Dr Nandalal Weerasinghe was appointed by former President Rajapaksa.
- CBSL seems to function on the personal ‘belief’ of the CBSL Governor;
- CBSL continues to bury its head in the sand while the country is robbed by business elites in the export and import sector, saying corporate corruption is ‘their business’;
- CBSL ignores crucial findings and recommendations of IMF, World Bank, ADB, UNCTAD and OHCHR on illicit financial outflows affecting countries like Sri Lanka;
- Trade Unions demand immediate coordinated effort between CBSL, Commercial Banks and Customs to investigate the issue and repatriate illicitly transferred funds, starting from most recent transactions.
Central Bank of Sri Lanka (CBSL) Governor Dr. Nandalal Weerasinghe has disregarded and trivialised the extent of illicit financial flows through trade mis-invoicing in instigating Sri Lanka’s ongoing foreign exchange and fiscal crisis. This was fully apparent at the Parliamentary Committee on Public Finance meeting on January 23rd in response to revelations made by us as a collective of Sri Lanka’s prominent trade unions, mass organisations, professionals and economists.
In response to questions raised by Parliamentarians on our statement at the Committee meeting, the CBSL Governor responded,
“Obviously people who do under-invoicing or over-invoicing happens basically to evade taxes. If you have taxation, you declare low value and pay low taxes and then they keep money. probably they keep it out or bring it here. That’s their business. We don’t know.”
The Governor of the country’s Central Bank continued to rationalise or mis-rationalise his admitted ignorance by speaking in a language which is alien to economists, saying,
“Other thing is, I don’t believe this number. Reason is if exporters are doing business here, they can’t keep that amount of money abroad.”
After hearing this, we as citizens are concerned whether the operations of the CBSL are in fact moving forward on the erroneous personal beliefs of the CBSL Governor at this time of deep economic crisis. Since the CBSL Governor ‘does not know’, we as trade unions, civil society organisations, economists and concerned professionals find the need to enlighten him, CBSL Officials and all concerned citizens the extent and dynamics of trade mis-invoicing in accelerating Sri Lanka’s economic collapse. In the following account we will critically address the misleading remarks of CBSL Governor on capital outflows through trade mis-invoicing.
International Recognition that Trade Mis-invoicing is Not a Myth
The CBSL Governor dismissed the findings of Global Financial Integrity (GFI) report published in December 2021 which pointed out that an estimated US$ 40 billion was transferred out of the economy between 2009-2018 through fraudulent invoicing by corporates operating in the import-export sector. This figure significantly exceeds Sri Lanka’s foreign debt of US$ 36 billion in default since April 2022. The impact of capital outflows of this magnitude on the ongoing economic collapse is self-explanatory. Nevertheless, the CBSL Governor is of the view that corporates would not have sufficient funds to operate within the economy if such a large sum of capital is held outside the country. Consequently, he falsely concludes that the GFI estimates are extreme exaggerations. This amounts to a complete misunderstanding of illicit outflows globally. If not, it indicates that the CBSL’s Governor and officials are colluding with business interests and the political establishment to trivialise and dismiss what appears to be the largest financial crime in Sri Lankan history.
These outflows are surpluses from both legal and illegal operations and therefore are not reutilised in domestic operations and in the interest of expanding industries locally. Economists such as Professor Arun Kumar at Jawaharlal Nehru University, New Delhi, have pointed out that the illegal outflow of capital is used to acquire property abroad or in conspicuous luxury consumption. In other words, illicit financial outflows enable the extravagant enrichment of individuals at the expense of entire countries in the third world.
However illicit financial flows are a common occurrence in countries which have poor financial controls. For instance, the UN referring to the GFI report published in 2014 recognised that illicit financial flows from the African continent through trade mis-invoicing from 1970 to 2009 is a staggering four times the aggregate foreign debt of the region. Furthermore, the UN Conference on Trade and Development (UNCTAD) in September 2020 revealed that an estimated US$ 88.6 billion leaves the African continent as illicit capital flight yearly and the aggregate outflows between 2000-2015 (US$ 836 billion) is far greater than total foreign borrowings of the continent (US$ 770 billion).
