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Preventing Money Laundering and Combating the Financing of Terrorism
PAMPHLET SERIES
NO. 6
PREVENTING MONEY LAUNDERING
Financial System
AND COMBATING THE
Stability
FINANCING OF TERRORISM
On 6 March 2006, the Prevention of Money Laundering Act, No. 5 of 2006 and the Financial
Transaction Reporting Act, No. 6 of 2006 became law. Earlier, in August 2005 the Convention on the
Suppression of Terrorist Financing Act, No. 25 of 2005 was enacted. These three far reaching pieces of
legislation form the legal framework for Prevention of Money Laundering and Combating the Financing
of Terrorism in Sri Lanka. This pamphlet has been published by the Central Bank to increase public
awareness on the offences of money laundering and terrorist financing, the methodologies adopted by
money launderers, the negative consequences associated with money laundering and terrorist financing,
the contents of the three new laws and the duties and responsibilities imposed on persons and entities in
terms of these laws.
Central Bank of Sri Lanka
July 2006
Pamphlet Series No. 6 1
Preventing Money Laundering and Combating the Financing of Terrorism
G reed is the root cause for the majority of
crimes committed today. Crimes such as
drug trafficking, human trafficking, illegal arms
of transactions undertaken by a wide array
of persons and entities. In the final stage of
the money laundering process however, the
trading, corruption, fraud, forgery, armed rob- laundered funds usually re-enter the formal
bery, blackmail and smuggling are all economy, with their criminal origin completely
commited for money. Criminals involved need obliterated.
to find a way to control such money without
STAGES IN THE PROCESS OF
attracting attention to the underlying activity
MONEY LAUNDERING
or people involved. This dictates the need for
The process of Money Laundering has been
a process to disguise the criminal origin of
separated into three stages namely, Place-
such money. This process has come to be
ment, Layering and Integration which are
known as money laundering.
briefly described below:
WHAT IS MONEY LAUNDERING? Placement is the introduction of funds de-
The Financial Action Task Force on Money rived from crime into the financial system.
Laundering (FATF), defines the term “Money Layering is the process of effecting a large
Laundering” briefly as “the processing of number of transactions with the funds to dis-
criminal proceeds to disguise their illegal ori- tance them from their criminal origin.
gin in order to legitimize the ill-gotten gains of Integration is the stage at which the laun-
crime”. Although there are many more com- dered proceeds re-enter the financial system
prehensive definitions of “Money Laundering” with the appearance of having originated from
used by different countries, the FATF defini- normal business activities.
tion adequately captures the essence of the
However, it would be misguided to visualize the
process.
Money Laundering process as a simple three
Money launderers use a variety of persons stage process. Depending on the circum-
and entities to accomplish their objective of stances, these stages could occur simultane-
disguising the criminal origin of their funds. ously or even overlap.
These include not only financial institutions
MAGNITUDE OF THE PROBLEM
but also both formal and informal non finan-
As secrecy and evasion are core character-
cial institutions as well as individuals. Non-
istics of the Money Laundering process, it is
financial institutions used by money laun-
difficult to estimate precisely the quantum of
derers are those which have a large cash
criminal proceeds laundered world wide. The
turnover such as casinos and real estate
International Monetary Fund (IMF) some years
agencies. Indeed there are some who claim
back estimated this figure to be in the range
that the term laundering came to be asso-
of 2-5 per cent of global Gross Domestic Prod-
ciated with this process because of the use
uct (GDP).
of launderettes by criminals to launder the
proceeds of crime in the 1920s. Money THE FIGHT AGAINST MONEY
launderers also use individuals who deal LAUNDERING
with large sums of money such as dealers in Although Money Laundering activities have a
precious stones and precious metals as well long history, international efforts to arrest
as professionals who facilitate transactions Money Laundering commenced in earnest
which involve large cash turnover such as only since the late 1980s. Initially these efforts
lawyers and accountants, to accomplish were focused mainly on the laundering of
their objective. Therefore, a comprehensive funds by drug traffickers. This was extended
money laundering regime requires scrutiny to cover other crimes when it became appar-
2 Central Bank of Sri Lanka
Preventing Money Laundering and Combating the Financing of Terrorism
ent that anti-Money Laundering activities are entities to effect laundering activities. These
a strong deterrent to crime. Separating a crimi- 40 Recommendations have been accepted
nal from the proceeds of crime is likely to de- world wide as a comprehensive Anti-Money
ter crime in two ways. Firstly, the criminal will Laundering (AML) regime.
