SRI LANKA: INCSR PART II 2007-2008 SUBMISSION

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