Cablegate: Sri Lanka: Incsr Part Ii 2007-2008 Submission

Published: Wed 21 Nov 2007 11:34 AM
DE RUEHLM #1580/01 3251134
R 211134Z NOV 07
E.O 12958: N/A
REF: STATE 138130
1. The following is Embassy Colombo's International Narcotics
Control Strategy Report (INCSR) Part II regarding money laundering
and financial crimes, per request in reftel.
2. Begin text:
Sri Lanka
Sri Lanka is neither an important regional financial center nor a
preferred center for money laundering.
Civil Conflict with Liberation Tigers of Tamil Eelam
Since 1983, the Government of Sri Lanka has been in armed conflict
with the Liberation Tigers of Tamil Eelam (LTTE), a terrorist
organization seeking an independent homeland for Sri Lanka's Tamil
people. In October 1997, the US Government designated the LTTE as a
Foreign Terrorist Organization under provisions of the
Anti-Terrorism and Effective Death Penalty Act of 1996. The
Government of Sri Lanka lifted a proscription on the LTTE in 2001
consequent to a now-defunct peace process. However, Sri Lanka still
designates the LTTE as a terrorist organization under "UN Regulation
1 of 2001" made under United Nations Act No 45 of 1968. This
regulation was introduced by the Ministry of Foreign Affairs to give
effect to binding obligations under UN Security Council resolution
1373. Under the regulation, funds cannot be remitted to the LTTE.
The Government enacted three separate laws to deal with money
laundering and terrorist financing in 2005-2006. Money laundering
is a criminal offence under the Prevention of Money Laundering Act
No 5 of 2006. The Convention on the Suppression of Terrorist
Financing Act No 25 of 2005 gives effect to the UN Convention for
the Suppression of the Financing of Terrorism. The Financial
Transactions Reporting Act No 6 of 2006 provided for the
establishment of a Financial Intelligence Unit, which was
established in 2006.
The definition of money laundering, under these laws, covers many
offenses already covered under existing laws on narcotics, terrorism
prevention, bribery, firearms, exchange control, banking,
transnational organized crime, cyber crimes, child protection,
trafficking of persons and any other offense punishable by death or
imprisonment of seven years or more. The offense of money
laundering involves receiving, possessing, concealing, disposing of,
importing, exporting, investing or dealing in any property or
proceeds derived or realized from any offense covered by these laws.
Sri Lanka has a tradition of strict bank secrecy laws, under which
the Government of Sri Lanka is required to have a court order to
obtain banking information on bank customers. However, the 2006
money laundering and terrorist financing laws override the bank
secrecy provisions of other laws. In practice, banks have
recognized a fairly liberal reading of the anti-money
laundering/combating the financing of terrorism (AML/CFT) laws and
have generally been responsive to the FIU and investigators in
providing information under these laws.
Work is currently underway to amend AML/CFT laws to address
technical and substantive deficiencies in the legal framework and
strengthen the authority of the FIU and law enforcement authorities
engaged in AML/CFT detection and suppression. The new legislative
package will address issues raised in the Asia Pacific Group on
Money Laundering (APGML) evaluation performed this year and the
governments internal review of their laws' conformity with the
revised Financial Action Task Force (FATF) recommendations. These
include a draft law to strengthen forfeiture provisions relating to
the proceeds of crime or funds related to the financing of terror.
Under the sentencing provisions of the AML/CFT laws, persons
convicted of money laundering will be liable for a fine up to three
times the value of the property in respect of which the offence is
committed and/or imprisonment for a period of 5-20 years; persons
convicted of terrorist financing will be liable for a fine (not
defined) and imprisonment for a period of 15-20 years. In addition,
the property involved in the above offences shall be liable to
COLOMBO 00001580 002 OF 004
Anti-money laundering legislation includes asset forfeiture and
seizure provisions for narcotics-related money laundering. Both
money laundering and terrorist financing are extraditable offenses.
The trafficking, possessing, importing or exporting of narcotics is
punishable by death or life imprisonment under the Poisons, Opium
and Dangerous Drugs Ordinance (OPDDO).
Criminal and Civil Prosecutions
Sri Lanka did not report any criminal prosecutions with regard to
money laundering or terrorist financing in 2007. Sri Lanka's
Financial Intelligence Unit has referred twenty money laundering
cases to the Sri Lanka Police Criminal Investigation Division (CID)
for investigation, but none have been referred for prosecution.
