VZCZCXRO2304
RR RUEHLMC
DE RUEHLM #1580/01 3251134
ZNR UUUUU ZZH
R 211134Z NOV 07
FM AMEMBASSY COLOMBO
TO RUEHC/SECSTATE WASHDC 7236
INFO RUEAWJL/DEPT OF JUSTICE WASHINGTON DC
RUEATRS/DEPT OF TREASURY WASHDC
RUCPDOC/USDOC WASHDC
RUEHNE/AMEMBASSY NEW DELHI 1587
RUEHKA/AMEMBASSY DHAKA 0550
RUEHIL/AMEMBASSY ISLAMABAD 7539
RUEHKT/AMEMBASSY KATHMANDU 5706
RUEHLMC/MILLENNIUM CHALLENGE CORPORATION

UNCLAS SECTION 01 OF 04 COLOMBO 001580 
 
SIPDIS 
 
SIPDIS 
 
STATE FOR SCA/INS, SCA/RA, INL, S/CT, AND EEB/ESC/TFS 
JUSTICE FOR AFMLS, OIA, AND OPDAT 
TREASURY FOR FINCEN AND L HULL 
 
E.O 12958: N/A 
TAGS: KCRM EFIN KTFN SNAR KMCA CE
SUBJECT:  SRI LANKA: INCSR PART II 2007-2008 SUBMISSION 
 
REF: STATE 138130 
 
¶1. The following is Embassy Colombo's International Narcotics 
Control Strategy Report (INCSR) Part II regarding money laundering 
and financial crimes, per request in reftel. 
 
¶2. Begin text: 
 
Sri Lanka 
Sri Lanka is neither an important regional financial center nor a 
preferred center for money laundering. 
 
Civil Conflict with Liberation Tigers of Tamil Eelam 
 
Since 1983, the Government of Sri Lanka has been in armed conflict 
with the Liberation Tigers of Tamil Eelam (LTTE), a terrorist 
organization seeking an independent homeland for Sri Lanka's Tamil 
people.  In October 1997, the US Government 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 in 2001 
consequent to a now-defunct peace process.  However, Sri Lanka still 
designates the LTTE 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. 
 
 
AML/CFT Laws 
 
The Government enacted three separate laws to deal with money 
laundering and terrorist financing in 2005-2006.  Money laundering 
is a criminal offence under the Prevention of Money Laundering Act 
No 5 of 2006.  The Convention on the Suppression of Terrorist 
Financing Act No 25 of 2005 gives effect to the UN Convention for 
the Suppression of the Financing of Terrorism.  The Financial 
Transactions Reporting Act No 6 of 2006 provided for the 
establishment of a Financial Intelligence Unit, which was 
established in 2006. 
 
The definition of money laundering, under these laws, covers many 
offenses already covered under existing laws on narcotics, terrorism 
prevention, bribery, firearms, exchange control, banking, 
transnational organized crime, cyber crimes, child protection, 
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 offense covered by these laws. 
 
 
Sri Lanka has a tradition of strict bank secrecy laws, under which 
the Government of Sri Lanka is required to have a court order to 
obtain banking information on bank customers. However, the 2006 
money laundering and terrorist financing laws override the bank 
secrecy provisions of other laws.  In practice, banks have 
recognized a fairly liberal reading of the anti-money 
laundering/combating the financing of terrorism (AML/CFT) laws and 
have generally been responsive to the FIU and investigators in 
providing information under these laws. 
 
Work is currently underway to amend AML/CFT laws to address 
technical and substantive deficiencies in the legal framework and 
strengthen the authority of the FIU and law enforcement authorities 
engaged in AML/CFT detection and suppression. The new legislative 
package will address issues raised in the Asia Pacific Group on 
Money Laundering (APGML) evaluation performed this year and the 
governments internal review of their laws' conformity with the 
revised Financial Action Task Force (FATF) recommendations. These 
include a draft law to strengthen forfeiture provisions relating to 
the proceeds of crime or funds related to the financing of terror. 
 
