PREVENTING MONEY LAUNDERING AND COMBATING THE … · On 6 March 2006, the Prevention of Money...

1Pamphlet Series No. 6

Preventing Money Laundering and Combating the Financing of Terrorism

Financial System Stability

Central Bank of Sri LankaJuly 2006

PAMPHLET SERIESNO. 6

PREVENTING MONEY LAUNDERINGAND COMBATING THE

FINANCING OF TERRORISM

On 6 March 2006, the Prevention of Money Laundering Act, No. 5 of 2006 and the Financial

Transaction Reporting Act, No. 6 of 2006 became law. Earlier, in August 2005 the Convention on the

Suppression of Terrorist Financing Act, No. 25 of 2005 was enacted. These three far reaching pieces of

legislation form the legal framework for Prevention of Money Laundering and Combating the Financing

of Terrorism in Sri Lanka. This pamphlet has been published by the Central Bank to increase public

awareness on the offences of money laundering and terrorist financing, the methodologies adopted by

money launderers, the negative consequences associated with money laundering and terrorist financing,

the contents of the three new laws and the duties and responsibilities imposed on persons and entities in

terms of these laws.

2 Central Bank of Sri Lanka


Greed is the root cause for the majority ofcrimes committed today. Crimes such as

drug trafficking, human trafficking, illegal armstrading, corruption, fraud, forgery, armed rob-bery, blackmail and smuggling are allcommited for money. Criminals involved needto find a way to control such money withoutattracting attention to the underlying activityor people involved. This dictates the need fora process to disguise the criminal origin ofsuch money. This process has come to beknown as money laundering.

WHAT IS MONEY LAUNDERING?The Financial Action Task Force on MoneyLaundering (FATF), defines the term “MoneyLaundering” briefly as “the processing ofcriminal proceeds to disguise their illegal ori-gin in order to legitimize the ill-gotten gains ofcrime”. Although there are many more com-prehensive definitions of “Money Laundering”used by different countries, the FATF defini-tion adequately captures the essence of theprocess.

Money launderers use a variety of personsand entities to accomplish their objective ofdisguising the criminal origin of their funds.These include not only financial institutionsbut also both formal and informal non finan-cial institutions as well as individuals. Non-financial institutions used by money laun-derers are those which have a large cashturnover such as casinos and real estateagencies. Indeed there are some who claimthat the term laundering came to be asso-ciated with this process because of the useof launderettes by criminals to launder theproceeds of crime in the 1920s. Moneylaunderers also use individuals who dealwith large sums of money such as dealers inprecious stones and precious metals as wellas professionals who facilitate transactionswhich involve large cash turnover such aslawyers and accountants, to accomplishtheir objective. Therefore, a comprehensivemoney laundering regime requires scrutiny

of transactions undertaken by a wide arrayof persons and entities. In the final stage ofthe money laundering process however, thelaundered funds usually re-enter the formaleconomy, with their criminal origin completelyobliterated.

STAGES IN THE PROCESS OFMONEY LAUNDERINGThe process of Money Laundering has beenseparated into three stages namely, Place-ment, Layering and Integration which arebriefly described below:

Placement is the introduction of funds de-rived from crime into the financial system.

Layering is the process of effecting a largenumber of transactions with the funds to dis-tance them from their criminal origin.

Integration is the stage at which the laun-dered proceeds re-enter the financial systemwith the appearance of having originated fromnormal business activities.

However, it would be misguided to visualize theMoney Laundering process as a simple threestage process. Depending on the circum-stances, these stages could occur simultane-ously or even overlap.

MAGNITUDE OF THE PROBLEMAs secrecy and evasion are core character-istics of the Money Laundering process, it isdifficult to estimate precisely the quantum ofcriminal proceeds laundered world wide. TheInternational Monetary Fund (IMF) some yearsback estimated this figure to be in the rangeof 2-5 per cent of global Gross Domestic Prod-uct (GDP).