The Central Bank in August 2006 froze funds held by the Tamils
Rehabilitation Organisation (TRO), an NGO aligned to the LTTE, in
several local banks and a branch of an international bank. The
Central Bank alleged that TRO personnel in many foreign countries
have been involved in terrorist financing and that funds have been
channeled to the Sri Lankan TRO office through the local banking
system under the mask of humanitarian projects. Since the initial
freeze, the Central Bank has received permission from the High Court
of Colombo to keep the TRO accounts frozen while it the FIU
continues investigation. The freeze currently extends until March
5, 2008. Civil cases are pending. The United States in November
2007 designated the TRO as an organization providing material
support for terrorism, based on its links to the LTTE. Under this
designation, the United States froze TRO assets under US
jurisdiction and prohibited US persons from transacting with the
Financial Intelligence Unit
Sri Lanka established a Financial Intelligence Unit (FIU) in 2006 as
a semi-autonomous body connected to the Central Bank. In 2007 the
FIU was moved to be a line department under the direct authority of
the Central Bank. The FIU is an administrative body that performs
intelligence collection and analytical functions. It has the
authority to issue regulations and instructions to combat money
laundering and terrorist financing, including the ability to freeze
transactions and accounts.
The FIU intends to develop a reasonably sophisticated
analytical/case development facility enabling risk-based and
model-based detection activities. Proposed amendments to the
existing AML/CFT legislation include provisions enabling the FIU to
access other government databases to enhance its ability to perform
detection and case development functions. The government's
implementation plan includes improved coordination with law
enforcement to enable more rapid case development and prosecutions,
particularly in the area of terrorist financing where investigations
and preventive actions are much more time-sensitive than AML cases.
In June 2007, the FIU issued Know Your Customer (KYC) and Customer
Due Diligence (CDD) policies applicable to Banking Institutions and
Securities Dealers. Regulatory instruments are being developed for
the other reporting entities and will be issued after the FIU
implements its IT support system in early 2008.
Financial institutions such as banks, finance companies, leasing
companies, money transfer agents, credit card issuers, foreign
exchange and money market dealers, and designated non-finance
businesses such as portfolio managers, fund managers, insurance
companies, casinos, and real estate agents are required to generate
suspicious activity reports and other mandatory disclosures such as
cash transaction reports and forward to the FIU. These reports are
required to be maintained for 6 years.
More than 50 Suspicious Transaction Reports were received by the FIU
in 2007 leading to 20 referrals to law enforcement for
investigation. The CID maintains that it has a special unit of 20+
officers detailed for AML/CFT cases, but it appears that this unit,
as a matter of practice, has been detailed to other duties.
Furthermore, the CID does not currently have any qualified financial
investigators. Representatives from the international community
including the US Treasury, the Asia Pacific Group, the World Bank
and others are currently pressing the Government to address the
deficiencies in the law enforcement sector.
COLOMBO 00001580 003 OF 004
Other Financial Crimes Monitoring and Enforcement Authorities
The Police Department and the Attorney General's Department are
charged with criminal investigative and prosecution responsibilities
with regard to AML/CFT crimes. The Bank Supervision Department and
the Non Bank Financial Institutions Supervision Department of the
Central Bank supervise and examine banks and non bank financial
institutions (i.e. finance companies and leasing companies)
respectively for compliance with AML/CFT regulations. The
Securities and Exchange Commission regulates securities brokers and
the Insurance Board regulates insurance companies for compliance
with AML/CFT.
Exchange Controls
Sri Lanka is not considered an offshore financial center. Offshore
banking units are allowed to operate as a part of a commercial bank
operating in an overseas country in order to facilitate trade
finance. They are subject to Central Bank supervision. Bearer
shares are not permitted for offshore banks and foreign-owned
Sri Lanka has 12 free trade zones, also called export-processing
zones, administered by the state-owned Board of Investment (BOI).
The free trade zones house export-manufacturing operations. Only
companies approved by the BOI are allowed to operate inside the
zones. There are no indications that these free trade zones are
being used in trade-based money laundering schemes or terrorist
financing. The zones are secured by fences and GSL-provided guards
are posted at the entrances; only individuals with proper zone
identification and/or previously approved for access may enter the
The Central Bank's Exchange Control Department has imposed
regulations for limiting and monitoring the cross border
transportation of currency and monetary instruments. The bank has
set monetary thresholds for declarations at border crossings.
Declarations are required when leaving the country for currency
notes over USD 5000 and for currency plus travelers checks amounting
to over USD 10,000 (or the equivalent in other foreign currencies).
Declarations are required when arriving in Sri Lanka for amounts
over USD 15,000 or for lower amounts of foreign currency notes
brought in if the traveler intends to later take out foreign
currency notes exceeding USD 5,000.