not be able to benefit from the proceeds of his
Further it became apparent that there was a
crime which would be a disincentive to com-
necessity to have a separate institution with
mit further crime and secondly he would be
the expertise to convert financial transactions
unable to reinvest criminal proceeds in further
reports received from reporting institutions
criminal activity, and thereby perpetuate a vi-
into financial intelligence. As a result many ju-
cious circle of crime.
risdictions began establishing such institu-
During the 1980s International Organisations tions which have come to be known as Finan-
such as the United Nations and the Bank for cial Intelligence Units(FIUs). In its 2003 recom-
International Settlements took some initial mendations to prevent Money Laundering, the
steps to address the problem of Money FATF recommended the establishment of
Laundering. The establishment of the FATF FIUs as national centers for receiving, analys-
in 1989 was a major landmark in the fight ing and disseminating financial information.
against Money Laundering. The FATF was The flow of information to and from a typical
initially established by the Group of 7 Fi- FIU is given in Figure 1.
nance Ministers under the auspices of the
ECONOMIC IMPACT OF MONEY
Organization of Economic Cooperation and
LAUNDERING
Development with a brief to encourage
Money Laundering activities adversely affect
countries to make Money Laundering a
the financial sector, the real sector as well as
criminal activity in it self, and also seek
the external sector of an economy. Associa-
to strengthen international cooperation
tion with criminal elements involved in Money
between criminal investigation agen-
Laundering tends to expose employees of fi-
cies and the judiciaries in different
nancial sector institutions to corruption which
countries.
would inevitably undermine public confidence
In the early 1990s, the FATF formulated 40 in these institutions.(There is even a possibility
Recommendations aimed at governments and of such institutions being controlled by crimi-
financial institutions. Under these recommen- nals). Lack of public confidence in such insti-
dations, banks and other selected financial tutions would prevent their further develop-
institutions were required to report suspicious ment. Loss of confidence in a country’s finan-
transactions undertaken by their customers. cial system would also deter Foreign Direct
Since 1996 these recommendations have Investment (FDI) flows, as genuine investors
become applicable to all serious crime(earlier would be reluctant to deal with financial insti-
the crime of drug trafficking was the main fo- tutions which are perceived to be corrupt.
cus). These recommendations were updated When using a country’s territory for Money
in 2003 to keep them in line with evolving Laundering activities, particularly in the layer-
Money Laundering techniques. Under this ing stage, money launderers tend to bring in
revision, the coverage of entities required to large amounts of money into the country and
report financial transactions was widened to then exit to another jurisdiction. This would
include non-financial entities such as casinos result in the liability base of financial institu-
as well as individuals in specific businesses tions becoming unstable and cause an up-
and professions, as money launderers had surge of activity in the financial sector followed
begun to increasingly use such persons and by a downturn which would in turn contribute
Pamphlet Series No. 6 3
Preventing Money Laundering and Combating the Financing of Terrorism
FIGURE 1 - FLOW OF INFORMATION TO AND FROM A FINANCIAL
INTELLIGENCE UNIT (FIU)
REPORTING ANALYSIS DISSEMINATION
Reporting Report
Entity
Banks
FIU Database
↑
Securities
Dealers Cash
Other
Transaction
↑
↑
↑
FIUs
Reports
Insurers Government
Databases
↑
Law
Casinos Enforcement
↑
↑ Data from Agencies
Other FIUs
Lawyers
Suspicious
Transaction
↑
↑
Other Data
↑
Reports
Accountants
↑
Prosecutor’s
↑
Financial Office
Others Intelligence
Persons Cross Border
Transporting Currency
Currency Across Transaction
↑
Source: Paul Gleason & Glenn Gettselig “Financial
Border Reports Intelligence Units - An Overview”
International Monetary Fund (2004).
to financial sector instability. Further, over- In fact, empirical studies have revealed that
seas banks will also be reluctant to have cor- economic growth depends on sound domes-
respondence relationships with banks which tic financial institutions. Further as discussed
are tainted by Money Laundering allegations, above, FDI flows could reduce, depriving the
adversely affecting banking activity in various country of foreign capital for development.
