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Apparel and vehicle parts trades raise red flags for money-laundering risks
View(s):By Kapila Bandara
Sri Lanka’s textile and apparel trade, which spends more than half of its annual foreign currency earnings on imported inputs, tops five other sectors including vehicle parts, and food, for money laundering risks, an analysis has found.
The findings by the Asian Development Bank, which has been an unfailing supporter of Sri Lanka for decades, highlights textile fabric and related materials as the prime suspect through a risk analysis of suspicious transaction reports of trade-based money laundering, in which over-invoicing and under-invoicing is notoriously prevalent among exporters and importers.
Undervaluing an import that incurs high taxes in Sri Lanka is not unusual, nor is overvaluing an import not liable to tax.
Trade-based money-laundering is a ‘white collar’ crime that can taint countries, their foreign trade and banks, and also rips off billions in tax revenues owed to the state. Its full adverse impact is not known. The money trail is complex and harder to uncover.
The billions laundered is the difference between the real and stated value of goods.
About Rs. 14.5 billion in illegal proceeds would have been generated by Sri Lanka’s foreign trade in the seven years to 2021, the National Money Laundering and Terrorist Financing Risk Assessment of 2021/22 reports. The involvement of banks is significant. But, the magnitude of the dodgy trade is unknown considering Sri Lanka’s severe deficiencies in tracking and investigating it.
Customs-related violations including trade related offences are the third most significant unlawful activity that generates criminal proceeds and poses a ‘medium high’ threat to money laundering in Sri Lanka, the 2021-22 risk assessment reports. The top threats are drug trafficking, and bribery and corruption.
In one case study, the Financial Intelligence Unit cites a remittance or an attempt at remitting overseas about Rs 500m, likely using fraudulent invoices, and perhaps importing commodities different to that declared in invoices.
Sri Lanka was on the ‘grey list’ of the Financial Action Task Force on two previous occasions for strategic deficiencies and is due for review in March this year by the regional body Asia/Pacific Group on Money Laundering.
From ADB’s analysis in a pilot ‘masterclass’ from January to June 2023, six suspects in Sri Lanka were flagged for money laundering risks from trade. Besides the apparel sector, the others are: vehicle parts, food items, electronics, hardware, and stationery. Data came from suspicious transaction reports that banks had provided.
The pilot project was by the ADB’s Trade and Supply Chain Finance Program, which has provided US$69.5b in trade and supply chain finance from 2009 to 2023. The trial involved five countries, Bangladesh, Mongolia, Nepal, Pakistan, and Sri Lanka.
In Sri Lanka, suspicious transaction reports are filed under Section 7 of the Financial Transactions Reporting Act No. 6 of 2006. Cash and electronic transactions above Rs 1m (section 6), as well as suspect transactions (section 7) must be reported within 31 days.
The transactions in the ADB analysis were related to trade routes of West Asia, North Africa, and Asia-Pacific. Sri Lanka exports millions of US dollars worth of apparel and food category products such as coconuts, black tea, bulk tea, vegetables and banana, to West Asia including United Arab Emirates and Saudi Arabia.
And the red flags cited by the ADB, and or classifications based on categories were: indirect connection with high-risk countries or sanctioned entities, transactions without an economic rationale (payments contradicting export amounts), over/under/split invoicing, and forged documents.
The ADB workshops have helped to improve the detection and investigation of trade-based money laundering crimes and build capacity at Sri Lanka Customs, Financial Intelligence Unit, state and commercial banks, and law enforcers. Suspicious transaction reporting improved substantially, the ADB reports. It also underscored the importance of multi-sectoral, multiagency, and cross-border cooperation.
ADB collaborated with the United Nations Office on Drugs and Crime goAML software to carry out the trial. The results are to be scaled across dozens of countries. Sri Lanka has moved to the goAML reporting system.
Textiles and garments exports in the 11 months to November 2024, were worth US$4.613b. Intermediate goods imports for the apparel trade – textiles and textile articles — vacuumed up US$2.594b of forex greater than in 2023.
These businesses involve politicians, billionaires, and foreign companies, in large and small-scale operations including companies listed on the Colombo Stock Exchange.
In the vehicle parts business, there are at least a dozen companies listed by the Export Development Board. But there are plenty more. Auto component exports in 2022 were worth US$316m.
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