Malley was recalled to Australia in July 1940, departing China with a note of thanks from May-Ling for his "loyal service" before rejoining the RAAF on active service as a squadron leader in October. He became the Air Force representative at the Combined Operational Intelligence Centre (COIC), Melbourne, a tri-service organisation responsible for intelligence collection, analysis and dissemination. Drawing on his knowledge of Japanese raids on Chinese airfields in the 1930s, Malley visited several RAAF stations in northern Australia to advise on protective measures; it became evident in the wake of the attack on Darwin in February 1942 that none of his recommendations had been implemented. COIC primarily handled naval intelligence, so Army and Air Force participation was part-time initially. By April 1941, Malley had been assigned a full-time role, and the RAAF was maintaining a round-the-clock presence. He was promoted to honorary wing commander in October 1941, and two months later succeeded Commander Rupert Long as Director of COIC. Malley was raised to acting group captain on 1 July 1942, but ill health forced him to relinquish his post on 3 October. He was discharged from the Air Force as medically unfit on 9 June 1943. General Douglas MacArthur praised Malley for his "foresight, planning, and organizational ability". The former aviator went on to work as officer-in-charge of the Chinese section at the Commonwealth Security Service in Canberra from January 1944 to March 1947 as an honorary group captain.