spheres. Money launderers, if they invest in a country,
Money Laundering takes its toll on the real are also likely to choose sterile investments
sector as well. The break-down in public con- such as real estate and precious metals which
fidence in financial institutions owing to Money do not contribute significantly to economic
Laundering activities and the consequent re- development. This would distort asset prices
tardation of the development of these institu- causing further problems to the economy. In-
tions would have negative implications on the flation could also increase as a result of
real economy, given the important role played Money Laundering. Further, funds moving in
by financial institutions in the allocation of re- and out of the country would make interest
sources particularly in a developing country. rates and exchange rates more volatile pos-
4 Central Bank of Sri Lanka
Preventing Money Laundering and Combating the Financing of Terrorism
ing problems for macro economic manage- control of certain regions, they also impose
ment. As the money supply becomes difficult “taxes” and “fees” upon those at their mercy.
to track, monetary projections could also be- By selling their case convincingly, terrorists
come unreliable. These factors would there- are also able to secure funding from certain
fore increase the probability of making policy sections of the population such as the
mistakes. diaspora or displaced persons whom they
claim to represent. Another mode by which
In the case of the external sector, as we ob-
they obtain funds is by way of donation to
served earlier, FDI levels would drop if inves-
charitable institutions which are in reality fronts
tors lose confidence in a country’s financial
for terrorist organisations.
sector due to it being tainted by Money Laun-
dering. Further, lack of confidence in the do- The global attention became more sharply
mestic financial sector could induce capital focused on terrorism and the need to arrest
flight as persons look for safer havens for their its funding after the terrorist attack on the
savings. Sometimes money launderers tend World Trade Center of the United States on
to use international trade to effect their laun- 11 September 2001, which is now commonly
dering activities by the means of inaccurate known as the 9/11 disaster. Since then, exten-
pricing (misinvoicing) of imports and exports sive action has been taken globally to freeze
to hide the transfer of funds. For example assets held by terrorist organisations and in-
over-invoicing of an import will permit the stitute other measures required for combat-
transfer of funds outside the country. These ing the financing of terrorism.
practices could also lead to price distortions.
The United Nations spearheaded the fight
TERRORISM against the financing of terrorism in the wake
Terrorism is a label which came to be used to of the 9/11 disaster with its Security Council
describe a special kind of conflict since the passing resolutions requiring member coun-
early 1970s. Such conflicts are often low tries to freeze assets of terrorists and thereby
intensity offensives which do not escalate into prevent terrorists accessing their funds. Such
full scale wars and are usually undertaken to action was required to be taken in respect of
achieve a political objective. Sporadic attacks, entities and organisations designated as ter-
hijacking, kidnapping and bombing etc. are rorist persons and organisations by the United
associated with these conflicts. The Nations Counter Terrorism Committee.
development consequences of such conflicts The FATF also took steps to formulate Eight
tend to be catastrophic, as they disrupt Special Recommendations on combating the
normal life and economic activity and are financing of terrorism (CFT). Subsequently
usually sustained for a long period of time. Sri these eight recommendations were aug-
Lanka has experienced a bitter civil war for mented to nine. The FATF did not specifically
over 20 years involving one of the deadliest define the term financing of terrorism in these
terrorist groups existing in the world and this recommendations, but recommended that
has caused substantial disruption of social and countries ratify and implement the 1999
economic activity. United Nation International Convention for
As in the case of most other activities, terror- Suppression of the Terrorist Financing. Thus,
ist activities cannot be sustained without fi- the definition of financing of terrorism given in
nance. Funding for these types of activities are the above Convention is the one most coun-
sometimes obtained through extortion, kid- tries including Sri Lanka have adopted for the
napping for ransom and other crimes such as purposes of defining terrorist financing (See
bank robbery. When a terrorist group gains Box 1).