Many areas of concern exist with respect to Sri Lanka's current
anti-money laundering efforts. The Central Bank continues to allow
the operation of bearer certificates of deposits. In July 2003, in
order to limit money laundering through bearer certificates, the
Central Bank required banks to maintain a record of purchasers of
these certificates. Casinos, jewelry shops and dealers in gems are
also areas of concern, there are no laws to regulate their
operations. A key vulnerability in the Sri Lankan financial system
is the existence of SIERA accounts which allow foreign investors to
participate directly in the Sri Lankan Stock Exchange. These
accounts have historically allowed for undisclosed principals and
beneficial owners. The Central Bank and Securities Commission are
currently drafting rules which would require better disclosure and
CDD procedures prior to establishment of these accounts.
Alternative Remittance Systems
Sri Lanka has an indigenous alternative remittance system in the
form of informal money transfer operations. Many Sri Lankan migrant
workers, mainly in the Middle East, use a hawala-like system to
remit their earnings. Various payments out of Sri Lanka are also
made using this system. Sri Lankan commercial banks are increasing
their presence and services in the Middle East in order to cater to
this clientele. Trafficking of drugs generates significant amounts
of criminal proceeds, and those proceeds are also readily
transported using this system. Drug proceeds are laundered through
various methods, including investment in real estate. In November
2004, a high court judge who was presiding over several narcotics
related cases was killed at his home. A known drug dealer and four
others were found guilty of the murder and sentenced to death. The
accused are in prison serving life sentences as Sri Lanka does not
carry out death penalty convictions.
2004 Tsunami
Following the December 2004 tsunami, a large number of international
COLOMBO 00001580 004 OF 004
and local non-governmental organizations (NGOs) opened offices in
Sri Lanka. In order to ensure the legitimacy of the NGOs, the
Government created a Center for Non-Government Sector (CNGS) in the
Ministry of Finance. NGOs require a recommendation from the CNGS to
register as a NGO. Further, NGOs receiving tsunami-related funds
from abroad are required to channel these funds through a Special
Bank Account titled "Post Tsunami Inward Remittances Account"
(PTIRA). All registered banks in Sri Lanka are allowed to open such
accounts. The banks are required to forward monthly statements on
these accounts to the Exchange Control Department of the Central
Bank. Commercial Banks are required to obtain Finance Ministry
clearance before releasing funds received from abroad. The Central
Bank reports that existing arrangements are inadequate to monitor
financial flows to NGOs. The government in October 2006 asked four
foreign NGOs working in the north and east to leave the country
because they were suspected of providing assistance to the LTTE.
International Cooperation
Sri Lanka is a party to the UN International Convention for the
Suppression of the Financing of Terrorism and to the 1988 UN Drug
Convention. Sri Lanka is also a party to the UN Convention Against
Corruption. Sri Lanka has signed but not ratified the UN Convention
against Transnational Organized Crime. Sri Lanka is a member of the
Bay of Bengal Initiative for Multi-Sectoral Technical and Economic
Cooperation (BIMSTEC) working group on Counter-Terrorism and
Transnational Crime formed in July 2004. Sri Lanka also
participates in a Financial Action Task Force (FATF) regional body
and is a member of the Asia Pacific Group on Money Laundering
(APGML). The Central Bank FIU has submitted its application for
membership in the Egmont Group of FIUs and hopes to be considered in
the summer of 2008.
The Mutual Assistance in Criminal Matters Act of 2002 provides for
cooperation in criminal matters with Commonwealth countries and with
non-Commonwealth countries with which Sri Lanka has entered into a
bilateral agreement on mutual assistance in criminal matters. Under
the Convention on the Suppression of Terrorist Financing Act No 25
of 2005, and the law on the Prevention of Money Laundering, the
government is required to co-operate with and provide assistance to
state parties to the Convention with regard to investigations and
prosecutions under the respective laws.
The FIU circulates the list of individuals designated under UNSCR
1267 to local financial institutions with instructions to identify,
freeze, and seize terrorist assets. To date, no such assets have
been identified.
US Government Assistance
The Government of Sri Lanka has accepted USG assistance to implement
its anti-money laundering and counterterrorist financing programs.
The US Treasury's Financial Crimes Enforcement Unit conducted three
training seminars in Sri Lanka for officers from regulatory and
reporting agencies during 2004-2005. Treasury has also placed a
Resident Advisor to assist in the implementation of the national
AML/CFT regime with special emphasis on the development of the FIU.
The US Department of Justice conducted a South Asia regional
workshop on detecting and preventing terrorist financing in Sri
Lanka in June 2005; officials from several Sri Lankan government
agencies attended the workshop along with officials from several
other countries in South Asia. The United Nations Office on Drugs
and Crime (UNODC) and the Commonwealth Secretariat, together with
the US Treasury and the Central Bank of Sri Lanka co-hosted a major
financial investigations training event in Colombo in January 2007.
Another Joint Commonwealth/US Treasury training program was
delivered to prosecutors and law enforcement officers in November
End text.
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