Case Explained: Suppression of Terrorist Financing Bill: FATF deadline drives financial crime overhaul – Legal Perspective

• Expanded powers for surveillance and asset freezing introduced
• Reforms target money laundering, digital assets
• Stricter compliance rules and penalties for financial institutions
• Gaps in enforcement and forensic capacity highlighted
• Civil society flags risks to NGOs and vulnerable groups

Sri Lanka has gazetted the Convention on the Suppression of Terrorist Financing (Amendment) Bill, aiming to tighten the regulatory framework surrounding digital assets, expand covert investigative powers, and introduce severe financial penalties for institutions that fail to comply.

The Government maintains that these rapid amendments are strictly necessary to align the domestic legal framework with international standards ahead of the highly anticipated 2026 mutual evaluation by the Financial Action Task Force (FATF).

However, legal experts and civil society advocates have raised significant concerns regarding local implementation capabilities and the potential for severe collateral damage among marginalised communities and legitimate Non-Governmental Organisations (NGOs).

Historical context and FATF mandate

The FATF is the global money laundering and terrorist financing watchdog. Established in 1989, it sets international standards that aim to prevent illegal financial activities and the harm they cause to society. 

Sri Lanka has a fraught history with the organisation, having been previously placed on its grey list of jurisdictions under increased monitoring. Being on this list severely hampers a nation’s ability to engage in seamless international finance, restricts foreign direct investment, and increases the administrative cost of international transactions.

The implications of the upcoming 2026 mutual evaluation cannot be overstated. Following its unprecedented sovereign default in 2022, Sri Lanka’s economy remains in a fragile state of recovery. Placement on the grey list would subject cross-border transactions to enhanced due diligence by global correspondent banks. This friction inevitably leads to delays in trade financing and increased operational costs for local financial institutions.

The original Convention on the Suppression of Terrorist Financing Act No.25 of 2005 was enacted to give effect to the United Nations International Convention for the Suppression of the Financing of Terrorism. The rapid evolution of financial technology, borderless digital currencies, and complex global terrorism networks have now necessitated an updated legal mechanism.

Legislative mechanics 

The current amendment is not an isolated piece of legislation. It is part of a broader regulatory strategy orchestrated by the Ministry of Finance and the Central Bank of Sri Lanka (CBSL). Ministry of Finance Department of Legal Affairs Additional Director General A.K.D.D.D. Arandara confirmed the swift progress of the legislation.

“We have finalised the draft amendment bill prepared by the Legal Draftsman and the Attorney General has cleared it, confirming there are no contradictions with constitutional provisions. Following Cabinet approval, we have officially gazetted the bill. 

“The Convention on the Suppression of Terrorist Financing (Amendment) Bill is being introduced alongside amendments to the Prevention of Money Laundering (Amendment) Bill and the Financial Transactions Reporting (Amendment) Bill. All three bills have been published on the Department of Government Printing website and forwarded to Parliament, where they will be tabled in due course,” he said.

Virtual assets 

The bill introduces sweeping changes to the definition of assessable property under Sri Lankan law. The previous terminology of funds or property has been replaced entirely with the broader phrase ‘funds, property, or other assets’. 

Crucially, this new definition explicitly includes virtual assets. The legislation formally defines a virtual asset as a digital representation of value that can be digitally traded or transferred and can be used for payment or investment purposes.

Sharing a statement with The Sunday Morning, the Financial Intelligence Unit (FIU) of the CBSL clarified its current regulatory stance regarding cryptocurrencies.

“Currently, under the CBSL Act No.16 of 2023, only physical currency notes and coins issued by the Central Bank hold the status of legal tender for payments. The proposed amendments do not immediately impose regulatory requirements on virtual assets, as investigations involving such properties are currently managed by law enforcement agencies.

“However, a subcommittee was established in December 2025 under the Anti-Money Laundering and Countering the Financing of Terrorism National Coordinating Committee. Led by the Deputy Minister of Digital Economy and chaired by the CBSL Governor, this committee is developing a national policy and prudential regulatory framework for Virtual Asset Service Providers (VASPs), which is expected to be implemented by the end of 2026. Additionally, upcoming amendments to the Financial Transactions Reporting Act will enable us to launch a phased supervisory framework for these digital assets.”