Pamphlet Series No. 6 5
Preventing Money Laundering and Combating the Financing of Terrorism
BOX 1 - DEFINITION OF TERRORIST FINANCING
The United Nations International Convention for Suppression of Terrorist Financing defines Terrorist
Financing in the under mentioned manner in its Article 2, and on the recommendation of the FATF,
most countries including Sri Lanka use this definition
Article 2
1. Any person commits an offence within the meaning of the Convention if that person by
any means, directly or indirectly, unlawfully and wilfully, provides or collects funds with the
intention that they should be used or in the knowledge that they are to be used, in full or in
part, in order to carry out:
(a) An act which constitutes an offence within the scope of and as defined in one of the
treaties listed in the Annex; or
(b) Any other act intended to cause death or serious bodily injury to a civilian, or to any
other person not taking an active part in the hostilities in a situation of armed conflict,
when the purpose of such act, by its nature or context, is to intimidate a population, or
to compel a Government or an international organization to do or to abstain from
doing any act.
ANNEX
1. Convention for the Suppression of Unlawful 6. Protocol for the Suppression of Unlawful Acts
Seizure of Aircraft, done at The Hague on 16 of Violence at Airports Serving International
December 1970. Civil Aviation, supplementary to the
2. Convention for the Suppression of Unlawful Convention for the Suppression of Unlawful
Acts against the Safety of Civil Aviation, done at Acts against the Safety of Civil Aviation, done
Montreal on 23 September 1971. at Montreal on 24 February 1988.
3. Convention on the Prevention and Punishment 7. Convention for the Suppression of Unlawful
of Crimes against Internationally Protected Acts against the Safety of Maritime Navigation,
Persons, including Diplomatic Agents, adopted done at Rome on 10 March 1988.
by the General Assembly of the United Nations 8. Protocol for the suppression of Unlawful Acts
on 14 December 1973. against the Safety of Fixed Platforms located
4. International Convention against the Taking of on the Continental Shelf, done at Rome on 10
Hostages, adopted by the General Assembly of March 1988.
the United Nations on 17 December 1979. 9. International Convention for the Suppression
5. Convention on the Physical Protection of Nuclear of Terrorist Bombings, adopted by the General
Material, adopted at Vienna on 3 March 1980. Assembly of the United Nations on 15
December 1997.
SRI LANKA’S POSITION PRIOR TO Act, the Customs Ordinance, the Banking Act
ENACTMENT OF AML/CFT LAWS and other laws. One such measure was the
Even before the enactment of AML/CFT laws requirement for a declaration to be made by
in Sri Lanka, there were certain measures in any person importing or exporting currency
place which would have discouraged money exceeding US$ 10,000 in value. This would
launderers from using the country’s financial have deterred large scale cross border flows
institutions for laundering activities. These of currency, a mechanism often used by
measures were put in place in terms of powers money launderers in their operations. Further,
vested on authorities by the Exchange Control although the current account in Sri Lanka was
6 Central Bank of Sri Lanka
Preventing Money Laundering and Combating the Financing of Terrorism
fully liberalized since 1994, the capital account Council as terrorist persons and entities or
was only partially liberalized. Therefore it was with associates of such listed persons and
necessary for persons undertaking entities and to freeze all accounts held by such
transactions which involved the remittance of persons and entities and their associates.
foreign currency out of the country to provide Banks were also requested to report to the
documentary evidence to confirm the bona- Controller of Exchange, all attempts made by
fides of the transaction. All instances of sales the listed persons and entities or their asso-
and purchases of foreign currency by ciates to engage in transactions with them.
commercial banks also have to be recorded Similar orders were issued to Finance Com-
in specific forms and submitted to the Central panies as well. Restricted foreign exchange
Bank. Here, the recorded information includes dealers such as money changers, wire trans-
identification information on the seller/ fer agencies and travel agents authorised to
purchaser. Further, the Department of Bank issue travellers cheques were also directed to
Supervision of the Central Bank had issued inform the Controller of Exchange of any at-
Know Your Customer (KYC) guidelines to all tempts by the listed persons and entities and
banks and urged such banks to follow these their associates to engage in transactions with
guidelines when engaging in banking them.
business. Undoubtedly, these measures
LEGAL FRAMEWORK FOR
would have saved Sri Lanka from being
AML/CFT IN SRI LANKA
identified by money launderers as a suitable
When AML measures were first under
location for their activities. Despite this
consideration there were those who
situation however, there is no room for
advocated a policy of “inaction” in this regard.
