## 1lkaea2023002 ## Source details **Canonical URL:** [1lkaea2023002](https://www.imf.org/-/media/files/publications/cr/2023/english/1lkaea2023002.pdf) ## Other formats - [Markdown version](/-/media/files/publications/cr/2023/english/1lkaea2023002.pdf.md) - [Structured JSON version](/-/media/files/publications/cr/2023/english/1lkaea2023002.pdf.json) --- ### Mission overview and scope - IMF Governance Diagnostic Assessment (GDA) mission undertaken from March 9 to March 31, 2023; main diagnostic mission during March 20 - March 31, 2023. - Mission led by Mr. Joel Turkewitz with a multi-disciplinary team and one short-term expert. - Mission held over 80 meetings with national authorities, oversight bodies, financial sector representatives, civil society, and international partners. - Report is based on information obtained during the March 2023 main mission and does not capture reforms introduced since March. ### Country context, shocks, and social impact - Key macroeconomic and social developments: - Rupee depreciated by about 40 percent (in dollar terms) between February and March 2022. - Poverty level nearly doubled from its pre-pandemic level to about 25.6 percent of the population living below the USD 3.65 poverty line. - Fiscal deficits: 2020: 12.1 percent of GDP; 2021: 11.6% of GDP. - Total tax revenue averaged 11 percent of GDP (2007–2019); tax to GDP ratio fell to 7.5 percent following 2020 tax cuts. - Unpaid bills reached LKR 106 billion (0.5 percent of GDP) at end-December 2022; Treasury estimates arrears at LKR 126 billion as at March 2023. - Political change and reform program: - President Rajapaksa resigned July 2022; H.E. Mr. Ranil Wickremesinghe assumed the Presidency later that month. - IMF approved an Extended Fund Facility (EFF) Arrangement in March 2023. - Government program includes cutting spending, raising revenues, restructuring debts, strengthening central bank independence, and confronting corruption. ### Macro-critical governance weaknesses and corruption vulnerabilities (summary) - Systematic and severe governance weaknesses across state functions with macroeconomic impact in: - budget credibility; expenditure control; public investment management; - public procurement; - management and oversight of State-Owned Enterprises (SOEs); - transparency of revenue policy and integrity of revenue administration; - central bank governance and financial sector oversight; - clarity and security of land ownership and judicial integrity. - Compounding factors: - Weak accountability institutions (e.g., CIABOC with limited authority/competency). - Restricted civil society participation due to limited transparency and application of counter-terrorism rules. - Compromised independence of key institutions, legal/regulatory gaps, limited fiscal discipline, and disorganised legislative process. - Minimal public sector digitization; impunity for officials. ### Priority recommendations (selected measures, authority, objective, timeline) - 1 — By November 2023, establish an Advisory Committee to assist in nomination of CIABOC Commissioners and the Director General. — Constitutional Council — Strengthen accountability and rule of law — ST - 2 — Publication of Asset Declarations for senior officials (President, Prime Minister, ministers) on a designated website in line with Anticorruption Law by July 2024. — CIABOC — Strengthen accountability and transparency — ST - 3 — Enact Proceeds of Crime legislation fully aligned with UNCAC and FATF standards by April 2024. — Ministry Justice — Strengthen accountability and rule of law — ST - 4 — Amend the National Audit Act to enable the Auditor-General to levy surcharges on officers for failure to properly discharge responsibility. — Auditor-General; Ministry Finance — Strengthen accountability and transparency of fiscal governance — ST - 5 — Finalise and implement regulations to provide beneficial ownership information and establish a public beneficial ownership registry by April 2024. — Ministry Industries — Strengthen accountability and transparency — ST - 6 — Enact a Public Procurement Law reflecting international good practice by December 2024. — Ministry Finance — Enhance transparency in fiscal governance — MT - 8 — Starting in March 2024, publish on a designated website: (i) all public procurement contracts above LKR 1 billion, (ii) list of firms receiving tax exemptions through the Board of Investment and the SDP with estimation of value, and (iii) list of firms receiving tax exemptions on luxury vehicle import. Update every 6 months. — Ministry Finance — Strengthen transparency — ST/MT - 9 — Implement the SOE Reform Policy ensuring HoCo and advisory committee are skilled, independent, and ethical. — Ministry Finance — Enhance transparency — ST/MT - 10 — Abolish or suspend application of the Strategic Development Projects Act until an explicit and transparent evaluation process is promulgated. — Office of the President — Strengthen transparency — ST - 15 — By December 2024, establish an on-line digital land registry, and publish report on progress in implementing Plan for registering/titling all state land. — Ministry Lands — Strengthen transparency — MT ### Anticorruption Act (ACA), CIABOC, asset declarations, and conflict-of-interest - ACA replaces multiple prior laws and expands CIABOC’s mandate to prevention, investigation, prosecution, strategy, and coordination. - Effectiveness depends on: - Transparent, merit-based selection and appointment of Commissioners and Director General. - Rapid operationalisation with a time-bound Action Plan and regular public reporting. - CIABOC empowered to establish a secure electronic database for asset and liability declarations; publication after redaction is required. - Asset Declaration system specifics: - Laws since 1975 require declarations for parliamentarians, judges, public officials, local authorities, chairpersons and staff of public corporations, candidates, and elected officials. - ACA provisions: centralised electronic system, review each declaration for prima facie illicit enrichment/conflicts, criminal offences for failure/false declarations. - Recommended operational timelines (examples): - Establish Advisory Committee for CIABOC selection — Constitutional Council — November, 2023. - Nominate Director General and Commissioners — Constitutional Council — December, 2023. - Publish 18-month ACA action plan — CIABOC — February 2024. - Enact regulations to operationalise Asset Declaration system — CIABOC — January 2024. - Make Asset Declarations of Senior Officials publicly available — CIABOC — July 2024. - Issue first annual report on Asset Declaration system performance — CIABOC — December 2024. ### Investigation, prosecution, and CIABOC capacity - CIABOC has legal powers under ACA but lacks dedicated personnel, equipment, and operational independence; many investigators seconded from police. - Performance issues and data gaps: - Commission reported many investigations (e.g., CIABOC completed 4206 investigations 2010–2015) but far fewer prosecutions/convictions; publicly available performance metrics limited. - Recommendation: capture detailed case-level data (reasons for non-prosecution, dismissals, appeals, evidentiary failures) and analyse trends. - Prosecutorial decision-making reforms: - Introduce a Code for Commission Prosecutors with a two-stage test: Evidential stage and Public interest stage (seven public interest considerations listed). - Create “Points to Prove” guides for common offenses. - Delegate authority to institute proceedings to senior staff to reduce bottlenecks and managerial risk. - Administrative timelines for CIABOC actions: - Establish protocols and Code for Commission Prosecutors — CIABOC — April 2024. - Establish rules for case flow management and delegation — CIABOC — March 2024. - Strengthen Mutual Legal Assistance — CIABOC — June 2024. - Publish CIABOC Annual report on a government website — CIABOC — December 2024. ### AML/CFT, beneficial ownership, and asset recovery - AML/CFT context: - 2015 MER assessed Sri Lanka Partially Compliant/Non-Compliant on many FATF Recommendations; corruption and bribery identified as top proceeds-generating crimes. - Updated National Risk Assessment finalized September 2023; corruption and bribery expected to remain high-risk. - Key gaps and recommendations: - Enact Proceeds of Crime legislation aligned with UNCAC and FATF — Ministry of Justice — April 2024. - Amend Companies Act for beneficial ownership measures aligned with FATF — Ministry of Justice; Registrar General of Companies; FIU — June 2024. - Formulate implementing regulations and consider a public beneficial ownership registry — Implementation Timeline: September 2024. - Conduct strategic analysis of laundering channels and disseminate findings — FIU — December 2024. - Develop national asset recovery strategies in line with Proceeds of Crime legislation — Authorities with power for asset confiscation — June 2025. - FIU and intelligence observations: - Very low number of corruption-related STRs and disseminations (annual data 2016–2021 shows single-digit counts for corruption/bribes/PEPs). - 2016–2021 dissemination counts to LEAs: 2016: 4; 2018: 6; 2019: 7; 2020: 7; 2021: 4 (annual table referenced). - Causes include low reporting entity understanding, absence of sanctions for non-reporting, and poor domestic cooperation. ### Public Financial Management (PFM), public investment, and cash/commitment controls - Budget credibility and execution: - Since 2014, total revenue over-estimated every year with average annual forecast error of 16.9 percent. - Primary expenditure exceeded budget forecasts in 2019, 2020 and 2022 by an average of 6.3 percent. - Financing constraints caused unpaid bills LKR 106 billion at end-December 2022 and arrears estimated LKR 126 billion as at March 2023. - Public Investment Management (PIM): - Only 22 (10 percent) out of 261 ongoing projects were implemented by end-2022. - Project classification (Third Quarter vs Fourth Quarter 2022) shows many projects in Category 6 Critical projects: Third Quarter 95; Fourth Quarter 133. - Commitment control and ITMIS: - ITMIS roll-out incomplete; recommendation to define time-bound roll out of ITMIS commitment control function — Ministry of Finance — Timeline: December 2023. - Report progress publicly — Ministry of Finance — Timeline: Sept 2024. - Recommended PFM legal reform measures: - Submit new Public Financial Management Law — Ministry of Finance — Timeline: February 2024. - Improve Medium-Term Fiscal Framework analytics — Ministry of Finance — Timeline: June 2024. - Include presentation of sources/uses for all entities in budget documents — Ministry of Finance — Timeline: October 2024. ### Public Procurement and PROMISe (e-GP) - Procurement governance weaknesses: - No public procurement law; governed by Procurement Guidelines (PG) 2006 with numerous supplements and circulars. - High discretion, lack of competitive bidding, acceptance of unsolicited proposals, poor contract management, and weak oversight. - Public procurement spend in 2017 was 5.3 percent of GDP. - PROMISe (e-GP) system: - Currently limited coverage (only shopping procurements). - Government plans to expand PROMISe to full e-GP including bids submission, fees, complaints/appeal handling, contract administration, and project monitoring. - As of 24 December 2020: 1,032 confirmed registered vendors and 121 confirmed registered procuring entities. - Procurement reform recommendations and timelines: - Operationalise NPC with an 18-month Action Plan — Ministry Finance — January 2024. - Enact a Public Procurement Law — Ministry of Finance — December 2024. - By March 2024 publish on a designated website: (i) information on all public procurement contracts above LKR 1 billion; (ii) a list of contracts above threshold assigned without competitive tendering; update every 6 months — NPC — March 2024. - Move all public procurement transactions to an e-Government Procurement System by December 2025 — NPC, Ministry of Finance — December 2025. ### State-Owned Enterprises (SOEs) governance and reforms - Scale and ambiguity: - Government controls between 300 and 500 entities identified as Public Corporations; Public Enterprises Division collates budgets/financials for 52 key SOEs. - No authoritative consolidated list; fiscal risks and weak oversight pervasive. - Governance failures: - Politicised board appointments; lack of performance accountability; poor transparency and financial reporting; frequent qualified or disclaimer audit opinions. - Unfunded quasi-fiscal operations; price setting below cost recovery; state-assisted borrowing dependence. - SOE Reform Policy and HoCo: - Proposed State Holding Company (HoCo) and SOE Act to register commercial SOEs under Companies Act and apply Good Corporate Governance tenets. - Recommendations: publish authoritative list of public entities — Ministry of Finance — December 2023; implement SOE Reform Policy with competent HoCo and advisory committee — Ministry of Finance — March 2024; publish names of Chief Executives and Board Members for 52 largest SOEs — Ministry of Finance — December 2023; establish selection regulations for directors — Ministry of Finance — March 2024. ### Tax policy, tax expenditures, and revenue administration vulnerabilities - Revenue trends and capacity: - Total tax revenue averaged 11 percent of GDP (2007–2019); tax capacity estimated at 22 percent of GDP. - If Sri Lanka reached 60 percent of tax capacity, revenue ratio of 13 percent of GDP would be achieved. - Governance vulnerabilities: - Frequent, opaque tax law changes via Gazette notifications; discretionary ministerial authority (notably the Special Commodity Levy) caused revenue losses (example: October 2020 sugar levy change; Auditor-General estimated revenue loss LKR 16 billion in first 5 months). - Strategic Development Projects (SDP) Act and Port City Act grant long-term wide-ranging exemptions; incomplete tax expenditure reporting. - Revenue administration weaknesses: - High corruption vulnerability at points of interaction (Customs, IRD, Excise); promotions largely seniority-based; average Commissioner-General tenure ~ one year in IRD. - Low reported disciplinary/prosecution activity for tax official corruption; CIABOC notes revenue-related cases are relatively rare. - RAMIS (IRD system) is maturing but requires streamlining of business processes; online filing UX needs simplification. - Key tax policy recommendations and timelines: - Enact a Tax Administration Act with anti-corruption provisions — Ministry of Finance — March 2024. - Require DoFP to issue and post opinion on each tax law amendment — Ministry of Finance — December 2023. - Transfer authority for customs duties and special commodity levy to DoFP — Ministry of Finance — March 2024. - Require DoFP to quantify costs of all existing tax expenditures and report annually — Office of the President — January 2024. - Abolish or suspend SDP Act until evaluation and transparent process established — Ministry of Finance — (timeline not specified in source table). - Revenue administration measures (selected): - Minimise taxpayer/revenue official interactions and mandate simplified online filing — IRD Commissioner-General — Sept 2024. - Institute short-term anti-corruption measures within each revenue department (Internal Affairs units, ethics training) — IRD Commissioner-General; DG Customs; DG Excise — December 2023. - Ensure anonymised tax data sharing with MoF for fiscal modelling and forecasts — IRD Commissioner-General — March 2024. ### Central Bank (CBSL) governance, financial sector oversight, and supervisory reforms - CBSL legal reforms: - CBSL Act (enacted in 2023) replaces Monetary Law Act, strengthens price stability mandate, institutional/personal/financial autonomy, and appointment safeguards. - Removal of government voting representation on Board; remuneration safeguards; prohibition on monetary financing; removal of debt management function from CBSL. - Remaining issues and recommendations: - Transition of debt management to a public debt management agency remains to be completed (commitments in EFF: establish public debt management agency by December 2024). - Employee Provident Fund (EPF) governance: recommendation to produce Cabinet policy paper on options to terminate direct CBSL management — Ministry Finance — June 2024. - Financial sector oversight weaknesses: - State ownership concentration: banking sector accounts for 72% of total financial sector assets; two largest state-owned commercial banks represent 36.1% of banking assets. - Supervisory capacity shortfalls: BSD has only 48 staff vs budgeted 80; many supervisors with <3 or <5 years experience. - Regulatory fragmentation across banks, LFCs, and other NBFIs; need to harmonise rules and apply proportionality. - Related-party exposures and lending to connected parties have driven NPL rise in state banks. - Supervisory and corporate governance recommendations (selected): - Remove government voting representative from Monetary Board and eliminate MoF approval/concurrence requirements for licensing/ownership transfers in Banking Act — Short-term. - Adequately staff supervision departments and align regulatory frameworks for banks and NBFIs — Short-term/Medium-term. - Strengthen fit-and-proper processes, board nomination transparency, and limits/oversight on related-party transactions — Short-term. - Consolidated/conglomerate supervision to be initiated — Medium-term. ### Judiciary, rule of law, enforcement of property rights, and land administration - Separation of powers and legal stability: - Frequent constitutional amendments have eroded and restored institutional independence (18th, 19th, 20th, 21st/22nd Amendments cited). - As of end-March 2023 legislative activity cited: 54 amendments/new Acts being processed; 29 new or amendments/rules/orders in 2022. - Court backlog and case processing: - Minister of Justice estimate (2020): 800,000 pending cases requiring 15 years to clear at current resolution rate. - Municipal and District Courts (as at 30.09.2022): - Civil pending: 227,606 (brought forward 222,352; inflow 49,252; outflow 43,998). - Criminal pending: 778,827 (brought forward 770,943; inflow 520,104; outflow 512,220). - Commercial High Court pending: 8,229 (brought forward 7,723; inflow 6,292; outflow 5,786). - Average time to enforce a contract: 6-7 years. - Judicial Service Commission (JSC) and professionalization: - JSC understaffed; no system to evaluate judges of first instance; limited capacity for performance data collection. - Recommendation: expand resources and skills of JSC and implement transparent selection/performance procedures — Ministry of Justice/JSC — December 2024. - Land administration and property rights: - Around 82% of land administered by government institutions; dual deed and title systems; approximately 800,000 titles certified out of 2 million plots in full cadaster. - Property disputes take 10–20 years; some land cases 40+ years old. - Recommended reforms: - Establish integrated, interoperable land/geospatial records and an on-line digital land registry — Ministry of Lands — By December 2024. - Publish progress on registering/titling all state land on a designated website by December 2024. ### On the question of an independent prosecution service (Annex 2) - Annex provides information (informational, not prescriptive) on creating an independent prosecution service. - Core findings: - Prosecutorial independence is central to democratic criminal justice; Sri Lanka currently lacks an independent national prosecution service. - Attorney-General combines government legal adviser role and chief prosecutor; sole non-delegable power of nolle prosequi and control over indictments raises perception of politicization. - CIABOC prosecutes certain corruption offenses but lacks published prosecution guidance and clear interaction protocols with Attorney-General’s Department. - Recommendations/options: - Immediate: publish comprehensive prosecutorial guidelines for AG’s Department and CIABOC (charging standards, evidential tests, public interest criteria). - Structural: consider creating an independent Public Prosecutor’s Office with functional and significant financial independence, subject to parliamentary scrutiny. - If separation not immediate: constrain AG discretion via published guidelines aligned to IAP standards and transparency. *IMF | Technical Report – Sri Lanka Governance Diagnostic Assessment | excerpt (report based on information gathered before and during March 2023).* ### PREFACE _________________________________________________________________________________________ 9 ### PREFACE ### Mission overview and composition - In response to a request from the Government of Sri Lanka, an IMF mission undertook a governance diagnostic assessment from March 9 to March 31, 2023. - The mission was led by Mr. Joel Turkewitz and was comprised of Mr. David Robinson, Ms. Alice French, Ms. Jane Duasing, Ms. Cindy Negus, Ms. Ozlem Aydin, Mr. Sebastian Beer, Mr. Kris Kaufman, Mr. David Kloden, Mr. Jacques Loubert, Ms. Yara Gilchrist Sandakly, and Ms. Joanna Grochalska. - The mission was assisted by a short-term expert, Mr. Asanga Abeyagoonasekera. - The mission held over 80 meetings and met with: - the Chief of Staff of the President; - the Governor, Deputy Governor and officials of the Central Bank of Sri Lanka; - officials from the Ministry of Finance, Ministry of Justice, Ministry of Lands; - Office of Auditor-General, Office of the Attorney General; - Commission to Investigate Allegations of Bribery and Corruption; - Sri Lanka Revenue Administration, Customs; - Right to Information Commission, Financial Intelligence Center; - Banking Association, and representatives of state and private banks. - The mission also met with members of civil society and international partners working on governance and anti-corruption issues. ### Report basis, scope, and limitations - The report is based on information obtained during the March 2023 main mission. - It does not capture reforms that have been introduced since March. ### Acknowledgements - The mission expressed appreciation for the support and cooperation given by officials and staff of the various agencies, civil society, and international partners. - The mission acknowledged support provided by Mr. Peter Breuer (IMF Senior Mission Chief for Sri Lanka), Ms. Sarwat Jahan (IMF Resident Representative in Sri Lanka), Ms. Manavee Abeyawickrama (Economist) and other IMF staff. - The mission thanked Ms. Alexandra Rajs and Ms. Jeahyun Nham for administrative and technical contributions and Mr. Emmanuel Mathias for overall guidance and advice. ### Executive Summary — Diagnostic mission timing and remit - An interdepartmental (LEG/FAD/MCM, FIN) Governance Diagnostic Assessment (GDA) mission was conducted during March 20 - March 31, 2023. - The diagnostic assessment followed the IMF’s 2018 Framework on Enhanced Fund Engagement on Governance and focused on corruption vulnerabilities and governance weaknesses linked to corruption in macroeconomically critical priority areas: - (i) the anti-corruption, anti-money laundering and combating the financing of terrorism (AML/CFT); - (ii) fiscal governance (e.g., public financial management, tax policy and revenue administration, state enterprise management, and public procurement); - (iii) central bank governance; - (iv) financial sector oversight; and - (v) enforcement of contract and protection of property rights. - Annex 1 provides additional information on the methodology and scope of the Governance Diagnostic. ### Country context and recent shocks - Sri Lanka is an island nation in the Indian Ocean off the coast of India and is highly connected to the global market. - The economy has begun transformation from primarily agriculture to higher value-added industry and service sectors and has potential to further diversify and upgrade its economic structure. - Current economic reliance includes tourism, tea export, clothing, rice, and other agricultural production. - Recent developments and causes of the deep economic and governance crisis: - Two years of low tourism revenues due to COVID. - Loss of market access and deep reductions in tax revenues. - Debt service burden depleted reserves. - Policy choices that generated gains for private individuals while saddling the nation with debts. - The country defaulted and foreign exchange shortages led to nationwide power cuts, shortages of essentials, and long queues for petrol. - The rupee depreciated by about 40 percent (in dollar terms) between February and March 2022. - Inflation soared and the economy contracted sharply while the banking sector was put under extreme stress by a state-granted moratorium of domestic debt repayment. - The poverty level nearly doubled from its pre-pandemic level to about *IMF | Technical Report – Sri Lanka Governance Diagnostic Assessment | Preface and Executive Summary (March 2023)* ### 25.6 percent of the population living below the USD 3.65 poverty line. Popular protests against government ### 25.6 percent of the population living below the USD 3.65 poverty line. Popular protests against government ### Background and political change - 25.6 percent of the population living below the USD 3.65 poverty line. - Popular protests against government policies and widespread corruption, starting in March 2022, spotlighted the role of a small number of connected individuals who wielded enormous power and authority. - President Rajapaksa resigned in July 2022, and H.E. Mr. Ranil Wickremesinghe assumed the Presidency later that month. ### Reform program and IMF engagement - President Wickremesinghe has set out a reform program designed to stabilise the economy and country featuring a combination of steps to restore fiscal and debt sustainability, improve governance, and reduce corruption risks. - Program measures include cutting spending, raising revenues, and restructuring debts, while maintaining necessary social programs to meet severe social needs. - Governance changes envisioned include strengthening the independence of the central bank and enhancing the country’s ability to confront corruption and integrity issues. - The IMF approved an Extended Fund Facility (EFF) Arrangement with Sri Lanka in March 2023 to support the implementation of reforms required to address critical balance of payment issues. - The report is based on information gathered before and during March 2023, and does not capture reforms introduced since March. - The publication of the Governance Diagnostic by the end of September 2023 is a structural benchmark in the Fund’s program. ### Ongoing economic and social context - Sri Lanka continues to face severe economic, social and governance challenges. - Tentative signs of macroeconomic stabilization include inflation moderating, exchange rate stabilizing, and the Central Bank of Sri Lanka (CBSL) rebuilding reserves buffers, but social tensions remain high due to falling real incomes. - Government measures to address the balance of payment crisis, including tax reforms and cost-recovery pricing in the energy sector, have raised the cost of living. - Continued shortages of essentials, strong-arm measures against protestors, and the postponement of local government elections have been sources of popular discontent. - Large fiscal deficit and elevated debt continued to weigh on the recovery prospects. - The absence of visible progress on addressing corruption and holding officials to account for past behaviour raises popular concerns about impunity. ### Macro-critical governance weaknesses and corruption vulnerabilities (summary) - The GDA revealed systematic and severe governance weaknesses and corruption vulnerabilities across state functions with particular macroeconomic impact in: - budget credibility; expenditure control; public investment management and control of spending; - public procurement; - management and oversight of State-Owned Enterprises (SOEs); - transparency of revenue policy and the integrity of revenue administration; - governance and legal frameworks of the Central Bank; - the application of financial sector regulations; - clarity and security of land ownership and the integrity of the judicial sector. - Corruption vulnerabilities are exacerbated by weak accountability institutions, including the Commission to Investigate Allegations of Bribery and Corruption (CIABOC) that have neither the authority nor competency to successfully fulfil their functions. - Current governance arrangements have not established clear standards for permissible official behaviour, acted to deter and sanction transgressions, nor pursued individuals and stolen public funds that have exited the country. - Regular civil society participation in oversight and monitoring of government actions is restricted by limited transparency, the lack of platforms for inclusive and participatory governance, and by broad application of counter-terrorism rules. - Problematic structural issues include compromised independence of key governance institutions, gaps in legal and regulatory infrastructure for managing public resources, limited fiscal discipline and transparency, and a disorganised regulatory and legislative process with insufficient review and engagement. - Minimal progress has been made in integrating modern information technology into public sector operations and public-private interfaces. - Impunity for misbehaviour enjoyed by officials undermines trust in the public sector and compounds concerns over limited access to efficient and rule-based adjudication processes. ### Specific area weaknesses and vulnerabilities - Anti-corruption legal frameworks and institutional arrangements: - Anticorruption Act (“ACA”) substantially improved the legal environment, but gaining full benefit hinges on transparent and merit-based selection of CIABOC Commissioners and the Director General. - Improvement requires drafting and enactment of a modern law on Asset Recovery. - Rapid operationalizing of the ACA is critical to address lack of a functional system for receiving, publishing, and reviewing asset declarations, and procedural and competency issues in investigation and