March 13, 2019 Reading Time: 10 minutes
Reading Time: 10 min read
Image Credits: anirut/depositphotos
Nilipul Gunawardena and Shihan Maharoof*
In light of Sri Lanka’s inclusion in the European Union’s (EU) list of high-risk countries for money laundering, and the subsequent rejection of this list by the European Council last week, this LKI Explainer examines the key aspects of money laundering, the emerging challenges and its impact in Sri Lanka. It also explores vital domestic and international legal instruments in force to combat money laundering.
1. What is Money Laundering?
2.How Can Money Laundering Impact Society?
3.What are the Problems in Combating Money Laundering?
4.Some Problems of Most High-Profile Money Laundering Cases?
5.Combating Money Laundering in Sri Lanka?
6.Why is it Important for Sri Lanka?
7.Has Sri Lanka met the Global Standards?
8.Conclusion
The EU blacklist of countries with deficient anti-money laundering (AML) and counter-terrorist financing (CTF) frameworks, which included Sri Lanka, was unanimously rejected by the European Council last week.1 The European Commission will now have to propose a new draft of high-risk third countries that will address the concerns of the EU member states.
In 2018, the European Commission listed Sri Lanka as a country with deficient AML and CTF frameworks. Subject to a new methodology2 which reflected the stricter criteria of the 5th Anti-Money Laundering Directive (Directive (EU) 2018/843), the European Commission re-published their list in February 2019, including Sri Lanka as one of the 23 countries with strategic deficiencies in their anti-money laundering and terrorist financing regimes that pose significant threats to the financial system of the EU.3 While the rejection of the list may be of temporary relief to Sri Lanka, it certainly does not absolve Sri Lanka of the incumbent responsibility to strengthen its AML and CTF frameworks in compliance with international standards and requirements.
In light of these developments it is essential to understand the key aspects of money laundering and its implications for Sri Lanka as an emerging financial hub of the region.
Figure 1: The Process of Money Laundering
Source: Fuzzy Logix, 2019
Figure 2: The Eventuality of Criminal Proceeds
Source: The Inquiring Mind, 2019
5.1. Prevention of Money Laundering Act No. 5 of 2006
5.2. The Financial Transaction Reporting Act No. 6 of 2006
Sri Lanka is a member of various regional and international bodies fighting money laundering. Additionally, Sri Lanka has passed numerous legislations to comply with the international requirements and standards.
However, gaps exist within the legal framework of Sri Lanka. Notably, Sri Lanka lacks laws to monitor the financial activities of non-profit organisations, such as trusts and charities, some of which may be used as a front for money laundering. The FIU is in the process of strengthening the legal framework to effect the necessary legal provisions, in collaboration with the Attorney General’s Department, to eliminate the gaps identified by the FATF and the APG.
Financial Crimes consulting Group (2016) . Societal Costs of Money Laundering [Online]. Available at: http://financialcrimes.com/societal-cost-of-money-laundering/ [Accessed on 13 Nov 2018]
International Compliance Official. What is money laundering? [Online]. Available at: https://www.int-comp.org/careers/a-career-in-aml/what-is-money-laundering/ [Accessed on 13 Nov 2018]
1Nytimes.com. (2019). EU Nations Reject Commission Money Laundering Blacklist. [online] Available at: https://www.nytimes.com/aponline/2019/03/07/world/europe/ap-eu-europe-money-laundering-.html [Accessed 8 Mar. 2019].
2 Ec.europa.eu. (2019). Commission Staff Working Document. [online] Available at: https://ec.europa.eu/info/sites/info/files/swd_2018_362_f1_staff_working_paper_en_v2_p1_984066.pdf [Accessed 8 Mar. 2019].
3Europa.eu. (2019). European Commission – PRESS RELEASES – Press release – European Commission adopts new list of third countries with weak anti-money laundering and terrorist financing regimes. [online] Available at: http://europa.eu/rapid/press-release_IP-19-781_en.htm [Accessed 8 Mar. 2019].
4United Nations Office on Drugs and Crime. (2018). Introduction to Money Laundering. [Online]. Available at: https://www.unodc.org/unodc/en/money-laundering/introduction.html?ref=menuside [Accessed 20 Nov 2018].
5Ibid.
6Ibid.
7United Nations Office on Drugs and Crime. (2011). Estimating Illicit Financial Flows Resulting from Drug Trafficking and Other Transnational Organized Crimes. [Online]. Available at: https://www.unodc.org/documents/data-and-analysis/Studies/Illicit_financial_flows_2011_web.pdf [Accessed 22 Nov 2018].
8TATA Consultancy Service Ltd. Anti-Money Laundering: Challenges and Threats. [Online]. Avialiable at: https://www.tcs.com/content/dam/tcs/pdf/Industries/Banking%20and%20Financial%20Services/Anti-Money%20Laundering%20-%20Challenges%20and%20trends.pdf [Accessed 22 Nov 2018 ].
9Nations Office on Drugs and Crime. (2011). Estimating Illicit Financial Flows Resulting from Drug Trafficking and Other Transnational Organized Crimes. [Online]. Available at: https://www.unodc.org/documents/data-and-analysis/Studies/Illicit_financial_flows_2011_web.pdf [Accessed 22 Nov 2018 ].
10Henning, P. (2015).The Challenges of Fighting Money Laundering. [Online] New York Times. Available at: https://www.nytimes.com/2015/08/04/business/dealbook/the-challenges-of-fighting-money-laundering.html [Accessed 25 Nov 2018].
11Hitt, J. (2000). The Billion-Dollar Shack. [Online] New York Times. Available at: https://www.nytimes.com/2000/12/10/magazine/the-billion-dollar-shack.html?pagewanted=1&_ga=2.240010763.942852779.1544106759-1673361091.1544106759 [ Accessed 20 Nov 2018].
