CAN MALAYSIAN BUSINESSES ENGAGE IN CONTRACTS WITH ISRAELI COMPANIES? UNDERSTANDING THE LEGAL AND POLITICAL CONTEXT

The General Rule: A Strict Prohibition

Can a Malaysian company enter into a contract, commercial agreement, or financial transaction with an Israeli company?

Generally, NO.

In 2022, Bank Negara Malaysia issued the Direction on Dealings with Specified Person and in Restricted Currency (“the Direction”), which took effect on 3 January 2022. This regulatory instrument was enacted pursuant to Section 216(1) of the Financial Services Act 2013 (FSA 2013) and Section 227(1) of the Islamic Financial Services Act 2013 (IFSA 2013).

Under both statutes, Bank Negara Malaysia (“BNM”) possesses sweeping statutory powers to issue binding directions to “ANY PERSON” in Malaysia—defined broadly to encompass private individuals, corporations, statutory bodies, societies, and partnerships—to prohibit, restrict, or regulate acts as specified by the central bank.

Severe Statutory Penalties for Non-Compliance

Breaching BNM’s Direction carries severe criminal and financial sanctions under Section 216(4) of the FSA 2013 and Section 227(4) of the IFSA 2013:

Scope of the Prohibition & Who Qualifies as a “Specified Person”

Paragraph 3(1) of the Direction establishes an unequivocal command:

“3. (1) No person in Malaysia shall undertake or engage in any dealing or transaction with or involving a Specified Person.”

Under Paragraph 2 of the Direction, a “Specified Person” is comprehensively defined to include:

• The State of Israel;
• Any citizen or permanent resident of Israel;
• Any corporation or entity incorporated, established, or registered in Israel; and
• Any person or entity owned or controlled, directly or indirectly, by the State of Israel, an Israeli citizen/resident, or an Israeli corporation.

Narrow Exceptions & Mandatory Prior Approval of Bank Negara Malaysia

The prohibition is not absolute. Under Paragraph 4(1) of the Direction, commercial dealings involving a Specified Person may be permitted under strictly limited conditions:

1. International Trade in Goods: Where the transaction is explicitly licensed under the Customs Act 1967, or where it does not involve the physical movement of goods into or out of Malaysia; or
2. International Trade in Services: Where the provision of services is approved in writing by a relevant Malaysian statutory authority, or does not involve the provision of services to or from a person in Malaysia.

The Broader Political, Diplomatic & Historical Context

The BNM Direction directly reflects Malaysia’s longstanding, multi-decade foreign policy and diplomatic stance:

• Non-Recognition Policy: Malaysia maintains a strict policy of non-recognition toward Israel and holds no formal diplomatic or consular ties;
• Trade Embargoes & Passport Invalidation: Beginning in 1974, trade embargoes and entry prohibitions were enacted. Malaysian passports bear the explicit constitutional endorsement: “This passport is valid for all countries except Israel”;
• Port Ban on Israeli Ships (December 2023): Prime Minister Dato’ Seri Anwar Ibrahim announced that all Israeli-flagged vessels—specifically terminating the longstanding 2002 docking authorization for Israeli container liner ZIM Integrated Shipping Services—are barred from docking at Malaysian ports, and all vessels bound for Israel are prohibited from loading cargo at Malaysian maritime terminals; and
• Public Scrutiny & Reputational Exposure: Commercial dealings with Israeli-linked software or enterprise vendors (such as the controversy surrounding Astro and Amdocs in 2014) illustrate the heightened commercial, reputational, and consumer risks associated with transactions in this space.

Conclusion & Compliance Guidance for Businesses

In conclusion, Malaysian businesses are legally prohibited from executing contracts with Israeli entities, save for extraordinary circumstances satisfying Paragraph 4(1) that have received explicit, written pre-approval from Bank Negara Malaysia. Companies must institute thorough Know-Your-Customer (KYC) and beneficial ownership screening across international supply chains, joint ventures, and software licensing agreements to avoid catastrophic financial penalties and criminal exposure under the FSA and IFSA 2013.

Disclaimer: This article is for informational purposes only and does not constitute formal legal advice. For specialized international trade compliance, sanctions review, or Bank Negara regulatory advisory, please contact Hasrina Hakimi Advocates & Solicitors directly.