FIU assessing risk on DNFBs to combat black cash
The Financial Intelligence Unit (FIU) is assessing the risk weightage of Designated NonFinance Businesses (DNFBs) to the financial system pertaining to money laundering and is focusing on the condominiums sub sector as a priority, officials say.
The FIU, an arm of the Central Bank (CB) has been following black money trails and is collating data on DNFBs such as gambling, condos, gems, precious metals, digital currencies (Bitcoins) and remittance systems. Officials said that such channels often exploit relatively low reporting requirements and use of shell companies/corporations to shroud the identity of persons controlling funds. These financial sources which also exploit relatively low reporting requirements are rackets that CB has stepped up its vigilance on.
“There’s black cash circulating in the island but it’s tricky to ‘ catch’ the perpetrators in the DNFBs as most such entities aren't in the formal financial system. In a bid to streamline this, the regulator issued an advertisement in June to DNFBs stating an obligation to report any transaction where there's reasonable ground to suspect that the transaction may be related to anything that steps on Section 33 of the Financial Transactions Reporting Act ( FTRA).” a senior official said.
Senior CB officials told the Business Times that FIU’s risk assessment in these sectors in Sri Lanka has shown that the country is at a high risk of money laundering. "Especially when buying immovable property such as lands, houses, apartments, etc this happens," an official told the Business Times. He said that as a money laundering vehicle, a mass of mechanisms frequently used with real estate transactions can irritate efforts to expose the criminal source of funds, such as nominees, fake mortgages, solicitor–client privilege, and legal trust accounts. Weighing the real estate for risk will help a market that has long neglected the amount of criminal activity taking place in the condo sector, he added.
Analysts agreed saying that as against other systems, money laundering through real estate in both residential and commercial sectors can be somewhat easy, calling for little planning or expertise. Large sums of illegal funds can be hidden and integrated into the legitimate economy through real estate.
Real estate and apartments in particular, are a popular asset class for investment in this country for those who may not be able to fully explain the source of their recent wealth, a HSBC study last year reported. "Businessmen and dealmakers with unexplained wealth are purchasing swankier properties in Colombo to profit from the boom. An important shift in the market may come when these speculative bets involve leverage,” HSBC’s "Beyond Money" magazine has said.
DNFBs are subject to compliance, legal and reputational risk owing to non-detection of their bank accounts, other banking products and delivery channels being misused by criminals to launder money, the CB official said. He said that the illicit financial risk for real estate agents is often eased by the involvement of financial institutions already subject to stringent anti-money laundering/counter-terrorist financing laws, but the use of real estate in money laundering schemes go on to be an area of concern to the regulator.
He added that the CB is discussing and educating real estate professionals to increase awareness, knowledge, and understanding of the potential money laundering risks surrounding real estate and enable them to identify practical measures to mitigate the risks.