University of Colombo Sri Palee Campus Rector and former Commissioner of the Human Rights Commission of Sri Lanka (HRCSL) Prof. Prathibha Mahanamahewa expressed deep scepticism regarding the readiness of the State to tackle decentralised digital financial crimes.

“Sri Lanka faces structural challenges regarding cryptocurrency due to the absence of a comprehensive licensing regime for VASPs. Because the State lacks visibility over regulated entry and exit points, our forensic capabilities remain inadequate. We currently do not possess the dedicated blockchain analytics infrastructure seen in countries like Australia or Singapore. To effectively manage this, specialised crypto forensic units must be established within the Police and the FIU.

“Furthermore, cryptocurrency payments are currently restricted or prohibited entirely through formal banking channels in Sri Lanka. While these amendments signal forward-looking compliance aimed at avoiding grey-listing, the lack of immediate licensing and mandatory reporting poses a critical risk. Without modern tools, there is a danger of selective and arbitrary enforcement stemming from an over-reliance on traditional financial intelligence methods,” he said.

Foreign terrorist fighters

The legislation also introduces the legal concept of the foreign terrorist fighter. This targets individuals who travel to a state other than their residence or nationality for the purpose of perpetrating, planning, or preparing for a terrorist act, or to provide or receive terrorist training. 

The bill criminalises the act of organising, directing, or participating as an accomplice in the financing of these fighters. Furthermore, the scope of offences has been expanded to explicitly include attacks or financing directed against a Government facility of Sri Lanka located in other countries, protecting embassies and diplomatic premises.

Threat of de-risking and collateral damage

One of the most pressing civil rights concerns surrounding the new regulations is the concept of de-risking. With heavier reporting liabilities and severe monetary penalties placed on banks, accountants, and real estate agents, there is a distinct fear that these entities will simply sever ties with clients deemed to carry any compliance risk.

Prof. Mahanamahewa elaborated on this operational threat. “The combination of stricter reporting obligations and severe penalties creates a significant risk asymmetry for bankers. Financial institutions face severe downside risks, including regulatory sanctions, reputational damage, and the potential loss of their licences, while the financial upside from managing accounts for small NGOs remains relatively low.

“Consequently, de-risking has become a recognised global phenomenon. Avoiding wholesale financial exclusion requires a nuanced, case-by-case risk assessment. We must carefully evaluate the evidence of collateral damage and the broader social impact, as overly cautious compliance can lead to entire groups being financially excluded. 

“In Sri Lanka, this risk is amplified by limited supervisory capacity to train officers in proper risk-based compliance. Pressured to meet international evaluation benchmarks, banks often resort to defensive strategies, ultimately resulting in zero tolerance for certain demographics.”

The FIU provided a sharply contrasting perspective, pushing back against the narrative that banks are engaging in discriminatory practices.

“We firmly deny the existence of a culture where banks pre-emptively close accounts solely as a de-risking measure. Financial institutions are mandated to adhere to the obligations set out in the Financial Transactions Reporting Act, regardless of the upcoming mutual evaluation. 

“Under Customer Due Diligence Rules, banks are required to apply a targeted, risk-based approach to identify specific money laundering and terrorist financing risks for individual customers. These legislative reforms are designed to protect the financial system and will not make it more expensive or difficult for legitimate foreign companies to invest in Sri Lanka. On the contrary, they will significantly enhance overall investor confidence.”

Investigative powers and judicial oversight

The amendment bill introduces stricter timelines and streamlined processes for freezing suspicious bank accounts. Under the previous framework, a freezing order issued by law enforcement was valid for only seven days. The new amendment extends this initial period to 14 working days.

The FIU detailed the procedural safeguards currently in place to prevent the arbitrary seizure of assets by the State.

“Under the Convention on the Suppression of Terrorist Financing Act, the FIU does not possess the authority to issue freezing orders. That power is strictly reserved for Police officers not below the rank of assistant superintendent. The law provides clear checks and balances through judicial scrutiny by the High Court. This oversight occurs during or at the end of the initial freezing period if law enforcement seeks an extension. The High Court must be fully satisfied with the original justification for the freeze before confirming any extension, and the total aggregate period of any freezing order cannot exceed two years.”