prosecution. - Limitations on information sharing across institutions (Supreme Audit Agency, Financial Intelligence Unit, Anticorruption Agency) constrain effectiveness. - Transparent standards for public officials, including a Conflict-of-Interest system, are lacking; public participation and oversight are increasingly restricted. - Anti-Money Laundering/Combatting Financing of Terrorism (AML/CFT): - Current approaches largely fail to support effective state action. - Issues in legal definitions and processes to capture and share information on beneficial ownership of companies persist since 2015. - Financial institutions largely fail to identify suspicious transactions and prevent money laundering. - Weaknesses in legal framework, domestic cooperation, and protocols for collaboration with foreign jurisdictions impair sanctioning and asset recovery. - Public Financial Management (PFM) and SOEs: - Lack of robust legal framework and poor PFM processes create corruption vulnerabilities: limited budget coverage, lack of transparency in managing commitments, poor investment planning and management. - Acceptance of unsolicited capital investment proposals in non-transparent processes contributed to a large and growing portfolio of “problem” projects. - Substantial governance weaknesses across SOE management: lack of clarity in government’s portfolio, absence of explicit state policy for financial stakes, limited regulatory guidance and monitoring of executive selection. - Lack of oversight and transparency around SOE operation enhances corruption exposure, especially in procurement and contracting. - Weak internal audit and control processes burden the Auditor-General; absence of effective follow-up on audit findings perpetuates problematic practices. - Public Procurement: - Corruption vulnerabilities remain high due to absence of a public procurement law, political engagement in procurement winners, poor contract management, limited transparency, and lack of oversight. - Poor procurement planning, reliance on non-competitive contract awards, inadequate competition, and weak contract performance enforcement are persistent problems. - Lack of beneficial ownership information increases conflict-of-interest risks in contract awards. - Tax Policy and Revenue Administration: - Progress made in clarifying tax legal framework, reducing tax incentives, and providing integrity and oversight provisions. - Frequent modifications of tax laws with little notice or centralized consideration. - High-value and long-lasting concessions for strategic investments granted in opaque processes create corruption vulnerabilities. - Special Commodity Levy provides excessive ministerial discretion to grant tax changes with immediate effect. - Limited government attention to protecting competition and absence of a competition policy agency; extensive government control of markets in critical sectors. - Absence of clear mechanisms for information sharing among tax policy and revenue administration authorities limits soundness of policy choices and ability to identify revenue shortfalls. - Exposure to corruption in customs and tax administration is substantial due to absence of effective performance monitoring and sanctioning systems. - Limited digitization in tax and customs increases direct interaction with officials and reduces ability to detect integrity issues through data analytics. - Central Bank and Financial Sector Oversight: - Under the recently repealed legal framework, weaknesses included safeguards to central bank autonomy and conflict of interest from CBSL direct management of the Employee Provident Fund and Sri Lanka’s Debt Management office. - Enactment of the Central Bank of Sri Lanka Act is a critical step improving CBSL institutional, personal, and financial autonomy and appointment processes. - The Central Bank has worked to avoid a banking crisis and established mechanisms to monitor compliance with core financial sector rules, but its governance arrangements constrained financial sector oversight. - The new CBSL, enacted in September 2023, improves governance structure but governance weaknesses remain. - Exposure to integrity risks arises from differences in regulations applied to state-owned banks and corporate governance provisions in state bank statutes that do not reflect good practice. - Inconsistent rules for Non-Bank Financial Institutions (NBFI) and exemptions in lending limits (“maximum amount of accommodation”) undermine oversight. - Heavy public sector shareholding in the banking sector generates opportunities for non-transparent influence. - Contract Enforcement, Property Rights, and Judiciary: - Multi-year waiting times for contract dispute resolution prevent reliance on courts and encourage extra-legal means to speed adjudication. - Confusion over property rights and lack of digitized property records generate long-term disputes and promote opaque means to influence dispute resolution. - Corruption risks around state-owned land, estimated at approximately 80 percent of the country, are particularly severe due to lack of clarity around titles, absence of a property registry, and ambiguity in divestiture processes. - Concerns about the integrity of the judiciary have grown, increasing incentives for illicit payments to resolve legal problems. ### Recommendations approach - The report highlights immediate and short-term measures to address key corruption issues, and structural reforms that require more time and resources. - Recommendations focus on clarity of authority and responsibility for core functions; financial and operational independence of essential accountability and law enforcement institutions; transparency in government practices and performance, especially planning, spending, and accounting for public funds and assets; inclusive, accessible, and rule-based means to enforce private agreements and challenge official behaviour; and efficient mechanisms for public information and accountability. - Combination of short-term actions to deliver observable improvements and long-term structural initiatives is essential to achieve social and economic aspirations. - Comprehensive governance reform will require medium- and long-term initiatives, significant resources, prolonged efforts, and support from international partners. - Recommendations will contribute to governance and anticorruption policies and programs and to measures agreed in the Staff Level Agreement for an Extended Credit Facility Arrangement for Sri Lanka. ### Priority recommendations (measure, authority, objective, timeline) - 1 — By November 2023, establish an Advisory Committee, composed of independent experts on anticorruption to assist in the nomination of CIABOC Commissioners and the Director General. — Constitutional Council — Strengthen accountability and rule of law — ST - 2 — Publication of Asset Declarations for senior officials (President, Prime Minister, ministers) on a designated website in line with Anticorruption Law by July 2024. — CIABOC — Strengthen accountability and transparency — ST - 3 — Enact Proceeds of Crime legislation that is fully aligned with UNCAC and FATF standards by April 2024. — Ministry Justice — Strengthen accountability and rule of law — ST - 4 — Amend the National Audit Act to enable the-the Auditor-General to levy surcharges on officers, including Chief Accounting Officers, for failure to properly discharge responsibility for oversight and accountability for use of public resources. — Auditor-General; Ministry Finance — Strengthen accountability and transparency of fiscal governance — ST - 5 — Finalise and implement regulations to support the provision of beneficial ownership information as required by the Companies Act and establish a public beneficial ownership registry by April 2024. — Ministry Industries — Strengthen accountability and transparency — ST - 6 — Enact a Public Procurement Law that reflects international good practice by December 2024. — Ministry Finance — Enhance transparency in fiscal governance — MT - 7 — In December 2024, publish report on a designated website on progress in increasing the proportion of competitive tendered procurement contracts in the 10 agencies determined to have the lowest level of competitive tenders in 2022. — Ministry Finance — Increased transparency in fiscal governance — MT - 8 — Starting in March 2024, publish on a designated website: (i) all public procurement contracts above LKR 1 billion, along with comprehensive information in a searchable format on contract award winners; (ii) a list of all firms receiving tax exemptions through the Board of Investment and the SDP, and an estimation of the value of the tax exemption; and (iii) a list of firms receiving tax exemptions on luxury vehicle import. Information to be updated every 6 months. — Ministry Finance — Strengthen transparency — ST/MT - 9 — Implement the SOE Reform Policy, ensuring that the holding company (HoCo) and the advisory committee are comprised of skilled, independent, and ethical staff. — Ministry Finance — Enhance transparency — ST/MT - 10 — Abolish or suspend application of the Strategic Development Projects Act until promulgation of explicit and transparent process for evaluation of proposals and costing of investment promotion conditions. — Office of the President — Strengthen transparency — ST - 11 — Amend tax legislation to eliminate or restrict ministerial authority to introduce tax changes without prior parliamentary approval and ensure that such changes do not generate revenue losses. — Ministry Finance — Strengthen rule of law — ST - 12 — Institute short-term anti-corruption measures within each revenue department to strengthen internal oversight and sanctioning processes and linkages with CIABOC and related criminal investigation and enforcement processes by Dec 2023 and issue a public report on steps taken and results obtained by Dec 2024. — Ministry Finance — Enhance accountability — ST and MT - 13 — Following a broad consultative process, produce a Cabinet policy paper by June 2024 on options for establishing new management arrangements for the Employee Provident Fund that terminates direct CBSL management. — Ministry Finance — Reduce conflict of interest. — MT - 14 — Revise legislation, regulations, and process relating to financial sector oversight in the banking sector, including strengthening corporate governance for banks with government ownership by improving the selection of executives and Board members. — Central Bank of Sri Lanka — Strengthen oversight — ST - 15 — By December 2024, establish an on-line digital land registry, and publish, on a designated website, report on progress in implementing published Plan for registering/titling all state land. — Ministry Lands — Strengthen transparency — MT - 16 — Establish and implement a plan to expand the resources and skills available to the Judicial Services Commission in order to enhance their ability to carry out their function and define potential options for modifying governance arrangements in the Justice sector to strengthen oversight, monitoring, and proper sector development. — JSC/Ministry of Justice — Enhance rule of law — MT *IMF | Technical Report – Sri Lanka Governance Diagnostic Assessment | excerpt (report based on information gathered before and during March 2023).* ### Section I. Severity of Corruption ### Section I. Severity of Corruption ### Overview and political consequences - Widespread and persistent popular protests in 2022 over the behaviour of top officials reflected a consensus that corruption had paved the way for the economic crisis; the resignation of President Gotabaya Rajapaksa in July 2022 emphasised that addressing the crisis required changes in governance as much as changes in economic policies. - The role of civil society in demanding accountability conveyed an important message about the drivers of change. ### Concentration of power and governance configuration - The Presidency of Gotabaya Rajapaksa featured an excessive concentration of authority in the hands of a group of individuals tightly linked by familial ties, emphasising the political power of a small elite and facilitating coordinated improper use of public power. - The Rajapaksa Government lasted less than three years from its start in November 2019 and featured catastrophic declines in tax revenues, the signing of investment agreements negotiated in opaque circumstances granting control over state property and extensive long-lasting concessions, and dramatic increases in external and domestic debt. - Under the last Rajapaksa Government, ministerial portfolios of the Rajapaksa brothers accounted for 70% of the national budget. ### Undermining of public accountability and oversight - The passage of the 20th Amendment to the Constitution in 2020 abolished the 19th Amendment, granted unfettered Presidential control over appointment processes in “independent” bodies such as the Central Bank, the Judiciary, and the Anticorruption Commission, and eliminated regulatory bodies in Procurement and Auditing. - Oversight bodies in Parliament, including the Parliamentary Accountants Committee and the Committee on Public Enterprises, proved unable to effectively monitor and discipline government actions. - Laws on counter-terrorism were applied in ways that restricted public participation in monitoring and governance. ### Government pledges and institutional reversals - President Wickremesinghe has pledged to confront corruption and change the way the nation is governed, announcing government reform programs in fiscal and monetary policy, taxation, public financial management, and anticorruption, and stating commitment to “implementing anti-corruption practices through a government mechanism that emphasises accountability.” - The quick passage of the 21st Amendment in September 2022 reimposed limits on the authority of the President, demonstrating resolve to unwind recent attacks on accountability and the rule of law. - Efforts to simply restore past arrangements and institutions are unlikely to be sufficient to address underlying systemic governance challenges and corruption issues exposed in recent years. ### Public perceptions and survey evidence - International assessments (Transparency International’s Corruption Perception Index and the World Justice Project’s Rule of Law Index) show little alteration in Sri Lanka’s performance from 2016 through 2022, with scores remaining relatively unchanged and close to average for the region and income group. - A detailed 2019 survey and interview-based study found corruption perceived as pervasive: - Slightly more than one-third of respondents had direct experience with corruption. - Over 85 percent of the interviewed indicated that corruption happened regularly in the hiring of government workers and the awarding of government contracts. - Among those who had experienced or witnessed an act of corruption, the encounter happened with a government official in 36 percent of respondents and with a member of Parliament in 35 percent. - Grand corruption was perceived to be slightly more frequent than petty