Building a secure future: Key strategies for financial crime prevention in Sri Lanka

By Michelle Therese Alles

In an increasingly interconnected world, financial crimes such as money laundering, terrorist financing, and corruption present significant threats to national security and economic stability.

Sri Lanka, like many other nations, is grappling with these challenges through a comprehensive legal and regulatory framework, as discussed in recent presentations by leading experts. Their insights provide a detailed overview of the mechanisms in place to combat financial crimes, and the ongoing efforts to enhance the effectiveness of these measures.

At a recent event organised by Asian Pathfinder and Corporate Legal Consultants, Former ICA Regional Director – Asia and Pacific PC Dr. Dayanath Jayasooriya highlighted the importance of banks and financial institutions regularly updating their Anti-Money Laundering (AML) manuals and procedures, particularly with upcoming reviews by the Financial Action Task Force (FATF) on the horizon. These updates are crucial for ensuring that staff are thoroughly familiar with AML requirements and that these protocols are effectively implemented. Dr. Jayasooriya stated that effective AML compliance is not merely a formality, but a vital defence against financial crime.

In his book ‘Guide to AML in Sri Lanka’, Dr. Jayasooriya encourages a comprehensive approach to risk assessment, considering both local and global factors, to safeguard their operations and maintain financial stability. He emphasises: “We need to recognise the risks not only on a domestic scale, but also on a global scale to determine whether these risks are pertinent to our financial institutions.”

Dr. Jayasooriya also focused on the complexities of identifying beneficial ownership within companies. He explained how the true owners of companies often hide behind complex legal structures and offshore entities, making it difficult to identify them. This is particularly important in the context of corruption, where individuals may use shell companies to conceal illicit gains.

Dr. Jayasooriya referenced the World Bank and United Nations Office on Drugs and Crime (UNODC)’s ‘Puppet Masters’ report, which documented how corporate vehicles are often misused to obscure the real owners. He emphasised the importance of thorough due diligence in identifying beneficial owners, particularly when dealing with politically exposed persons (PEPs) and high-risk individuals. 

Dr. Jayasooriya explained that, while not all public officials pose a high risk, those in influential positions might, necessitating a risk-based approach where higher-risk PEPs are subject to more stringent scrutiny and oversight by senior management. He illustrated this point with a case study involving Gulnara Karimova, a former high-ranking official in Uzbekistan, who was involved in significant financial crimes, underscoring the need for rigorous AML measures to prevent the misuse of public office for personal gain.

Dr. Jayasooriya emphasised the importance of Suspicious Transaction Reporting (STR) in detecting money laundering, using examples of complex offshore transactions to illustrate the challenges. He stressed the need for informed decision-making when reporting to the Financial Intelligence Unit (FIU). He also highlighted the close link between corruption and money laundering, discussing a Memorandum of Understanding (MoU) between the FIU and the Commission to Investigate Allegations of Bribery or Corruption (CIABOC) for better information sharing. 

Dr. Jayasooriya warned of emerging risks, particularly post-pandemic, where new opportunities for financial crime have arisen, and stressed the need for vigilance and adaptation of AML practices. He also stressed the importance of customer-centric complaint handling within the AML framework, reinforcing the need for continuous vigilance to protect the financial system.

Central Bank FIU Additional Director Dr. Ayesh Abeysinghe outlined how Sri Lanka is aligning with international standards set by the Financial Action Task Force (FATF). Emphasising the FATF’s pivotal role in establishing global benchmarks for AML and counter-financing of terrorism (CFT) measures, Dr. Abeysinghe stated that every member country, including Sri Lanka, is required to set up a FIU to spearhead these efforts.

Drawing attention to the global scale of money laundering and terrorism financing, Dr. Abeysinghe highlighted the importance of international cooperation. He pointed to critical conventions like the Vienna Convention of 1988, the Palermo Convention of 1990, and the United Nations Convention against Corruption (UNCAC) as the cornerstones of worldwide efforts to curb financial crimes. These conventions, he noted, led to the FATF’s 40 recommendations, which set the standard for AML/CFT compliance across the globe. Dr. Abeysinghe explained that these guidelines cover everything from identifying risks to ensuring countries work together effectively.

