Hawala system is funded by drug money: Ajith Nivard Cabraal

  • Cabraal advises workers to ‘stay away from illegal channels’
  • Defends official exchange rate; plans to maintain below Rs. 203
  • 3-pronged strategy to develop worker remittances

BY Shenal Fernando

Central Bank of Sri Lanka (CBSL) Governor Ajith Nivard Cabraal, speaking at a recent press conference organised by the CBSL, claimed that, considering the sheer scale of the sum that is being distributed through unofficial foreign worker remittance channels, there exists suspicion that a significant portion of such sum is “drug money” that is being laundered and advised foreign workers to stay away from such channels in order to avoid being indirectly complicit in such an offence.

“Foreign worker remittance inflows have decreased by over $ 300 million last month. While the decrease in outflow of foreign workers may also be a reason, the primary reason for the current state of affairs is the fact that informal channels available for money exchange are, to our knowledge, paying an exchange rate of Rs. 240 when the official rate is only Rs. 200. When $ 300 million is brought to the country through unofficial channels, the resulting Rs. 72 billion distributed in the economy raises questions such as where this money has originated from, who possesses this money which is being deposited in the accounts of other persons, etc.” he stated.

Explaining further, Cabraal claimed that under the money laundering law of the country, when a person credits money to the account of another without a legitimate reason, the CBSL shall, through the Financial Intelligence Unit (FIU), take measures to freeze such accounts. According to him, the CBSL will consider such transactions as illegal transactions and will monitor such transactions strictly.

He also called on financial institutions to report suspicious transactions and claimed that the FIU is obligated to investigate all suspicious transaction reports (STRs). 

As such, he called upon all foreign workers to remit money through official channels facilitated by the banking system instead of utilising unofficial channels which shall cause problems within the country.

According to the CBSL Governor, foreign workers who continue to utilise such unofficial channels may face problems, despite their ignorance, over the supervening illegality of the transaction, if the transaction is flagged by the CBSL.

“We kindly request all hard-working foreign workers to remit their money through official channels, which has been incentivised by the numerous benefits provided by the CBSL, which includes the additional Rs. 10 granted per US dollar. Moreover, they will face grave consequences if they were to continue to rely on unofficial channels,” stated Cabraal.

Despite initially granting a Rs. 2 incentive in December 2020, under the “Incentive Scheme on Inward Workers’ Remittances” programme, the CBSL so far has proved unsuccessful in attracting worker remittances as such inflows have fallen 13.2% Year-on-Year (YoY) during 2021 to $ 4.5 billion, compared to $ 5.7 billion remitted during the corresponding period in 2021.

Therefore, this raises the question as to how effective this recent Rs. 10 per US dollar incentive is, along with other forms of incentives for remittance, in attracting worker remittance.

Further commenting on this issue, Cabraal claimed that the CBSL will utilise a carrot and stick strategy which shall involve not only the granting of incentives, but also a crackdown on illegal unofficial remittance channels used to launder drug money.

“We want to ensure that those who are indulging in these practices will find it difficult because we will be looking at the sources to identify them. There are many ways in which this can be identified; all the banks are co-operating and I believe, before long, we will have persons who are indulging in these practices brought before the law, and that will be an important part of this whole exercise,” he noted.

According to him, the CBSL has observed certain suspicious transactions and several accounts have already been frozen, and such action will be implemented whenever such a suspicious transaction is identified.

He further claimed that people who have received money through these unofficial channels shall also indirectly be complicit in an offence of this nature, and thus called on ordinary people to stay away from such practices.

Cabraal further defended the current official exchange rate, which currently involves a buying rate of Rs. 198.5 and a selling rate of Rs. 202.9, claiming that different people may have various opinions regarding the value of the Sri Lanka rupee, but the CBSL has the responsibility to maintain the exchange rate.

“Our view is that the rupee has depreciated and we don’t want it to depreciate further. We also don’t want to enter into an auction sale with these Hawala people,” stated Cabraal. 

He further dismissed all allegations that local licenced commercial banks (LCBs) are not following the official exchange rate.

According to Cabraal, foreign worker remittances, which traditionally amounts to $ 7 billion per annum, is essential in providing a substantial cushion for external sector resilience of the country. As such, he stated that specific attention must be paid to this form of inflows in order to develop it further.

Accordingly, he set out a three-pronged strategy to further develop worker remittance inflows. This included firstly to assist foreign workers in migrating overseas.

Prior to the Covid-19 pandemic, 230,000 foreign workers would migrate from Sri Lanka per year. However, this figure has significantly decreased over the past two years and in 2021, only 96,00 workers had migrated abroad. However, it appeared that worker migration has started improving as of last month, as was reflected in the much-publicised queues observed in front of the Department of Emigration and Immigration and over 20,000 workers migrating just within the last month. Cabraal estimated this improvement to continue and said that 20,000-25,000 workers will migrate in the month of December.

Therefore, in order to assist workers in migrating abroad, the Government will speak with the Department of Emigration and Immigration to streamline the emigration process. Assistance will also be granted to establish bank accounts when going abroad as well as in the subsequent remittance of funds to Sri Lanka. For this purpose, Cabraal claimed that they will look to establish branches of local banks at the Department of Emigration and Immigration.

The second strategy, as per Cabraal, involved streamlining the remittance process as many workers have complained of the cumbersome red tape and other issues faced by them in remitting money to Sri Lanka.

The third strategy involved rewarding workers for remitting through official channels. Recently, the CBSL announced that it would be granting foreign workers who remit their earnings through official channels an incentive of Rs. 8 per US dollar in addition to the existing incentive of Rs. 2, during the month of December. According to the CBSL Governor, the CBSL will provide foreign workers remitting through official channels further incentives such as loan facilities to dependents of foreign workers in Sri Lanka,  retirement schemes, insurance schemes, and increased duty-free allowances.