Rush for “no questions-asked” foreign exchange deposits
Sri Lanka has been inundated with requests to open Special Deposit Accounts (SDAs) declared by the government in April with everyone from foreign monthly wage earners to high net worth individuals cashing in, in a mad rush to invest.
Many bankers are hoping that this won’t be a funnel for inventive black money moguls to pump in fresh sums into the economy through these ‘no questions asked’ accounts.
Prime Minister Mahinda Rajapaksa in April announced that Sri Lankans or Sri Lankan expatriates could deposit funds in the special account for a period of six years or one year, offering additional interest rates. The SDA is a fixed deposit with a minimum tenure of six months in any designated foreign currency. This can also be opened as joint accounts and was introduced to entice foreign direct investments into Sri Lanka, to build foreign exchange reserves particularly since the country has to settle more than US$4.8 billion of foreign loans this year.
The Department of Foreign Exchange, Central Bank (CB) is seeing ‘more than’ a good trend in SDAs opening, a CB official at the said department told the Business Times. Two large commercial banks – Commercial Bank and HNB – also saw substantial account openings, according to bank sources. Some are tapping business promotion officers abroad to canvass business, they said.
The smaller ones say that it’s picking up slowly. The three state banks – Bank of Ceylon, People’s Bank and National Savings Bank are the real winners in the game as they have opened many accounts, banking sources said.
In this whole situation, there’s no denying that big time black cash is entering the country. It may as well be the government’s intention, economists say. Especially after Joint Cabinet Spokesperson Minister Bandula Gunawardena said recently that no questions would be asked or tax charged from the account holder, the account will be free of foreign exchange regulations and added for instance if the normal interest rate is 4 per cent for a foreign currency account, 6 per cent would be paid for the SDA.
However commercial bankers are following their Know Your Customer (KYC) policies to the ‘T’. “They are the cornerstones of an effective Anti Money Laundering (AML) programme,” a senior top banker told the Business Times stressing that KYC denotes the checks carried out at the beginning of a customer relationship to identify and verify that they are who they say they are.
Those wishing to know more about their potential customers before they open accounts need to carry out due diligence – Customer Due Diligence (CDD) to spot if the person or entity is litigious, prone to late payment or non-payment of monies due. It wasn’t clear whether CDD which covers financial institutions to identify and verify the identity of the persons (known as beneficial owners) of the legal entity that own, control, and profit from companies when those companies open accounts is being strictly followed by ‘all’. KYC checks are done at the first stage of establishing business relations and vetting the potential clientele and CDD is an ongoing process to ensure the money is ‘clean’.
A top bank CEO was adamant that his bank follows all due diligence when accepting SDAs. “We will do all we need to within the regulatory guidelines and within the Financial Intelligence Unit (FIU) which implements the recommendations by Financial Action Task Force (on money laundering) (FATF),” he said pointing out that if not they run the risk of losing their correspondent banks accounts. These are the accounts of foreign banks that require the ability to pay and receive the domestic currency. A bank will typically require correspondent accounts for holding currencies outside of jurisdictions where it has a branch or affiliate.
A state banking source told the Business Times that his bank has received many big-ticket queries amounting to over $10 million. “These are very reliable customers whom we are pursuing,” he said. He also said there were some ‘strange’ queries by Sri Lankans living abroad on whether they could open a SDA and within a few weeks take out about 60 per cent and transfer it to other accounts. The bank did not entertain these requests saying they need to hold the account for at least six months.
A commonality that all bankers rely on is the legitimacy of bank to bank transfer in opening the SDAs. They all said that cash coming from a foreign account has the entire regulatory customer due diligence followed. Also they said that the Common Reporting Standard (CRS) is an information standard for the Automatic Exchange of Information (AEOI) regarding financial accounts on a global level, between tax authorities, which the Organisation for Economic Co-operation and Development (OECD) developed in 2014 and is something they rely on. As a result they don’t worry too much.
However, when asked if SDAs can be still opened with account transfers from jurisdictions which are listed as grey in the list of the FATF, some said they never got such requests but others did not have an answer.