CBSL’s Financial Intelligence Unit battling to keep Sri Lanka away from ‘black and grey’ lists

By Sanath Nanayakkare

The Next Mutual Evaluation of the Financial Action Task Force (FATF), the global money laundering and terrorist financing watchdog has begun to creep up on Sri Lanka, and the Financial Intelligence Unit (FIU) of the Central Bank of Sri Lanka (CBSL) is busy taking on the gigantic challenge of effectively implementing a compliance framework to convince the FATF that Sri Lanka qualifies to stay away from their black and grey lists.

The framework also needs to include ways to prevent Financing of Proliferation of Weapons of Mass Destruction.

Dr. Subhani Keerthiratne, Additional Director, Financial Intelligence Unit (FIU) of the Central Bank of Sri Lanka told the media recently that Money Laundering and Terrorism Financing (ML and TF) pose serious risks to the domestic and global financial system, peace and development, and therefore, it is important for Sri Lanka to have a robust Anti-Money Laundering and Countering the Financing of Terrorism (AML/CFT) framework in place. FATF calls upon all countries to effectively implement these measures in their national systems. These requirements are in line with the United Nations Convention and The International Convention for the Suppression of the Financing of Terrorism,” she pointed out.

“The 3rd Mutual Evaluation of Sri Lanka in this regard is scheduled to commence in March 2025 and all stakeholders need to unite with a national spirit to demonstrate that Sri Lanka has strong measures in place to combat money laundering and terrorist financing. The FIU alone can’t achieve this. It has to be a concerted effort of all stakeholders, the media and the general public. Responsible parties need to apply enhanced due diligence to apply counter-measures to protect the international financial system from the risks that could emanate from our country,”

The Additional Director of the FIU made these remarks at a workshop conducted for journalists with the objective of creating broader awareness of money laundering and terrorist financing risks while asking the media to take the message across to the general public of the country who could effectively support the FIU and the law enforcement authorities to detect and crack down on the culprits engaging in such activities.

FATF sets international standards that aim to prevent such illegal activities and the harm they cause to society and the FIU has to demonstrate its technical compliance of International standards on combatting Money Laundering and Financing of Terrorism and Proliferation.

This means the FIU will have to set standards and promote effective implementation of legal, policy and operational measures to combat ML/TF/PF, both at national and international level.

The FIU, as the focal point of AML/CFT for the country, has the responsibility to ensure that Sri Lanka is compliant with all 40 FATF Recommendations and its AML/CFT framework produces expected results. FIU has played a key role in achieving the current acceptable technical compliance level of Sri Lanka in order to stay away from the Grey List.

The FATF does not require its members to take action on countries listed in the ‘Grey List’. Members are required to take action only against Blacklisted Countries. However, most countries treat Grey Listed countries as of ‘high risk’ and blacklist them. Subsequent to Sri Lanka’s second Grey Listing, the EU included Sri Lanka in its Blacklist. Repercussions of EU Blacklisting led to several banks in the EU region stopping their dealings with Sri Lankan customers/institutions. ‘Handelsbanken’ in Sweden stopped all payments to Sri Lanka both for individual and corporate customers. Sri Lankan exporters (IT exporters, tourism sector) faced difficulties in getting back their export proceeds. Foreign investors raised concerns about real estate sector investments .Reluctance for new correspondent banking relationships could also result in from such a situation,” she said.

She pointed out that J P Morgan visited FIU-Sri Lanka as the country was treated as of high-risk and subjected to enhanced due diligence for correspondent banking. Western Union and Danske Bank expressed the same sentiments.

“If we go back to grey list, Sri Lankan corporations, individuals, financial institutions could be subject to extra scrutiny. There would be higher cost of borrowing– Increased interest rates due to additional risk premia. Also, there is the possibility of being downgraded by global credit agencies and the decline of doing business indicators. Sri Lankan business community would be discouraged to engage in import/export trade in such a context,” she noted.

She went on to say that the IMF also concerns in this area with regard to the country’s lack of successful corruption-related money laundering investigations, prosecutions, and convictions.

“The IMF is concerned that Sri Lanka has yet to address the deficiencies relating to transparency of beneficial ownership of legal persons in its legal framework,” she said.

“The Mutual Evaluation in March 2025 will assess how effectively Sri Lanka has implemented measures to combat ML/TF. In this process, Sri Lanka is required to submit a technical compliance report with all the relevant material such as laws, regulations, manuals, procedures, circulars, SOPs as evidence of compliance,”

Once a robust FIU framework is in place, it will help the authorities to take effective action to detect and disrupt financial flows that fuel crime, terrorism and corruption and punish those responsible for illegal activity and become a jurisdiction free from constant monitoring by the FATF.