FATF AML Deficiency List
Non - Compliance with FATF MER Recommendations
Corruption Index (Transparency International & W.G.I.)
World Governance Indicators (Average Score)
Sri Lanka is no longer on the FATF List of Countries that have been identified as having strategic AML deficiencies
Latest FATF Statement - 18 October 2019
The FATF welcomes Sri Lanka's significant progress in improving its AML/CFT regime and notes that Sri Lanka has strengthened the effectiveness of its AML/CFT regime and addressed related technical deficiencies to meet the commitments in its action plan regarding the strategic deficiencies that the FATF identified in November 2017. Sri Lanka is therefore no longer subject to the FATF’s monitoring process under its ongoing global AML/CFT compliance process. Sri Lanka will continue to work with APG to improve further its AML/CFT regime.
Compliance with FATF Recommendations
The last follow-up Mutual Evaluation Report relating to the implementation of anti-money laundering and counter-terrorist financing standards in Sri Lanka was undertaken in 2020. According to the Evaluation, Sri Lanka was deemed Compliant for 7 and Largely Compliant for 24 of the FATF 40 Recommendations. It was deemed Highly effective for 0 and Substantially Effective for 1 of the Effectiveness & Technical Compliance ratings.
US Department of State Money Laundering assessment (INCSR)
Sri Lanka was deemed a “Monitored” Jurisdiction of by the US Department of State 2016 International Narcotics Control Strategy Report (INCSR). Key Findings from the report are as follows: -
Sri Lanka is neither an important regional financial center nor a preferred center for money laundering. Nevertheless, the lack of transparent tender mechanisms in government projects, past experience with terrorism, tax evasion, and a large informal economy make the country vulnerable to money laundering and terrorism financing. Corruption and drug-related proceeds pose the highest money laundering risks. Local authorities report that drug trafficking, primarily of heroin, is becoming an increasing problem. Terrorism financing activity, by all accounts, has diminished significantly since the end of Sri Lanka’s civil war in 2009.
As a major transshipment port, Sri Lanka receives 70 percent of all vessels sailing to and from South Asia, exposing Sri Lanka to associated drug and human trafficking. Authorities believe the proceeds of drug trafficking are mostly laundered back to their source jurisdictions, and those for human smuggling, to end destinations or transit points. Overall, Sri Lanka is not considered an end destination for foreign proceeds of crime. There does not appear to be a significant black market for smuggled goods in the country.
Legal remittance flows through the formal banking system have increased sharply in recent years, reaching $7 billion in 2014. Remittances originate primarily from Sri Lanka’s substantial overseas workforce. According to local authorities, these funds are processed largely through the banking system, and therefore, do not present serious money laundering concerns. The Sri Lankan government’s Board of Investment regulates the 12 free trade zones (FTZs) in Sri Lanka. FTZs employ strict access and customs controls with no reported incidences of suspicious transactions.
There are no international sanctions currently in force against this country.
BRIBERY & CORRUPTION
Rating (100-Good / 0-Bad)
Transparency International Corruption Index 38
World Governance Indicator – Control of Corruption 44
There is a moderately high risk of corruption for businesses in Sri Lanka. The most common forms of corruption include facilitation payments paid to avoid bureaucratic red tape, bribe solicitation by government officials, nepotism and cronyism. There is a high-level of corruption in the public procurement sector. The main anti-corruption laws are the Penal Code and Bribery Act, which criminalize corruption and attempted corruption in the form of extortion, and active and passive bribery. No clear distinction between bribery and facilitation payments is made, but gifts given with a corrupt intent are prohibited under the Prevention of Corruption Act. While Sri Lanka's government has started to enforce the anti-corruption laws, enforcement remains constrained by a lack of resources and technical expertise, and powerful political elites often go unpunished for committing corruption crimes. For further information - GAN Integrity Business Anti-Corruption Portal
Sri Lanka continues to experience strong economic growth following the end of the government's 26-year conflict with the Liberation Tigers of Tamil Eelam. The government has been pursuing large-scale reconstruction and development projects in its efforts to spur growth in war-torn and disadvantaged areas, develop small and medium enterprises, and increase agricultural productivity.
The government's high debt payments and bloated civil service have contributed to historically high budget deficits and low tax revenues remain a concern. Government debt of about 72% of GDP remains among the highest in emerging markets.
The new government in 2015 drastically increased wages for public sector employees, which boosted demand for consumer goods but hurt the overall balance of payments and reduced foreign exchange reserves.
