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Trade-based
Trade-based money laundering money
and informal remittance services: laundering

implications on the sustainability

of the balance of payments of a 877

small open economy

Sisira Dharmasri Jayasekara
Financial Intelligence Unit, Central Bank of Sri Lanka,
Colombo, Sri Lanka

Abstract
Purpose – This study aims to discuss the consequences of trade-based money laundering (TBML) and
informal remittance services on the sustainability of the position of balance of payments and net foreign
assets of a small open economy.
Design/methodology/approach – This paper uses a case study design using facts related to TBML and
informal remittance services on the balance of payment and net foreign assets of Sri Lanka.
Findings – The contextual analysis reveals that the growth of the informal economy promotes informal
remittance services in Sri Lanka. The policy decision to peg local currency to US dollars as a result of a
shortage of foreign exchange had forced people to use informal channels for different purposes. The unclear
and vague customer due diligence process of the anti-money laundering and countering the financing of
terrorism (AML/CFT) regime also has forced people to use informal remittance services. Criminals especially
drug traffickers have grabbed the promoted informal remittance services to transfer proceeds from Sri Lanka
to overseas drug suppliers. On the other hand, systematic deficiencies in monitoring and regulation of
movement of fund transfers and merchandise across borders provide opportunities for criminals to use
different TBML techniques to transfer funds. These limitations force policymakers and regulators to think of
developing a comprehensive payment ecosystem to prevent money laundering and terrorist financing.
Therefore, the global initiative is required to move towards a payment ecosystem from a recommendation-
based AML/CFT regime to reduce global crimes.
Research limitations/implications – This study was designed to discuss the implications of TBML
and informal remittance services on the balance of payments and net foreign assets in a small open economy.
The structure and size of the economy, the strength of the overall economy and the AML/CFT regime will
play an important role in controlling criminal activities and combating money laundering of an economy;
hence, the impact of TBML and informal remittance services will vary accordingly across the countries
Originality/value – This paper is an original work done by the authors, which discusses the implications
of TBML and informal remittance services on the balance of payments and net foreign assets of an emerging
market context.
Keywords Balance of payments, Informal remittance services, Net foreign assets, Payment ecosystem,
Trade-based money laundering
Paper type Case study

