The rise of irregular transfers/loss of forex resources

President Anura Kumara Dissanayake

Digital Economy Deputy Minister Eranga Weerarathne

 Why are law enforcement and prosecutors inactive in the face of irregular transfers/loss of forex resources of Sri Lanka?

 Will three risks crystalise and destabilise country and damage its image?

An ancient Sinhalese poem reads “මරණ තුනක් ඇති මිනිසෙක් පැණි කෑය : A man facing 3 risks of death ate honey.” Will the regime in governance have to face the attendant socio-economic challenges and Mud on its Face due to the Inaction of Law Enforcement and Prosecutors?

Sri Lanka faces the under noted risks because of Irregular Transfers/Loss of Forex Resources of Sri Lanka, all witnessed over the one or more recent years:

1. Risks of Sri Lanka being downgraded in the forthcoming mutual evaluation due in November 2026, on account of failure to ensure the effective adoption, implementation and enforcement of internationally accepted anti-money laundering and counter-terrorist financing standards as set out in the FATF Forty Recommendations.

2. Going Forward potential risks of Inadequacy of Forex resources to settle the restructured external debt commitments and consequently being downgraded in sovereign ratings, and thus without recourse to raise long term foreign borrowings.

3. Financial systems and economic instability, like the crisis in 2022, arising from 1 and 2 above, can lead to public unrest, rule of law breakdown, with even governance processes being destabilised, and Sri Lanka’s economic growth and its people’s livelihoods and prosperity being damaged once again.

It is estimated that over-invoicing of imports and under-invoicing of exports and other trade-related transfer pricing unacceptable options, which are not easily controllable, lead to annual forex losses of $1-2 billion.

In addition, easily controllable to an extent, national forex losses arise from the following and may amount to about $1 billion annually:

1. Narcotics trading

2. Smuggling of gems, jewellery, gold and currency, with focused options via Indian mafia businesses and gem city in Thailand and Sri Lankan travelling abroad

3. Tourism proceeds retained overseas by tourism service providers operating via overseas registered entities; and visiting tourists gambling related spends and funds for meeting local spends being supported via funds informally secured by crypto wallets filled and transported to tourists by local banks and foreign citizens/tourists operated crypto booths scattered in tourist hotspots

4. Expatriate inward remittances and citizen outward transfers of capital payments, channeled via informal Undiyal and Hawala operators

5. Unregulated Crypto currency operations and proceeds of crime transfers using block chain driven Crypto Exchanges and Aggregators

However, it is unforgivable if errant businesses and persons engage in money laundering, cyber scams, crypto exchange transfers, and illegal forex fund transfers overseas use legally available options of credit cards, telegraphic transfers, letters of credit, to transfer out illegally proceeds of crime, tax evasion derived funds, black money, or legal currency transfers open to finance imports and  service fees being remitted using false invoices, with no corresponding imports or services, especially when these operations are allowed to happen and thrive over long periods, due to governance failures, associated noncompliance with laws and regulations associated with gross negligence of oversight institutions and regulatory bodies.

In this connection the public at large are well aware of the losses of the State from External Debt Payment, Postal and SriLankan Airlines related Cyber Crimes and the payment for an IT system not delivered. In addition, the public are aware of the significant losses of the NDB Bank, Private Sector entities engaging in Telegraphic Transfers, without associated imports.

Inactions and failure of oversight supervision

Here the dissonance and anger of the public arise from the inactions of the regulators, public institutions, directors and officers of the entities, who having failed in their oversight supervision, control and risk management accountabilities, yet act with arrogant straight faces and appear to only point fingers at another party as the party at fault; and also engage in misrepresenting facts, despite clear evidence of systemic failures due to governance lapses with clear evidence of gross negligence.

 As a part of Clean Sri Lanka initiatives, it is essential that the Presidential Secretariat via the Digital Economy Ministry ensures that the infrastructure needs and capacity to engage professional services are immediately made available to Law Enforcement Investigation Departments if the risks outlined at the inception of this Risk Alert are to be avoided

Factually in all these instances the expected professional oversight and systems of internal control and risk management processes and need for compliance with regulations failed not only at entity level; but more importantly at all levels of secondary regulatory reviews, independent practitioner’s reviews by auditors etc.; and include even the break down in corporate culture of integrity, transparency and commitment to diligent, good faith driven requirements of acting in the best interests of the institutions by acknowledged and accountability endowed Professionals in Governance. Refer previous note titled “Litmus test for effective enforcement of laws and regulations” https://www.ft.lk/opinion/Litmus-test-for-effective-enforcement-of-laws-and-regulations/14-794467.

In such a backdrop, public expects law enforcement officers and prosecutors to act with independence, unbiased approaches, commitment, professionalism; and most importantly take timely action to investigate and penalise not only the actual offenders but also all those with due accountability for oversight supervision, control and risk management, where they have failed in the discharge of their accountabilities due to gross negligence.