The ground-breaking findings of GFI and their collective work with the UN, the World Bank and the IMF advocated including illicit financial flows in the UN’s Sustainable Development Goals in 2015 under goal 16.4 to which Sri Lanka is also a signatory. As early as September 2018, Mr. Juan Pablo Bohoslavsky, the UN’s Independent Expert on Foreign Debt and Human Rights for 2014-2020 stated following his visit to Sri Lanka that “no study or official estimation of illicit outflows or inflows has been conducted to date in Sri Lanka”. In his report, he urged the Government “to conduct these studies in order to further curb illicit financial flows in line with the Sustainable Development Goals.”
Further, the Asian Development Bank (ADB) in 2003 emphasized that “inaccurate pricing (“misinvoicing”) of imports or exports [is used] to hide the transfer of funds. When such transactions are extensive, the impact on a country’s entire external sector can be substantial” (ADB, Manual on Countering Money Laundering, 2003). In 2017, the ADB further estimated that trade mis-invoicing accounts for a staggering 83% of all illicit capital outflows from developing countries. The recent statement endorsed by 182 globally renowned economists, academics and activists demanding cancellation of Sri Lanka’s foreign debt also highlighted that capital outflows during the past 15 years is estimated to be greater than Sri Lanka’s total outstanding foreign debt.
There is thus a vast body of research conducted by institutions such as the ADB, IMF, World Bank, OHCHR, UNCTAD and international economists on what happens to national economic development when rampant corruption is allowed through illicit financial flows. It is therefore hugely concerning that our CBSL Governor ‘does not believe’ and does not seem to be aware of the impact illicit financial flows through trade mis-invoicing have had on the Sri Lankan debt crisis. Ultimately, it is a tragedy that Sri Lanka’s foremost authority on economic affairs is completely oblivious to chronic issues engulfing the developing world and the root causes of the fiscal crises we face. Alternatively, if this is not ignorance or misunderstanding, then it points to deliberate collusion by the CBSL’s Governor and his officials with business interests and the political establishment to trivialise and dismiss what are massive financial crimes.
Government Enabling of Illicit Capital Flows
We are well aware that the Sri Lankan Government ‘legally’ permitted companies to park income outside the country for years and that this economic hara-kiri was only addressed in October 2021 through a regulation under the Monetary Law Act. It is our interest as citizens to know the full impact of this disastrous blunder. We demand that the CBSL publicise the amount of residual income that the export sector failed to repatriate between the period October 2021 to date, thereby aggravating the economic crisis. We further request institutions such as the CBSL to be responsible and reflect on the implications of the ‘legality’ of enabling local companies to take capital on a developing economy like ours’ in the long run. We are glad to note that the CBSL Governor is aware of other developing countries such as India and Malaysia which have placed restrictions on financial flows as part of a policy framework to accelerate their development with the capital produced in their own countries.
CBSL Governor passing the buck to Customs
In a separate press conference on January 26th, Dr. Nandalal Weerasinghe stated it is the responsibility of the public to inform the Financial Investigative Unit (FIU) of CBSL and Customs Department if they have conclusive evidence of firms involved in fraudulent trade invoicing. It is only then he claimed that the FIU of CBSL and Customs Department can take appropriate legal measures against the perpetrators. He further stated it is the responsibility of Customs Department to address mis-invoicing and not of the CBSL. These assertions indicate the reluctance of CBSL to recognise and investigate illicit outflows. It is shocking to hear from the Governor that it is the general public who should provide information or advise CBSL on highly technical matters like illicit capital transfers when the CBSL employs the greatest number of Ph.D. holders under one institution in Sri Lanka. Furthermore, it is clearly stated throughout the Monetary Law Act, No. 58 of 1949 that the CBSL bears the responsibility and authority to address issues threatening the economic stability and economic wellbeing of the general public. Hence, the CBSL cannot simply abdicate responsibility by passing the mantle to Customs Department and the general public.
