NGOs - THE DO AND THE DONTS - Overview by Nik Zafri

Recently, an NGO that became a cooperative and later a business entity was arrested (not for legally collecting humanitarian donations with LHDN approval, but) for investing those funds without proper authorisation. I want to clarify this so people understand how a well-intentioned NGO can still be found guilty of money laundering.

1. Collection of Donations

An NGO that collects donations with approval from LHDN (usually under Income Tax Act 1967 Section 44(6) or via official charitable status) is authorised only for the stated charitable purpose.

The money must be used for that stated purpose e.g., humanitarian aid to Palestine and not diverted for other uses unless approved by the donors or governing committee and compliant with the NGO’s constitution.

2. Investing Donations Without Approval

a) Internal governance: If the NGO invests funds without the prior consent of its committee or in breach of its constitution, that can be a breach of trust under Malaysian law.

b) Criminal aspect: Misuse of charitable funds may fall under Penal Code provisions for criminal breach of trust (CBT).

c) Regulatory aspect: Investing pooled funds in securities or capital markets without licensing can violate Capital Markets and Services Act 2007 (CMSA), which requires:

a. A Fund Manager’s License from the Securities Commission Malaysia (SC).

b. Proper registration, disclosure, and, in certain cases, a prospectus if the fund resembles a collective investment scheme.

3. Why It’s a Big Offense

a) Misappropriation: Using donation money for unauthorised investments even if profits are intended for the cause is treated as diversion of funds.

b) Unlicensed activity: Managing or investing public money without a fund management license is prohibited under CMSA Section 58 and 59.

c) Breach of trust: Trustees, office bearers, or committee members can be held personally liable.

4. Possible Consequences

a) LHDN can revoke the NGO’s tax-exempt status,

b) Securities Commission (SC) can impose fines or imprisonment for unlicensed fund management,

c) ROS (Registrar of Societies) or SSM (if it’s a company limited by guarantee) can deregister the NGO,

d) MACC may investigate if there’s suspicion of corruption or abuse.

In short : Any unlawful activity may be deemed or misconstrued as money laundering.

Bottom line:

Even if intentions are good, NGOs must get written approval from their governing body and comply with LHDN, SC, and ROS/SSM regulations before investing donation money. Otherwise, it’s a high-risk move that can lead to deregistration, legal charges, and reputational damage.