complacency, as with the enforcement of
One of the arguments put forward was that
stringent Money Laundering measures in
crimes pertaining to Money Laundering occur
some countries, money launderers are
in developed countries and therefore
moving into countries which do not have an
developing countries like Sri Lanka should not
effective AML/CFT regime. Therefore, in the
waste scarce resources to establish a strong
absence of a comprehensive AML regime, Sri
AML regime. However, Sri Lanka as a
Lanka will not be immune from the threat of
responsible stakeholder of the global
Money Laundering. Also, capital account
community has an obligation to take all action
restrictions are being gradually relaxed, and
possible to curb transnational organised
therefore, it is timely to institute a strong AML
crime. A further consideration is that a lax
regime, to prevent money launderers taking money laundering regime could even attract
advantage of these relaxations. criminals and crime into the country. Another
In the area of prevention of terrorist financing argument put forward to support a policy of
considerable advances had been made even inaction was that money laundering
before the Convention for the Suppression of represents a flow of capital from developed
the Terrorist Financing Act, No. 25 of 2005 countries to developing countries and
became law. In October 2001, Sri Lanka took therefore developing countries should not
action to issue UN Regulation No. 1 of 2001 deter this flow of capital which would contribute
which created terrorist financing offences in to the country’s development. This argument
response to UN Security Council Resolution is of course refuted by empirical evidence as
1373. With the issue of this regulation, the well as the negative economic impact of
Central Bank issued instructions requiring money laundering on FDI discussed above.
banks not to undertake any transactions with For several years government authorities, the
persons and entities listed by the UN Security Central Bank, financial sector authorities, le-
Pamphlet Series No. 6 7
Preventing Money Laundering and Combating the Financing of Terrorism
FIGURE 2 - OFFENCES COVERED UNDER THE PREVENTION
OF MONEY LAUNDERING ACT, NO. 5 OF 2006 (PMLA)
Exchange
Control Cyber
Transnational Violations Crime Pyramid
Organised Scams
Crime
UNLAWFUL Offences under the
Offences Fire Arms Ordinance,
punishable by death ACTIVITIES Explosives Ordinance
or imprisonent for 07 or the Offensive
years or more Weapons Act
Trafficking of Drug
persons trafficking
Offences
Bribery against
Terrorism
children
gal and law enforcement authorities, have concealing, investing, disposing or bringing
worked together with international experts to into Sri Lanka, transferring out of Sri Lanka
formulate the necessary AML/CFT legal or engaging in any other manner in any
framework for Sri Lanka. The Central Bank transaction, in relation to any property
played a major role in these deliberations not derived or realized directly or indirectly from
only because it is the institution at the helm of “unlawful activity” or proceeds of “unlawful
the financial sector, but also because one of activity”.1
its core objectives is the preservation of finan- • Any movable or immovable property ac-
cial system stability which could be threatened quired by a person which cannot be part of
by Money Laundering activities. The first piece the known income or receipts of a person
of legislation the Convention on the Suppres-
or money/property to which his known in-
sion of Terrorist Financing Act, No. 25 of 2005
come and receipts have been converted, is
became law on 8 August 2005. The other two
deemed to have been derived directly or
laws, the Prevention of Money Laundering Act,
indirectly from unlawful activity, in terms of
No.5 of 2006 and the Financial Transactions
the PMLA.
Reporting Act, No. 6 of 2006 became law on
• PMLA has provisions for a police officer not
6 March 2006. All three Acts were prepared in
below the rank of Superintendent of Police
line with the FATF’s 40 Recommendations for
Prevention of Money Laundering and its 9 or in the absence of such an officer an As-
Special Recommendations for combating the sistant Superintendent of Police to issue an
financing of terrorism, and therefore Sri Lanka 1/ “Unlawful activity” is defined as an act that constitutes
an Offence under the Poison Opium and Dangerous Drug
is now compliant with the requirements of the Ordinance, any Law relating to the Prevention and Suppres-
FATF. Some of the main features of these sion of Terrorism, the Bribery Act, the Fire Arms Ordinance,
the Explosives Ordinance, the Offensive Weapons Act, the
three Acts are given below.
Exchange Control Act, Offences under Section 83c of the
Banking Act No. 30 of 1988 (Relating to Pyramid Scams).