THE FIGHT AGAINST MONEYLAUNDERINGAlthough Money Laundering activities have along history, international efforts to arrestMoney Laundering commenced in earnestonly since the late 1980s. Initially these effortswere focused mainly on the laundering offunds by drug traffickers. This was extendedto cover other crimes when it became appar-



ent that anti-Money Laundering activities area strong deterrent to crime. Separating a crimi-nal from the proceeds of crime is likely to de-ter crime in two ways. Firstly, the criminal willnot be able to benefit from the proceeds of hiscrime which would be a disincentive to com-mit further crime and secondly he would beunable to reinvest criminal proceeds in furthercriminal activity, and thereby perpetuate a vi-cious circle of crime.

During the 1980s International Organisationssuch as the United Nations and the Bank forInternational Settlements took some initialsteps to address the problem of MoneyLaundering. The establishment of the FATFin 1989 was a major landmark in the fightagainst Money Laundering. The FATF wasinitially established by the Group of 7 Fi-nance Ministers under the auspices of theOrganization of Economic Cooperation andDevelopment with a brief to encouragecountries to make Money Laundering acriminal activity in it self, and also seekto strengthen international cooperationbetween criminal investigation agen-cies and the judiciaries in differentcountries.

In the early 1990s, the FATF formulated 40Recommendations aimed at governments andfinancial institutions. Under these recommen-dations, banks and other selected financialinstitutions were required to report suspicioustransactions undertaken by their customers.Since 1996 these recommendations havebecome applicable to all serious crime(earlierthe crime of drug trafficking was the main fo-cus). These recommendations were updatedin 2003 to keep them in line with evolvingMoney Laundering techniques. Under thisrevision, the coverage of entities required toreport financial transactions was widened toinclude non-financial entities such as casinosas well as individuals in specific businessesand professions, as money launderers hadbegun to increasingly use such persons and

entities to effect laundering activities. These40 Recommendations have been acceptedworld wide as a comprehensive Anti-MoneyLaundering (AML) regime.

Further it became apparent that there was anecessity to have a separate institution withthe expertise to convert financial transactionsreports received from reporting institutionsinto financial intelligence. As a result many ju-risdictions began establishing such institu-tions which have come to be known as Finan-cial Intelligence Units(FIUs). In its 2003 recom-mendations to prevent Money Laundering, theFATF recommended the establishment ofFIUs as national centers for receiving, analys-ing and disseminating financial information.The flow of information to and from a typicalFIU is given in Figure 1.

ECONOMIC IMPACT OF MONEYLAUNDERINGMoney Laundering activities adversely affectthe financial sector, the real sector as well asthe external sector of an economy. Associa-tion with criminal elements involved in MoneyLaundering tends to expose employees of fi-nancial sector institutions to corruption whichwould inevitably undermine public confidencein these institutions.(There is even a possibilityof such institutions being controlled by crimi-nals). Lack of public confidence in such insti-tutions would prevent their further develop-ment. Loss of confidence in a country’s finan-cial system would also deter Foreign DirectInvestment (FDI) flows, as genuine investorswould be reluctant to deal with financial insti-tutions which are perceived to be corrupt.When using a country’s territory for MoneyLaundering activities, particularly in the layer-ing stage, money launderers tend to bring inlarge amounts of money into the country andthen exit to another jurisdiction. This wouldresult in the liability base of financial institu-tions becoming unstable and cause an up-surge of activity in the financial sector followedby a downturn which would in turn contribute



to financial sector instability. Further, over-seas banks will also be reluctant to have cor-respondence relationships with banks whichare tainted by Money Laundering allegations,adversely affecting banking activity in variousspheres.

Money Laundering takes its toll on the realsector as well. The break-down in public con-fidence in financial institutions owing to MoneyLaundering activities and the consequent re-tardation of the development of these institu-tions would have negative implications on thereal economy, given the important role playedby financial institutions in the allocation of re-sources particularly in a developing country.

