From a DAU professor perspective, based on experience in the area of FMS contracting policy and practice, we would agree with your statement:

"Although it is a cost reimbursable CLIN, I’m assuming the answer [on "up front" Malaysian subcontractor payment] would be no because the prime should only be billing for actual work being completed."

The fact that the prime in this case entered into its own arrangements with their Malaysian subcontractor to pay them "up front" for 30% of subcontract costs was their choice (not DoD's) and, in my view, does not provide a justification for DoD payment of such up front costs.  The prime contractor should be paid based on the terms and conditions of their DoD contract which, as you have noted, would typically involve DoD payment to the prime after the CLIN work is performed, QA'ed, and a DD 250 (or equivalent DoD approval for work performed) is approved.  

Final Thought:  DAU responses like this one are intended to provide useful info but should not be used as the sole basis for decision making by the DoD Component organization(s) involved in a specific matter.