been subject to US CBP Withold Release Orders (though most have since exited from WRO restrictions)

Malaysia is not party to the 1951 Refugee Convention and does not have an asylum system in place to regulate the status and rights of refugees. Refugees are unable to work legally.

In April 2023, the Malaysian Parliament approved the abolition of the mandatory death penalty for 11 serious crimes, including murder, drug trafficking, treason (offences against the person of any Malaysian federal or federated head of state), kidnapping, acts of terror and firearms (including explosives) offences. Once the bill comes into force, those on death row will have 90-days to file for a review of their sentences, but not their convictions.

However, courts will still have the power to uphold a death penalty after review, and the option of sentencing to death will remain at judges’ discretion.

Malaysia also has a moratorium on the death penalty and the last execution was carried out in May 2017 on an individual convicted of armed robbery.

4.Bribery and corruption

Overseas companies investing in Malaysia face several business risks related to bribery and corruption.

In 2022, Malaysia was ranked 61 (out of 180 countries) in the Transparency International’s Corruption Perceptions Index with a score of 47/100. In recent years, several high-profile corruption cases have also been reported. This has drawn widespread attention in Malaysia and around the world and contributed to a growing demand for greater transparency and accountability in the country.

4.1The country is a signatory to the following agreements:

Malaysia ratified the UNCAC in 2008 and has since implemented a range of measures to comply with its provisions, including the establishment of an independent anti-corruption agency (MACC), and the enactment of several laws and regulations aimed at combating corruption.

Overseas companies in Malaysia face the following risks related to bribery and corruption :

  • legal and regulatory risks
  • financial risks
  • operational risks
  • reputation risks
  • compliance risks

To mitigate these risks, overseas companies should implement robust anti-corruption policies and procedures, conduct due diligence on business partners and third-party agents, and provide regular anti-corruption training to employees. Companies should also be prepared to report any suspected cases of bribery and corruption the relevant authorities and cooperate fully with investigations. By taking these steps, overseas companies can reduce their exposure to corruption risks and ensure that they are operating in an ethical and sustainable manner in Malaysia.

Under the UK Bribery Act 2010, 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 pay or solicit a 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.

5.Terrorism threat

Refer to the latest travel advice for Malaysia from the Foreign, Commonwealth and Development Office.

6.Protective security advice

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

7.Maritime (Port Security)

Malaysia is a signatory to the International Convention for the Safety of Life at Sea (SOLAS), 1974 and as such the International Ship and Port Facility Security Code (ISPS) 2004. International port security is regulated by the Marine Department (Ministry of Transport) – ‘Jabatan Laut Malaysia’.

8.Intellectual Property

Intellectual Property Rights (IPR), as intangible assets, are a key factor in the competitiveness of your business in the global economy. IPR can protect your innovation from competitors and can be an important source of cash flow through licensing deals or selling IP. IPR infringement can lead to loss of business, revenue, reputation and competitive advantage unless you take steps to protect your IP both in the UK and abroad.

When exporting to Malaysia, it is essential to register your rights in Malaysia as soon as possible in order to be able to defend and enforce them. IP rights are territorial in nature, which means that registrations in the UK or another country’s jurisdiction are not automatically enforceable in others.

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 Agreement on Trade Related Aspects of Intellectual Property Rights (TRIPS) signed under the auspices of the World Trade Organisation (WTO).

It is a signatory to a number of international intellectual property (IP) treaties administered by the WIPO:

  • the Paris Convention - protection of industrial property
  • the Berne Convention - relating to the protection of copyright and
  • the Patent Cooperation Treaty (PCT) - provides for a common patent filing system
  • the Madrid Agreement – relating to registration of trade marks to obtain protection in multiple export markets

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.

8.1IP top tips for businesses

  • Malaysia is part of the ASEAN Patent Examination Co-operation (ASPEC), a regional patent work-sharing programme among 9 participating ASEAN member States (AMS). The purpose of this programme is to share search and examination results between the participating offices to allow applicants in participating countries to obtain patents faster and more efficiently. ASPEC is free of charge and operates in English
  • the Intellectual Property Corporation of Malaysia (MyIPO) have signed MOUs with the European Patent Office and Japan Patent Office to pursue collaboration on IP systems and practices
  • MyIPO and the Korean Intellectual Property Office have initiated a new bilateral patent prosecution highway pilot programme to accelerate examination of patent application
  • there is no customs record system in Malaysia. It is not possible to register IP with customs for detaining counterfeit products
  • companies may use a reputable lawyer to assist with registering or contact MyIPO
  • businesses are generally encouraged to learn more about IP issues relevant to their specific industry sector and to consider defensive measures early in their plans to enter the Malaysian market
  • the UK Intellectual Property Office has an IP attaché based in Singapore with specific focus on providing support and advice to UK companies in Indonesia

9.Organised crime

The Malaysian Government has stated its commitment to improve both its physical and technological capabilities in order to address transnational crime.

Transnational crime networks are active in the fields of counterfeiting goods, credit card fraud, human trafficking, prostitution, and smuggling. International co-operation on crime is good. Since 2011, a Mutual Legal Assistance Treaty and a Memorandum of Understanding on Transnational Crime between Malaysia and the UK has provided for cooperation and the effective gathering of evidence in criminal matters.

There is evidence that organised crime syndicates are involved in human trafficking into and through Malaysia and that this activity is facilitated by corrupt officials. Illegal immigrants to Malaysia risk ending up working as forced labour or as prostitutes. The US State Department’s 2022 Trafficking in Persons Report placed Malaysia in the Tier 3for a second consecutive year largely due to failure to tackle the underlying issues, protect victims and prosecute offenders. However it also notes that the government is making significant efforts to meet the minimum standards for the elimination of trafficking, including through important legislative changes.

Cyber security is a key issue for the Government which established its National Cyber Security Agency (NACSA) in 2017 and in 2020 launched a comprehensive strategy with significant investment to improve Malaysia’s cyber security preparedness over the next 5 years.

Although some increase in sea piracy has been seen in waters around Malaysia, including the Malacca Strait and Sulu Sea, incidents have mostly been low level and opportunistic rather than organised.

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