corruption. - Grand corruption was viewed as common by 72% of respondents as compared to 67% who viewed petty corruption as common. - Corruption was viewed as common among politicians (by 75%) and bureaucrats (76%), figures that closely align with the 78% who viewed corruption as common among ministers, and the 81% who viewed corrupt behaviour to be common among parliamentarians. - Until prompted, respondents did not view corruption as a critical problem, suggesting acceptance of corruption as a regular part of governance. ### High-level scandals, costs, and corroborating indicators - Extensively reported transgressions involving high-level officials and economic elites (e.g., Sri Lankan Airlines’ interactions with Airbus, the reduction of the import tax on sugar in 2020, issuing of bonds in February 2015) produced extensive public information on incidents involving high-level officials. - In these cases, multiple state entities, including the Central Bank, generated extensive profits for private parties while saddling the state with costly debts; in all instances cited, high-level officials escaped sanctioning for corruption, including in foreign jurisdictions in one case. - Complementary indicators: - A comparison determined highway construction costs per kilometre in Sri Lanka were three times global averages. ### Common elements and mechanisms of corruption - High-value corruption issues are strongly associated with state-owned enterprises and close relationships between public institutions and private firms, including in the financial sector. - Multiple avenues exist by which officials influence and direct actions of public and private parties, often lacking transparency. - High levels of discretion in policy creation and implementation (public procurement, state contracting, granting of concessions for strategic investments) have contributed to corruption vulnerabilities, especially where state actions cannot be easily challenged. - Opaque control over public activity is assisted by high levels of organizational fragmentation of authority, combined with extensive concentration of responsibility in a limited number of individuals (e.g., the practice of having the President also serve as Minister of Finance). - Corruption appears less about isolated transactions and more about long-established relationships binding public and private elites. ### Failures of internal and external accountability - Current arrangements insulate top government officials from accountability. - Government control over key enterprises limits market forces’ ability to discipline government policies and rent-seeking behaviour. - Extensive government regulation in core sectors (agriculture, electricity, construction) restricts market-based accountability and creates opportunities for top officials to direct state resources to privileged private parties. - Internal accountability sources (regulatory bodies, inspectorates, internal audit functions) lack capacity and authority and are regularly circumvented by discretion afforded to high-level officials and informal influence mechanisms. - Government decisions on capital investments, high-value procurement, concessions for “strategic” investments, marketing and payment of debt instruments, or divestiture of state property occur through opaque processes at the highest level with limited oversight and contestation. - External mechanisms of accountability (auditing and parliamentary oversight) have proven ineffectual in constraining questionable behaviour, in part due to absence of effective follow-up mechanisms for actions that waste public resources. - The absence of functional relationships with external law enforcement agencies enables officials to enjoy the profits of illicit actions outside the country. ### Impacts and imperatives for reform - Governance and corruption issues have imperilled national and social well-being; the recent past demonstrates the extent of impunity afforded top officials even for ruinous behaviour. - Civil society has proven able to organise and demand accountability as a last resort. - Confronting corruption effectively requires: - Short-term actions to address core vulnerabilities. - More long-term actions to introduce structural changes in governance and accountability addressing underlying governance weaknesses. - Dismantling current protections that afford officials immunity for their actions is fundamental to achieving and sustaining success. ### Transition to legal, organizational, and strategic reforms (beginning of Section II) - Effective anticorruption efforts require core competencies: capacity to identify key corruption risks and vulnerabilities; establish priorities; coordinate implementation of policies to achieve core objectives; and monitor implementation and adapt practices. - Successful anticorruption efforts typically include prevention, identification, investigation and sanctioning of corrupt behaviour, and establishing and enforcing clear standards of official behaviour, often pursued through collaborative initiatives involving government, the private sector and civil society, with emphasis on transparency and inclusive governance. - The anticorruption framework is undergoing major changes: the recent adoption of the Anticorruption Act (ACAACA) introduced substantial improvements and will go far in aligning Sri Lanka’s legal framework with international commitments and good practice standards. - Sri Lanka has been a party to the United Nations Convention against Corruption (UNCAC) since 2004; past evaluations (2013 and 2017) identified substantial deficiencies (protection of whistleblowers, provision of mutual legal assistance, procedures for stolen asset recovery and management of frozen assets), and subsequent legal reforms have addressed some, but not all, of these gaps. - Existing legal and organizational constraints highlighted: - Legislation preventing information sharing across accountability agencies, hampering collaboration and effectiveness. - Institutional independence neutered by political control over selection of senior officials and restricted competencies due to budgetary constraints. - High-profile corruption cases repeatedly abandoned due to coordination problems across multiple agencies, raising concerns about police and judicial skills and incentives, and possible direct political involvement in case resolution. - Experience of the Financial Crimes Investigation Division (FCID) (formed in 2015, given authority to investigate and arrest without Attorney General approval, supported by the UK Serious Fraud Office, later brought under direct control of the Criminal Investigation Department) illustrates challenges of establishing an outcome-oriented anticorruption effort. - Political considerations have often dominated anticorruption action; special commissions have highlighted severity of corruption and dysfunctionality of formal structures while failing to hold individuals to account. _Imf | Technical Report – Sri Lanka Governance Diagnostic Assessment — Section I. Severity of Corruption_ ### Chapter III and IV Exec Summary ### Chapter III and IV Exec Summary ### Recent legal reforms and institutional changes - Laws enacted further to the UNCAC review recommendations include: - Assistance to and Protection of Victims of Crime and Witnesses Act No 4 of 2015 - Right to Information Act no 12 of 2016 - Mutual Assistance in Criminal Matters (Amendment) Act no 24 of 2018 - Judicature Act (Amendment) No 9 of 2018 - Amendment Act no 22 of 2018 - National Audit Act no 9 of 2018 - Prevention of Offenses relating to Sports Act no 24 of 2019 - The new Act replaces the Bribery Act (Chapter 26), the Commission to Investigate Allegations of Bribery or Corruption Act No. 19 of 1994, and the Declaration of Assets and Liabilities Law No. 1 of 1975. ### The Anti-Corruption Agency (ACA) and CIABOC: mandate and urgency - Rapid and steadfast progress in implementing the ACA is critical to demonstrate commitment to reducing corruption. - CIABOC is central to the new legal and organizational architecture and has expanded responsibilities: development of anticorruption strategies; prevention, investigation, and prosecution of corruption offences; and establishment of mechanisms to coordinate anticorruption efforts across government. - The ACA vests CIABOC with new and extensive responsibilities; the extent of ACA’s impact depends on CIABOC’s ability to fulfil its expanded mandate. ### Selection, appointment, and governance of CIABOC leadership - Effectiveness of CIABOC hinges on selecting Commissioners and a Director General with expertise, experience, and integrity. - The ACA establishes CIABOC as an independent entity; selection and appointment processes must be fair, above-board, transparent, and free from external interference to preserve public trust. - Current arrangements: - Applicable legislation vests responsibility for selection of Commissioners with the Constitutional Council (CC). - The CC provides a measure of protection due to its multistakeholder composition, but risks lacking the specific expertise and information to select the most qualified individuals. - Statutory qualification provision (Section 4(1)): - “The Commission shall consist of three members appointed by the President on the recommendation of the Constitutional Council from among the persons who have expertise, reached eminence and have at least twenty years of experience in: a) law; and b) one or more the following fields: i) forensic auditing; ii) forensic accounting; iii) engineering; iv) international relations and diplomatic services; v) management of public affairs; or vi) public administration.” - Identified gap: s.4(1) contains no requirement for experience in criminal law, criminal practice, criminal investigation, or intelligence gathering and analysis, despite Commissioners’ roles in criminal investigation and prosecution decisions. ### Recommendation: Advisory Committee for selection - The Constitutional Council should establish an Advisory Committee to assist in selecting CIABOC Commissioners and the Director General. - Modeled on practices in Indonesia, Ukraine, and Moldova where multi-stakeholder advisory mechanisms strengthen selection of anticorruption commissioners. - The Advisory Committee could be a collective body of five reputable and qualified members representing diverse sectors (e.g., two anti-corruption civil society representatives and two law enforcement officers with investigation/prosecution experience). - The Advisory Committee’s work would be exclusively advisory; the CC retains discretion to select candidates not on the Committee’s list. - Publishing the names of qualified candidates as determined by the Advisory Committee would further strengthen transparency. ### Action planning, operationalization, and reporting - Early reporting on progress in operationalizing the ACA is important to demonstrate government resolve. - The ACA introduces many new provisions, including a Conflict of Interest system and an Asset Declaration system, and expands criminalization of corruption-related offences. - Defining and publishing a time-bound Action Plan is vital for coordination within CIABOC and across agencies. - A phased approach is recommended so visible progress can occur in the near term while full system implementation may require more time. - An initial 18-month Action Plan could focus on: - (i) the Asset Declaration and Conflict of Interest Systems; - (ii) more effective investigation and prosecution of corruption; and - (iii) enhancing mechanisms for recovering stolen assets, including non-conviction-based confiscation. - Regular reporting on Action Plan progress on a designated CIABOC website will increase transparency and invite public monitoring. - The law permits CIABOC to submit budgetary requests directly to Parliament to establish financial independence; estimating annual financial and human resource requirements requires a clear organizational strategy and implementation protocols. - Note: The ACA does not cover recovery or management of frozen/stolen assets; separate legislation on asset recovery is critical and is addressed in the Anti-money Laundering and Counter-Terrorism Financing section. ### Table of recommended near-term measures and exact implementation timelines - 1 Establish an Advisory Committee composed of reputable and qualified individuals with expertise in anticorruption to assist in the identification of candidates for CIABOC leadership positions. - Authority: Constitutional Council - Implementation Timeline: November, 2023 - 2. Nominate the Director General and the Commissioners using a process that promotes independence of CIABOC and selects individuals with the experience, expertise, and integrity required to lead the agency. - Authority: Constitutional Council - Implementation Timeline: December, 2023 - 3. Establish and publish on a government website an 18-month action plan to implement the ACAACA, with allocation of authority, responsibility, and accountability for managing implementation and clear milestones for operationalizing the Law. - Authority: CIABOC - Implementation Timeline: February 2024 - 4. Publish first report on progress in implementing the Action Plan on a government website, and publish subsequent reports every 6 months. - Authority: CIABOC - Implementation Timeline: December; 2024 - 5. Develop, publish, and submit a CIABOC budget, aligned with the Action Plan, and report on budget implementation at least every 6 months on a designated website. - Authority: CIABOC - Implementation Timeline: March 2024 ### National Anticorruption Plan (NAP) - The first Sri Lankan National Anti-Corruption Plan (NAP) covered 2019-2023. - The NAP’s five pillars: A) Prevention Measures – including establishment of a Corruption Prevention Division at CIABOC B) Value-Based Education and Community Engagement C) Institutional Strengthening of CIABOC and other Law Enforcement Agencies D) Law and Policy Reforms E) Monitoring and Evaluation - Implementation and monitoring observations: - Primary implementation burden assigned to CIABOC; implementation matrix identifies other agencies but lacks detailed assignment to departments or divisions. - Key performance indicators exist but timelines are vague, often labelled only as ‘short-term’, ‘medium-term’ or ‘long-term’. - Progress is unclear due to limited public information; little indication the NAP served as an effective collaborative platform across state and non-state actors. - Recommendation: - Develop a National Anticorruption Plan for 2025-2029 on the basis of inclusive consultation, with clearly defined objectives, responsibilities, management and oversight arrangements, and public reporting requirements. - Authority: CIABOC - Implementation Timeline: December 2024 ### Prevention of corruption: oversight, transparency, and systems - Prevention is the bedrock of effective anticorruption given limits on prosecutions and high cost of remediation. - Targeted prevention efforts include: - Development of systems to direct and oversee behaviour of public officials (e.g., Codes