Focusing on Sri Lanka, Dr. Abeysinghe outlined the country’s AML/CFT legal framework, rooted in the Prevention of Money Laundering Act and the Financial Transactions Reporting Act. Established in 2006, Sri Lanka’s FIU operates under the Central Bank, responsible for analysing financial data and sharing intelligence with authorities.

Dr. Abeysinghe candidly addressed the challenges Sri Lanka faces in tackling money laundering and terrorist financing. He identified drug trafficking, bribery, corruption, and customs-related offences as the most pressing threats, based on a National Risk Assessment conducted from 2015 to 2022.

Dr. Abeysinghe also reviewed Sri Lanka’s performance in the FATF’s mutual evaluation process, which initially highlighted several shortcomings. However, he noted that Sri Lanka has made significant strides, with 32 out of 40 FATF recommendations now rated as compliant. He emphasised the need to continue improving, especially in areas like transparency around beneficial ownership.

Looking ahead, Dr. Abeysinghe warned of emerging challenges, such as the misuse of virtual assets and trade-based money laundering, urging Sri Lanka to strengthen its defences. He stressed that maintaining a robust AML/CFT regime is crucial as the country prepares for its next mutual evaluation in 2025. With the clock ticking towards this evaluation, Dr. Abeysinghe made it clear that the FIU and its partners must remain vigilant to protect Sri Lanka’s financial system from the growing threats of money laundering and terrorist financing.

Commission to Investigate Allegations of Bribery or Corruption (CIABOC) Commissioner PC Chethiya Goonesekara delivered a compelling address on the expanded powers of the Commission under the new Anti-Corruption Act, urging public cooperation in the fight against corruption. He outlined the offence of money laundering, emphasising that anyone involved in transactions related to property derived from unlawful activities, whether knowingly or having reason to believe such origins, is guilty of money laundering. This definition, he noted, is crucial under the Prevention of Money Laundering Act No. 5 of 2006.

With the enactment of the new Anti-Corruption Act, the Bribery Commission now has the authority to investigate offences under the money laundering law – powers previously reserved for the Criminal Investigation Department (CID). Goonesekara highlighted this significant shift, explaining that the Commission can now probe cases where the funds used in bribery are linked to unlawful activities, allowing them to charge individuals under both the Anti-Corruption Act and the Prevention of Money Laundering Act.

Detailing the Commission’s investigative process, Goonesekara stated that the CIABOC receives around 100 petitions weekly, which must be meticulously reviewed to determine if they fall under the Commission’s jurisdiction. The Commission, with its 200 investigators, then commences the investigation process, examining banking records and other financial transactions when necessary.

Goonesekara also discussed the Commission’s power to freeze assets during investigations. Under Section 49 of the Anti-Corruption Act, the Commission can instruct banks to hold funds suspected of being tied to illegal activities until the investigation is concluded. He recounted a recent case where these powers were exercised against a high-ranking official, demonstrating the Commission’s commitment to tackling corruption at all levels.

The address also touched on the protection of whistleblowers, a critical aspect of the new law. Goonesekara urged employees, especially those in private companies, to report corrupt activities without fear of retribution, assuring them of legal protection and the Commission’s support. He stressed that whistleblower information is vital for the Commission to initiate successful operations.

In his closing remarks, Goonesekara made a heartfelt appeal for public assistance in eradicating corruption, emphasising that the CIABOC relies on citizen cooperation to achieve its mission. He highlighted the Commission’s readiness to protect and support those who come forward with information, reinforcing the importance of collective action in restoring integrity and justice in Sri Lanka.

Goonesekara concluded by expressing optimism about Sri Lanka’s future, urging the public to remain committed to the country and its fight against corruption. He assured that with continued cooperation, the nation could overcome its challenges and build a better, more transparent society.

Former Securities and Exchange Commission of Sri Lanka (SEC) Director General and Corporate Legal Consultants Senior Legal Counsel Malik Cader concluded by stressing the critical role of transparency and good governance in financial markets as a cornerstone for preventing financial crimes. He highlighted the importance of strengthening corporate governance frameworks, particularly in the context of capital markets, to deter illicit activities such as insider trading and market manipulation. 

Cader also emphasised the necessity for regulatory bodies to adopt a proactive stance in monitoring and enforcing compliance with financial regulations. By doing so, he argued, Sri Lanka could not only enhance investor confidence but also fortify its defences against financial crimes, ensuring the integrity and stability of the country’s financial system.

- Pix by Lasantha Kumara