In fact, empirical studies have revealed that

economic growth depends on sound domes-tic financial institutions. Further as discussed

above, FDI flows could reduce, depriving the

country of foreign capital for development.Money launderers, if they invest in a country,

are also likely to choose sterile investments

such as real estate and precious metals whichdo not contribute significantly to economic

development. This would distort asset prices

causing further problems to the economy. In-flation could also increase as a result of

Money Laundering. Further, funds moving in

and out of the country would make interestrates and exchange rates more volatile pos-

FIGURE 1 - FLOW OF INFORMATION TO AND FROM A FINANCIALINTELLIGENCE UNIT (FIU)

REPORTING ANALYSIS DISSEMINATION

ReportingEntity

Report

Banks

SecuritiesDealers

Insurers

Casinos

Lawyers

Accountants

Others

PersonsTransporting

Currency AcrossBorder

Cross BorderCurrency

TransactionReports

SuspiciousTransaction

Reports

CashTransaction

Reports

FIU Database

GovernmentDatabases

Data fromOther FIUs

Other Data

FinancialIntelligence

OtherFIUs

LawEnforcement

Agencies

Prosecutor’sOffice

↑↑

↑

↑

↑

↑↑

↑

↑

↑

↑↑

↑

Source: Paul Gleason & Glenn Gettselig “FinancialIntelligence Units - An Overview”International Monetary Fund (2004).



ing problems for macro economic manage-ment. As the money supply becomes difficultto track, monetary projections could also be-come unreliable. These factors would there-fore increase the probability of making policymistakes.

In the case of the external sector, as we ob-served earlier, FDI levels would drop if inves-tors lose confidence in a country’s financialsector due to it being tainted by Money Laun-dering. Further, lack of confidence in the do-mestic financial sector could induce capitalflight as persons look for safer havens for theirsavings. Sometimes money launderers tendto use international trade to effect their laun-dering activities by the means of inaccuratepricing (misinvoicing) of imports and exportsto hide the transfer of funds. For exampleover-invoicing of an import will permit thetransfer of funds outside the country. Thesepractices could also lead to price distortions.

TERRORISMTerrorism is a label which came to be used todescribe a special kind of conflict since theearly 1970s. Such conflicts are often lowintensity offensives which do not escalate intofull scale wars and are usually undertaken toachieve a political objective. Sporadic attacks,hijacking, kidnapping and bombing etc. areassociated with these conflicts. Thedevelopment consequences of such conflictstend to be catastrophic, as they disruptnormal life and economic activity and areusually sustained for a long period of time. SriLanka has experienced a bitter civil war forover 20 years involving one of the deadliestterrorist groups existing in the world and thishas caused substantial disruption of social andeconomic activity.

As in the case of most other activities, terror-ist activities cannot be sustained without fi-nance. Funding for these types of activities aresometimes obtained through extortion, kid-napping for ransom and other crimes such asbank robbery. When a terrorist group gains

control of certain regions, they also impose“taxes” and “fees” upon those at their mercy.By selling their case convincingly, terroristsare also able to secure funding from certainsections of the population such as thediaspora or displaced persons whom theyclaim to represent. Another mode by whichthey obtain funds is by way of donation tocharitable institutions which are in reality frontsfor terrorist organisations.

The global attention became more sharplyfocused on terrorism and the need to arrestits funding after the terrorist attack on theWorld Trade Center of the United States on11 September 2001, which is now commonlyknown as the 9/11 disaster. Since then, exten-sive action has been taken globally to freezeassets held by terrorist organisations and in-stitute other measures required for combat-ing the financing of terrorism.

The United Nations spearheaded the fightagainst the financing of terrorism in the wakeof the 9/11 disaster with its Security Councilpassing resolutions requiring member coun-tries to freeze assets of terrorists and therebyprevent terrorists accessing their funds. Suchaction was required to be taken in respect ofentities and organisations designated as ter-rorist persons and organisations by the UnitedNations Counter Terrorism Committee.

The FATF also took steps to formulate EightSpecial Recommendations on combating thefinancing of terrorism (CFT). Subsequentlythese eight recommendations were aug-mented to nine. The FATF did not specificallydefine the term financing of terrorism in theserecommendations, but recommended thatcountries ratify and implement the 1999United Nation International Convention forSuppression of the Terrorist Financing. Thus,the definition of financing of terrorism given inthe above Convention is the one most coun-tries including Sri Lanka have adopted for thepurposes of defining terrorist financing (SeeBox 1).