1. Introduction Journal of Money Laundering

Control
The prime motive of most of the crimes is money. The criminals perceive that money can Vol. 26 No. 4, 2023
pp. 877-891
buy everything that brings them things, lifestyle and prestige. Sometimes, this motive © Emerald Publishing Limited
1368-5201
promotes getting money to get even more money. However, they face a fundamental DOI 10.1108/JMLC-03-2022-0042
JMLC problem of using money that was generated from crimes. Therefore, criminals consider
26,4 money laundering as the solution to this fundamental problem. Criminals use different
approaches to launder criminal proceeds including trade-based money laundering (TBML),
which is a traditional and popular method of money laundering. In general terms, TBML is
using international trade to transfer and/or disguise illicitly derived value which involves
the financial system when falsified trade transactions are used to justify financial
878 transactions. FATF-Egmont Group (2020) defines TBML as the process of disguising the
proceeds of crime and moving value through the use of trade transactions in an attempt to
legitimize their illegal origin or finance their activities. The criminals use some techniques
for falsifying trade value in TBML, which may include over and under-invoicing of goods
and services, multiple invoicing of goods and services, over and under-shipments of goods
or falsely described goods and services, among others. TBML becomes a challenge when it
comes to a small open economy in which international trade plays a key role and place an
unfavourable trade position in international trade. For example, Sri Lanka experiences a
continuous deficit in the trading account of the balance of payment during the last couple of
decades.
TBML related transactions involve some ways to falsify trade value by misrepresenting
the fair market value. The difficulty faced by the authorities in the identification process is
that the value of some goods is not easier to identify and measure over the others. For
example, in the Sri Lankan context, the value of 1 Kg of tea is identifiable and measurable in
terms of the available list of prices based on the auctions. However, how can authority
identify the true value of software developed by a Sri Lankan company or import of high-
capacity computer processors? Quality and quantity are two other aspects that can be used
for TBML. For example, when importing crude oil the countries face difficulties in the
identification of TBML transactions because authorities sometimes lack competencies to
identify the quality of various types of crude oil categories and the quantity in the
shipments. The shipment may contain millions of gallons of oil. The variation of the
quantity by a few million will not be identified accurately by the authorities. For example,
documents reveal that shipment comprises 100 million gallons. However, actual maybe 90–
110 million gallons. Therefore, it is obvious that a country is required to implement a proper
mechanism to monitor international trade transactions to prevent TBML. The monitoring
mechanism should be developed in terms of monitoring transactions as well as merchandise.
On the other hand, informal remittance service providers (undiyal and hawala) influence
the position of foreign reserves of a country because of moving funds across borders
avoiding the formal financial system. This study uses the term hawala to represent undial
as well despite the slight difference for the purpose of the study. DOJ (2018) quoting an
indictment, defines hawala as an alternative form of money remittance, which operates
outside of traditional banking or financial systems. The transfer of monetary value occurs
between the brokers who are typically located in different countries, but sometimes in
different cities in one nation based solely upon the trust that exists between the brokers. The
hawala system, which originated on the Indian subcontinent, does not rely on promissory
instruments; rather, it relies on trust and long-established connections between brokers that
are typically based on familial, ethnic, religious, regional and/or cultural grounds (DOJ,
2018). The hawala transactions transfer only the value of the money, but it does not involve
transferring the money itself. Therefore, hawala transactions restrict the movement of
foreign currencies across borders and hence affect the position of foreign reserves of the
country.
TBML activities and informal remittance services are not the sole influencing factors on
the position of foreign reserves of a country. The competitive advantage of countries for the
goods and services it produces is a key for success in international trade. The trade Trade-based
competitiveness of a country will be determined by various factors, and the trade money
competitiveness will determine the position of international trade as well as the balance of
payment of a country. However, this study will not discuss the issues related to the
laundering
competitiveness of international trade, which will impact the position of balance of payment
and depletion of foreign reserves. Instead, we will focus on discussing some issues related to
TBML and informal remittance services, which may affect the depletion of foreign reserves
and balance of payments in the Sri Lankan context.
879

2. Background
The prevailing COVID-19 pandemic has impacted negatively the economy of Sri Lanka
during the past two years. The prolonged lockdown of the country was a decisive factor in
the negative growth of the economy. The economy did not grow as expected and the level of
inflation began to rise because of various reasons including demand-side pressures. The
analysis of the international trade position of Sri Lanka shows that the country has failed to
build a favourable net trade position over time. This unfavourable position has broadened
the trade gap between exports and imports causing serious pressure on the macroeconomy
of the country. The widening of the unfavourable trade position of Sri Lanka is shown in
Figure 1.
On the other hand, the unfavourable trade position has caused to deplete the official
foreign reserves of the country. COVID-19 pandemic also has fuelled the depletion of foreign
reserve position because of the restricted economic activities as a result of the lockdown of
the country. Because of this external sector pressure, the country has tried to control the
foreign exchange market through fixing exchange rates, which have provided opportunities
to the informal money remittance service providers to expand their activities in the informal
market. The operating of dual systems, i.e. formal and informal, forced people to the
informal sector because they had to wait for a long period to process transactions through
formal channels because of a shortage of foreign currencies even with the fixed exchange
rates. IMF (2022) reveals that large foreign exchange debt service payments by the
government and a wider current account deficit have led to a significant foreign exchange
shortage in the economy. And, the official exchange rate has been effectively pegged to
the US dollar since April 2021. The migrant workers also shifted to informal channels