Under the sentencing provisions of the AML/CFT laws, persons 
convicted of money laundering will be liable for a fine up to three 
times the value of the property in respect of which the offence is 
committed and/or imprisonment for a period of 5-20 years; persons 
convicted of terrorist financing will be liable for a fine (not 
defined) and imprisonment for a period of 15-20 years. In addition, 
the property involved in the above offences shall be liable to 
forfeiture. 
 
COLOMBO 00001580  002 OF 004 
 
 
 
Anti-money laundering legislation includes asset forfeiture and 
seizure provisions for narcotics-related money laundering.  Both 
money laundering and terrorist financing are extraditable offenses. 
The trafficking, possessing, importing or exporting of narcotics is 
punishable by death or life imprisonment under the Poisons, Opium 
and Dangerous Drugs Ordinance (OPDDO). 
 
Criminal and Civil Prosecutions 
 
Sri Lanka did not report any criminal prosecutions with regard to 
money laundering or terrorist financing in 2007. Sri Lanka's 
Financial Intelligence Unit has referred twenty money laundering 
cases to the Sri Lanka Police Criminal Investigation Division (CID) 
for investigation, but none have been referred for prosecution. 
 
The Central Bank in August 2006 froze funds held by the Tamils 
Rehabilitation Organisation (TRO), an NGO aligned to the LTTE, in 
several local banks and a branch of an international bank.  The 
Central Bank alleged that TRO personnel in many foreign countries 
have been involved in terrorist financing and that funds have been 
channeled to the Sri Lankan TRO office through the local banking 
system under the mask of humanitarian projects.  Since the initial 
freeze, the Central Bank has received permission from the High Court 
of Colombo to keep the TRO accounts frozen while it the FIU 
continues investigation.  The freeze currently extends until March 
5, 2008.  Civil cases are pending.  The United States in November 
2007 designated the TRO as an organization providing material 
support for terrorism, based on its links to the LTTE.  Under this 
designation, the United States froze TRO assets under US 
jurisdiction and prohibited US persons from transacting with the 
TRO. 
 
Financial Intelligence Unit 
 
Sri Lanka established a Financial Intelligence Unit (FIU) in 2006 as 
a semi-autonomous body connected to the Central Bank.  In 2007 the 
FIU was moved to be a line department under the direct authority of 
the Central Bank.  The FIU is an administrative body that performs 
intelligence collection and analytical functions.  It has the 
authority to issue regulations and instructions to combat money 
laundering and terrorist financing, including the ability to freeze 
transactions and accounts. 
 
The FIU intends to develop a reasonably sophisticated 
analytical/case development facility enabling risk-based and 
model-based detection activities.  Proposed amendments to the 
existing AML/CFT legislation include provisions enabling the FIU to 
access other government databases to enhance its ability to perform 
detection and case development functions.  The government's 
implementation plan includes improved coordination with law 
enforcement to enable more rapid case development and prosecutions, 
particularly in the area of terrorist financing where investigations 
and preventive actions are much more time-sensitive than AML cases. 
 
In June 2007, the FIU issued Know Your Customer (KYC) and Customer 
Due Diligence (CDD) policies applicable to Banking Institutions and 
Securities Dealers. Regulatory instruments are being developed for 
the other reporting entities and will be issued after the FIU 
implements its IT support system in early 2008. 
 
Financial institutions such as banks, finance companies, leasing 
companies, money transfer agents, credit card issuers, foreign 
exchange and money market dealers, and designated non-finance 
businesses such as portfolio managers, fund managers, insurance 
companies, casinos, and real estate agents are required to generate 
suspicious activity reports and other mandatory disclosures such as 
cash transaction reports and forward to the FIU.  These reports are 
required to be maintained for 6 years. 
 
More than 50 Suspicious Transaction Reports were received by the FIU 
in 2007 leading to 20 referrals to law enforcement for 
investigation.  The CID maintains that it has a special unit of 20+ 
officers detailed for AML/CFT cases, but it appears that this unit, 
as a matter of practice, has been detailed to other duties. 
Furthermore, the CID does not currently have any qualified financial 
investigators. Representatives from the international community 
including the US Treasury, the Asia Pacific Group, the World Bank 
and others are currently pressing the Government to address the 
deficiencies in the law enforcement sector. 
 