SRI LANKA’S POSITION PRIOR TOENACTMENT OF AML/CFT LAWSEven before the enactment of AML/CFT lawsin Sri Lanka, there were certain measures inplace which would have discouraged moneylaunderers from using the country’s financialinstitutions for laundering activities. Thesemeasures were put in place in terms of powersvested on authorities by the Exchange Control

Act, the Customs Ordinance, the Banking Actand other laws. One such measure was therequirement for a declaration to be made byany person importing or exporting currencyexceeding US$ 10,000 in value. This wouldhave deterred large scale cross border flowsof currency, a mechanism often used bymoney launderers in their operations. Further,although the current account in Sri Lanka was

BOX 1 - DEFINITION OF TERRORIST FINANCING

The United Nations International Convention for Suppression of Terrorist Financing defines TerroristFinancing in the under mentioned manner in its Article 2, and on the recommendation of the FATF,most countries including Sri Lanka use this definition

Article 21. Any person commits an offence within the meaning of the Convention if that person by

any means, directly or indirectly, unlawfully and wilfully, provides or collects funds with theintention that they should be used or in the knowledge that they are to be used, in full or inpart, in order to carry out:

(a) An act which constitutes an offence within the scope of and as defined in one of thetreaties listed in the Annex; or

(b) Any other act intended to cause death or serious bodily injury to a civilian, or to anyother person not taking an active part in the hostilities in a situation of armed conflict,when the purpose of such act, by its nature or context, is to intimidate a population, orto compel a Government or an international organization to do or to abstain fromdoing any act.

ANNEX

1. Convention for the Suppression of UnlawfulSeizure of Aircraft, done at The Hague on 16December 1970.

2. Convention for the Suppression of UnlawfulActs against the Safety of Civil Aviation, done atMontreal on 23 September 1971.

3. Convention on the Prevention and Punishmentof Crimes against Internationally ProtectedPersons, including Diplomatic Agents, adoptedby the General Assembly of the United Nationson 14 December 1973.

4. International Convention against the Taking ofHostages, adopted by the General Assembly ofthe United Nations on 17 December 1979.

5. Convention on the Physical Protection of NuclearMaterial, adopted at Vienna on 3 March 1980.

6. Protocol for the Suppression of Unlawful Actsof Violence at Airports Serving InternationalCivil Aviation, supplementary to theConvention for the Suppression of UnlawfulActs against the Safety of Civil Aviation, doneat Montreal on 24 February 1988.

7. Convention for the Suppression of UnlawfulActs against the Safety of Maritime Navigation,done at Rome on 10 March 1988.

8. Protocol for the suppression of Unlawful Actsagainst the Safety of Fixed Platforms locatedon the Continental Shelf, done at Rome on 10March 1988.

9. International Convention for the Suppressionof Terrorist Bombings, adopted by the GeneralAssembly of the United Nations on 15December 1997.



fully liberalized since 1994, the capital accountwas only partially liberalized. Therefore it wasnecessary for persons undertakingtransactions which involved the remittance offoreign currency out of the country to providedocumentary evidence to confirm the bona-fides of the transaction. All instances of salesand purchases of foreign currency bycommercial banks also have to be recordedin specific forms and submitted to the CentralBank. Here, the recorded information includesidentification information on the seller/purchaser. Further, the Department of BankSupervision of the Central Bank had issuedKnow Your Customer (KYC) guidelines to allbanks and urged such banks to follow theseguidelines when engaging in bankingbusiness. Undoubtedly, these measureswould have saved Sri Lanka from beingidentified by money launderers as a suitablelocation for their activities. Despite thissituation however, there is no room forcomplacency, as with the enforcement ofstringent Money Laundering measures insome countries, money launderers aremoving into countries which do not have aneffective AML/CFT regime. Therefore, in theabsence of a comprehensive AML regime, SriLanka will not be immune from the threat ofMoney Laundering. Also, capital accountrestrictions are being gradually relaxed, andtherefore, it is timely to institute a strong AMLregime, to prevent money launderers takingadvantage of these relaxations.

In the area of prevention of terrorist financingconsiderable advances had been made evenbefore the Convention for the Suppression ofthe Terrorist Financing Act, No. 25 of 2005became law. In October 2001, Sri Lanka tookaction to issue UN Regulation No. 1 of 2001which created terrorist financing offences inresponse to UN Security Council Resolution1373. With the issue of this regulation, theCentral Bank issued instructions requiringbanks not to undertake any transactions withpersons and entities listed by the UN Security

Council as terrorist persons and entities orwith associates of such listed persons andentities and to freeze all accounts held by suchpersons and entities and their associates.Banks were also requested to report to theController of Exchange, all attempts made bythe listed persons and entities or their asso-ciates to engage in transactions with them.Similar orders were issued to Finance Com-panies as well. Restricted foreign exchangedealers such as money changers, wire trans-fer agencies and travel agents authorised toissue travellers cheques were also directed toinform the Controller of Exchange of any at-tempts by the listed persons and entities andtheir associates to engage in transactions withthem.