Figure 1.
Net international
trade position of Sri
Lanka
JMLC because of attractive rates, low cost and efficient service, which have not been provided by
26,4 the formal financial institutions. The movement of net foreign reserves of Sri Lanka over the
years is shown in Figure 2.
The frequent use of informal remittance services is an opportunity for the criminals who
are waiting to grab every possible chance to generate more money from criminal activities.
Daily News (2022) reports that the investigators that an individual has obtained money from
880 an associate of the drug dealer who resides abroad and that money has been sent using the
hawala system to him, from a foreign country. In this context, drug trafficking seems to be
extensively used in the informal economy. The strength of the regime of anti-money
laundering and countering the financing of terrorism (AML/CFT) of the country restrict the
use of the formal system for criminal activities. Therefore, criminals may rely on informal
methods of money remittance services as well as limitations of the formal system to settle
the transactions related to crimes.
On the criminal side, the seizure of heroin by the law enforcement authorities has
increased significantly during the past couple of years, which shows the growth of illegal
activities in the informal sector. This process is shown in Figure 3. The strengthened

Figure 2.
Net foreign reserve
position of Sri Lanka

Figure 3.
Seizure of heroin in
Sri Lanka
AML/CFT framework in the financial system discourages transactions related to drug Trade-based
trafficking and other crimes. Fernando (2022) quoting the Governor of the Central Bank of money
Sri Lanka states that considering the sheer scale of the sum that is being distributed through
unofficial remittance channels, there exists suspicion that a significant portion of such sum
laundering
is drug money that is being laundered and warned foreign workers to stay away from such
channels to avoid being indirectly complicit in such an offence. It further reveals that foreign
worker remittance inflows have decreased by over US$300mn in December 2021 while the
decrease in the outflow of foreign workers may also be a reason, the primary reason for the
881
current situation is the fact that informal channels available for money exchange which
pays an exchange rate of Rs 240 when the official rate is only Rs 200. Therefore, when US
$300mn is brought to the country through unofficial channels resulting in Rs 72bn
distributed in the economy raises questions of the source of money of this Rs 72 bn.
However, law enforcement agencies need to understand this phenomenon concerning the
increased volumes of drug trafficking.
The decreasing trend of outward labour migration also suddenly further dropped
because of global travel restrictions. The final effect of these consequences was the depletion
of worker remittance as shown in Figure 4.
The outward labour migration has gradually decreased since 2014. This may be because of
the migration of Sri Lankans to settle in other countries like Australia. The gradual decrease of
the outward labour migration is the main factor of the decrease in foreign worker remittance
position of the country over time. Further, it is a challenge to the government for building a
skilled workforce for the development agenda of the country. On the other hand, Sri Lanka is
facing a shortage of labour in the construction industry, and many contractors use Chinese and
Indian labour to fill the demand gap. According to the data of the Department of Motor Traffic,
there were 1,062,447 three-wheelers by the end of 2016 (DMT, 2022). The increase in the use of
three-wheelers is one of the major factors for the decrease in outward labour migration as well as
the shortage of labour in Sri Lanka. The reduction of labour migration and increase in the
registration of total three-wheelers are shown in Figure 5.
The cash-intensive business such as Gem and Jewellery dealers, vehicle dealers and real
estate dealers among others are usually engaged in the hawala business. Therefore, hawala
is an effective mechanism for criminals to launder money generated from criminal activities.
For example, a gem and jewellery dealer who operates an informal remittance service can

Figure 4.
Position of workers’
remittance in Sri
Lanka
JMLC
26,4

882

Figure 5.
Outward labour
migration and total
number of registered
three wheelers

bank proceeds that are derived from drug trafficking or money of drug traffickers to appear
them derived from his business. He will justify these deposits to the financial institutions as
the proceeds of his business and also can use part of illegal proceeds to meet the expenditure
of the business reducing the amount of banking.
This background analysis shows that the criminals have used formal as well as informal
systems to launder money using different techniques. The preceding paragraph discusses
some methods used by the criminals to launder money through formal and informal
systems, which have affected the depletion of foreign currency reserves of the country.