PREVENTION OF MONEY LAUNDERING ACT, Law relating to Transnational Organised Crime, Law relat-
NO. 5 OF 2006 (PMLA) ing to Cyber Crime, Law relating to Offences against Chil-
dren, Law relating to Trafficking of Persons and any other
• The offence of Money Laundering is
offence punishable by death or imprisonment of 07 years or
defined as receiving, possessing, more.
8 Central Bank of Sri Lanka
Preventing Money Laundering and Combating the Financing of Terrorism
order prohibiting any transaction in relation • His Excellency the President in his capacity
to any account, property or investment as Minister of Finance has made regulations
which may have been used or which may published in the Gazette Extraordinary No.
be used in connection with the offence of 1437/25 of 23/03/2006 prescribing that this
Money Laundering for a specific period value should also be Rs. 500,000.
which may be extended by the High Court, • All suspicious transactions have to be re-
if necessary, in order to prevent further acts ported by institutions to the FIU irrespective
being committed in relation to the offence. of their magnitude.
• In terms of the PMLA, a person convicted • FTRA required an institution covered by the
of the offence of Money Laundering is liable Act to appoint a compliance officer who
to a penalty of not less than the value of the would be responsible for the institution’s
property involved in the offence and not compliance with the Act.
more than thrice this value, and a term of • The FTRA also requires Supervisory Au-
imprisonment of not less than 05 years and thorities of Institutions and Auditors to make
not more than 20 years. a suspicious transaction report if they have
• Property derived from an offence of Money information which gives them reasonable
Laundering is forfeited to the state free of grounds to suspect that a transaction is re-
encumbrances in terms of the PMLA. lated to money laundering or financing of
• PMLA makes “tipping-off”(pre warning sus- terrorism.
pects of impending action against them) an • Supervisory Authorities are required by the
offence. FTRA to examine whether institutions su-
• The extradition law applies to the offence pervised by them comply with the provisions
of Money Laundering. of the FTRA and to report instances of non
compliance to the FIU. Further they are
FINANCIAL TRANSACTIONS REPORTING also required to co-operate with law en-
ACT, NO. 6 OF 2006 (FTRA)
forcement agencies and the FIU in any in-
• FTRA provides for the setting up of a FIU vestigation, prosecution or proceeding re-
as a national central agency to receive lating to any act constituting an unlawful
analyse and disseminate information in re- activity.
lation to Money Laundering and the financ-
ing of terrorism (See Box 2). • In terms of the FTRA, institutions are re-
quired to engage in Customer Due Dili-
• The FTRA obliges institutions, to report to
gence (verifying the true identity of custom-
the FIU cash transactions above a value
ers) with whom they undertake transactions
prescribed by an Order published in the
and on going Customer Due Diligence with
Gazette. The term “institutions” covers a
wide array of persons and entities (See customers with whom they have a business
Box 3 ). relationship.
• His Excellency the President in his • The opening and operating of accounts
capacity as Minister of Finance has issued under a fictitious name is an offence under
an Order published in the Gazette the FTRA.
Extraordinary No. 1437/25 of 23/03/2006 • FTRA makes “tipping-off” an offence(e.g.
prescribing that this value should be Rs. pre warning a suspect of an impending in-
500,000. vestigation).
• The Act also obliges institutions to report to • In terms of the FTRA, persons making re-
the FIU all electronic fund transfers above ports under the Act are protected from civil
such sum as prescribed by regulations. or criminal liability.
