The Central Bank of Sri Lanka (CBSL), through its Financial Intelligence Unit (FIU), has intensified efforts to combat money laundering and other financial crimes within the gem and jewelry industry. This sector, already burdened by high taxation, has been a focal point for regulatory scrutiny.
The FIU has conducted awareness programs on Anti-Money Laundering and Countering the Financing of Terrorism (AML/CFT) compliance obligations, aiming to educate industry participants. These initiatives are part of Sri Lanka’s preparations for the 2025 international evaluation of its AML/CFT framework, a critical step in maintaining the country’s global reputation and securing market access.
Key measures include training on the Financial Transactions Reporting Act (FTRA) and Customer Due Diligence (CDD) requirements, particularly for gem transactions exceeding USD 15,000. However, despite these regulatory efforts, much of the gem trade in Ratnapura and Beruwala remains informal. Reports indicate that only 12% of daily transactions—valued at over Rs. 10 billion—pass through legal channels, while informal financial systems such as hawala are widely used. These unregulated methods circumvent banking oversight, complicating enforcement, according to a senior official from the National Gem and Jewellery Authority.
Although Sri Lanka’s gem exports are expected to reach USD 2 billion annually by 2025, the industry is currently facing significant setbacks. Export revenue dropped 20.9% in the first eight months of 2024, falling to USD 212.8 million from USD 268.8 million the previous year. Industry insiders attribute this decline to the imposition of an 18% Value Added Tax (VAT) on both rough and finished gemstones. This tax applies to both re-exported gems and those sold to foreign tourists, diminishing Sri Lanka’s competitiveness against major trading hubs such as Dubai, India, Hong Kong, and Thailand.
The lack of financial support has further hampered the industry’s growth, as banks generally do not provide loans to gem traders, forcing them to rely on personal capital. Additionally, the absence of a VAT refund mechanism on foreign currency sales has further deterred traders. The national risk assessment has classified money laundering risks in the gem sector as moderate, prompting calls for stronger AML/CFT measures. These include enhanced due diligence for politically exposed persons (PEPs), transaction monitoring, and internal control systems.
The predominance of cash transactions without receipts makes VAT compliance challenging and obscures fund tracking. The Finance Ministry estimates that taxing local gem sales could generate Rs. 38 billion annually, a crucial contribution to Sri Lanka’s struggling economy. However, illegal gem exports continue, with authorities identifying at least 45 regular smugglers transporting valuable stones to Bangkok and other destinations. Reports also suggest corruption among certain customs officials facilitating these illicit transactions.
Compounding the issue, smuggled gemstones from Madagascar and Burma are entering Sri Lanka’s market, being falsely sold as locally sourced gems. This practice damages Sri Lanka’s reputation and deceives buyers. Additionally, undervaluation in the mining sector leads to significant tax revenue losses.
In response, the FIU has underscored the need for gem dealers to register, report suspicious transactions, and adhere to international AML/CFT standards. These measures aim to improve transparency, curb illicit financial activities, and ensure the long-term sustainability of Sri Lanka’s gem industry.
