A CBSL scheme announced in April to drive inward remittances and investment may risk Sri Lanka falling back into the FATF’s grey list, says Duruthu Chandrasekera.
The recent introduction of the so-called ‘Special Deposit Account’ (SDA) may risk Sri Lanka falling back into the ‘grey list’ of the FATF (Financial Action Task Force).
The SDA is a no-questions-asked deposit account designed to attract Diaspora funds into the country, and to entice foreign direct investment, as the government looks to settle more than USD 4.8 billion in foreign loans due this year.
The scheme was announced in April, prescribing Sri Lankan nationals and non-nationals alike, fund and other corporate bodies, and “any other well-wishers” as eligible applicants. Applicants were invited to open 6- or 12-month fixed deposit accounts in any currency, with any licensed bank in Sri Lanka, with a minimum tenure of six months.
According to Joint-Cabinet Spokesperson Minister Bandula Gunawardena, tax will not be charged to the SDA account holder and the account will be free of foreign exchange regulations, while also earning – upon maturity – 2 percent interest above what is paid on other bank deposits in Sri Lanka.
The SDA scheme was announced not long after Sri Lanka’s removal from the FATF’s list of jurisdictions with strategic AML/CFT deficiencies that are subject to increased monitoring, commonly known as the ‘grey list’. When a jurisdiction is placed on this list, it is typically seen to have a direct impact on inward foreign investment and the economy.
A decision was taken at the FATF Plenary in October last year in Paris to remove Sri Lanka from the grey list. The inter-governmental body said:
“The FATF welcomes Sri Lanka’s significant progress in improving its AML/CFT regime and notes that Sri Lanka has strengthened the effectiveness of its AML/CFT regime and addressed related technical deficiencies to meet the commitments in its action plan regarding the strategic deficiencies that the FATF identified in November 2017.”
The FATF is due for another evaluation of Sri Lanka’s AML/CFT regime next year, and the CBSL (Central Bank of Sri Lanka), which will engage the FATF team on the assessment, is so far unsatisfied with certain banks’ compliance with AML rules, according to sources.
The regulator is primarily concerned with inadequate due diligence carried out on potential customers before they open accounts. “We still see large gaps among many relating to the CDD [customer due diligence] rules implementation in their respective systems,” a CBSL official recently said in a phone interview.
The CBSL’s Financial Intelligence Unit (FIU), which is charged with implementing the FATF recommendations, revamped the CDD rules in 2018. It mandated the collection of UBO (ultimate beneficial ownership) and PEP (politically exposed person) information, introduced MVTS (money or value transfer service) providers to the CDD regime, and directed regulated entities to gradually shift from a rules-based approach to the FATF-recommended risk-based approach (RBA).
As part of the revamp, banks were required to establish risk management functions proportionate to the nature, scale and complexity of their activities and money laundering / terrorist financing risk profiles.
While bankers understand the need for KYC checks during onboarding and ongoing monitoring for suspicious activity, most banks are simply relying on the assumed legality of bank-to-bank transfers when opening SDAs.
Some bankers say CDD is performed after the funds are remitted from foreign accounts into SDAs, but there are no restrictions preventing SDAs from being opened with account transfers from jurisdictions still listed on the FATF’s grey list.
If Sri Lanka is to remain off the list itself, the CBSL needs to address this oversight.