FATF Status

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 2021. According to the Evaluation, Sri Lanka was deemed Compliant for 7 and Largely Compliant for 25 of the FATF 40 Recommendations. It remains 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.

Rating                                                                           (100-Good / 0-Bad)

Transparency International Corruption Index                           34

World Governance Indicator – Control of Corruption             40

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, a lower middle-income country with a population of approximately 22 million, continues to face the challenge of navigating its way out of an unprecedented economic crisis. Precipitated by unsustainable external debt load and budget deficits resulting from poor fiscal management, the Sri Lankan economy contracted by an estimated 8.7 percent in 2022. Near depletion of foreign currency reserves to meet even the basic import requirements of the country resulted in shortages of basic goods including food, fuel, and medical supplies throughout 2022, with the government halting the servicing of external public debts pending an orderly restructuring of debt obligations. Mass protests led to the resignation of former President Gotabaya Rajapaksa in July 2022. Meanwhile, Sri Lanka’s deteriorating ability to import agricultural inputs such as fertilizers – exacerbated partly by surging global prices from the Russian invasion of Ukraine – led to mass food insecurity and historic food inflation reaching as high as 94.9 percent in September 2022.

Since assuming office in July 2022, President Ranil Wickremesinghe introduced a variety of sweeping financial reforms including tax hikes and ongoing privatization of money-losing state-owned enterprises (SOEs). After prolonged negotiations, the IMF approved an Extended Fund Facility (EFF) in March 2023 – valued at roughly $3 billion over four years – to support Sri Lanka’s efforts to shore up financing. The disbursement began on March 22 with the first tranche of $330 million.

Economic outlook remains sluggish, albeit with a positive recovery momentum. The GDP is projected to contract by roughly 3 percent in 2023 before returning to positive growth in 2024, according to the IMF. Inflation which had risen since October 2021 to reach historic levels in October 2022 has since been declining but remains high. The Central Bank of Sri Lanka’s (CBSL) tight monetary policy including high interest rates adopted mid-last year has likely contributed to further economic contraction. CBSL had pegged the Sri Lankan Rupee’s (LKR) exchange rate with the U.S. dollar early last year; after this practice ended in March 2023, the rupee’s exchange rate has experienced increased volatility.

Key foreign exchange earners for the country include exports (namely apparel and tea), foreign remittances, and tourism. Due to strong export numbers largely led by the apparel sector as well as various import restrictions, the trade deficit remained relatively stable in 2022. Out of roughly $13 billion in exports, apparel accounted for $5.6 billion in 2022. Tourism, which recorded a severe blow due to the 2019 Easter attacks and COVID-19, gradually began recovering at the end of 2022; while still below peak arrival numbers in 2018, January-February 2023 saw two consecutive monthly arrivals of over 100,000 for the first time since 2018. Remittances recorded a considerable growth with the rapid increase of Sri Lankans seeking job opportunities overseas since the break of the crisis.

The current government appears committed to achieving budget sustainability, implementing several key economic reforms via politically unpopular tax hikes and cost-cutting measures. Many of these reforms reflect genuine efforts to qualify for the IMF’s EFF package which is conditioned on budget sustainability and transparency. Successful completion of these reforms and the IMF program is not guaranteed, with the political-economic landscape still very much uncertain in the country. While the government introduced an anti-corruption bill in April 2023 to tackle some of its endemic corruption issues, Sri Lanka’s track record on combatting corruption remains dubious at best, which may undermine the effectiveness of financial reforms to attract foreign investments.

Foreign investments in Sri Lanka, historically below those of other comparable countries, is expected to have declined further in 2022 (the CBSL’s annual FDI report is scheduled for release in late April 2023). Foreign direct investments (FDI) stood at $780 million in 2021 compared to $687 million in 2020. Meanwhile, portfolio investments in the stock exchange and the government securities market also continued to witness net outflows in 2021. FDIs in Sri Lanka have largely been in tourism, real estate, development projects, ports, and telecommunications in recent years. The Sri Lankan government seeks to expand investment potential in franchising, information technology services, agriculture, electronics, and light manufacturing. The Board of Investment (BOI) is the primary government authority responsible for attracting both foreign and domestic investment, aiming to provide “one-stop” services for foreign investors. BOI facilitates FDIs by offering project incentives, arranging utility services, assisting in obtaining resident visas for expatriate personnel, and facilitating import and export clearances.

Sri Lanka’s strategic location off the southern coast of India along the main east-west Indian Ocean shipping lanes gives it a regional logistical advantage, especially as India does not have deep-water ports comparable to what Sri Lanka’s. This geographic advantage remains relatively untapped.

Country Links

Financial Intelligence Unit of Sri Lanka (Sri Lanka FIU)​

Central Bank of Sri Lanka