3. Financing of international trade

International trade transactions are structured using different payment methods, which
may include formal as well as informal methods. This section will discuss some formal and
informal methods used by the criminals to launder money or remit money to other
jurisdictions, which may cause pressure on the net foreign reserve position of the country.

3.1 Money laundering through formal system

Traditional TBML methods have been discussed extensively and well researched. However, the
use of different financing methods is narrowly discussed and hence, this part discusses how
criminals use formal banking channels to transfer money from one jurisdiction to another. Often,
documentary trade finance methods are used to manipulate the value of invoices to launder
money which happens usually when the values of the transactions are large and the terms of the
contracts are long. Criminals try to use this approach to transfer funds when there is political and
economic instability in a country. The instability of the country will not allow the policymakers to
strengthen AML/CFT regime to prevent TBML. Often, AML/CFT legal framework does not
cover the predicate offences, which are required to prevent TBML. For example, tax evasion is
not a predicate offence in Sri Lanka. Parties who are engaged in TBML would use the letter of
credits and document collection as financing approaches. The proper monitoring mechanism of
moving funds and merchandise are not implemented effectively in these countries to detect and
deter illegal transactions. Sometimes there may be proper systems established in accordance with
international best practices. However, the problem of ineffectiveness arises as a result of the
limitations of the implementation of the system.
 Even within the formal system, importers have adopted some strategies to manipulate Trade-based
the value of imports to reduce import taxes. In such instances, the importers use formal as money
well as informal money transfer services to settle the original value of the merchandise. For
example, when a luxury vehicle or other asset, which is subject to higher import taxes is
laundering
imported to the country, the official import documents do not include the original value of
the assets instead a lower value is indicated. The difference between the original value and
indicated value is remitted to the exporter through an informal channel. This is very
common in importing used vehicles under a special permit scheme, which is given to senior 883
government officials. The applicable taxes and customs charges are calculated based on the
manipulated value depriving revenue to the government providing benefit to the importer.
Assume that A, an importer of a luxury vehicle, establish a letter of credit at a licenced
commercial bank providing a proforma invoice that indicates 75% of the actual value of the
vehicle. The exporter of the other jurisdiction provides commercial invoices and other
documents for the undervalued price of the vehicle to receive the 75% value of the vehicle
through the proper banking channel. The importer settles the balance part of 25% of the
vehicle through informal channels such as hawala/undial. The importer pays taxes, import
duties and other charges for the 75% value. The government loses revenue in minimum
related to the value of 25% of the vehicle. The actual loss may become higher if the actual
value comes under the higher value tax band of the country. The process of this practice is
shown in Figure 6.
Open account financing is another area where the regulators need to give proper
attention to curtail money laundering. This method is used by importers to settle
transactions where the risks are borne by trading parties in accordance with terms and
conditions. The payment terms may take the form of either advance payment or delayed
payment. In the Sri Lankan context, some parties use advanced payment techniques to
transfer funds to other jurisdictions without a proper economic rationale. The fraudsters
produce fraudulent documents stating that the payments are advance payments for future
imports. The financial institutions are required to take extra measures to identify whether
these transactions are related to expected trade transactions, imports. The regulator of
international trade should have established proper systems and controls to monitor these
transactions and to take appropriate actions against fraudsters.
There are two possibilities for these kinds of transactions. First, it may be both the parties
involved in the transaction illegally colluding to launder money. The collusion may be structured
to evade taxes, duties, exchange controls or sanctions or maybe to take illegal advantage of trade
incentives. For example, importing low-quality tea from other jurisdictions and reexporting them
under the name of Ceylon tea to extract trade incentives. These practices in the long term will

