Financial Times

Legal framework to combat money laundering
By Sunil Karunanayake
The growth of globalization and the consequent facilitation and integration of cross border financial transactions have necessitated new mechanisms and legal framework to counter the adverse effects of expanding global trade.
The Financial Action Task Force (FATF), the force behind these modern legislations adopted a series of recommendations to enable countries to introduce new legislation.

In July 2005 the Sri Lanka Parliament enacted the Convention on the Suppression of Terrorist Financing Act No 2005 to combat funding of terrorist organizations. With the speakers certification on March 6 of The Prevention of Money Laundering Act No 5 of 2006(PML) and Financial Transactions Reporting Act no 6 of 2006 (FTRA) Sri Lanka becomes compliant with the adoption of the FATF on anti money laundering and countering terrorist financing activities.

The Financial Intelligence Unit (FIU) an apex body will be responsible for the administration of the provisions of the Act. Functions of the FIU include the collection of data relating to suspicious financial transactions to facilitate the prevention, detection investigation and prosecution of offences of money laundering and the financing of terrorism. Provisions of the FTRA make it mandatory for "persons and bodies of persons" engaged in "financial businesses" and "designated non financial businesses' to report cash transactions and electronic fund transfers above a threshold value.

Additionally the law makes it mandatory for such bodies to report to the FIU any transaction which they have reasonable grounds to believe is associated with the commission of unlawful activity or terrorist activity, this places a tremendous responsibility on the financial sector and the Bankers are said to have already expressed concern that they are called up to do a police job. As defined by the FTRA " persons and 'bodies of persons engaged in finance business" includes, banks, finance companies, leasing companies, money changers, issuers of credit cards, travel agents empowered to issuing travellers cheques, etc while designated "non finance business" includes casinos, dealers in precious stones, lawyers, notaries, other independent legal professions and accountants. These definitions are in line with the recommendations of the FATF.

The functions of the FIU include receipt of transaction reports, analysis of such reports to determine whether they should be forwarded to prosecuting authorities for further action and disseminating such reports to other institutions both within and outside the country.

FIU will have the authority to collect information from relevant parties and forward them to enforcing authorities should the occasion demand. FIUs globally will share a common understanding and obtaining intelligence expertise would further facilitate information dissemination.

This will be very valuable for countries like Sri Lanka in preventing the flow of funds to terrorist organizations. FIU will play a pivotal role in transforming financial data provided by reporting institutions into financial intelligence required for the fight against money laundering and terrorist financing.

The FIU is therefore a nerve centre and a central element of the AML/CFT framework. It is an accepted conclusion that money launderers are big time operators, well networked globally and use the opportunities such as weak legal enforcement framework to move their unlawful earnings across the borders. Money laundering thrives amidst fraud, corruption and weak governance.

Money launderers’ tendency to move funds from one country to another could also create imbalance in the financial stability. Apart from the ethical deficiencies money laundering causes many ill effects to countries which will keep the genuine foreign investments away at much long term risk to the host countries. Unethical activities will affect the credit rating of such countries thus impairing their stakes in the global trade.

Given these factors it is extremely important for countries big or small to combat this menace with an appropriate legal structure backed by good governance. Sri Lanka’s move in adopting the recommendations of the FATF is a step in the right direction.

Another important advantage of the establishment of the FIU is that it would facilitate obtaining overseas intelligence, as FIUs all over the world are obliged to mutually share information.

This could prove to be important for Sri Lanka particularly in relation to prevention of the financing of terrorism.These new legislations will herald a new era in Sri Lanka and a challenging situation for the entire financial sector with a lead role to be played by the commercial banks. The financial sector will require more specialization and expertise and advanced mechanisms to meet the requirements of the new laws.

Professions such as Accountants and lawyers too will have a major role to play. Financial intelligence Unit (FIU) to be established within the Central Bank as an independent unit will play a key role in administration of the legal provisions of the act. Despite the availability of well established legal structure Sri Lanka has displayed a weakness in implementation and enforcement of laws with clear examples from Traffic, Narcotics, Public Health, Bribery and Corruption, etc. Given the sensitivities attached to foreign investment and financial stability the government should give highest priority to the independent functioning of the Financial Intelligence Unit.

(Comments on this article could be sent to the writer at suvink@eureka.lk)

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