Agriculture - products:
rice, sugarcane, grains, pulses, oilseed, spices, vegetables, fruit, tea, rubber, coconuts; milk, eggs, hides, beef; fish
processing of rubber, tea, coconuts, tobacco and other agricultural commodities; telecommunications, insurance, banking; tourism, shipping; clothing, textiles; cement, petroleum refining, information technology services, construction
Exports - commodities:
textiles and apparel, tea and spices; rubber manufactures; precious stones; coconut products, fish
Exports - partners:
US 26%, UK 9%, India 7.2%, Germany 4.3% (2015)
Imports - commodities:
petroleum, textiles, machinery and transportation equipment, building materials, mineral products, foodstuffs
Imports - partners:
India 24.6%, China 20.6%, UAE 7.2%, Singapore 5.9%, Japan 5.7% (2015)
Investment Climate - US State Department
Sri Lanka is located in South Asia off the southern coast of India, on the main East-West Indian Ocean shipping lanes. In January 2015, President Maithripala Sirisena was elected to a six-year term. He campaigned on a platform of good governance and anti-corruption as well as ethnic reconciliation. Candidates running on a similar platform gained a majority of seats in parliamentary elections held in August 2015. Sirisena leads a national unity government comprising the pro-business United National Party (UNP), the reformist wing of the Sri Lanka Freedom Party (SLFP) and several smaller political parties. The coalition has embarked on a major political and economic reform process including constitutional reforms aimed at reducing the powers of the executive president. The government is working to improve its relations with other countries and to develop its economy to compete more effectively in the global marketplace. Specifically, Sri Lanka is working to position itself as a financial and trading hub in South Asia.
The Sirisena government’s initial attempts to introduce economic reforms received mixed reactions. The government’s 2016 budget contained extensive reforms that were commendable but which special interest groups were not prepared to accept. As a result, the government has reversed several reforms, creating uncertainty among investors. In March 2016, the government introduced new taxes to meet increasing debt obligations and to cover previously unannounced financial commitments made by the former administration. The government has identified the following key economic priorities: 1) integration of the economy into the global marketplace; 2) attracting increased foreign direct investment (FDI); 3) job creation; and 4) increased digitalization. The government is eager to enter into trade pacts with the United States, China, and Singapore to boost trade and investment and wants to expand the current Free Trade Agreement (FTA) with India to a broader Economic and Technology Agreement (ECTA). It is also trying to regain the European Union’s (EU) Generalized Scheme of Preferences (GSP+) privileges for Sri Lankan exports. The EU withdrew GSP+ status from Sri Lanka in 2010 due to alleged human rights abuses committed by the military and security forces during the 26 year long civil war that ended in 2009. Additionally, several government agencies are investigating suspected corruption by the previous administration. Several officials and politicians connected to the former regime have been arrested for corruption or are on bail.
The Sri Lankan economy grew 4.8 percent in 2015, a year in which the new government began reversing years of statist economic policies. Gross domestic product (GDP) reached USD82 billion in 2015, and the per capita GDP was USD3,925. Growth is expected to be approximately 5.3 percent in 2016. The new government’s efforts to boost the economy are hampered by a large fiscal deficit and the slowing global economy. The government tax revenue to GDP ratio is one of the lowest in the world. Sri Lanka also suffers from a large foreign debt burden and a persistent current account deficit. Foreign debt is comprised of concessional debt and commercial debt, including debt owed to China for recent infrastructure investment. Exports and foreign remittances from Sri Lankan workers overseas declined, and the rupee depreciated approximately nine percent in 2015. In March 2016, rating agencies downgraded Sri Lanka’s credit ratings and revised its rating outlook from `Stable’ to `Negative,’ citing increased refinancing risks, weak public finance, decline in foreign exchange reserves, and higher foreign debt. The government has requested assistance from the International Monetary Fund (IMF). Financing from the IMF could lead to substantial fiscal consolidation and increased taxation.
Sri Lanka’s annual exports are approximately USD10.5 billion, mostly tea and garments. Imports are approximately USD19 billion, leaving an annual trade deficit of nearly USD8.5 billion. The United States is the largest single market for Sri Lankan exports, capturing over USD2 billion of the total. Remittances from migrant workers, approximately USD7 billion per year, are Sri Lanka’s largest source of foreign exchange and help to offset the external deficits. Tourism is a USD2.9 billion industry with 1.8 million tourist arrivals in 2015.
Future growth will require structural changes to the economy, including a shift away from agriculture, as well as greater diversification of exports, improvements in productivity levels across all sectors, and the establishment of a more transparent regulatory and procurement framework. Sri Lanka needs to modernize education and improve government administration in order to build the foundation for long-term economic growth. The bloated civil service and losses at state-owned enterprises (SOEs) are significant challenges for the government.
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