Figure 6.
Tax evasion through
hawala
JMLC tarnish the image of the country and criminals will earn money in the short run. The collusion
26,4 works well if both parties support each other. This practice is possible when both sides of the
transaction are controlled by the same person. For example, in some instances, Sri Lankan
migrants with dual citizenship are engaged in international trade transactions representing the
same person as the exporter as well as the importer. On the other hand, some importers of
essential items have established related entities in sourcing jurisdictions or in tax havens to
884 facilitate transactions. In such instances, related entities export the merchandise to Sri Lanka
charging a higher price to transfer profit out of the country.
The second type of transaction may be related to frauds which are related to criminal
deception where an importer or exporter defrauding the other party or a third party or
sometimes defrauded party may be the facilitating bank.
There were some other mechanisms used by the importers to transfer money for the
merchandise. During the pandemic, some traders had used the automated teller machine (ATM)
cards issued by the banks to withdraw money from other jurisdictions. The fraudsters had used
other third-party individuals to establish banking relationships with selected banks and had
collected ATM cards from the individuals after paying money to the original accountholders.
These collected cards are couriered to the representatives of the importer or importer itself or the
representative carry the ATM cards to the other country for withdrawing money to make
payments for merchandise. Once the banking relationship was established, the traders had
deposited money in these accounts and had used ATM cards to withdraw money in the country
where they had purchased goods. The goods purchased may be either shipped to Sri Lanka or
carried out by the importer or a representative through airfreight.
The importers had used the discussed strategy to extract the benefit arising from the
difference of the market exchange rate of the informal sector and the official rates of
the banks. The commercial bank rates are decided based on the central bank rates, and
the overall informal market exchange rate was well above the bank rates. Considering
this position, the importers had tried to grab the arbitrage profit using ATM cards to
withdraw money from the ATMs located abroad to finance their merchandise. This
manipulated process is shown in Figure 7. The movement of the exchange rate of Sri
Lankan Rupees and US dollars in the parallel markets after the policy measures are
shown in Figure 8.

Figure 7.
Use of third-party
ATM cards to
withdraw money
abroad to finance
imports
 Trade-based
money
laundering

885

Figure 8.
Movement of
exchange rates in
formal and informal
markets

There was another instance where the traders had collected foreign currencies from banks at
a lower rate over the informal market rate providing fraudulent documents stating that they
are going abroad. The individuals had used this method to get the maximum foreign
currency limit allowed by the regulator for travellers. The fraudulent documents include
fake air tickets, which indicate countries those grant visas on arrival. The criminals can
collect the maximum limit allowed for individuals in this practice and collusion would
provide more opportunities to collect a sizable amount, which can be exchanged at the
informal market or can be used to purchase goods abroad.
These practices were the outcome of the fixing exchange rate by the authorities because
of the depletion of foreign reserves causing shortages of foreign exchange. Having analysed
this issue, Worstall (2022) states that:
you can fix the price of something but not the quantity or the quantity but not the price. If you try
to fix both, then you’ll get none at any price. You can only have a foreign exchange shortage if
you’re trying to fix the price of that foreign exchange.
This policy decision has provided opportunities to the participants in the informal sector over the
participants in the formal sector which will be detrimental to the AML/CFT measures. And also,
it has created two parallel foreign exchange markets within a single jurisdiction which dilutes the
confidence in the formal market because of restrictions. Therefore, it is required to clearly define
the legality of the informal market and take appropriate measures to strengthen AML/CFT
measures in this respect because current foreign exchange regulations are not strong enough to
criminalize foreign exchange malpractices.

