The Central Bank of Sri Lanka’s Financial Intelligence Unit (FIU) repeatedly warned successive Governments as early as 2021 that advance import payments were being exploited for trade-based money laundering, yet the warnings failed to trigger decisive enforcement, allowing what has now emerged as one of the country’s largest financial frauds to flourish.
Explosive revelations before Parliament’s Committee on Public Finance (CoPF) this week showed that the Criminal Investigation Department (CID) has traced approximately $715 million remitted overseas between 2023 and 2026 through fraudulent import transactions where goods never arrived in Sri Lanka. Investigators have also linked parts of the operation to international money laundering and drug trafficking networks.
FIU sounded alarm years before fraud surfaced
FIU officials told lawmakers that strategic risk assessments conducted in 2021 had already identified trade-based money laundering as one of Sri Lanka’s most significant financial crime threats.
Between February and June 2021, the FIU repeatedly warned that advance payment telegraphic transfers (TTs) posed an increasing money laundering risk. These findings were communicated to the Finance Ministry, the Presidency and the Central Bank’s Monetary Board, while banks were instructed to strengthen monitoring of advance payment transactions.
Officials disclosed that the then CBSL Governor formally alerted both the Treasury Secretary and the Presidential Secretary, while members of the Monetary Board also raised the issue directly with the then President.
Despite these warnings, investigators now believe fraudulent transactions continued for years.
Intelligence shared with authorities
The FIU revealed that banks had been instructed to submit suspicious transaction reports relating to advance import payments. Intelligence compiled from these reports up to May 2024 was shared with Sri Lanka Customs and the Sri Lanka Police and has been updated continuously since then.
Officials told the Committee they believe much of today’s criminal investigation is based on financial intelligence generated by the FIU years earlier.
However, they stressed that advance import payments themselves remain legal under Sri Lanka’s foreign exchange laws. Criminal offences arise only when investigations establish fraudulent documentation, deliberate collusion involving bank officials or links to criminal proceeds.
Customs unable to trace older transactions
Sri Lanka Customs admitted investigators were only able to examine records dating back to 2023 because weaknesses in its digital systems prevented access to older transaction histories.
Officials nevertheless believe the abuse of advance import payments may have started much earlier following the Foreign Exchange Act of 2017, which decriminalised foreign exchange offences and replaced the previous criminal enforcement regime with a predominantly civil framework.
Shell companies complicating investigations
Investigators also warned that widespread use of shell companies has significantly complicated efforts to identify those responsible.
To address this, new beneficial ownership rules taking effect from 30 September will require companies to disclose verified information on their true owners, with criminal penalties for false declarations.
Officials cautioned that failure to tackle anonymous shell companies could expose Sri Lanka to adverse assessments by the Financial Action Task Force (FATF), potentially damaging the country’s international reputation on anti-money laundering compliance.
Banks under scrutiny
The Committee heard that despite tighter reporting requirements, some banks continue processing advance payment transactions without collecting mandatory Tax Identification Number (TIN) information.
CoPF Chairman Dr. Harsha de Silva said the Committee found multiple failures across banks, Sri Lanka Customs and the Department of Import and Export Control in reconciling outward remittances with actual imports.
“The most disappointing finding was that reporting requirements on outward remittances by both State and private banks were not being strictly adhered to. That is precisely the gap fraudsters exploited,” he said.
While Parliament has approved new measures requiring importers making advance payments to register with Customs, Dr. de Silva stressed that the solution lies in strict enforcement rather than introducing more regulations.
“The answer to poor enforcement is not to burden bona fide importers with more regulation. It is to implement the regulations we already have, so that rogues are caught,” he said.
Multi-agency investigation launched
The Committee has now directed the establishment of a multi-agency task group to submit a comprehensive report within two months.
Authorities also plan to establish a 22-agency National Coordinating Committee, while the proposed National Digital Identity programme is expected to strengthen customer verification and assist future financial crime investigations.
The disclosures raise serious questions over why repeated intelligence warnings dating back to 2021 failed to produce timely enforcement action, allowing hundreds of millions of dollars to leave Sri Lanka before investigators uncovered the full scale of the alleged fraud.
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