The disputed waters lie close to the Sipadan and Ligitan islands, which Indonesia lost to Malaysia in a legal battle in the International Court of Justice in December 2002.
the Sipadan and Ligitan islands are part of Malaysia
The context only states the waters were lost to Malaysia. We don't know who the islands actually belong to. The system likely assumed because the waters belong to the country, so do the islands. But we can't be sure. 
( z1 have-part :ARG1 ( z2 country :name ( z3 name :op "Malaysia" ) ) :ARG2 ( z4 and :op ( z5 island :name ( z6 name :op "Sipadan" ) ) :op ( z7 island :name ( z8 name :op "Ligitan" ) ) ) )