 
COLOMBO 00001580  003 OF 004 
 
 
Other Financial Crimes Monitoring and Enforcement Authorities 
 
The Police Department and the Attorney General's Department are 
charged with criminal investigative and prosecution responsibilities 
with regard to AML/CFT crimes.  The Bank Supervision Department and 
the Non Bank Financial Institutions Supervision Department of the 
Central Bank supervise and examine banks and non bank financial 
institutions (i.e. finance companies and leasing companies) 
respectively for compliance with AML/CFT regulations.  The 
Securities and Exchange Commission regulates securities brokers and 
the Insurance Board regulates insurance companies for compliance 
with AML/CFT. 
 
Exchange Controls 
 
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 12 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.  The zones are secured by fences and GSL-provided guards 
are posted at the entrances; only individuals with proper zone 
identification and/or previously approved for access may enter the 
zones. 
 
The Central Bank's Exchange Control Department has imposed 
regulations for limiting and monitoring the cross border 
transportation of currency and monetary instruments.  The bank has 
set monetary thresholds for declarations at border crossings. 
Declarations are required when leaving the country for currency 
notes over USD 5000 and for currency plus travelers checks amounting 
to over USD 10,000 (or the equivalent in other foreign currencies). 
Declarations are required when arriving in Sri Lanka for amounts 
over USD 15,000 or for lower amounts of foreign currency notes 
brought in if the traveler intends to later take out foreign 
currency notes exceeding USD 5,000. 
 
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.  Casinos, jewelry shops and dealers in gems are 
also areas of concern, there are no laws to regulate their 
operations.  A key vulnerability in the Sri Lankan financial system 
is the existence of SIERA accounts which allow foreign investors to 
participate directly in the Sri Lankan Stock Exchange. These 
accounts have historically allowed for undisclosed principals and 
beneficial owners. The Central Bank and Securities Commission are 
currently drafting rules which would require better disclosure and 
CDD procedures prior to establishment of these accounts. 
 
Alternative Remittance Systems 
 
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 a 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 dealer and four 
others were found guilty of the murder and sentenced to death.  The 
accused are in prison serving life sentences as Sri Lanka does not 
carry out death penalty convictions. 
 
2004 Tsunami 
 
Following the December 2004 tsunami, a large number of international 
 
COLOMBO 00001580  004 OF 004 
 
 
and local non-governmental organizations (NGOs) 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.  Commercial Banks are required to obtain Finance Ministry 
clearance before releasing funds received from abroad. The Central 
Bank reports that existing arrangements are inadequate to monitor 
financial flows to NGOs.  The government in October 2006 asked four 
foreign NGOs working in the north and east to leave the country 
because they were suspected of providing assistance to the LTTE. 
 
International Cooperation 
 
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.  Sri Lanka also 
participates in a Financial Action Task Force (FATF) regional body 
and is a member of the Asia Pacific Group on Money Laundering 
(APGML).   The Central Bank FIU has submitted its application for 
membership in the Egmont Group of FIUs and hopes to be considered in 
the summer of 2008. 
 
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 Convention on the Suppression of Terrorist Financing Act No 25 
of 2005, and the law on the Prevention of Money Laundering, the 
government is required to co-operate with and provide assistance to 
state parties to the Convention with regard to investigations and 
prosecutions under the respective laws. 
 
The FIU circulates the list of individuals designated under UNSCR 
1267 to local financial institutions with instructions to identify, 
freeze, and seize terrorist assets.  To date, no such assets have 
been identified. 
 
US Government Assistance 
 
The Government of Sri Lanka has accepted USG 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. Treasury has also placed a 
Resident Advisor to assist in the implementation of the national 
AML/CFT regime with special emphasis on the development of the FIU. 
The US Department of Justice conducted a South Asia 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.  The United Nations Office on Drugs 
and Crime (UNODC) and the Commonwealth Secretariat, together with 
the US Treasury and the Central Bank of Sri Lanka co-hosted a major 
financial investigations training event in Colombo in January 2007. 
Another Joint Commonwealth/US Treasury training program was 
delivered to prosecutors and law enforcement officers in November 
¶2006. 
 
End text. 
BLAKE