Sri Lanka’s Financial Crime Reporting Obligations: Understanding Money Laundering, Terrorist Financing, and the Role of the Financial Intelligence Unit
In the global financial landscape, combating money laundering and terrorist financing has become a top priority. In Sri Lanka, the legal framework to address these concerns comprises several pieces of legislation. In this article, we will explore the fundamentals of money laundering, terrorist financing, the Financial Intelligence Unit, and the key laws in Sri Lanka.
Money laundering: masking the criminal origin of funds
Money laundering is the process of disguising the criminal origin of ill-gotten funds to appear legitimate. Money launderers move their illicit funds through legal channels, obscuring their criminal origin and converting them into assets. The progression involves three stages: placement, layering, and integration.
- Placement: The initial step involves depositing ill-gotten funds into the financial system, often through financial institutions, or purchasing assets like stocks or insurance contracts. This process breaks down large sums into smaller deposits to avoid suspicion.
- Layering: In this stage, the funds undergo transformations to increase their complexity and distance from their criminal origin. Transactions between financial institutions, purchases of other securities or investment instruments, and sales further conceal the original funds’ provenance.
- Integration: In the final stage, the funds are integrated into the legitimate sector through purchases of assets like real estate, luxury goods, or securities. At this point, the funds are difficult to distinguish from legitimate assets.
Terrorist financing: covertly supporting terrorism
Terrorist financing is the funding of terrorism or those who plan, encourage, or engage in it. These funds may originate from both legitimate and illegal sources, and their destination and usage are often concealed.
Financial Intelligence Unit (FIU): analyzing financial reports for illicit activities
The Financial Intelligence Unit (FIU) acts as the national agency to collect, analyze, and disseminate information about suspicious transactions and other financial intelligence for money laundering, terrorist financing, and designated predicate offenses.
Sri Lanka’s anti-money laundering/terrorist financing laws
Sri Lanka’s anti-money laundering and counter-terrorist financing regime includes the following legislations:
- Conventions on the Suppression of Terrorist Financing Act No 25 of 2005
- Prevention of Money Laundering Act No 5 of 2006
- Financial Transactions Reporting Act No. 06 of 2006
These laws mandate financial institutions and designated non-finance businesses to comply with reporting requirements, customer identification, record-keeping, and other provisions to prevent money laundering and terrorist financing.
Predicate offenses of money laundering in Sri Lanka
The criminal activity generating the proceeds is called a predicate offense or underlying crime in money laundering. In Sri Lanka, an “unlawful activity” includes various acts which constitute an offense under local laws, including the Poisons, Opium and Dangerous Drugs Ordinance, the Bribery Act, the Firearms Ordinance, the Exchange Control Act, and over 20 other written laws.
Penalties for committing money laundering offenses
Any person found guilty of money laundering offenses under Sri Lankan law is subject to fines ranging from the value of the property involved to three times that amount, and imprisonment for a minimum of five years and a maximum of 20 years. Additionally, forfeiture of the derived or involved assets is mandatory under the Act.
The Financial Action Task Force (FATF) and the Asia Pacific Group on Money Laundering (APG)
The Financial Action Task Force (FATF) is an inter-governmental organization founded to develop and promote policies to combat money laundering, terrorist financing, and the financing of weapons of mass destruction. FATF publishes recommendations for worldwide adoption.
The Asia Pacific Group on Money Laundering (APG) is a FATF-style regional monitoring body responsible for monitoring the compliance of the Asia Pacific region with FATF recommendations. Sri Lanka is a founding member of the APG.
Suspicious Transaction Reports (STRs)
A Suspicious Transaction Report (STR) is a report filed when there are reasonable grounds to suspect that a transaction may be related to money laundering, terrorist financing, or criminal offenses. Financial institutions and designated non-finance businesses are required to report STRs under Sri Lankan law.