3.2 Money laundering through informal system

The unfavourable trade position and subsequent macroeconomic implications because of
COVID-19 pandemic have provided opportunities to the criminals to expand the informal
sector within the economy. The shortage of foreign reserves forced the financial institutions
to limit the foreign transactions because of the unfavourable position. The environment has
impacted international trade specifically on imports and importers tend to use informal
systems to remit money to finance the imports. Some of the common cases of using informal
money transfer services and the structures of such mechanisms are discussed below.
JMLC 3.2.1 Investment in cryptocurrencies. The stance of the country on cryptocurrency is neutral
26,4 because it neither accepts nor rejects the use of cryptocurrencies. Having identified the
growing interest in virtual currencies, both domestically and international, CBSL (2018)
announces to the public that the Central Bank of Sri Lanka has not given licence or
authorization to any entity or company to operate schemes involving virtual currencies,
including cryptocurrencies and has not authorized any initial coin offerings. Further, it
886 announces that the unintentional usage of cryptocurrencies could amount to breaches of
AML/CFT laws.
Therefore, cryptocurrencies, in the present form, may pose significant risks in terms of
financial, operational, legal, customer protection and security-related risks to their users as
well as to the economy. However, despite the warning of the risk of transactions, there is a
trend of investing money in cryptocurrencies using the banking channel of the country.
Because of the limitations of foreign currencies, the regulator has restricted these kinds of
transactions, and hence, the informal system has been used for the investment in
cryptocurrencies. The local investment coordinators or agents collect money from interested
investors and use hawala to invest such proceeds in cryptocurrencies from overseas
countries. In this process, hawaladars use agents to collect remittance proceeds of Sri
Lankan migrants abroad and use the collected proceeds for making investments in
cryptocurrencies. The locally collected proceeds are used to make the remittance payment to
the relatives or to the intended beneficiaries of the migrant workers. The final result of the
process is that there is no movement of foreign currencies across the borders which is
unfavourable for the countries of which the position of foreign assets is limited. This process
is shown in Figure 9.
3.2.2 Financing foreign educational expenses. A lesser number of students get the
opportunity of higher university education in Sri Lanka because of the limited capacities in
government universities. This limitation forces a sizable number of students to go abroad
for higher studies. UNESCO (2022) reveals that 28,583 Sri Lankan students studying abroad
in 2022. This number seems to understate the actual movement of students out of the
country given the advertising campaigns of the agents of foreign universities targeting Sri
Lankan students. Given the increasing number of students going abroad, the parents of such
students face the difficulty of remitting funds abroad to meet the educational expenses of the

Figure 9.
Use of banking
system and hawala to
invest in
cryptocurrencies
children because of the shortage of foreign currencies in the banking system. The parents Trade-based
tend to use informal remittance services, hawala, to remit funds to their children. Here, money
hawaladars collect funds from the parents in Sri Lanka to remit the funds to the children. On
the other end, hawalahawaladars collect foreign currency from the Sri Lankan migrant
laundering
workers abroad offering a higher rate than the rate of the Sri Lankan financial institutions.
The collected foreign currencies are remitted to Sri Lankan students to meet educational
expenses. The rupee value of the funds collected from the migrant workers is deposited to
the accounts of beneficiaries of the migrant workers to complete the cycle of the transaction.
887
On the other hand, parents themselves also use netting structures to send money to their
children. This strategy involves sending money from another country to the country where
the children study without the involvement of the formal or informal system of Sri Lanka. In
such instances, either a relative of the student who works abroad or a third-party remits
funds to the student and the parents settle the value of the transaction locally.
3.2.3 Remitting the disposal proceeds of assets of migrants. One of the other instances
where the transfer of money through informal transfers is related to the remittance of
disposal proceeds of the assets of Sri Lankan migrants. CBSL (2021) suspends the
repatriation of funds under the migration allowance out of funds received as monetary gifts
by an emigrant from an immediate family member (i.e. parents, grandparents, siblings and
spouse of the emigrant) and limit the repatriation of funds under the migration allowance
through capital transactions rupee accounts by the emigrants. These restrictions force
migrants to use hawala to transfer money to the countries where they are going to reside.
The migrants use the formal banking system with the restricted levels and the remaining
funds are transferred through the hawala system. This process is shown in Figure 10.
The growth of the informal remittance system may reduce the trust and confidence of the
customers in the formal financial system which may affect the effectiveness of the AML/
CFT regime of the country because crimes grow in informal sectors. The criminals prefer to
use physical cash and use cash-intensive businesses to cover illegal activities. For example,
having conducted field interviews, UNODC (2018) reveals that there are three main methods
in Afghanistan to move funds in the context of opiate trafficking. The first involves a
traditional bank or money exchange transfers, the second is based on the basic barter of
opiates for goods (mainly cars) and the third involves informal money transfer systems such
as hawala. UNODC (2018) further states that within Afghanistan, the use of hawala as a
means of payment for drug shipments is common, partly because of the limited use of the
formal banking system for all financial transactions. In a decided case, DOJ (2018) shows