LEGAL FRAMEWORK FORAML/CFT IN SRI LANKAWhen AML measures were first underconsideration there were those whoadvocated a policy of “inaction” in this regard.One of the arguments put forward was thatcrimes pertaining to Money Laundering occurin developed countries and thereforedeveloping countries like Sri Lanka should notwaste scarce resources to establish a strongAML regime. However, Sri Lanka as aresponsible stakeholder of the globalcommunity has an obligation to take all actionpossible to curb transnational organisedcrime. A further consideration is that a laxmoney laundering regime could even attractcriminals and crime into the country. Anotherargument put forward to support a policy ofinaction was that money launderingrepresents a flow of capital from developedcountries to developing countries andtherefore developing countries should notdeter this flow of capital which would contributeto the country’s development. This argumentis of course refuted by empirical evidence aswell as the negative economic impact ofmoney laundering on FDI discussed above.

For several years government authorities, theCentral Bank, financial sector authorities, le-



gal and law enforcement authorities, haveworked together with international experts toformulate the necessary AML/CFT legalframework for Sri Lanka. The Central Bankplayed a major role in these deliberations notonly because it is the institution at the helm ofthe financial sector, but also because one ofits core objectives is the preservation of finan-cial system stability which could be threatenedby Money Laundering activities. The first pieceof legislation the Convention on the Suppres-sion of Terrorist Financing Act, No. 25 of 2005became law on 8 August 2005. The other twolaws, the Prevention of Money Laundering Act,No.5 of 2006 and the Financial TransactionsReporting Act, No. 6 of 2006 became law on6 March 2006. All three Acts were prepared inline with the FATF’s 40 Recommendations forPrevention of Money Laundering and its 9Special Recommendations for combating thefinancing of terrorism, and therefore Sri Lankais now compliant with the requirements of theFATF. Some of the main features of thesethree Acts are given below.

PREVENTION OF MONEY LAUNDERING ACT,NO. 5 OF 2006 (PMLA)

• The offence of Money Laundering isdefined as receiving, possessing,

concealing, investing, disposing or bringinginto Sri Lanka, transferring out of Sri Lankaor engaging in any other manner in anytransaction, in relation to any propertyderived or realized directly or indirectly from“unlawful activity” or proceeds of “unlawfulactivity”.1

• Any movable or immovable property ac-quired by a person which cannot be part ofthe known income or receipts of a personor money/property to which his known in-come and receipts have been converted, isdeemed to have been derived directly orindirectly from unlawful activity, in terms ofthe PMLA.

• PMLA has provisions for a police officer notbelow the rank of Superintendent of Policeor in the absence of such an officer an As-sistant Superintendent of Police to issue an

1/ “Unlawful activity” is defined as an act that constitutesan Offence under the Poison Opium and Dangerous DrugOrdinance, any Law relating to the Prevention and Suppres-sion of Terrorism, the Bribery Act, the Fire Arms Ordinance,the Explosives Ordinance, the Offensive Weapons Act, theExchange Control Act, Offences under Section 83c of theBanking Act No. 30 of 1988 (Relating to Pyramid Scams).Law relating to Transnational Organised Crime, Law relat-ing to Cyber Crime, Law relating to Offences against Chil-dren, Law relating to Trafficking of Persons and any otheroffence punishable by death or imprisonment of 07 years ormore.

UNLAWFULACTIVITIES

Offencespunishable by deathor imprisonent for 07

years or more

Trafficking ofpersons

BriberyTerrorism

Offencesagainstchildren

Drugtrafficking

Offences under theFire Arms Ordinance,Explosives Ordinance

or the OffensiveWeapons Act

PyramidScams

CyberCrime

ExchangeControl

ViolationsTransnationalOrganised

Crime

FIGURE 2 - OFFENCES COVERED UNDER THE PREVENTIONOF MONEY LAUNDERING ACT, NO. 5 OF 2006 (PMLA)



order prohibiting any transaction in relationto any account, property or investmentwhich may have been used or which maybe used in connection with the offence ofMoney Laundering for a specific periodwhich may be extended by the High Court,if necessary, in order to prevent further actsbeing committed in relation to the offence.

