Sri Lanka’s decision to postpone its third evaluation of the Anti-Money Laundering and Countering the Financing of Terrorism (AML/CFT) framework from March 2025 to March 2026 reflects the challenges of conducting such assessments in the wake of two national elections the previous year. This delay arrives at a juncture where Sri Lanka is grappling with complex economic recovery processes following a sovereign debt default. The nation’s financial health and international standing are contingent on its ability to implement robust measures against money laundering and financing of terrorism, areas scrutinized heavily by the global Financial Action Task Force (FATF).
The Importance of Robust AML/CFT Measures
To avoid being placed on the FATF’s grey list for a third time, Sri Lanka must fortify its AML/CFT measures. The FATF, an inter-governmental organization, combats money laundering and terrorism financing globally. Being grey-listed signifies that a nation has strategic deficiencies in its AML/CFT framework, leading to numerous challenges, including limited access to global financial markets, reduced foreign direct investment (FDI), increased compliance costs, and potential downgrades in financial ratings. Historically, Sri Lanka has been grey-listed twice: first in February 2010 and again in November 2017. However, successful compliance initiatives allowed the nation to be delisted in June 2013 and October 2019, respectively. Despite these improvements, the risk of grey-listing remains if comprehensive actions against money laundering and terrorism financing are not executed.
The repercussions of grey-listing underscore the critical need for compliance with FATF guidelines. Economic challenges, coupled with a need for international financial cooperation, necessitate Sri Lanka’s unwavering commitment to enhancing its AML/CFT systems. Failure to meet these international standards could obstruct economic recovery, impeding Sri Lanka’s ambitions for financial stability and growth. The threat of being on the grey list again presents a stark reminder of the pivotal role of stringent regulatory measures in safeguarding the nation’s financial system.
Evaluation Criteria and Compliance Efforts
The forthcoming evaluation will examine the extent to which Sri Lanka complies with the FATF’s 40 recommendations and the effectiveness of its AML/CFT framework under 11 Immediate Outcomes. These evaluations include significant regulatory measures, such as risk-based AML/CFT examinations of banks, which are stringent undertakings detailed in the Financial Transactions Reporting Act (FTRA). The establishment of a high-level AML/CFT Task Force, reconstituted in December 2024, signifies Sri Lanka’s intention to align with international standards and ensure full compliance by July 2027. The Central Bank, alongside relevant stakeholders, is implementing 24 institution-specific action plans approved by the Sri Lankan Cabinet. These measures address gaps identified in prior evaluations and a National Risk Assessment (NRA) conducted during 2021/2022.
Forward-looking efforts also encompass plans for a new update to the NRA expected by the second quarter of the year. This update will assess new risk areas like tax crimes and proliferation financing. Continuous appraisal and enhancement of these risk measures are imperative for Sri Lanka to demonstrate unwavering commitment to the global financial community. The collaboration between the Central Bank’s Financial Intelligence Unit (FIU) and its working groups is vital in maintaining international confidence in Sri Lanka’s financial system.
International Support and Legislative Amendments
The International Monetary Fund (IMF) has extended a $3 billion bailout package to Sri Lanka, underscoring the necessity of adhering to international Anti-AML/CFT compliance obligations. The IMF insists that stringent measures and international cooperation are vital for maintaining financial integrity. In this regard, the FIU is finalizing amendments to key AML/CFT legislation to align with global standards. These legislative changes include updates to the Companies Act to strengthen beneficial ownership requirements. The overarching goal is to enhance intelligence sharing and international cooperation by expanding the number of bilateral Memoranda of Understanding (MOUs) with both domestic and foreign counterparts.
Strengthening the AML/CFT framework is poised to deliver myriad benefits for Sri Lanka. Better financial governance will lead to increased foreign investments, enhanced integrity of the financial system, and improved access to international financial markets. Beyond economic incentives, robust AML/CFT measures can foster better domestic governance and reduce incidents of bribery and corruption. The IMF’s involvement emphasizes the urgent need for Sri Lanka to meet its obligations under the AML/CFT pillar to avoid strategic deficiencies and the threat of grey or blacklisting.
The Road Ahead for Sri Lanka
Sri Lanka has decided to delay its third evaluation of the Anti-Money Laundering and Countering the Financing of Terrorism (AML/CFT) framework, pushing it from March 2025 to March 2026. This decision underscores the difficulties of conducting such critical assessments following two national elections in the preceding year. The postponement occurs amidst Sri Lanka’s efforts to navigate a complex economic recovery after a significant sovereign debt default. The nation’s financial stability and international reputation heavily rely on its capacity to enforce stringent measures against money laundering and terrorism financing. These areas are meticulously examined by the global Financial Action Task Force (FATF). Ensuring compliance with FATF standards is crucial for Sri Lanka as it seeks to restore economic health, secure foreign investments, and maintain international relationships. The delay gives the country more time to align its financial policies and practices with international expectations, which is vital for its overall economic and political recovery strategy.
