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Sri Lanka to undergo third money laundering, terrorism financing evaluation in 2026
View(s):By Namini Wijedasa
Sri Lanka will start its third mutual evaluation on anti-money laundering and countering the financing of terrorism (AML/CFT) next year – and officials admit the stakes are high.
The exercise is carried out in conjunction with the Financial Action Task Force (FATF) and its regional affiliate, Asia Pacific Group on Money Laundering (APG), every 5-10 years. It was initially scheduled to begin in March, but was postponed owing to the two major elections in 2024. It will now be done under the FATF’s revised methodology, which places sharper emphasis on effectiveness rather than merely having laws and processes on paper.
FATF is an intergovernmental body that sets international standards to combat money laundering, terrorist financing, and proliferation financing. Sri Lanka’s past record is mixed. After evaluations in 2006 and 2014-15, the country was identified as having “strategic deficiencies” in its AML/CFT regime and placed on the FATF grey list. Following the second grey listing in 2017, the European Union also blacklisted Sri Lanka. The country was removed from both lists only in 2019 and 2020, respectively.
Director of FIU Subhani Keerthiratne briefs President Anura Kumara Dissanayake about what needs to be done to improve Sri Lanka's AML/CFT compliance in the run-up to the FATF mutual evaluation.
Cannot afford to be grey-listed again
To stay off them, any remaining weaknesses in AML/CFT governance, regulations, and implementation must be fixed. “The bottom line, simply, is that we cannot afford to be grey-listed again,” said Subhani Keerthiratne, Director of the Financial Intelligence Unit (FIU). “We must somehow avoid it, because we are still recovering from the 2019 Easter Sunday attacks, the Covid pandemic, and recent economic crisis.”
The FIU is an independent institution within the Central Bank of Sri Lanka (CBSL) that serves as the national agency to combat money laundering, terrorist financing, and related crimes. It analyses suspicious transaction reports (STRs) and other financial information to provide intelligence to domestic and global institutions. It also leads national efforts to strengthen the country’s AML/CFT regime.
A grey listing has serious negative repercussions, identified as “unintended consequences”. “FATF does not want other countries to take measures against grey-listed countries,” Ms Keerthiratne said. “When a country is grey-listed, however, other countries view it as a high risk and take counter-measures.”
A continuation of correspondent banking relationships is reliant on staying off the grey list. Failure will affect credit ratings and sovereign ratings, and there will be high risk premia for insurance. Borrowing costs will rise.
“We do not want criminals to abuse our financial system,” Ms Keerthiratne stressed. “We cannot talk about financial system stability if our system is misused by criminals.”
Actions taken
The FATF’s 40 recommendations are the global benchmark for combating money laundering, terrorist financing and, increasingly, proliferation financing. They require countries not only to set up adequate legal and institutional frameworks but also to prove, in practice, that these frameworks deliver results.
Sri Lanka has conducted its second and third national risk assessments (NRAs) on money laundering and terrorist financing. The latest assessment is yet to be published, but the previous one, dated 2022, found medium-high threats in three areas: drug trafficking, bribery and corruption, and customs-related violations, including trade-based money laundering.
The government has also adopted a national AML/CFT policy for 2023-2028. It identifies 24 public sector stakeholders tasked with implementing institution-wide action plans. A high-level task force was established to monitor progress.
But gaps remain. One is virtual assets. FATF Recommendation 15 requires countries to regulate cryptocurrency service providers, including exchanges, custodians, and firms offering initial coin offerings. Sri Lanka is listed as “partially compliant” because it has yet to regulate this sector.
The CBSL has requested the government to make a policy decision on regulating and supervising virtual assets service providers (VASPS), Governor Nandalal Weerasinghe said, adding that the appointment of a committee has been recommended. Meanwhile, amendments are underway to three key statutes: the Financial Transactions Reporting Act, the Prevention of Money Laundering Act, and the Suppression of Terrorist Financing Act.
Another gap is the beneficial ownership register. FATF’s revised Recommendation 24 requires countries to ensure that competent authorities have access to adequate, accurate, and up-to-date information on the true owners of companies. Sri Lanka is listed as noncompliant, the only one out of 40 recommendations (the others are compliant, largely compliant, and partially compliant).
The Companies Act has since been amended to require companies to maintain a register of their beneficial owners and to disclose their information. The Registrar of Companies, with technical assistance from the International Monetary Fund and the World Bank, is “working very hard” to have complete this process within 2025, Ms. Keerthiratne said.
Challenges remain
The FATF’s new methodology evaluates countries on 11 “immediate outcomes” that measure effectiveness. For instance, financial institutions must not only carry out “know your customer” checks at onboarding but also conduct ongoing monitoring, transaction scrutiny, and institution-wide risk assessments. Non-financial businesses such as casinos, real estate agents, lawyers, and accountants must do the same.
Sri Lanka’s FIU is unusual among its peers. Although administrative in type, it has direct powers to freeze accounts, suspend transactions, and impose penalties for noncompliance – powers that many FIUs around the world lack. Legal amendments will expand these.
Still, challenges persist. High staff attrition means institutions struggle to retain trained personnel. Some agencies view AML/CFT compliance as a burdensome add-on rather than a strategic priority. And despite progress, more needs to be done to encourage parallel financial investigations; that is, the tracking of illicit money trails alongside investigation into predicate offences (a crime which is a component of a larger crime).
“For instance, drug traffickers are aware that they can commit the crime, earn some money, go to prison for six months, come back and enjoy the proceeds,” Ms. Keerthiratne pointed out. “So there must be a parallel investigation to find the money trail. If we are to break this vicious cycle, we need to take the monetary element out of it. This means there will be no motive for criminals to commit an offence. Criminals should be deprived of criminal proceeds.”
Sri Lanka now has more money laundering convictions than during its last evaluation – 14 compared to just one in 2015. But FATF examiners will expect much more. “We must show effectiveness,” Ms Keerthiratne said. “We cannot go back to the past.”
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