• In terms of the PMLA, a person convictedof the offence of Money Laundering is liableto a penalty of not less than the value of theproperty involved in the offence and notmore than thrice this value, and a term ofimprisonment of not less than 05 years andnot more than 20 years.

• Property derived from an offence of MoneyLaundering is forfeited to the state free ofencumbrances in terms of the PMLA.

• PMLA makes “tipping-off”(pre warning sus-pects of impending action against them) anoffence.

• The extradition law applies to the offenceof Money Laundering.

FINANCIAL TRANSACTIONS REPORTINGACT, NO. 6 OF 2006 (FTRA)

• FTRA provides for the setting up of a FIUas a national central agency to receiveanalyse and disseminate information in re-lation to Money Laundering and the financ-ing of terrorism (See Box 2).

• The FTRA obliges institutions, to report tothe FIU cash transactions above a valueprescribed by an Order published in theGazette. The term “institutions” covers awide array of persons and entities (SeeBox 3 ).

• His Excellency the President in hiscapacity as Minister of Finance has issuedan Order published in the GazetteExtraordinary No. 1437/25 of 23/03/2006prescribing that this value should be Rs.500,000.

• The Act also obliges institutions to report tothe FIU all electronic fund transfers abovesuch sum as prescribed by regulations.

• His Excellency the President in his capacityas Minister of Finance has made regulationspublished in the Gazette Extraordinary No.1437/25 of 23/03/2006 prescribing that thisvalue should also be Rs. 500,000.

• All suspicious transactions have to be re-ported by institutions to the FIU irrespectiveof their magnitude.

• FTRA required an institution covered by theAct to appoint a compliance officer whowould be responsible for the institution’scompliance with the Act.

• The FTRA also requires Supervisory Au-thorities of Institutions and Auditors to makea suspicious transaction report if they haveinformation which gives them reasonablegrounds to suspect that a transaction is re-lated to money laundering or financing ofterrorism.

• Supervisory Authorities are required by theFTRA to examine whether institutions su-pervised by them comply with the provisionsof the FTRA and to report instances of noncompliance to the FIU. Further they arealso required to co-operate with law en-forcement agencies and the FIU in any in-vestigation, prosecution or proceeding re-lating to any act constituting an unlawfulactivity.

• In terms of the FTRA, institutions are re-quired to engage in Customer Due Dili-gence (verifying the true identity of custom-ers) with whom they undertake transactionsand on going Customer Due Diligence withcustomers with whom they have a businessrelationship.

• The opening and operating of accountsunder a fictitious name is an offence underthe FTRA.

• FTRA makes “tipping-off” an offence(e.g.pre warning a suspect of an impending in-vestigation).

• In terms of the FTRA, persons making re-ports under the Act are protected from civilor criminal liability.

1 0 Central Bank of Sri Lanka


BOX 2 - ESTABLISHMENT OF A FINANCIAL INTELLIGENCE UNIT (FIU)IN SRI LANKA

Recommendation 26 of the FATF’s 40 Recom-mendations for the prevention of Money Laun-dering states that :Countries should establish a Financial Intelligence Unit(FIU) that serves as a national center for the receiving(and, as permitted, requesting), analysis and dissemina-tion of Suspicious Transaction Reports ( STR) and otherinformation regarding potential Money Laundering orterrorist financing. The FIU should have access, directlyor indirectly, on a timely basis to the financial, adminis-trative and law enforcement information that it requiresto properly undertake its functions, including the analysisof Suspicious Transaction Reports (STR).In conformity with the above recommendationthe FTRA provides for the setting up of a FIUwhich would be the entity charged with admin-istration of the provisions of the Act. Accord-ingly, His Excellency the President in his capacityas the Minister of Finance has in an Order pub-lished in Gazette Extraordinary No. 1437/24 of23/03/2006 designated the FIU of the CentralBank to be the FIU for the purpose of this Act.The FIU will be an independent unit within theCentral Bank and its CEO will report directlyto the Monetary Board through the Governorof the Central Bank. The powers and functionsentrusted to the FIU by the FTRA are in line withthe FATF recommendations and the require-ments needed to meet other international con-ventions and resolutions on countering MoneyLaundering and terrorist financing.The core functions the FIU undertakes in com-mon with all FIUs are the collection, analysisand dissemination of information, and theFTRA grants the FIU wide powers in this regard.For the purpose of collection of data, the FTRAobliges selected institutions to report cash trans-actions and electronic fund transfers over athreshold value (presently set at Rs. 500,000 by anOrder issued under the FTRA) and any suspi-cious transactions irrespective of value to the FIU.The coverage of institutions required to re-port to the FIU in terms of the FTRA is verywide in line with FATF recommendations,and includes entities and persons in the fi-

