Sri Lanka’s efforts to strengthen its anti-money laundering and counter-terrorism financing regime could produce consequences far beyond financial-crime enforcement if banks continue applying blanket restrictions to non-profit organisations.
Sangeeta Goswami, Co-Chair of the Global NPO Coalition on FATF, said countries undergoing FATF Mutual Evaluations can become “desperate” to avoid grey-listing because an adverse assessment can reduce correspondent banking access and international assistance.
That pressure, she said, frequently results in governments adopting measures exceeding actual FATF requirements.
The central issue is FATF Recommendation 8, which governs the treatment of non-profit organisations. Goswami said the recommendation was revised in 2016 after FATF moved away from treating the entire non-profit sector as inherently vulnerable to terrorism financing.
The revised framework calls for a risk-based approach, with countries identifying organisations and activities presenting genuine vulnerabilities. Most non-profits in many countries are assessed as low risk.
However, the practical application of this principle remains uneven.
Goswami said regulatory institutions and banks have been slow to move away from the security-driven framework that dominated non-profit oversight for approximately 25 years. Where regulators fail to provide clear risk differentiation, banks may choose blanket caution because it reduces their own regulatory exposure.
That response carries a price.
Banks face potentially severe penalties and reputational consequences when money-laundering or terrorism-financing controls fail. Goswami said compliance personnel at some banks account for up to 20% of their workforce.
For a non-profit organisation, this can create an uncomfortable equation. Such clients generally produce less commercial revenue than conventional corporate customers while requiring potentially substantial compliance work.
Instead of conducting detailed case-by-case assessments, banks may therefore introduce additional transaction friction or terminate relationships with non-profit customers.
The consequences become particularly severe when humanitarian money is involved.
Goswami said banking delays have held up humanitarian transfers, sometimes causing funds intended for urgent relief work to arrive too late to serve their original purpose.
For Sri Lanka, the issue is further complicated by a longstanding political dispute over the role of civil society.
Ambika Satkunanathan, Chairperson of the Neelan Tiruchelvam Trust, said successive governments have portrayed NGOs as corrupt, opportunistic or acting as foreign agents. She argued that this narrative has intensified since 2023, with FATF requirements increasingly cited in support of measures affecting civil society organisations.
She also questioned whether tougher financial restrictions would address Sri Lanka’s underlying organised-crime problem.
Referring to the recent killing of two children in a mistaken-identity incident allegedly connected to rival drug-trafficking groups, Satkunanathan argued that attention should focus on failures to prosecute organised criminal networks rather than automatically expanding restrictions on legitimate organisations.
She further raised concerns over safeguards when authorities suspect financial wrongdoing. If accounts were frozen on suspicion without adequate judicial safeguards, innocent individuals could potentially lose access to money needed for basic living expenses before having an opportunity to challenge the action.
Her position is that courts, rather than police, should ultimately determine guilt or innocence.
The economic dimension is equally significant. Satkunanathan said FATF partial-compliance or non-compliance findings could increase Sri Lanka’s borrowing costs, restrict international banking relationships and increase compliance expenses.
Civil society organisations have consequently submitted a shadow report to the FATF Mutual Evaluation, seeking to ensure that Sri Lanka’s reforms follow the risk-based framework FATF itself introduced rather than extending financial controls beyond its requirements.