Pamphlet Series No. 6 9
Preventing Money Laundering and Combating the Financing of Terrorism
BOX 2 - ESTABLISHMENT OF A FINANCIAL INTELLIGENCE UNIT (FIU)
IN SRI LANKA
Recommendation 26 of the FATF’s 40 Recom- nance business as well as entities and per-
mendations for the prevention of Money Laun- sons in designated non-finance business
dering states that : (See Box 3). The FIU is also empowered to
Countries should establish a Financial Intelligence Unit collect any other supporting information from
(FIU) that serves as a national center for the receiving reporting entities or even from foreign FIUs. In
(and, as permitted, requesting), analysis and dissemina- the second stage, the FIU has to undertake the
tion of Suspicious Transaction Reports ( STR) and other intensive analysis of financial transaction infor-
information regarding potential Money Laundering or mation so collected and convert such informa-
terrorist financing. The FIU should have access, directly tion into financial intelligence. At the third stage,
or indirectly, on a timely basis to the financial, adminis- the FIU should disseminate such information as
trative and law enforcement information that it requires necessary. If after its analysis of a transaction
to properly undertake its functions, including the analysis report, the FIU is satisfied that the transaction in-
of Suspicious Transaction Reports (STR). volved is a money laundering transaction or a
transaction related to financing of terrorism, the
In conformity with the above recommendation
FIU refers the case to law enforcement authori-
the FTRA provides for the setting up of a FIU
ties for prosecution. Further, the FIU is also
which would be the entity charged with admin-
in a position to disseminate information to for-
istration of the provisions of the Act. Accord-
eign FIUs, particularly if the information is rel-
ingly, His Excellency the President in his capacity
evant to the prosecution of Money Laundering
as the Minister of Finance has in an Order pub-
offences in other jurisdictions or if the informa-
lished in Gazette Extraordinary No. 1437/24 of
tion reveals new trends in Money Laundering
23/03/2006 designated the FIU of the Central
activities. In terms of the FTRA, the FIU may
Bank to be the FIU for the purpose of this Act.
also disseminate information to reporting enti-
The FIU will be an independent unit within the
ties and their regulators. The information flow
Central Bank and its CEO will report directly
to and from the FIU is depicted in Figure 1.
to the Monetary Board through the Governor
of the Central Bank. The powers and functions The FTRA empowers Sri Lanka’s FIU to also
entrusted to the FIU by the FTRA are in line with undertake several non core activities including
the FATF recommendations and the require- the following:
ments needed to meet other international con- • Compiling of statistics and records.
ventions and resolutions on countering Money • Conducting training programs for reporting
Laundering and terrorist financing. institutions in relation to customer identifica-
The core functions the FIU undertakes in com- tion, record keeping and reporting obliga-
mon with all FIUs are the collection, analysis tions.
and dissemination of information, and the • Conducting research into the trends and de-
FTRA grants the FIU wide powers in this regard. velopments in the area of Money Launder-
For the purpose of collection of data, the FTRA ing and financing of terrorism.
obliges selected institutions to report cash trans-
• Educating the public and creating awareness
actions and electronic fund transfers over a
on matters relating to Money Laundering and
threshold value (presently set at Rs. 500,000 by an
the financing of terrorism.
Order issued under the FTRA) and any suspi-
cious transactions irrespective of value to the FIU. • Entering into any agreement or arrangement
The coverage of institutions required to re- with any domestic government institution or
port to the FIU in terms of the FTRA is very agency with regard to the exchange of infor-
wide in line with FATF recommendations, mation.
and includes entities and persons in the fi-
10 Central Bank of Sri Lanka
Preventing Money Laundering and Combating the Financing of Terrorism
BOX 3 - STRUCTURE OF THE FINANCIAL INTELLIGENCE UNIT (FIU)
UNDER THE PROVISIONS OF FINANCIAL TRANSACTIONS REPORTING
ACT, NO. 6 OF 2006 (FTRA)
“Finance business” includes “Designated non-finance
Reporting Institutions business” includes
- banking; (Financial & Designated Non-
Financial Institutions) - individual and collective portfolio
- finance business;
management;
- lending, including consumer
- investing, administering or
credit, mortgage credit, factoring
managing funds or money on
(with or without recourse) and
behalf of other persons;
financing of commercial Suspicious
transactions; Transaction - safekeeping and administration
Reports related to of cash or liquid securities on
- financial leasing; Unlawful Activities* behalf of other persons;
- the transfer of money or value; and Cash
Transactions and - safe custody services;
- money and currency changing Electronic Fund
- underwriting and placement of
services; Transfers over the
insurance, insurance intermedia-
value of
- issuing and managing means of tion by agents and brokers;
Rs. 500,000
payment (i.e. credit cards,
- trustee administration or
travellers’ cheques, money
investment management;
>
orders and bankers’ drafts and
electronic money); - casinos, gambling houses or
FIU conducting of a lottery;
- issuing financial guarantees and
established under the
commitments, - real estate agents;
FTRA
- trading for its own account or for - dealers in precious metals and
the account of customers in semi-precious stones;
>
money market instruments
- lawyers, notaries, other
(i.e. cheques, bills, certificates of
independent legal professionals
deposit and derivatives), foreign
and accountants;
exchange, exchange, interest
rate and index instruments, - trust or company service
commodity futures trading and provider;
transferable securities;
- offshore units in accordance
- participating in securities issues with the definitions provided for
and the provision of financial the same in other written laws;
services related to such issues;
>
and
>
and
- such other business as may be
Law Foreign FIUs
- such other business as may be prescribed from time to time by
Enforcement for Mutual
prescribed from time to time by the Minister taking into
Authorities Assistance
the Minister taking into consideration the interests of the
consideration the interests of the national economy.
national economy.
