This record is a partial extract of the original cable. The full text of the original cable is not available.

UNCLAS SECTION 01 OF 03 COLOMBO 002111 
 
SIPDIS 
 
STATE FOR INL AND SA/INS; EB/ESC/TFS; JUSTICE FOR OIA 
AND AFMLS; TREASURY FOR FINCEN 
 
E.O 12958: N/A 
TAGS: KTFN EFIN PTER SNAR KCRM CE ECONOMICS
SUBJECT: 2005-2006 INTERNATIONAL NARCOTICS CONTROL 
STRATEGY REPORT (INCSR) PART II, MONEY LAUNDERING AND 
FINANCIAL CRIMES, SRI LANKA 
 
Ref: STATE 210691 
 
¶1.  UPDATED RESPONSE TO REFTEL FOLLOWS: 
 
¶2.  Sri Lanka is neither an important regional 
financial center nor a preferred center for money 
laundering.  Money laundering currently is not a 
criminal offense. There are strict bank secrecy laws, 
under which the Government of Sri Lanka is required to 
obtain a court order to obtain banking information on 
bank customers. The Central Bank introduced 
regulations on customer due diligence in a December 
2001 bid to tackle money laundering and terrorist 
financing in the absence of a specific legal 
framework. These regulations apply to commercial banks 
and licensed specialized banks coming under the 
Central Bank.  In June 2005, the Central Bank 
tightened the rules for the appointment of money 
changers. 
 
¶3.  The Government has finalized three separate laws 
to deal with money laundering and terrorist financing. 
The Convention on the Suppression of Terrorist 
Financing, Act 25 of 2005, was passed by Parliament in 
August 2005.  This law gives effect to the UN 
Convention for the Suppression of the Financing of 
Terrorism.  The remaining two draft laws, a law for 
the prevention of money laundering and a law on 
financial transactions reporting, modeled on those in 
the Commonwealth, which will provide for the 
establishment of a financial intelligence unit (FIU), 
have been finalized and await Parliamentary approval. 
The passage of these two laws was delayed due to the 
November 17 Presidential elections and the Government 
of Sri Lanka (GSL) Budget presentations in November 
and December 2005.  The laws were tabled in Parliament 
in early December and expected to be passed into law 
soon.  The Government expects to create an FIU, most 
likely housed in the Central Bank, following the 
passage of the laws.  Currently, financial 
transactions relating to terrorism and narcotics are 
illegal under Central Bank regulations and banking 
laws. 
¶4.  The definition of money laundering, under the 
proposed anti-money laundering law, covers (as 
predicate offenses) the offenses under existing laws 
on narcotics, terrorism prevention, bribery, firearms, 
exchange control, banking, transnational organized 
crime, cyber crimes, child protection and trafficking 
of persons and any other offense punishable by death 
or imprisonment of seven years or more.  The offense 
of money laundering involves receiving, possessing, 
concealing, disposing of, importing, exporting, 
investing or dealing in any property or proceeds 
derived or realized from any unlawful activity covered 
by the law.  Under the sentencing provisions of the 
proposed anti-money laundering law, persons convicted 
will be liable for a fine or imprisonment for a period 
of 5-20 years.  Under the sentencing provisions of the 
recently enacted counterterrorist financing law, 
persons convicted will be liable for a fine and 
imprisonment for a period of 15-20 years.  Under the 
laws, both money laundering and terrorist financing 
would be extraditable offenses. 
¶5.  Many areas of concern exist with respect to Sri 
Lanka's current anti-money laundering efforts.  The 
Central Bank continues to allow the operation of 
bearer certificates of deposits.  In July 2003, in 
order to limit money laundering through bearer 
certificates, the Central Bank required banks to 
maintain a record of purchasers of these certificates. 
However, in reality, the banks currently maintain 
records of the initial purchaser and the ultimate 
bearer who turns in a bond to the bank.  Meanwhile, 
the bond may transfer through other hands. 
 
¶6.  Another area of concern relates to a 2003 tax 
amnesty, under which Sri Lankan individuals and 
companies could declare previously undisclosed wealth 
accrued from any source and receive immunity from a 
range of taxes.  The amnesty was revised in 2004, so 
that immunity is now only available with respect to 
the payment of income tax on relevant funds.  Casinos, 
jewelry shops and dealers in gems are also areas of 
concern, as there is no law to regulate their 
operations. 
¶7.  Sri Lanka has an indigenous alternative remittance 
system in the form of informal money transfer 
operations.  Many Sri Lankan migrant workers, mainly 
in the Middle East, use this hawala-like system to 
remit their earnings.  Various payments out of Sri 
Lanka are also made using this system.  Sri Lankan 
commercial banks are increasing their presence and 
services in the Middle East in order to cater to this 
clientele.  Trafficking of drugs generates significant 
amounts of criminal proceeds, and those proceeds are 
also readily transported using this system.  Drug 
proceeds are laundered through various methods, 
including investment in real estate.  In November 
2004, a high court judge who was presiding over 
several narcotics related cases was killed at his 
home.  A known drug peddler and four others were found 
guilty of the murder and sentenced to death. 
¶8.  Sri Lanka is also saddled with a long running 
terrorist problem.  Liberation Tigers of Tamil Eelam 
(LTTE), a terrorist organization seeking an 
independent homeland, has been operating in Sri Lanka 
for over 20 years.  In February 2002, with Norwegian 
Government facilitation, the LTTE and the Government 
of Sri Lanka agreed to a joint cease-fire accord. 
After holding six rounds of talks, the LTTE withdrew 
from the negotiation process in April 2003.  In 
November 2005, the newly elected Sri Lankan President 
invited the LTTE to resume negotiations but there has 
been no response as yet.  Since October 1997, the U.S. 
Government has designated the LTTE as a Foreign 
Terrorist Organization under provisions of the Anti- 
Terrorism and Effective Death Penalty Act of 1996. 
The Government of Sri Lanka lifted a proscription on 
the LTTE consequent to the peace process in 2001. 
However, the LTTE is still designated as a terrorist 
organization under "UN Regulation 1 of 2001" made 
under United Nations Act No 45 of 1968.  This 
regulation was introduced by the Ministry of Foreign 
Affairs to give effect to binding obligations under UN 
Security Council resolution 1373.  Under the 
regulation, funds cannot be remitted to the LTTE. 
 