12Whitehead, H. (2016). Top 5 Money Laundering Cases in the Last 30 Years. [Online] ICP. Available at: https://www.int-comp.com/ict-views/posts/2016/07/22/top-5-money-laundering-cases-of-the-last-30-years/ [Accessed 22 Nov 2018 ].
13Fintechnews Singapore (2018). Asia’s Most Wanted Top Ten AML Cases. [Online]. Available at: http://fintechnews.sg/16105/fintech/asia-wanted-top-ten-aml-cases/[Accessed 10 Dec 2018 ].
14ComplyAdvantage (2018). What is Anti-Money Laundering (AML) and Why is it Necessary?. [Online]. Available at: https://complyadvantage.com/knowledgebase/anti-money-laundering/[Accessed 10 Dec 2018 ].
15Parliament of the Democratic Socialist Republic of Sri Lanka (2006). Prevention of Money Laundering Act No. 5 of 2006. [Online]. Available at: http://www.oecd.org/site/adboecdanti-corruptioninitiative/39864395.pdf [Accessed 15 Dec 2018 ].
16Ibid.
17Parliament of the Democratic Socialist Republic of Sri Lanka. (2006). Financial Transactions Reporting Act, No. 6 Of 2006. [Online]. Available at: http://fiusrilanka.gov.lk/docs/ACTs/FTRA/Financial_Transactions_Reporting_Act_2006-6_%28English%29.pdf [Accessed 14 Dec 2018 ].
18Parliament of the Democratic Socialist Republic of Sri Lanka. (2008). The Gazette of the Democratic Socialist Republic of Sri Lanka. [Online]. Available at: http://fiusrilanka.gov.lk/docs/Regulations/1555-9/1555_9(E).pdf [Accessed 14 Dec 2018].
19European Parliament. (2018). MEPs Confirm Commission Blacklist of Countries at Risk of Money Laundering.[Online]. Available at: http://www.europarl.europa.eu/news/en/press-room/20180202IPR97031/meps-confirm-commission-blacklist-of-countries-at-risk-of-money-laundering [Accessed on 14 Dec 2018 ].
20United States Department of State Publication, Bureau of Counterterrorism. (2018). Country Reports on Terrorism 2017.[Online]. Available at: https://www.state.gov/documents/organization/283100.pdf [Accessed 14 Dec 2018 ].
21Financial Action Task Force. (2018). Improving Global AML/CFT Compliance: On Going Process. [Online]. Available at: http://www.fatf-gafi.org/publications/high-riskandnon-cooperativejurisdictions/documents/fatf-compliance-february-2018.html [Accessed 20 Dec 2018 ].
22Ibid.
23Financial Action Task Force. (2012). International Standards on Combatting Money Laundering and the Financing of Terrorism and Proliferation, The FAFT Recommendations. [Online]. Available at: https://www.google.com/url?q=http://www.fatf-gafi.org/media/fatf/documents/recommendations/pdfs/FATF%2520Recommendations%25202012.pdf&sa=D&ust=1551773696630000&usg=AFQjCNEBdvrkVcEEO9tpDVc4wrNj-KdGaw [Accessed 20 Dec 2018 ].
24Ibid.
25United Nations. (1988). United Nations Convention against Illicit Traffic in Narcotic Drugs and Psychotropic Substances.[Online]. Available at: https://treaties.un.org/Pages/ViewDetails.aspx?src=IND&mtdsg_no=VI-19&chapter=6&clang=_en [Accessed 20 Dec 2018 ].
26United Nations. (2000). United Nations Convention against Transnational Organized Crime.[Online]. Available at: https://treaties.un.org/Pages/ViewDetails.aspx?src=IND&mtdsg_no=XVIII-12&chapter=18&clang=_en [Accessed 20 Dec 2018].
27United Nations. (2003).United Nations Convention against Corruption.[Online]. Available at: https://treaties.un.org/Pages/ViewDetails.aspx?src=IND&mtdsg_no=XVIII-14&chapter=18&clang=_en [Accessed 20 Dec 2018].
28United Nations. (1999). International Convention for the Suppression of Financing of Terrorism.[Online]. Available at: https://treaties.un.org/Pages/ViewDetails.aspx?src=IND&mtdsg_no=XVIII-11&chapter=18&clang=_en [Accessed 20 Dec 2018].
29Financial Action Task Force. (2018).International Standards on Combatting Money Laundering and the Financing of Terrorism and Proliferation, The FAFT Recommendations.[Online]. Available at: http://www.fatgafi.org/media/fatf/documents/recommendations/pdfs/FATF%20Recommendations%202012.pdf [Accessed 20 Dec 2018 ].
AML Anti-Money Laundering
CFT Countering the Financing of Terrorism
FIU Financial Intelligence Unit
FATF Financial Action Task Force
GDP Gross Domestic Product
KYC Know Your Customer
CDD Customer Due Diligence
DFS Department of Financial Services
LEA Law Enforcement Agencies
APG Asia Pacific Group on Money Laundering
*Nilupul Gunawardena is a Research Fellow at the Lakshman Kadirgamar Institute of International Relations and Strategic Studies (LKI). Shihan Maharoof is a Research Assistant at LKI. The authors acknowledge with appreciation the editorial assistance and comments given by Mrs. Joan Moonesinghe, former Director of Bank Supervision, Central Bank of Sri Lanka, and independent consultant on financial regulation, and the feedback given by Mr. C. A. H. M. Wijeratne, Additional Secretary (Legal) Ministry of Foreign Affairs. The opinions expressed in this article are the authors’ own views. They are not the institutional views of LKI, and do not necessarily represent or reflect the position of any other institution or individual with which the authors are affiliated. This article was originally published in the DailyFT.