The legislation introduces Section 4C, allowing affected individuals to appeal to the High Court if the freezing order damages their legitimate business interests. The court may sanction essential and legitimate transactions to be carried out under its direct supervision. Furthermore, the newly enacted Proceeds of Crime Act No.5 of 2025 allows the High Court to direct the Proceeds of Crime Management Authority to take possession of and manage the frozen or forfeited assets.

To combat modern terrorist financing networks, the bill grants law enforcement unprecedented covert investigative powers. A newly inserted Section 4J explicitly authorises Police officers to utilise special investigation techniques, including surveillance, undercover operations, video recording, the use of listening devices, and accessing computer data. The use of electronic surveillance and computer network access requires an application to the Magistrate’s Court, ensuring judicial authorisation before an invasion of privacy occurs.

Regarding the technological capabilities used to process these financial investigations, the FIU highlighted its digital infrastructure.

“Our core platform for receiving and analysing Suspicious Transaction Reports (STRs) is the goAML system, which allows us to securely disseminate actionable intelligence to law enforcement agencies. This system facilitates near real-time access and data transmission, ensuring that priority reports linked to terrorism are escalated without delay.

“Furthermore, we have developed supplementary tools such as a targeted sanctions screening platform. This infrastructure significantly enhances the ability of reporting institutions and authorities to instantly identify matches with designated individuals or entities, triggering immediate enforcement action. Effective coordination is ensured through established inter-agency frameworks, including Targeted Financial Sanctions (TFS) committees led by the Ministry of Defence as the competent authority, facilitating the rapid exchange of intelligence and operational feedback for high-risk cases.”

The need for substantive enforcement

While the legislative framework is robust on paper, its effectiveness relies entirely on the operational capacity and the political will of State institutions. Prof. Mahanamahewa provided a critical assessment of the approach to financial crime.

“For these amendments to be truly productive, the scope of money laundering should be expanded to include tax evasion, cybercrimes, environmental offences, and corporate fraud. We also need to introduce mechanisms for non-conviction-based asset confiscations and strengthen our asset-tracing capabilities.

“Historically, State freezing powers have been utilised, such as in the case with the Tamils Rehabilitation Organisation where funds were forfeited to the State, but these actions always relied heavily on the Prevention of Terrorism Act (PTA). While the current changes improve technical compliance on paper, they carry a low practical impact because Sri Lanka already struggles to prosecute existing predicate offences.

“Simply adding new offences will not increase prosecutorial output without robust coordination between the Inland Revenue Department, Police, Commission to Investigate Allegations of Bribery or Corruption, and the FIU. Additionally, the mandate for Suspicious Transaction Reporting must be expanded beyond traditional reporting entities to include professionals such as lawyers, accountants, and real estate agents. Legislative clauses driven purely by international compliance are merely symbolic. Expanding the burden on reporting sectors without providing adequate State supervision is problematic.”

Prof. Mahanamahewa also pointed to severe gaps in corporate transparency that the current legal structure failed to address.

“Achieving beneficial ownership transparency requires the mandatory disclosure of ultimate beneficial owners through updated registers and strict reporting duties. Although this is a primary priority for the FATF, Sri Lanka’s company registers are frequently outdated, and the use of nominee shareholder structures remains common. Our current verification mechanisms are exceptionally weak. To rectify this, the State must implement stringent verification sanctions rather than relying solely on corporate self-declaration.”

As the Convention on the Suppression of Terrorist Financing (Amendment) Bill advances, the legislation highlights the ongoing tension between international regulatory compliance and domestic operational realities.

While aligning with the FATF standards remains an economic imperative to prevent grey-listing, the practical efficacy of the law remains an area of concern for legal and civil society observers. Moving forward, the focus will shift from the passage of the legislation to the capacity of State institutions to enforce these provisions transparently, ensuring that enhanced financial intelligence does not inadvertently penalise legitimate civil society and business operations.