nance business as well as entities and per-sons in designated non-finance business(See Box 3). The FIU is also empowered tocollect any other supporting information fromreporting entities or even from foreign FIUs. Inthe second stage, the FIU has to undertake theintensive analysis of financial transaction infor-mation so collected and convert such informa-tion into financial intelligence. At the third stage,the FIU should disseminate such information asnecessary. If after its analysis of a transactionreport, the FIU is satisfied that the transaction in-volved is a money laundering transaction or atransaction related to financing of terrorism, theFIU refers the case to law enforcement authori-ties for prosecution. Further, the FIU is alsoin a position to disseminate information to for-eign FIUs, particularly if the information is rel-evant to the prosecution of Money Launderingoffences in other jurisdictions or if the informa-tion reveals new trends in Money Launderingactivities. In terms of the FTRA, the FIU mayalso disseminate information to reporting enti-ties and their regulators. The information flowto and from the FIU is depicted in Figure 1.The FTRA empowers Sri Lanka’s FIU to alsoundertake several non core activities includingthe following:• Compiling of statistics and records.• Conducting training programs for reporting

institutions in relation to customer identifica-tion, record keeping and reporting obliga-tions.

• Conducting research into the trends and de-velopments in the area of Money Launder-ing and financing of terrorism.

• Educating the public and creating awarenesson matters relating to Money Laundering andthe financing of terrorism.

• Entering into any agreement or arrangementwith any domestic government institution oragency with regard to the exchange of infor-mation.

1 1Pamphlet Series No. 6


BOX 3 - STRUCTURE OF THE FINANCIAL INTELLIGENCE UNIT (FIU)UNDER THE PROVISIONS OF FINANCIAL TRANSACTIONS REPORTING

ACT, NO. 6 OF 2006 (FTRA)

“Finance business” includes

- banking;

- finance business;

- lending, including consumercredit, mortgage credit, factoring(with or without recourse) andfinancing of commercialtransactions;

- financial leasing;

- the transfer of money or value;

- money and currency changingservices;

- issuing and managing means ofpayment (i.e. credit cards,travellers’ cheques, moneyorders and bankers’ drafts andelectronic money);

- issuing financial guarantees andcommitments,

- trading for its own account or forthe account of customers inmoney market instruments(i.e. cheques, bills, certificates ofdeposit and derivatives), foreignexchange, exchange, interestrate and index instruments,commodity futures trading andtransferable securities;

- participating in securities issuesand the provision of financialservices related to such issues;and

- such other business as may beprescribed from time to time bythe Minister taking intoconsideration the interests of thenational economy.

Reporting Institutions(Financial & Designated Non-

Financial Institutions)

SuspiciousTransactionReports related toUnlawful Activities*and CashTransactions andElectronic FundTransfers over thevalue ofRs. 500,000

FIUestablished under the

FTRA

LawEnforcementAuthorities

Foreign FIUsfor Mutual

Assistance

“Designated non-financebusiness” includes

- individual and collective portfoliomanagement;

- investing, administering ormanaging funds or money onbehalf of other persons;

- safekeeping and administrationof cash or liquid securities onbehalf of other persons;

- safe custody services;

- underwriting and placement ofinsurance, insurance intermedia-tion by agents and brokers;

- trustee administration orinvestment management;

- casinos, gambling houses orconducting of a lottery;

- real estate agents;

- dealers in precious metals andsemi-precious stones;

- lawyers, notaries, otherindependent legal professionalsand accountants;

- trust or company serviceprovider;

- offshore units in accordancewith the definitions provided forthe same in other written laws;and

- such other business as may beprescribed from time to time bythe Minister taking intoconsideration the interests of thenational economy.

