SRI LANKA: FIU, MAKING LITTLE PROGRESS, WILL BE MERGED INTO

UNCLAS SECTION 01 OF 02 COLOMBO 000493 SIPDIS SENSITIVE SIPDIS STATE FOR SCA/INS, EEB/ESC/TFS, S/CT AND INL MCC FOR S GROFF, D NASSIRY AND E BURKE TREASURY FOR LESLIE HULL, TFI AND OTA E.O 12958: N/A TAGS: EAID ECON PREL PTER CE SUBJECT: SRI LANKA: FIU, MAKING LITTLE PROGRESS, WILL BE MERGED INTO CENTRAL BANK REF: 06 COLOMBO 1032 ¶1. (SBU) Summary and comment: Sri Lanka's Financial Intelligence Unit (FIU),which began operations about a year ago, has made little progress towards becoming an effective, independent operation. Sri Lanka's Central Bank Governor, who currently supervises the nominally autonomous FIU, plans to merge the FIU into the Central Bank and replace its weak Chief Executive Officer with a Central Bank official. The U.S. Treasury Advisor in Sri Lanka will continue working with the FIU and will begin monthly meetings with the Central Bank Governor to ensure that his expertise is well-utilized. While Embassy would ideally prefer to see a strong AND independent FIU, we believe the planned changes are likely to improve cooperation between the FIU and U.S. law enforcement and put the FIU on track towards greater effectiveness. End summary and comment. FIU LANGUISHED UNDER WEAK LEADERSHIP AND INADEQUATE RESOURCES -------------- -------------- ¶2. (SBU) The Sri Lanka Financial Intelligence Unit (FIU) was created in mid-2006 as a semi-autonomous agency under the supervision of the Central Bank Governor. Since then, the FIU has made little progress towards being a competent, independent agency able to identify signs of money laundering and terrorist finance. It has struggled both at the management and operational level, lacking strategic focus, hiring few skilled staff, missing opportunities for training, and failing to secure adequate financial or technical resources. These problems have also hampered the FIU's cooperation with U.S. law enforcement agencies investigating funding activities related to the Sri Lankan terrorist organization the Liberation Tigers of Tamil Eelam (LTTE). ¶3. (SBU) Sri Lanka Central Bank Governor Nivard Cabraal, unhappy with the FIU's poor progress, has decided to fully merge the FIU into the Central Bank. With this move, Cabraal will replace the FIU's current well-intentioned but ineffective Chief Executive Officer with a career Central Bank staffer whom the Governor believes is better suited for the job. The new manager has extensive experience in bank supervision and operations, according to the Governor. The Bank has not yet announced any of these planned actions. ¶4. (SBU) In a March 16 discussion with Governor Cabraal, Ambassador questioned whether the planned merger was the right way to address the FIU's inefficacy. The Ambassador emphasized that all FIUs must be seen as independent institutions, and must have the freedom to investigate government entities as well as private ones. Ambassador suggested that the Governor think about ways to keep the FIU independent, if it had to remain in the Bank at all. Ambassador urged the Governor to meet regularly with Embassy's U.S. Treasury advisor to the FIU, whose expertise was not being well utilized by the current FIU management. Cabraal agreed to do so and indeed called in Treasury Advisor Eric Stonecipher the following week. ¶5. (SBU) Ambassador also informed the Governor that the FIU had been slow to respond to a request from the U.S. Department of Justice, relayed by RSO through the Sri Lankan Solicitor General, for information pertinent to the ongoing U.S. prosecution of suspected LTTE arms procurers. Ambassador noted that Sri Lankan Foreign Minister Bogollagama, visiting Washington that same week, had asked U.S. officials for more assistance in cutting off LTTE financing and weapons procurement. Cabraal was not aware of the request but was surprised that his government had not yet responded, since "you are trying to help us." He promised to look into the matter and get a quick response. (Note: RSO followed up with the Solicitor General a few days later and was assured that most of the documents DOJ had requested would be ready to hand over as soon as they could be certified by the bank from which they originated. End note.) MERGING FIU INTO CENTRAL BANK TO PROTECT IT -------------- ¶6. (SBU) When Treasury Advisor, accompanied by Econoff, met wit the COLOMBO 00000493 002 OF 002 Governor on March 22, Cabraal confirmed that the FIU would be merged into the Central Bank. He believed the move would actually strengthen the FIU by getting it the staff, the resources, the training, and the bureaucratic cover it needed. By the latter, Cabraal indicated that the FIU would benefit from protection from Parliamentary inquiry into how the FIU conducted its hiring, budget, operations, and so forth. Cabraal implied that if the FIU operated under Central Bank procedures, there would be little of this nature for critical politicians to challenge. He further suggested that the anonymity of working within the Bank would protect FIU staff from pressure or threats they might otherwise confront if they were in a more visible stand-alone institution. ¶7. (SBU) Cabraal also agreed to hold monthly meetings with Treasury Advisor and to re-endorse the current Terms of Reference for the Treasury Advisor position. The Governor asked Treasury Advisor to work with the incoming FIU director to prepare for the Governor's review a work plan for personnel, procedures, and systems. COMMENT: SORTING OUT FIU LIKELY TO IMPROVE BILATERAL COPPERATION ON LTTE CRIMINAL CASE -------------- -------------- ¶8. (SBU) While Embassy would ideally prefer to see a strong AND independent FIU, we believe the planned move of the FIU into the Central Bank is likely to put the FIU on a faster track towards greater effectiveness. Cabraal prides himself on being a good manager (reftel),and appears ready to take a more active role in ensuring that the FIU functions properly. This should also result in improved collaboration between the FIU and U.S. law enforcement, as indicated by the Governor's responsiveness to our request for information from the FIU related to the LTTE investigation.