of Conduct, Asset Declaration) - Identification and correction of organizational risks (e.g., internal and external audits) - Transparency in provision of public information and opportunities for non-state participation in governance and oversight - Clarification and standardization of processes to reduce opportunities for corruption (e.g., tax administration and increased digitization) - Eliminating non-essential regulation and state involvement that create corruption opportunities - Current mechanisms for oversight and behaviour are limited: - Systems often exist on paper but operate partially without attention to ensuring application or remedial steps when problems are observed. - Transparency and public participation in monitoring and oversight are limited. ### Conflict of Interest (CoI) systems and asset declaration - Conflict of Interest systems can set behavioural standards and assist officials in managing conflicts to support trust and integrity; well-designed CoI systems define conflicts, identify who is subject, establish declaration mechanisms, and rules to manage conflicts. - Sri Lanka’s CoI system is poorly defined: - Concept set out in Chapters XLVII and XXIX of the Establishment Code; officials instructed to “not do anything which will bring his private interests into conflict with his public duty, or which compromises his office.” - The Code provides no additional definitions for “private interests”, “public duty”, or “anything.” - Institutions must formulate their own conflict of interest policy and manage implementation. - Operational gaps: - No evidence CoI mechanisms are operative. - CIABOC published a Conflict of Interest Handbook in 2019, but there is no centralised mechanism to record or report conflicts brought to management committees or the disposition of cases. - No mechanism exists to determine whether officials have submitted mandatory asset disclosure forms, nor to sanction officials for failure to disclose assets or declare conflicts. - The ACA contains provisions to strengthen CoI and asset declaration systems, but asset declaration is only one element of an effective CoI regime. Equally important are: - Clear definitions of conflict, - Training of officials in obligations and responsibilities, - Procedures for rapid and consistent guidance on managing declared conflicts, - Public reporting on system performance, - Appropriate and visible sanctions for non-conformity. *IMF | Technical Report – Sri Lanka Governance Diagnostic Assessment | Chapter III and IV Exec Summary* ### 45. Asset Declaration systems require a certain group of public officials to periodically ### 45. Asset Declaration systems require a certain group of public officials to periodically submit information to a government authority on income, assets, liabilities, and interests ### Purpose and international context - Asset declaration systems require periodic submission of information on income, assets, liabilities, and interests. - Approximately 90% of jurisdictions have legislation requiring some form of asset disclosure. - Asset disclosures: - help promote a culture of integrity; - can help public officials build trust in their work and in public institutions; - can promote partnerships with civil society and journalists. - Several international instruments, including the United Nations Convention Against Corruption, reference disclosure by public officials. - G-20 members endorsed common principles on financial disclosure (2012) and conflict of interest (2018). ### Sri Lanka: legal history and system performance - Sri Lanka has had laws requiring asset and liability declarations since the 1970s (Declaration of Asset and Liabilities Act No 1 of 1975). - CIABOC has administered the system starting in the 1990s. - Laws require that within three months of taking office, the following declare assets and liabilities (including family members’): - parliamentarians; - judges; - public officials of government departments; - ministries; - local authorities; - chairpersons and staff of public corporations; - candidates for elected public office; - elected officials. - Serious shortcomings were identified in verifying disclosures and addressing non-compliance. - Systems problems remain largely unaddressed, despite the passage of twenty years from the enactment of the laws. ### Recent efforts (2019–2021) and civil society role - Between 2019 and 2021, CIABOC, in collaboration with Transparency International Sri Lanka (TISL) and other NGOs, attempted to establish an effective asset declaration system aiming to: - establish an Office of Asset Disclosure; - publish an annual report on relevant prosecutions; - create and publicise an online asset declaration portal. - No progress was made in establishing: - an online public portal for asset declaration; - an Office of Assets Disclosure; - annual reports on prosecutions related to asset declaration verification. - TISL ran a highly visible information campaign (writing to members of parliament, publishing articles, posting billboards, creating social media campaigns), generating public demand. - By February 2021, 12 individual parliamentarians had voluntarily published their asset declarations; the remainder of Sri Lanka’s 225 parliamentarians did not follow suit. ### Anticorruption Law (ACA) reforms and capabilities - The ACA will substantially improve the legal framework for asset and liability declarations: - expands scope of application to public servants subject to its provisions; - allows submission and verification through a new centralised electronic system; - requires the Commission to establish and maintain a new database to secure information in electronic form concerning assets and liabilities; - requires the Commission to review each declaration to detect prima facie proof of illicit enrichment and conflicts of interest; - requires publication of asset declarations after a limited list of sensitive information is redacted; - creates criminal offenses connected to failure to provide a declaration of interest and providing false information in, or omitting relevant information from, a declaration of interest. ### Complementary reforms and sequencing - Effectiveness of Asset Declaration system is enhanced when implemented together with: - increased provision of beneficial ownership information of companies; - enhanced oversight of the award of procurement contracts. - CIABOC implementation requirements: - establish a clear, detailed, and time-bound action plan with regular and consistent oversight and public reporting; - properly budget the action plan, including provisions for IT development, capacity building in entering and submitting data, and data analytics. - Recommended phased approach to implementation to avoid multi-year delays: - emphasise early publication of asset declarations of prominent officials followed by building out the entire system; - priority to receive and publish comprehensive Asset Declarations of senior officials in the short term, even before a fully digitised process exists; - sequenced implementation and early public availability will sustain reform momentum and increase pressure for full implementation. ### Key implementation recommendations (selected items and timelines) - Enact regulations to operationalise the CoI rules set out in the ACA (defining conflict of interest; guidance on declaring and managing conflicts; sanctioning failure to declare; public reporting on system performance). - Authority: CIABOC - Implementation Timeline: March 2024 - Establish and publish on a CIABOC website an 18-month action plan for implementing the CoI system. - Authority: CIABOC - Implementation Timeline: April 2024 - Issue the first annual report on CoI system performance. - Authority: CIABOC - Implementation Timeline: December 2024 - Enact regulations to operationalise the Asset Declaration system set out in the Anticorruption Law (who must file; assets to be declared; form; filing process; publication, validation, and storage; sanctions; public reporting). - Authority: CIABOC - Implementation Timeline: January 2024 - Establish and publish an 18-month action plan for implementing the Asset Declaration system with phased-in implementation. - Authority: CIABOC - Implementation Timeline: April 2024 - Make Asset Declarations of Senior Officials publicly available in line with regulatory requirements on a government website. - Authority: CIABOC - Implementation Timeline: July 2024 - Issue first annual report on Asset Declaration system performance. - Authority: CIABOC - Implementation Timeline: December 2024 --- ### 2. Identification and Correction of Organizational Risks (Audit and Accountability) ### Role and functions of audit - Effective public sector auditing can detect and deter corrupt practices. - Internal audit: identifies organizational practices that generate risks of non-compliance and waste; helps governing bodies recognize and adjust practices. - External audit: examines implementation of policies (including financial management), makes observations, findings, and recommendations, and may raise concerns with competent authorities regarding specific transactions. ### Status in Sri Lanka - Internal audit function generally poorly developed. - External audit increasingly plays a significant oversight role. - Supreme Audit Institution (SAI) is the National Audit Office (NAO), headed by the Auditor-General (AG), with history back to 1799. - The 2018 Audit Act: - sets responsibilities of the Auditor General and the Audit Office; - established an Audit Service Commission to secure human and financial resources of the NAO, support improved performance, and report on NAO findings relating to fraud, negligence, misappropriation, or corruption. - The Commission was abolished by the 20th Amendment (2020) and reinstated by the 21st Amendment (2022). - The NAO’s mandate extends to all state entities but has encountered issues gaining access to records and cooperation with powerful agencies and state-owned enterprises. ### Limitations in linking audit to enforcement - Section 9 of the National Audit Act effectively prevents the Auditor General from sharing information obtained during an audit that raises corruption suspicions with law enforcement bodies in real time; S.9(2) creates an offense of sharing information in circumstances other than those set out in s.9(1)(a)-(c). - Without direct sharing, NAO’s impact depends on Parliament: - NAO audit reports are submitted to Parliament for scrutiny by the Committee on Public Accounts (COPA) and the Committee on Public Enterprise (COPE). - Issues exist with committee composition and speed of functioning; the principle that COPA and COPE should be chaired by a member of the opposition has not always been followed. - Committees only sit when Parliament sits; dissolution of Parliament (e.g., during COVID) highlighted oversight gaps and backlog of reports. - Recommendation: COPA and COPE should be constituted as permanent bodies. ### Surcharges and follow-up - Part IV of the 2018 Act assigned the Audit Service Commission responsibility for reporting instances where a transaction contravenes law and creates a deficiency or loss to the state due to fraud, negligence, misappropriation, or corruption. - The Report is filed with the Chief Accounting Officer of the audited entity for imposition of a surcharge on the value of the deficiency or loss in each transaction. - Recommendation: Amend provision to allow direct reporting and imposition of surcharges by the Auditor-General to address procedural challenges. - It appears that since the 2018 Act came into force, no officials have been made subject to surcharges. ### Resourcing and institutional capacity - Auditor-General historically had little control over hiring, promotion, firing, and limited involvement in budget setting and allocation. - Creation of the Audit Service Commission intended to strengthen resource management; intended impact remains to be felt. - Strengthening NAO function likely requires more effective utilization of financial and human resources. ### Key recommendations on Auditor-General and audit follow-up (selected items and timelines) - Amend s.9 of the Audit Act to allow the Auditor-General to share findings, preliminary or otherwise, with law enforcement bodies for possible criminal investigation, prior to the full report being tabled in Parliament. - Authority: Ministry of Justice - Implementation Timeline: December 2023 - Strengthen capacity of the Auditor-General and establish regular reporting, at least every 6 months, on follow-up of audit findings and recommendations. - Authority: Auditor-General - Implementation Timeline: March 2024 - Amend the National Audit Act to enable the Auditor-General to levy surcharges on officers, including Chief Accounting Officers, for failure to properly discharge oversight and accountability responsibilities. - Authority: Auditor-General; Ministry Finance - Implementation Timeline: March 2024 - Constitute COPA and COPE as permanent bodies, chaired by a member of the opposition party. - Authority: Parliament - Implementation Timeline: September 2024 --- ### D. Investigation, Prosecution, and Sanctioning of Corruption (capacity requirements) - A properly functioning anti-corruption authority (with prosecution function) should have: a) sufficient legal powers to investigate and prosecute complex corruption cases; b) proper funding for equipment and staff resources to avoid case failures for lack of expertise or equipment; c) data gathering and analysis from ongoing and concluded cases to identify patterns of case failure and success; d) clear communication between investigative and prosecutorial arms, including consistent use of ‘Points to Prove’ guides; e) clear, monitored policies on prioritization of cases; f) clear, monitored policies on charging decisions (who to charge and nature/number of charges); g) effective delegation of powers to prevent caseload bottlenecks and minimize corruption risks from power concentration; h) ability to communicate and collaborate with international partners (Mutual Legal Assistance or informal channels); i) proper funding for equipment and staff resources (repeated); j) data gathering and analysis from cases (repeated). - Under the ACA, CIABOC has adequate legal powers to gather intelligence, investigate, and prosecute corruption-related criminality, but lacks dedicated personnel and equipment. - A very substantial number of the Commission’s investigative staff are seconded from the Sri Lankan Police, raising questions of independence, particularly when investigations concern police conduct. - Recommendations for CIABOC capacity: - enable the Commission to recruit and train its own officers within a parallel promotional and ranking structure to the Sri Lankan Police; - resource the Commission sufficiently to have meaningful access to investigative and analytical equipment and training to ensure equality of arms in large corruption cases. *IMF | Technical Report – Sri Lanka Governance Diagnostic Assessment* ### 66. A limited amount of data relevant to performance is provided on the