Here it is most important to recognise the five clear principles in selecting those to be charged, especially where money laundering, significant proceeds of crime and loss of Forex losses have taken place:

1. Due application of Command Responsibility

2. Legal powers of the Auditor General to apply Surcharge Provisions of the Audit Act

3. Due Application of the wider concepts under section 111 -Corruption, of the Anti-Corruption Act which reads as follows

“111. Any public official who, with intent or knowledge to cause wrongful or unlawful loss to the Government, or to confer a wrongful or unlawful benefit, favour or advantage Gratification Corruption Anti-Corruption Act, No. 9 of 2023 105 on himself or on any other person, or with intent or knowledge, that any wrongful or unlawful loss will be caused to any person or to the Government, or that any wrongful or unlawful benefit, favour or advantage will be conferred on any person-

(a) does, or forbears to do, any act by virtue of his office as a public official or by use of such office with or without any power therefor vested with such officer;

(b) induces any other public official to perform, or refrain from performing, any act by virtue of his office as a public official;

(c) uses any information coming to his knowledge by virtue of his office as a public official;

(d) participates in the making of any decision by virtue of his office as a public official; or

(e) induces any other person, by the use, whether directly or indirectly, of his office as such public official to perform, or refrain from performing any act,

commits the offence of corruption and shall upon trial and conviction by a High Court or upon summary trial and conviction by a Magistrate be liable to rigorous imprisonment for a term not exceeding ten years or to a fine not exceeding one million rupees or to both such imprisonment and fine.”

4. Due leverage of the legal provisions against all those institutions and institutional heads, their executives, directors and officers covered for failures if any under Financial Transactions Reporting Act and Proceeds of Crime Act

5. Ensure all Directors and Officers, Auditors, Lawyers, Bankers, Professional Practitioners associated and grossly negligent and those persons who have aided and abated are also charged with their associated professional bodies being notified of the non-compliance with Laws and Regulations by the said persons

6. All Law Enforcement branches and Prosecutors must recognise,

1. The priority and significance of any loss; and act on a timely basis, making best efforts to recover in full or in part the proceeds of crime and

2. Commit to allocate sufficient human and other resources, recognising that time is of the essence; and in fact, the planned process should have be initiated at the earliest option of knowledge and value assessment of proceeds of crime at stake and never await the completion of formal audit/forensic audit reviews.

3. It is a myth that once the proceeds of crime, or any part thereof enter a block chain of a Crypto Exchange, that its tracing and tracking is not possible.  The belief that it is lost in a dark state with no ability to trace and track by external experts thereafter and that its  movements cannot be tracked is a part of this externally arbitrarily created myth. In fact, many of the recognised and openly transparent legitimate Blockchains have sufficient checks and balances with a clear path of management of funds being visible, with its continuous recorded entries within the chain on review. Blockchain recordings, except for the usual ledger-related debits and credit entries, yet maintain all transactions records and include any intermediate, mixing, integration and other in process changes in funds and even changes in status, address identification etc, which can be tracked by competent professionals. The Exchange operators are cognizant of their reputation for future growth and generally would even assist investigators; and be willing to freeze and avoid being directly supportive of laundering.

4. That there is a need to be cautious in accepting statements of the suspects stating that all the funds were transferred to Crypto and lost on gambling etc, as this may be a red herring to lead investigators on a wrong path

With Telegraphic Transfers Scam, investigations should also check for options used of loophole exploitation processes deployed by some of Port-To-Port Transfers of the cargo without unloading and upon payment of Clearance Charges Demurrage ETC, with repeated frauds at each identified purported destination port

That the ASYCUDA System is long past its best in technology value offer terms and even essential simple changes can improve efficiency of control and risk mitigations in its current technology generation. It is most helpful to scammers if Customs Department continues with a system that lacks essential effective controls and risks mitigation options and especially network linkages to FIU, IRD, and Exchange Management, with auto raised amber and red signal MIS, possibly leveraging AI options

7. The essential need for centralised data bases being available for use by all intelligence and investigative law enforcement units, similar to the Economic and Financial Crime related centralised data base of The National Economic Crime Centre (NECC), in coordination with the UK Financial Intelligence Unit (UKFIU),which processes, analyses, and disseminates suspicious activity reports (SARs) and illicit finance intelligence across law enforcement and the private sector.

8. There is an urgent need to secure intelligence of the enterprises and individuals operating informal forex exchanges as Undiyal and Hawala operators and Crypto Currency exchanges

9. The priority and immediate need for FCID, CID, PCID and CIABOC leaderships, assisted by State Intelligence to launch effective, capability embedded investigation teams to begin a joint investigation tracing and tracking the chain of payment pathways to ultimate destination accounts or to a crypto mail message or address directly or with name and asset class switches on normal payment of crypto exchange block chains or final cash or asset destinations and attempt to advance investigations towards recovery of proceeds of crime duly engaging external technical specialists

10. Where necessary access external service providers with integrity to assist with 8 above

It is clearly evident, that investigative arms of law enforcement, lack adequate number of trained competent investigators, lack access to vital ITC systems support, even including basic level requirements of ICT equipment, Storage devices and access to adequate capacity internet services with Cloud and drop box facilities.

As a part of Clean Sri Lanka initiatives, it is essential that the Presidential Secretariat via the Digital Economy Ministry ensures that the infrastructure needs and capacity to engage professional services are immediately made available to Law Enforcement Investigation Departments if the risks outlined at the inception of this Risk Alert are to be avoided.