- Police Department
- Criminal Investigation Department
- Attorney General
- Police and Narcotics Bureau
- National Dangerous Drug Board
- Commission to Investigate Allegations of
Bribery or Corruption
- Central Bank of Sri Lanka
- Exchange Control Department
- National Child Protection Authority
- Customs Department
* Please see footnote on page 8
Pamphlet Series No. 6 11
Preventing Money Laundering and Combating the Financing of Terrorism
• The FIU with Ministerial approval, may • On the conviction of a person for an of-
exchange information with other FIUs or fence under the Act, all funds collected in
Supervisory Authorities of a foreign state. contravention of the Act are forfeited to the
• Contravention of the provisions of the FTRA State.
is punishable by fines not exceeding • The extradition law applies to the offence
Rs.1.0 million. of financing of terrorism.
CONVENTION ON THE EFFECTIVENESS OF THE
SUPPRESSION OF TERRORIST AML/CFT REGIME
FINANCING ACT, NO. 25 OF 2005
Of course the mere enactment of the relevant
• On 10 January 2000, Sri Lanka became a laws and creation of the required institutions
signatory to the International Convention to implement an AML/CFT regime alone are
for the Suppression of Terrorist Financing not sufficient. It is vitally necessary for the
adopted by the United Nations General laws in this regard to be strictly enforced. Sri
Assembly on 10/01/2000 and ratified the Lanka for the first time was subjected to a Mu-
same on 8/9/2000. The Convention on tual Evaluation Exercise of its AML/CFT re-
the Suppression of Terrorist Financing Act, gime conducted by the Asia Pacific Group on
No. 25 of 2005 was enacted to give effect Money Laundering (APG). The Evaluation in-
to Sri Lanka’s obligations under this volved a comprehensive review of the institu-
Convention. tional arrangements, legal framework and law
• Under the Act, the provision or collection of enforcement mechanisms in relation to the
funds for use in terrorist activity with the present AML/CFT regime. On the basis of
knowledge or belief that such funds could this evaluation, the APG will provide advice
be used for financing a terrorist activity is and technical assistance to strengthen the
an offence (The definition of terrorist fi- AML/CFT regime in Sri Lanka. Of course for
nancing adopted is the definition contained the AML/CFT regime to be effective, it is also
in the UN International Convention for Sup- necessary for it to have the support of the
pression of the Terrorist Financing given in general public of the country. There have
Box 1). been several public discussions on this sub-
ject, while the media has played a role in
• The penalty for an offence under the Act is
increasing public awareness on the AML/
a term of imprisonment between 15-20
CFT regime. This pamphlet has also been
years and/or a fine.
prepared to enhance general awareness on
• On indictment of a person for an offence the subject. It is hoped that a greater aware-
under the Act, all funds collected in contra- ness of the danger Money Laundering and
vention of the Act will be frozen (if lying in a Terrorist Financing poses to the country
bank account) or seized (if held in the con- would induce the public to extend their fullest
trol of any person or institution other than cooperation to the authorities to arrest such
a bank). crimes.
For further inquiries, please contact:
Information Department Publications Sales Counter
Central Bank of Sri Lanka Centre for Banking Studies
30, Janadhipathi Mawatha, Colombo 1 58, Sri Jayewardenepura Mawatha, Rajagiriya
Tel.: 2477418, 2477420, 2477639, 2477000 Tel.: 2477829, 2477803
e-mail: information@cbsl.lk
www.centralbanklanka.org
12 Central
Published by the Central Bank of Sri Lanka, Janadhipathi Mawatha, Colombo 1, Sri Lanka.Bank of Sri Lanka
Printed at the Central Bank Press, No. 58, Sri Jayewardenepure Mawatha, Rajagiriya, Kotte, Sri Lanka.