Commission’s ### 66. A limited amount of data relevant to performance is provided on the Commission’s ### Data availability and performance metrics - The Commission’s website provides a limited amount of data relevant to performance. - While the number of corruption cases investigated is described as "not insignificant", the number progressed to a successful prosecution is "substantially smaller." (See Table 6 as referenced in the source.) - Risk from metric-driven behaviour: - When agencies or individuals know they will be evaluated by crude metrics (e.g., number of convictions or conviction rate), they have incentives to change behaviour to improve those metrics in ways that may not reflect substantive performance improvements. - Example risk: a law enforcement unit such as CIABOC might expend considerable resources on low-level, easily proved violations to improve conviction counts even if those cases are not important. ### Notable prosecutions and challenges for high-level cases - Significant successes cited: - A five-judge bench of the Supreme Court upheld the 2019 convictions for bribery of the former President’s Chief of Staff, and the former Chairman of the State Timber Corporation (January 2023). - In 2020, the Commission effectively prosecuted the former Parliamentarian Sarana Gunawardena (then Chairman of Development Lotteries Board) for corruption-related offending. - Constraints on prosecuting senior/sophisticated suspects: - Most criminality does not occur at senior level; when it does, sophistication of suspects makes evidence-gathering difficult. - Large, complex cases can take many years to investigate and prosecute effectively, even in highly developed jurisdictions with sophisticated equipment and case management (e.g., USA and the UK). - Possibility that smaller cases are being prioritised at the cost of larger cases. ### Prioritization of cases - Public narrative: the Commission is perceived to "go after the small fish" because more politically connected individuals may place pressure not to proceed with investigations/prosecutions. - Available statistics suggest the majority of CIABOC investigations and prosecutions focus on defendants who do not occupy (or did not previously occupy) senior government positions. - Justifications for case selection: - Reasons to pursue lower-level cases: easier to prove, concluded more quickly, and less long-term staff demand. - Reasons to pursue high-level cases: typically represent loss of significant state funds; serious criminal acts should be pursued to avoid perceptions of impunity. - Governance gap: - Absence of a clear policy that sets out principles for case prioritization, and absence of data/analysis on why cases succeed, fosters speculation. - Recommendation: Commission must establish and publicly publish principles for prioritization (on its website). ### The significant analysis gap that hinders CIABOC - Corruption-related offending is difficult to prove; need to ensure failures are not due to preventable reasons. - Current data captured is limited to whether a case is investigated, charged, prosecuted, and whether a conviction results. - Critical missing data elements (not currently captured or not subject to meaningful analysis): - Why a case was successful or not. - Whether a not guilty verdict was returned. - Whether the prosecution was rejected after a defense submission of no case to answer. - Whether the prosecution withdrew the case before trial commenced. - Importance of capturing and analysing these details: - Trends and patterns from such analysis are critical to identify shortcomings in investigation and prosecution. - Without analysis, Commission cannot establish why cases fail or justify specific needs for personnel, equipment, or training. - With analysis, Commission will be stronger positioned to request additional, targeted funding. ### Concrete data-capture and analysis actions recommended for CIABOC - CIABOC needs to ensure: 1) All future cases have recorded on the file jacket (or electronically, within the case management system) the detailed reasons for a case: - not proceeding to charge; - being withdrawn once proceedings are commenced; - being dismissed by the court; - being unsuccessful following trial. 2) Dedicated staff resources are provided to establish a back catalogue of data from concluded cases, or those undergoing appeal, ensuring the above data is captured. 3) All captured data is analysed for trends and patterns that could reveal shortcomings in investigative or prosecutorial approach and that may be remedied through better facilities, training or greater consistency of approach. - Additional specific recording needs noted: - Record cases successfully appealed by the defendant and the judge’s reasons for overturning a conviction. - Record admissibility issues, witnesses failing to appear, and other procedural or evidential failings. ### Two-stage prosecution test and supporting tools - Current absence of a clear, consistent policy determining when a case meets legal and evidential burdens to proceed to charge and whether it is likely to result in conviction. - Proposed remedy: create and implement a Code for Commission Prosecutors modeled on mechanisms used in a number of common-law jurisdictions. - The Code will require a two-stage process for prosecutorial decision-making: 1) Evidential stage: "Is there sufficient reliable and credible evidence to provide a realistic prospect of conviction?" - Prosecutors must consider likely defence case and how it affects conviction prospects. - Cases failing the evidential stage must not proceed regardless of seriousness or sensitivity. 2) Public interest stage: "Is it in the public interest to proceed with the charge?" - Seven considerations: a) How serious is the offense committed? b) What is the level of culpability of the suspect? c) What are the circumstances of and harm caused to the victim? d) What was the suspect’s age and maturity at the time of the offense? e) What is the impact on the community? f) Is prosecution a proportionate response? g) Do sources (e.g., informants) require protecting? - Additional tool: Points to Prove (P2P) guide - For each common corruption-related offense, P2P should: - Identify component parts of the offense. - Set out examples of how each component can be established evidentially. - Benefits: - Ensures evidence necessary to establish complete offense is adduced in court. - Promotes effective communication between investigative and prosecutorial arms about investigative leads to prioritise. ### Independent prosecution service considerations - Proposal noted by some: deliver all prosecutions through an independent prosecutor’s office outside the Commission and Attorney General’s Office. - International precedent: many common-law jurisdictions have independent prosecution bodies. - Advantages of an independent prosecutor’s office: - Operational independence helps address public concerns about political influence over decision-making. - Current practice and concerns: - The Commission can prosecute, but sometimes seeks assistance from the Attorney General’s Office which has experienced lawyers. - Accusations of political influence commonly arise in high-profile/complex cases because the Attorney-General is a government appointee and acts as government’s chief legal adviser; unclear when AG’s Office is consulted and the extent of its involvement. - Alternative models: - In other jurisdictions, a Director of Public Prosecutions (no other government role) heads the prosecution service; the AG "superintends" but is not involved in prosecution decision-making. - Legislative and resource implications: - Creating a new independent prosecutor’s office would require legislative process and substantial commitment of time and resources. - The report does not recommend establishing an independent prosecutor’s office in the near term but notes it may be worth considering and explores the option further in an accompanying Annex 2. ### Case-flow management and delegation of responsibility - Current institutional rule: - Only the Director-General of the Commission has power to institute criminal proceedings upon recommendation of the Commission. (At least two of the three-member Commission must agree, depending on circumstances.) - Risks of centralised authority: - Concentration in a single individual raises managerial and corruption risks and creates a throughput bottleneck given increasing case volume. - New Bill provisions: - Section 25(1) of the new Bill provides for the Director General of CIABOC to delegate any "power function or duty" to a competent officer; this should include the power to authorise prosecution under s.18(a). - If read to include prosecution authorisation, delegation would alleviate throughput bottleneck and address perceptions about independence of charging decisions. - Recommended practice: - Delegate powers to institute proceedings to a limited number of senior staff, particularly for lower-severity cases (a practice used in other jurisdictions). - The proposed Code for Commission Prosecutors would support consistency among those with delegated powers. ### Collaboration with other jurisdictions and Mutual Legal Assistance (MLA) - Section 34(3) of the ACA makes the Commission the central authority for Mutual Legal Assistance matters relating to offenses under the Commission's mandate, placing it outside the Central Authority within the Ministry of Justice. - Clarification gap: - It is not clear how MLA requests to CIABOC will be handled in practice relative to existing Central Authority processes. - Need to strengthen mutual legal assistance function: - Larger corruption cases often span multiple jurisdictions; effective international collaboration mechanisms are essential. - CIABOC has legal power for intelligence sharing and is a member of a large international network. - Importance of building relationships with police and enforcement bodies in other countries and developing expertise in seeking and using external assistance. - Specific operational suggestion: - Embedding officers from the Commission in the FIU and vice versa would be a helpful strategy. ### Table 7 — Recommendations to Strengthen Investigation and Prosecution of Corruption Cases - Measure / Authority / Implementation Timeline - 1. Define 18-month action plan for improving investigation and prosecution of corruption cases — CIABOC — April 2024 - 2. Establish staffing rules, procedures for recruitment, etc. – align with budget for CIABOC — CIABOC — April 2024 - 3. Establish and implement rules and protocols on the filing and information required for each case file — CIABOC — March 2024 - 4. Establish Data analytics to identify performance constraints — CIABOC — April 2024 *IMF | Technical Report – Sri Lanka Governance Diagnostic Assessment* ### 5. Establish protocols and rules for determination of whether to ### 5. Establish protocols and rules for determination of whether to proceed with prosecution of case – including Code for Commission Prosecutors ### Administrative action items and implementation timelines - CIABOC to establish protocols and rules for determination of whether to proceed with prosecution of case – including Code for Commission Prosecutors. CIABOC April 2024 - Establish guidance on building an effective case – through Points to Prove Guide. CIABOC May 2024 - Establish rules for case flow management – including delegation of responsibility. CIABOC March 2024 - Strengthen Mutual Legal Assistance. CIABOC June 2024 - Communications – publish statistics on website, and mechanisms for receiving information. CIABOC September 2024 - Design and initiate staff capacity building program. CIABOC June 2024 - Issue CIABOC Annual report on a government website. CIABOC December 2024 ### Key objectives embedded in the actions - Improve prosecutorial decision-making through a formal Code for Commission Prosecutors. - Strengthen case preparation via a "Points to Prove Guide". - Clarify operational responsibilities through case flow management and delegated roles. - Enhance cross-border and inter-agency cooperation through strengthened Mutual Legal Assistance. - Increase transparency and public engagement by publishing statistics and establishing feedback mechanisms. - Build sustained institutional capacity via staff training programs. - Improve public accountability through timely publication of an Annual report. ### Expected outcomes and monitoring elements - Clear implementation timelines tied to CIABOC actions (March 2024 through December 2024). - Public availability of statistics and an Annual report to facilitate external monitoring and trust-building. - Structured protocols and guidance materials to reduce ad-hoc decision-making in prosecutions. --- ### E. Transparency and participatory and Inclusive governance ### Role of civil society and participatory governance - Civil society has a vital role in demanding accountability and directly contributing to better governance and integrity. - Effective governance arrangements should enable non-state parties to participate in monitoring public sector performance through inclusive and participatory processes. - Anticorruption efforts are unlikely to achieve objectives unless they encompass initiatives designed and led by groups outside of government committed to rule-based inclusive economic and social progress. ### Importance of transparency and right to information - Transparency in public processes and the provision of reliable and timely information are essential for participatory governance. - Government policies, rules, and practices are often opaque, damaging trust and potentially reducing compliance with rules (e.g., paying taxes) or investment in formal economic activities. ### Right to Information Commission (RTIC) - RTIC was created by the Right to Information Act, No. 12 of 2016 (‘RTI Act’), to hear complaints of non-compliance by public authorities of their disclosure obligations, and to recommend disciplinary actions against offending officials. - RTIC has the power to prosecute those who commit offenses defined in the RTI Act and works closely with the Ministry of Media on outreach. - Experience to date demonstrates RTIC’s ability to require government agencies to disclose a wide variety of information requested by individuals. - RTIC’s interventions often originate from groups traditionally most exposed to corruption, including women and minority groups. ### Risks and legislative pressures - Recent proposed bills have the potential for constraining the ambit of the Commission, excluding “sensitive” matters from the Commission’s jurisdiction. - Concerns are particularly acute around antiterrorism and privacy legislation and certain provisions in the Anticorruption Law. - Policies and rules must balance protection of information rights with the state’s interest in security, privacy, and confidentiality of investigations; failure to do so risks stripping RTIC of effectiveness. ### Need for proactive disclosure and transparency infrastructure - Implementation of RTI Act principles remains uneven. - A