Sri Lanka is preparing for its third Mutual Evaluation on the Anti-Money Laundering and Countering the Financing of Terrorism (AML/CFT) framework, coordinated by the Asia Pacific Group on Money Laundering (APG).
This evaluation requires Sri Lanka to demonstrate compliance with the 40 recommendations of the Financial Action Task Force (FATF) and effective implementation of 11 Immediate Outcomes.
To address gaps in its AML/CFT framework, the Sri Lankan government has approved and communicated a set of action plans to key stakeholder institutions.
These include the Attorney General’s Department, Sri Lanka Police, Sri Lanka Customs, the Commission to Investigate Allegations of Bribery or Corruption, and various ministries and regulatory bodies.
In 2023, an AML/CFT Task Force was established to oversee the implementation of these institution-specific action plans.
The Financial Intelligence Unit (FIU) of the Central Bank of Sri Lanka (CBSL) has intensified efforts to combat money laundering, particularly within the gem and jewelry industry.
This sector, already struggling with high taxation, has been the focus of awareness programs on AML/CFT compliance.
In preparation for the 2025 international evaluation, CBSL has introduced key initiatives, including training on the Financial Transactions Reporting Act (FTRA) and Customer Due Diligence (CDD) for transactions exceeding $15,000.
Despite these efforts, much of the gem trade in areas like Ratnapura and Beruwala remains informal, with only 12% of daily transactions—valued at over Rs. 10 billion—going through legal channels.
The widespread use of informal financial systems, such as hawala, makes regulation enforcement challenging.
The industry is projected to generate $2 billion annually by 2025, but it currently faces multiple hurdles.
Gem export revenue declined by 20.9% in the first eight months of 2024, dropping to $212.8 million from $268.8 million in 2023, according to CBSL data. Industry sources attribute this downturn to an 18% Value Added Tax (VAT) imposed on rough and finished gemstones, which affects both re-exported gems and those sold to foreign tourists.
Many traders fear that these taxes could push businesses towards alternative hubs such as Dubai, India, Hong Kong, and Thailand.
Moreover, banks have been hesitant to extend loans to gem traders, forcing most dealers to rely on personal funds. The lack of a VAT refund mechanism on foreign currency sales further hampers competitiveness.
The national risk assessment has identified a medium risk of money laundering within the gem sector, highlighting the need for risk-based AML/CFT measures.
These include enhanced due diligence for politically exposed persons (PEPs), transaction monitoring, and improved internal controls.
Compliance remains difficult, as a significant portion of gem transactions are conducted in cash without proper documentation, complicating VAT enforcement and financial tracking.
Authorities estimate that VAT on local gem sales could generate Rs. 38 billion annually, providing much-needed revenue for Sri Lanka’s economy.
However, illegal exports continue, with at least 45 known smugglers regularly transporting valuable gems to Bangkok and other destinations. Corruption within customs services further exacerbates the problem, enabling illicit trade.
Additionally, Sri Lanka faces challenges with smuggled gemstones from Madagascar and Burma being falsely marketed as locally sourced, damaging the country’s reputation.
Unethical practices also plague the mining sector, where undervaluation of gemstones results in significant tax revenue losses. In response, the FIU stresses the importance of gem dealers registering, reporting suspicious transactions, and adhering to international AML/CFT standards. These measures aim to improve transparency, curb illegal financial activities, and ensure the sustainability of Sri Lanka’s gem industry.