* Please see footnote on page 8

- Police Department

- Criminal Investigation Department

- Attorney General

- Police and Narcotics Bureau

- National Dangerous Drug Board

- Commission to Investigate Allegations of

Bribery or Corruption

- Central Bank of Sri Lanka

- Exchange Control Department

- National Child Protection Authority

- Customs Department

> >

>>

1 2 Central Bank of Sri Lanka


For further inquiries, please contact:Publications Sales CounterCentre for Banking Studies58, Sri Jayewardenepura Mawatha, Rajagiriya

Tel.: 2477829, 2477803

Information DepartmentCentral Bank of Sri Lanka30, Janadhipathi Mawatha, Colombo 1Tel.: 2477418, 2477420, 2477639, 2477000e-mail: [email protected]

www.centralbanklanka.org

• The FIU with Ministerial approval, mayexchange information with other FIUs orSupervisory Authorities of a foreign state.

• Contravention of the provisions of the FTRAis punishable by fines not exceedingRs.1.0 million.

CONVENTION ON THESUPPRESSION OF TERRORISTFINANCING ACT, NO. 25 OF 2005• On 10 January 2000, Sri Lanka became a

signatory to the International Conventionfor the Suppression of Terrorist Financingadopted by the United Nations GeneralAssembly on 10/01/2000 and ratified thesame on 8/9/2000. The Convention onthe Suppression of Terrorist Financing Act,No. 25 of 2005 was enacted to give effectto Sri Lanka’s obligations under thisConvention.

• Under the Act, the provision or collection offunds for use in terrorist activity with theknowledge or belief that such funds couldbe used for financing a terrorist activity isan offence (The definition of terrorist fi-nancing adopted is the definition containedin the UN International Convention for Sup-pression of the Terrorist Financing given inBox 1).

• The penalty for an offence under the Act isa term of imprisonment between 15-20years and/or a fine.

• On indictment of a person for an offenceunder the Act, all funds collected in contra-vention of the Act will be frozen (if lying in abank account) or seized (if held in the con-trol of any person or institution other thana bank).

• On the conviction of a person for an of-fence under the Act, all funds collected incontravention of the Act are forfeited to theState.

• The extradition law applies to the offenceof financing of terrorism.

EFFECTIVENESS OF THEAML/CFT REGIMEOf course the mere enactment of the relevantlaws and creation of the required institutionsto implement an AML/CFT regime alone arenot sufficient. It is vitally necessary for thelaws in this regard to be strictly enforced. SriLanka for the first time was subjected to a Mu-tual Evaluation Exercise of its AML/CFT re-gime conducted by the Asia Pacific Group onMoney Laundering (APG). The Evaluation in-volved a comprehensive review of the institu-tional arrangements, legal framework and lawenforcement mechanisms in relation to thepresent AML/CFT regime. On the basis ofthis evaluation, the APG will provide adviceand technical assistance to strengthen theAML/CFT regime in Sri Lanka. Of course forthe AML/CFT regime to be effective, it is alsonecessary for it to have the support of thegeneral public of the country. There havebeen several public discussions on this sub-ject, while the media has played a role inincreasing public awareness on the AML/CFT regime. This pamphlet has also beenprepared to enhance general awareness onthe subject. It is hoped that a greater aware-ness of the danger Money Laundering andTerrorist Financing poses to the countrywould induce the public to extend their fullestcooperation to the authorities to arrest suchcrimes.

Published by the Central Bank of Sri Lanka, Janadhipathi Mawatha, Colombo 1, Sri Lanka.Printed at the Central Bank Press, No. 58, Sri Jayewardenepure Mawatha, Rajagiriya, Kotte, Sri Lanka.

PREVENTING MONEY LAUNDERING AND COMBATING THE … · On 6 March 2006, the Prevention of Money...

Documents

Transcript of PREVENTING MONEY LAUNDERING AND COMBATING THE … · On 6 March 2006, the Prevention of Money...