¶9.  Following the December 2004 tsunami, a large 
number of international and local Non Governmental 
Organizations (NGOs) have opened offices in Sri Lanka. 
In order to ensure the legitimacy of the NGOs, the 
Government created a Center for Non Government Sector 
(CNGS) in the Ministry of Finance.  NGOs require a 
recommendation from the CNGS to register as a NGO. 
Further, NGOs receiving Tsunami related funds from 
abroad are required to channel these funds through a 
Special Bank Account titled "Post Tsunami Inward 
Remittances Account" (PTIRA).  All registered banks in 
Sri Lanka are allowed to open such accounts.  The 
banks are required to forward monthly statements on 
these accounts to the Exchange Control Department of 
the Central Bank.  The Central Bank reports that 
existing arrangements are inadequate to monitor 
financial flows to NGOs. 
¶10.  Sri Lanka is not considered an offshore financial 
center.  Offshore banking units are allowed to operate 
as a part of a commercial bank operating in an 
overseas country in order to facilitate trade finance. 
They are subject to Central Bank supervision.  Bearer 
shares are not permitted for offshore banks and 
foreign-owned companies.  Sri Lanka has 10 free trade 
zones, also called export-processing zones, 
administered by the state-owned Board of Investment 
(BOI).  The free trade zones house export- 
manufacturing operations.  Only companies approved by 
the BOI are allowed to operate inside the zones. 
There are no indications that these free trade zones 
are being used in trade-based money laundering schemes 
or terrorist financing. 
¶11.  Sri Lanka is a party to the UN International 
Convention for the Suppression of the Financing of 
Terrorism and to the 1988 UN Drug Convention.  Sri 
Lanka is also a party to the UN Convention against 
Corruption.  Sri Lanka has signed but not ratified the 
UN Convention against Transnational Organized Crime. 
Sri Lanka is a member of the Bay of Bengal Initiative 
for Multi-Sectoral Technical and Economic Cooperation 
(BIMSTEC) working group on Counter-Terrorism and 
Transnational Crime formed in July 2004.  The working 
group had its first meeting in December 2004 and aims 
to serve as a platform for regional cooperation to 
prevent and suppress terrorism and transnational 
crime. 
¶12.  The Mutual Assistance in Criminal Matters Act of 
2002 provides for cooperation in criminal matters with 
Commonwealth countries and with non- Commonwealth 
countries with which Sri Lanka has entered into a 
bilateral agreement on mutual assistance in criminal 
matters.  Under the newly enacted Convention on the 
Suppression of Terrorist Financing Act No 25 of 2005, 
which gives effect to the UN International Convention 
for the Suppression of the Financing of Terrorism, and 
the draft law on the Prevention of Money Laundering 
the government is required to co-operate with and 
provide assistance to states party to the Convention 
with regard to investigations and prosecutions under 
the respective laws.  The Central Bank of Sri Lanka 
has circulated the list of individuals and entities 
that have been included on the UNSCR 1267 Sanctions 
Committee's consolidated list with instructions to 
identify, freeze and seize terrorist assets.  To date, 
no such assets have been identified. 
¶13.  Terrorist financing is an offense punishable by 
imprisonment for a period of five to ten years. 
Regulations under the United Nations Act No. 45 of 
1968 provide for the freezing and forfeiture of assets 
of financiers of terrorism.  There is no specific 
provision in law for the freezing and forfeiture of 
narcotics-related assets.  The trafficking, 
possessing, importing or exporting of narcotics is 
punishable by death or life imprisonment under the 
Poisons, Opium and Dangerous Drugs Ordinance (OPDDO). 
Draft amendments to OPDDO, and draft money laundering 
and the terrorist financing legislation include asset 
forfeiture and seizure provisions for narcotics 
related crimes, money laundering and terrorist 
financing. 
¶13.  The Government of Sri Lanka has accepted US 
Government assistance to implement its anti money 
laundering and counterterrorist financing programs. 
The US Treasury's Financial Crimes Enforcement Unit 
conducted three training seminars in Sri Lanka for 
officers from regulatory and reporting agencies during 
2004-2005.  The US Department of Justice also 
conducted a regional workshop on detecting and 
preventing terrorist financing in Sri Lanka in June 
¶2005.  Officials from several Sri Lankan government 
agencies attended the workshop along with officials 
from several other countries in South Asia.  US 
Treasury intends to place a full time technical 
advisor on anti money laundering related matters in 
Sri Lanka in summer 2006. 
ENTWISTLE