Figure 10.
Use of hawala to
remit funds of
migrants
JMLC that the convicted person has participated in a “hawala” conspiracy that was moving money
26,4 generated from drug sales in Canada to the USA to pay for multi-kilogram drug shipments
that were purchased in Los Angeles and then routed back to Canada for distribution. These
examples show that informal remittance services play a major role in the informal sector of
an economy providing financial facilities for criminals, especially for drug traffickers. This
is a huge challenge for a country like Sri Lanka because criminals use the legally hard-
888 earned income of migrant communities and other small businesses for their illegal activities.
The use of Hawala system by drug traffickers is shown in Figure 11. Therefore,
policymakers should assess the real requirement of having an informal remittance service in
view of managing foreign assets as well as strengthening the AML/CFT regime of the
country.
Therefore, there should be an evolution or restructuring banking and payment system
through digitalization to reduce the use of physical currencies (Gerboth, 1973).
The growth of the informal economy, as well as the informal remittance service
providers, are a huge challenge for a country in which the effectiveness of the
implementation of the AML/CFT regime is limited. Sri Lanka has been effective only for one
immediate outcome out of eleven immediate outcomes of its mutual evaluation conducted in
2015 (APG, 2015). Therefore, the policymakers have to keep in mind the level of
effectiveness of the AML/CFT regime in addition to the quality of the legal framework
before moving to adopt new policies. The piecemeal basis temporary policies, which are
focused on solving evolving phenomena, may result in further weakening the AML/CFT
regime of a country. The reactive regulations will not help to solve the long prevailed
structural problems of an economy. As Jayasekara (2021) suggested, an entrepreneurial
regulatory framework is required to solve the structural issues. The policymakers should
move from post-mortem types of regulations to a regime of entrepreneurial regulation which
focuses on studying structural changes of the economy as well as the behaviour of the
labour force. On the other hand, the entrepreneurial regulatory regime of the financial sector
should support the growing needs of the economy while satisfying the needs of all