government-wide effort is needed to create and maintain a Transparency Portal with reliable and updated information essential for holding government accountable for performance. - The Ministry of Media has a vital role in supporting more proactive and consistent disclosure. ### Civic platforms, media, and whistleblowers - Rules promoting a responsible and free press provide investigative journalists space to identify and publicise official misbehaviour; Sri Lanka benefits from a robust media space and institutions like the Centre for Investigative Reporting (CIR). - Whistle-blowers are a direct platform for anticorruption engagement; private information sources are vital to identify corruption. - Well-defined principles exist to support appropriate treatment and protection of whistle-blowers. ### Legal and practical status of whistleblower protection - Sri Lanka does not currently have a fully functioning dedicated whistleblowing scheme for public officers. - UNCAC first review cycle recommended measures to ensure persons reporting information on corrupt practices are protected as required by Article 33 of UNCAC (as referenced). - The ‘Assistance to and protection of victims of crime and witnesses Act’ No 4 of 2015 protects a person who makes a complaint to a law enforcement agency but does not provide for instances of whistleblowers. ### Provisions in existing laws affecting whistleblowers - The ACA provides for the protection of the identity of informers, whistleblowers, and witnesses and power to take measures to ensure their safety (e.g., requiring police physical protection). - However, Section 119 allows prosecution of persons who make false allegations to the Commission “knowing such allegation to be false or having reason to believe that such allegation does not constitute an offense.” - Section 122 creates an offense of “knowingly giving false or misleading information to the Commission.” Section 122 is widely drafted and could be used inappropriately against persons providing “misleading information” (term not further defined). ### Policy concerns and recommendations on whistleblower treatment - Criminalising false or misleading disclosures can have a chilling effect on legitimate disclosures by those unsure whether matters constitute an offense. - CIABOC should establish clear implementation rules that encourage and protect whistle-blowers, relying on available guidance (example cited: OECD guide ‘Committing to Effective Whistleblower protection’ (2016)). - Future legislative modifications may be prudent to better signal the value placed on individuals coming forward with information on wrongdoing. --- ### Table 8. Recommendations on Enhancing Right to Information (selected measures and timelines) - Explore ways to strengthen the RTI Act and ensure that is scope is not inappropriately restricted by future legislation. RTIC March 2024 - Action plan to strengthen the RTIC and enhance capabilities and competencies. RTIC June 2024 - Create Transparency Portal and the mechanisms to ensure it continues to be updated. Ministry Finance, President March 2024 - Define plan to expand proactive provision of information. RTIC March 2024 - Produce a report on ways to strengthen protection of free and responsible media. RTIC, CSOs, Ministry Media December 2024 - Implementation of regulations relating to whistleblowers. Ministry of Justice March 2024 - Consider amending law to more effectively protect whistle-blower rights. Ministry of Justice July 2024 --- ### Section III. AML/CFT ### Role of AML/CFT in anticorruption - AML/CFT framework is an important tool to fight corruption by contributing to prevention, detection, and prosecution of corruption; corrupt actors often seek to launder proceeds of corruption. - Corruption and bribery were identified in the 2015 Mutual Evaluation Report (MER) as one of the top two proceeds-generating crimes in Sri Lanka. - The 2015 MER highlighted that investigation, prosecution, and conviction of corruption-related money laundering cases was not forthcoming in line with corruption as a higher risk area. - In September 2023, Sri Lanka finalized its updated National Risk Assessment (NRA) report and published a sanitized report on its website. Outreach activities with the banking institutions have been organised to inform the sector on the key findings of the updated NRA. - Corruption and bribery are expected to remain as some of the highest proceeds-generating crimes. ### International and regional context - Sri Lanka is a member of the Asia/Pacific Group on Money Laundering (APG), a FATF-style regional body. - Sri Lanka’s compliance with international standards and effectiveness of its AML/CFT regime were assessed by APG in 2014; the MER adopted in 2015 assessed Sri Lanka to be Partially Compliant or Non-Compliant in 28 out of the 40 FATF Recommendations, with low effectiveness in 9 out of 11 Immediate Outcomes. - As of October 2021, Sri Lanka had largely rectified key shortcomings on technical compliance and was assessed to be Partially Compliant or Non-Compliant on remaining 8 out of 40 FATF Recommendations. - The next comprehensive mutual evaluation on Sri Lanka by the APG is expected to take place during 2025/2026. ### AML/CFT legal and institutional framework - Key legislations: Prevention of Money Laundering Act (PMLA), Convention on the Suppression of Terrorist Financing Act (CSTFA), Financial Transactions Reporting Act 2006 (FTRA), respective implementing regulations, and the Code of Criminal Procedure Act. - Measures include transparency of beneficial ownership of legal persons, enhanced customer due diligence (CDD) for politically exposed persons (PEPs), and reporting of suspicious transactions. - AML/CFT competent authorities comprise the Sri Lanka Financial Intelligence Unit (FIU), regulatory and supervisory bodies including the Central Bank of Sri Lanka (CBSL), and law enforcement authorities responsible for investigation and prosecution of ML/TF related cases. - Gaps remain in the legal framework preventing full compliance with FATF standards. ### Operational capacity constraints - Inadequate resources and skills across competent authorities hinder effective implementation of the AML/CFT framework. - Until recently, legal barriers prevented CIABOC from investigating money laundering cases and from proactively sharing information with other law enforcement agencies due to secrecy requirements under its legal framework; this legal barrier has been addressed through the passage of the ACA. ### Positive precedent: FCID experience - The experience of the FCID demonstrates that Sri Lanka can effectively investigate serious financial crimes, including money laundering, when given appropriate space and resources. - An adequately resourced and empowered investigative division under the Sri Lanka Police Service identified and charged a number of senior officials with corruption and financial crimes, indicating capacity exists when organized and led effectively. ### Investigation and prosecution of corruption-related money laundering offenses - There is a lack of successful corruption-related money laundering investigations, prosecutions, and convictions, limiting deterrence and mitigation of laundering of proceeds of corruption. - While CIABOC completed 4206 investigations (2010 – 2015) on bribery and corruption, only one led to a money laundering investigation by the police which did not lead to convictions. - Legal barriers previously prevented effective sharing and coordination to pursue corruption-related money laundering cases: the Bribery Act did not provide power to CIABOC to pursue money laundering cases in parallel with corruption cases; CIABOC was bound to “utmost secrecy” preventing disclosure to stakeholders like the police. - The ACA provided CIABOC with the mandate to pursue both money laundering and corruption investigations. ### Coordination and strategy gaps - Higher-level coordination and information sharing exist, but there is an absence of a clear national strategy and technical coordination mechanisms to pursue money laundering investigations in parallel with corruption investigations. - Exchange of information appears generally ad-hoc; access by police to information held by CIABOC was restricted until very recently due to legal constraints. - Information provided by the FIU to CIABOC was largely one-way without useful feedback. - Lack of technical competencies of law enforcement agencies to investigate and prosecute money laundering cases relating to corruption contributes to low levels of successful money laundering convictions related to corruption. *IMF | Technical Report – Sri Lanka Governance Diagnostic Assessment | excerpt* ### 111. Measured against international standards, substantial gaps exist in the current legal ### 1lkaea2023002 - 111. Measured against international standards, substantial gaps exist in the current legal ### Asset recovery, confiscation, and legal framework - Substantial gaps exist in Sri Lanka’s legal framework concerning the identification, recovery and return of proceeds of crime. - Current legal instruments relied upon: - PMLA (Prevention of Money Laundering Act) - Mutual Assistance in Criminal Matters Act - Criminal Procedure Code - International assessments and status: - The 2018 report by the Implementation Review Group (IRG) of the UNCAC acknowledged progress on UNCAC Chapter V on Asset Recovery but provided additional measures needed for full alignment with UNCAC requirements and global good practices. - Under FATF standards, Sri Lanka is assessed as Partially Compliant for technical compliance to Recommendation 4 on Confiscation and Provisional Measures, largely due to: - Lack of confiscation measures relating to third parties. - Lack of mechanisms for managing or disposing of property frozen, seized and confiscated. - Current reform effort: - Sri Lanka is working on establishing a comprehensive framework for asset recovery through the proposed Proceeds of Crime Act. - Implementation challenges and causes of low successful asset recovery/return relating to corruption: - Low level of parallel investigations and prosecutions of money laundering offenses, translating to lower confiscation of proceeds of crime. - Existence of complex, time-consuming court application requirements under the PMLA and delays in court processes. - Lack of technical expertise and staffing resources within law enforcement agencies. - The PMLA provides power to forfeit stolen assets but implementation remains largely ineffective in higher risk areas such as corruption. ### Beneficial ownership of legal persons - Deficiencies remaining since the 2015 MER: - Absence of requirement for companies or the company registry to obtain or hold up-to-date information on companies’ beneficial owners. - The concept and definition of beneficial ownership is not included in the Companies Act. - No mechanism to facilitate timely access by competent authorities to beneficial ownership information. - Interim and regulatory developments: - The Registrar General of Companies, working with the FIU and other authorities, has formulated draft amendments to the Companies Act to align legal framework for legal persons with FATF standards; these draft amendments are pending final review for submission to Parliament. - The concept and definition of beneficial owner are stipulated in the Customer Due Diligence (CDD) Rules 2016 for financial institutions (except insurance sector, which is covered under CDD Rules 2008). - Current practical access and limitations: - Law enforcement agencies access beneficial ownership information through records maintained by financial institutions. - The Companies Registrar maintains basic legal information but does not widely provide beneficial ownership information. - Information provided by companies to their financial institutions on beneficial ownership might not be comprehensive or accurate given legal gaps. - Implementation capacity risks: - Plans to develop implementing regulations once Companies Act amendments are adopted, but lack of operational capacity may hinder effective implementation. - No clear mechanism yet for collection, verification, and access to beneficial ownership information to be maintained at the Companies Registrar. - The Registrar General of Companies intends to leverage the existing electronic registration system, but existing operational issues need to be addressed. - Lack of competent and adequate resources at the Registrar, particularly on beneficial ownership requirements and awareness, poses a challenge. ### AML/CFT risk-based supervision - Supervisory framework and scope: - AML/CFT supervision is jointly carried out by the FIU, CBSL, SEC and IRCSL on financial institutions. - A risk-based supervisory framework has been adopted with annual dissemination of ML/TF risk data collection templates and risk management questionnaires to all financial institutions. - SEC and IRCSL conduct risk assessments and prepare onsite supervisory plans for securities and insurance sectors respectively; the FIU does so for banks, finance companies, restricted dealers with the DFE, MVTS providers and primary dealers. - FIU guidance notes issued: beneficial ownership (2018), suspicious transactions reporting (2018), and PEPs (2019). - Thematic reviews on implementation of PEPs and beneficial ownership requirements by banks were conducted within the past three years. - Resource and implementation constraints: - Lack of resources, particularly at the FIU, may hinder effective implementation given the FIU’s broad supervisory responsibilities including designated non-financial businesses and professions (Casinos, Real Estate Agents, Gem and Jewelry Dealers). - COVID-19 impact on onsite inspections: - 2020: 11 onsite inspections - 2021: 5 onsite inspections - 2022: 38 onsite inspections - Supervisory enforcement: - The FIU has a range of sanctions: warning letters, show cause letters, and monetary penalties which have been imposed for AML/CFT violations. - Prioritization of supervisory activities toward higher-risk areas, informed by the NRA and past onsite findings, is recommended to alleviate resource constraints and ensure appropriate risk-based supervision. ### Financial Intelligence Unit (FIU) performance and intelligence dissemination - Low receipt and dissemination of financial intelligence on corruption-related money laundering: - Number of corruption-related STRs received by the FIU (Table 9): - 2016: Corruption -, Bribes 5, PEPs 1 - 2017: Corruption -, Bribes 2, PEPs 4 - 2018: Corruption 2, Bribes 3, PEPs 8 - 2019: Corruption 2, Bribes 2, PEPs 7 - 2020: Corruption 1, Bribes 2, PEPs 8 - 2021: Corruption 2, Bribes 1, PEPs 2 - Number of financial intelligence reports disseminated to law enforcement agencies (LEAs) by the FIU (Table 10): - 2016: No of cases referred to LEAs 4 - 2017: (blank / not provided) - 2018: No of cases referred to LEAs 6 - 2019: No of cases referred to LEAs 7 - 2020: No of cases referred to LEAs 7 - 2021: No of cases referred to LEAs 4 - Observations on low STRs and disseminations: - The number of STRs relating