Export profits are only a fraction of capital transfers through trade mis-invoicing
During the Parliamentary Committee on Public Finance meeting, the CBSL Governor further claimed that capital flight through trade mis-invoicing is tantamount to shifting profits to an overseas destination for tax avoidance. However, this is a gross understatement of the gravity of the issue. We have shown in our earlier statements that the over-invoicing of imports transfers out foreign exchange received as foreign borrowing and even workers’ remittances. This compounds the foreign debt crisis, leads to chronic shortages of foreign exchange to finance essential imports and a collapse of living conditions. A study based on 39 African countries illustrates that between 1970 and 2010 approximately 63% to 73% of foreign borrowing exited Africa within a five-year window as a result of capital flight through trade mis-invoicing. Further, the IMF in its publications over the years shows that the loss of foreign reserves of Central Banks is accelerated by capital flight through trade mis-invoicing while decreasing tax revenue. It diminishes governments’ debt-servicing capacity and worsens the incidence of balance of payments crises. Capital outflows are a diversion of domestic savings out of the economy and deplete domestic resources, compelling governments to absorb more and more foreign debt to finance domestic investments, exacerbating debt unsustainability. Needless to say that these observations are clearly applicable to the course of Sri Lankan economy over the past three decades as we have emphasised repeatedly in earlier statements.
“IMF Budget” for the People, Non-IMF Concessions for Corrupt Businessmen
The government is imposing an ‘IMF budget’ on Sri Lanka, making life unbearable to ordinary Sri Lankans, particularly working and poor people. We hope that the CBSL Governor is able to see the ground from the tall towers he occupies and observe how people are not eating any longer because they can’t afford food; have restricted even essential travel for medical and education purposes; live in the dark because electricity has become a luxury; and have children not going to school because of hunger and costs. His ‘belief’ is costing the lives of millions in Sri Lanka. Hence, we as trade unions, civil society organisations, economists and concerned professionals ask the obvious question – Why has the Government failed to move an inch on the observations and recommendations of institutions such as the IMF on illicit financial outflows? Why is the Government burying its head in sand while their friends, the business elite, loot money out of this country and deny our country of much needed foreign exchange?
The CBSL should therefore immediately implement a coordinated mechanism integrating itself with commercial banks and the Customs Department to investigate the issue and repatriate illicitly transferred, funds starting from most recent transactions. Instead of speculating on the credibility of GFI and the extent of trade mis-invoicing which are already recognised by international organisations like the UN, World Bank, IMF and ADB, the CBSL should collaborate with GFI and UNCTAD to further clarify the findings on Sri Lanka that emerged from 2021GFI report. In the absence of no such an initiative being even proposed by the CBSL Governor, we can only conclude that the CBSL is complying with the criminal corporate-political corruption that has driven the economy to the ground and ordinary Sri Lankans into destitution.
Signed on behalf of:
Centre for Community Empowerment, Ceylon Bank Employees’ Union, Ceylon Federation of Labour, Ceylon Teachers’ Union, Dabindu Union, Engineers’ Services Professional Association, Federation of Media Workers’ Trade Union, Institute for People Engagement and Networking, Mass Movement for Social Justice, Movement for the Defence of Democratic Rights, Movement for Land and Agricultural Reform, Movement for Plantation Peoples’ Land Rights, National Collaboration Development Foundation, National Trade Protection Council, North South Solidarity Group, Professionals’ Centre for People, Protect Union, Satahan Media, Rural Development Foundation, Social Institute for Development of Plantation Sector, Sri Lanka All Telecommunication Employees’ Union, Stand Up Workers’ Union, Suriya Shakthi Foundation Nuwara Eliya, Textiles Garments and Clothing Workers’ Union, United Fishermen’s and Fish Workers’ Congress, Upcountry Civil Society Collective, Uva Shakthi Foundation, Young Lawyers’ Association
Sugath Kulathunga – Former Senior Advisor at International Trade Centre (WTO/UNCTAD), Former Director General of Sri Lanka Export Development Board and Former Additional Secretary to Ministry of Trade, Prof. (Dr.) M. P.S. Magamage – Former Chairman of National Livestock Development Board, Dr. Kalpa Rajapaksha – Senior Lecturer in Economics, Amali Wedagedara – Political Economist and PhD Student, Dhanusha Pathirana– Economist