Figure 11.
Use of informal
remittance services
for drug trafficking in
Sri Lanka
stakeholders. The authorities are required to solve issues related to the payment systems Trade-based
promoting formal channels for international transactions. On the other hand, business money
enterprises are required to improve the competitiveness of their products and services in the
global market to address unfavourable trade positions.
laundering
The informal remittance services are becoming popular not because of the prevailing foreign
currency limitations and restrictions. The customers use informal remittance services as a result
of low cost of transactions, fast and timely service, convenience and fewer formalities of
processing transactions and zero regulation and supervision. Ineffective regimes harass reporting 889
institutions as well as customers because of unclear rules on customer due diligence. Therefore,
the implementation of clear risk-based customer due diligence procedures, rules and regulation is
a vital factor in providing efficient customer service in a formal banking system. The failure to
define simplified and enhanced customer due diligence measures in the AML/CFT regime make
institutions that come under the regime inefficient because the institutions are required to
perform an equal level of work for both low-risk and high-risk customers. This unnecessary
process increases the cost of transactions and hence customers try to use informal methods.
The payment system under the entrepreneurial regulatory regime is developed
considering all needs of stakeholders. The evolving technology provides more opportunities
to improve the efficiency of payment systems while restricting the access of criminals to
launder money through the formal financial system because of proper controls. Therefore,
developing the conventional payment system to a payment ecosystem may be a solution to
strengthen the AML/CFT regime and also to solve foreign currency limitations as faced by
Sri Lanka. Here, a country is required to move into digital fiat currency with the
implementation of a payment ecosystem where all the transactions are performed within the
system digitally. The proposed ecosystem will reduce the cost of running a monetary
mechanism with physical fiat currencies and improve the efficiency of the fiscal regime of
the country as well. The audit practice of the country to be moved forward with the
ecosystem, and it will solve the problem of using cash-intensive business for money
laundering because of the audit trail and transparency of the ecosystem.
However, it will not be easy to move to the proposed payment ecosystem in the short run
because of the pressure that comes from the various stakeholders for the change. Therefore,
in the first phase, it is required to prohibit informal remittance services to encourage using
the formal banking system. Legalizing informal remittance services will not solve the
problem of shortage of foreign currencies because informal services use a mechanism of
netting to settle the transactions using TBML or some other structured transactions which
are backed by criminal activities. Therebefore, the legalization of informal remittance
services will not prevent the money laundering activities of the country.
The payment ecosystem will improve the efficiency traditional payment mechanism of
the government, which involves unnecessary documentation and human intervention. The
expansion of government activities is a burden for the government budget for many years.
Further, inefficiencies occur because of the corruption in the government sector and the
ecosystem will influence reducing bribery and corruption as a result of inbuilt audit trail and
transparency of the system.
Tax evasion and avoidance can be restricted because of the recording of all transactions
in the ecosystem and the system will not allow additional income sources without a proper
justification. The undisclosed income of professionals will have to come through the
ecosystem which will enhance the tax base as well as the tax revenue of the country. The
prevailing system encourages to use of cash-based payments, which cannot be captured
unless a proper disclosure. For example, fees for lawyers and medical professionals are
made using cash and often those proceeds are not reflected in the taxable income of those
JMLC individuals. However, under the proposed payment ecosystem, the tax authorities can
26,4 capture information from the ecosystem and improve the efficiency of the tax revenue
management process. Therefore, it is timely to think of implementing a comprehensive
payment ecosystem to deter informal remittance channels and combat money laundering.
The global AML/CFT regimes have been developed based on the recommendations of
Financial Action Task Force (FATF). The current FATF recommendations-based AML/CFT
890 regimes have failed to reduce global crimes and most of the regimes are ineffective in
implementing the AML/CFT framework because of the involvement of people with different
power factors. When the power factor involves people, they work for personal interest over the
national interest. That is why, hierarchical government organizations are so corrupted in weak
AML/CFT regimes. Considering the politicization of accounting standards, Gerboth (1973) states
when a decision-making process depends for its success on public confidence, the critical issues are
not technical; they are political. Therefore, developing a payment ecosystem will deliver better
outcomes over the traditional AML/CFT regimes. However, the development of such a mechanism
will be determined by the level of politicization of the policymakers. And also, the countries have to
consider the overall strength of the economy when deciding the policy stance of informal
remittance services. The weak economies with deficient AML/CFT regimes should prohibit
informal remittance services because such services support criminals and promote informal
underground economic activities making the economy further weaker and weaker. Therefore, a
policy stance has to be taken to strengthen the overall economy rather than following the
initiatives of other countries in addressing the issues on TBML and informal remittance services.

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Narcotic Bureau. (2019), “Sri Lanka police”, available at: www.police.lk/images/narcotic_bureau/2019/
march/3_significant_drugs_seized_in_sri_lanka_2018.pdf

Corresponding author
Sisira Dharmasri Jayasekara can be contacted at: [email protected]

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