to potential corruption remains very low despite multiple outreach activities by the FIU. - This has produced an extraordinarily low number of disseminations to law enforcement on corruption-related cases, appearing severely at odds with reported incidence of corruption. - Potential causes: - Low level of understanding by reporting entities on corruption-related risks. - Absence of sanctions for non-reporting. - Lack of clear understanding of how proceeds of domestic corruption are laundered. - Limited knowledge on whether Sri Lanka’s financial institutions are used to move proceeds of corruption originating in foreign jurisdictions. - Domestic cooperation barriers: - Lack of effective domestic cooperation on corruption-related issues between competent authorities and law enforcement hampered sound risk understanding to inform AML/CFT strategies. - Legal barriers prevent CIABOC from actively sharing information with the FIU and police on corruption-related cases. ### Key recommendations and implementation timelines (from Table 11) - 1. Enact the Proceeds of Crime legislation fully aligned with requirements under the UNCAC and FATF standards. - Authority: Ministry of Justice - Implementation Timeline: April 2024 - 2. Operationalise the provisions of the Proceeds of Crime legislation, and issue first annual report on a government website on progress and performance. - Authority: Ministry of Justice, CIABOC - Implementation Timeline: December 2024 - 3. Strengthen identification of PEPs and reporting of suspicious transactions by financial institutions through enhanced supervision by AML/CFT regulators, production of guidance notes and training, and application of dissuasive and proportionate sanctions in a timely manner. - Authority: FIU, CBSL - Implementation Timeline: Initiate by March 2024 - 4. Enact amendments to the Companies Act relating to the requirements on beneficial ownership measures fully aligned with the FATF standards. - Authority: Ministry of Justice, Registrar General of Companies, FIU - Implementation Timeline: June 2024 - 5. Formulate and adopt the implementing regulations to support the amendments to the Companies Act on beneficial ownership. Regulations should: - Provide clear mechanism for timely access by competent authorities to the beneficial ownership information, including other relevant public authority such as the public procurement authority. - Allow access to the beneficial ownership information by reporting institutions with AML/CFT obligations. - Consider establishing a public beneficial ownership registry to increase transparency and advance the fight against corruption. - Authority: Ministry of Justice, Registrar General of Companies, FIU - Implementation Timeline: September 2024 - 6. Conduct strategic analysis to better understand how proceeds of crime from corruption activities are laundered through banks, vulnerabilities in the banking sector, and involvement of other relevant actors in the laundering process. Disseminate findings to the banking sector and other relevant actors including law enforcement agencies. Identify risk mitigation measures that banks need to adopt. - Authority: FIU - Implementation Timeline: December 2024 - 7. Formulate and implement policies and strategies on corruption-related money laundering investigation, prosecution, and conviction, in line with the new power accorded to CIABOC to pursue money laundering offense under the Anti-Corruption Bill. This should include establishing mechanism for CIABOC to coordinate and cooperate with the FIU and other relevant law enforcement agencies and improve the collection and of statistics and successful cases related to corruption-related money laundering. Strategies should also include considering adopting new arrangements to ensure effective organization and leadership of money laundering investigations and prosecutions. - Authority: CIABOC, FIU, Police, and other relevant law enforcement authorities - Implementation Timeline: December 2024 - 8. Strengthen protocols and relationships to enhance mutual legal assistance to assist in the prosecution of cases involving money laundering and corruption and the recovery of stolen assets. - Authority: CIABOC and FIU - Implementation Timeline: December 2024 - 9. Develop national strategies and policy objectives relating to asset recovery, in line with the objectives of the Proceeds of Crime legislation. - Authority: Authorities with power for asset confiscation (e.g., Police, CIABOC, FIU, etc.) - Implementation Timeline: June 2025 ### Fiscal governance and public financial management (PFM) — key points - Role of PFM: - Good fiscal governance and a sound PFM system are important drivers of integrity, transparency, accountability and reduced vulnerabilities to corruption. - The section focuses on “hotspots” where governance weaknesses in PFM have created distinct corruption vulnerabilities. - Recent fiscal crisis context and fiscal metrics: - Fiscal deficits: - 2020: 12.1 percent of GDP - 2021: 11.6% of GDP - Following a policy reversal in 2019, the tax revenue to GDP ratio fell to below 8 percent. - Large interest bill severely squeezes fiscal space for growth-enhancing spending. - Domestic fiscal financing conditions have deteriorated since the onset of the crisis; external market access has been lost since early 2020. - The crisis involved large-scale direct lending to the government by the Central Bank of Sri Lanka (CBSL) and culminated in the suspension of debt servicing in 2022. - Underlying governance weaknesses identified: - Despite the Fiscal Management (Responsibility) Law, the government has struggled to maintain fiscal discipline due to overly positive revenue forecasts and challenges in reigning in spending, in a context of weak accountability for adherence to fiscal rules. - Weaknesses in budget coverage and commitment controls have led to extensive cash rationing, often opaque and with little oversight. - Large public projects have multiplied, with many approved that circumvent formal evaluation processes and produce weak returns on investment. - Processes for approving investments and public procurement are opaque and raise fiduciary probity and integrity concerns. - State-owned entities play a large role in the economy, but management and oversight are weak, with limited transparency and poor financial performance. - Legal framework for PFM: - Dispersed across the Constitution and several pieces of primary and secondary legislation: - The Constitution: gives Parliament “full control” over public finances, establishes the Consolidated Fund, and mandates the Auditor-General. - Fiscal Management (Responsibility) Act 2003 (FMRA): main law for fiscal planning and responsibility. - Finance Act 1971: regulates public corporations, budget preparation, borrowing powers, dissolution, and auditing standards. - Annual Appropriation Acts: authorize Executive to spend public funds each fiscal year, including domestic and external loans. - Financial Regulations 1992: provide detailed rules and procedures for PFM, including expenditure and revenue estimates, authorization for expenditure, accountability arrangements, rules for virements, use of the Contingencies Fund, and financial reporting requirements. - There is no overarching law on public financial management. *IMF | Technical Report – Sri Lanka Governance Diagnostic Assessment* ### Box 1. PFM Legal Reform Areas in Sri Lanka ### Box 1. PFM Legal Reform Areas in Sri Lanka ### Laws currently in force - The Finance Act No.38 of 1971 (Part II) - National Audit Act No.19 of 2018 - Central Bank Act 2023 (passed in August 2023; repeals Monetary Law Act (Chapter 422)) - FM(R)A No.3 of 2003 (expected to be repealed and replaced by the PFM Act) - Monetary Law Act (Chapter 422) (expected to be repealed by the new Central Bank Act) - Foreign Loans Act No. 29 of 1957 - Parliamentary Budget Office Act (recently passed in June 2023) - Accounting and Auditing Standards Act No. 15 of 1995 ### Laws being developed / to be developed - Draft Central Bank Act (currently with the Parliament, repeals Monetary Law Act (Chapter 422)) - Draft Public Financial Management Act (currently being developed) - Public Debt Management Act (currently being developed) - SOE Restructuring Act (currently being developed) - National Planning Act (to be developed) - Procurement Legal Framework (to be developed) - Public Asset Management Act (to be developed) ### Budget credibility and coverage — key findings - The annual budget process is traditional and largely incremental, lacking a performance framework or multiyear perspective. - Since 2014, total revenue has been over-estimated in every year, with an average annual forecast error of 16.9 percent. - Primary expenditure exceeded the budget forecast in 2019, 2020 and 2022 by an average of 6.3 percent, but came within budget estimates in other years since 2014. - Sri Lanka has not been able to achieve a deficit of less than 5 percent as required by its fiscal rule. - Financing constraints led to unpaid bills reaching LKR 106 billion (0.5 percent of GDP) at end-December 2022, of which LKR 60 billion were older than 90 days. - Arrears in debt service payments to creditors exist and have been a recurring systemic problem. - Large adjustments to the budget by Parliament just prior to approval often occur without prior analysis of cost benefits and feasibility. - Off-budget funds outside the Consolidated Fund create incomplete transparency and limited external oversight. - The Department of National Planning (NPD) and a new Macro Fiscal Unit (MFU) exist to support medium-term planning and forecasting, but the MFU will require enhanced technical capabilities and appropriate systems for revenue forecasting. ### Budget credibility — corruption and governance risks - Consistent overestimation of revenue creates pressure for administrative actions to enhance collections, increasing corruption risk through deviations from tax policy and collection procedures. - Unrealistic expenditure plans and administrative-level adjustments during execution generate opportunities for subjective approval processes and bribery when liquidity is constrained and payments are rationed. - Off-budget funds are typically not subject to standard internal controls, increasing corruption risk. ### Recommendations on enhancing budget formulation and the fiscal framework (Table 12) - Measure 1: Submit to Parliament a new Public Financial Management Law to strengthen the fiscal responsibility framework, budget formulation and execution. - Authority: Ministry of Finance - Timeline: February 2024 - Measure 2: Improve the quality of analytics in the Medium-Term Fiscal Framework - Authority: Ministry of Finance - Timeline: June 2024 - Measure 3: Include in budget documents a presentation of the planned sources and uses of all funds for each entity within the GFS General Government Sector - Authority: Ministry of Finance - Timeline: October 2024 ### Public Investment Management (PIM) — key findings - The Department of National Planning (NPD) produces a rolling four-year Public Investment Program (PIP); the PIP for 2021-2024 aims to provide a medium-term perspective. - Some capacity exists for MoF oversight, project reporting/tracking, and evaluation; a national PPP agency is in place. - Weaknesses persist across PIM stages: lack of realistic expenditure ceilings, weak project appraisal and selection, major delays, and cost overruns due to inadequate preparation and prioritization. - The Guidelines require all project proposals using the Consolidated Fund to be submitted to the NPD for preliminary and detailed appraisal, but these procedures were not universally followed. - In 2020, MoF Circular No. MFEPD 01/2020 restated procedural requirements; however, many proposals are directly submitted to the Cabinet, skipping NPD appraisal. - The MoF issued “Guidelines for Submitting Development Project Proposal for Public Investment” (MoF Circular No. MNPEA 02/2019) to rationalise project identification, submission and appraisal. - Project implementation performance (Progress of the Mega Scale Development Projects Report, Fourth Quarter - Year 2022): - Only 22 (10 percent) out of 261 ongoing projects were implemented by the end of 2022. - 29 projects were halted due to inability to resolve issues. - 129 projects were classified as poorly performing requiring serious attention. - Common implementation issues: delays in receiving allocation and imprest, delays in land acquisition, procurement-related problems, absence of performance indicators and outputs, poor contract performance. - The MoF lacks basic information on projects, including expected revenues and potential cost of early termination. ### Classification of progress of Capital Investment Projects, 2022 (Table 13) - Category 1 Completed: Third Quarter 20; Fourth Quarter 29 - Category 2 Being implemented successfully: Third Quarter 08; Fourth Quarter 04 - Category 3 Being implemented properly: Third Quarter 24; Fourth Quarter 18 - Category 4 Expected results could be achieved through interventions: Third Quarter 37; Fourth Quarter 18 - Category 5 Need special attention: Third Quarter 59; Fourth Quarter 30 - Category 6 Critical projects: Third Quarter 95; Fourth Quarter 133 - Category 7 Halted projects: Third Quarter 17; Fourth Quarter 29 ### PPPs and unsolicited proposals — governance concerns - Guidelines on Government Tender Procedure Part II allow unsolicited PPP proposals but state that “no decision should be taken solely on the basis of unsolicited offers without inviting proposals/bids through public advertisement”; Cabinet can permit deviations for urgent and exceptional circumstances. - The PPP process often operates independently of the public investment process, with large discretion on competitive bidding and no required cost comparison between traditional procurement and PPP procurement. - PPPs are mostly initiated without inclusion in the PIP and often result from unsolicited proposals, leading to approval outside the budget process and inadequate assessment of fiscal implications. - Unsolicited proposals typically yield a single bidder due to weak market testing, increasing corruption risk. ### Case: Gampaha, Attanagalla & Minuwangoda Integrated Water Supply Scheme (GAMWSS) (Box 2) - The contract was awarded to the China Machinery Engineering Corporation (CMEC) for USD 229.5 million in 2013 after an unsolicited proposal and Cabinet approval. - The Auditor-General found the contract was awarded through a non-competitive process at a price 33.4% higher than the cost estimate to a company that lacked experience in water projects. - The Attorney General requested the MoF to assess the case, take legal action against officials involved, and lodge a written complaint with CIABOC, noting “an element of corruption by public officials.” *IMF | Technical Report – Sri Lanka Governance Diagnostic Assessment* ### 140. Weak oversight of public investment by SOEs also poses significant governance ### 140. Weak oversight of public investment by SOEs also poses significant governance vulnerabilities ### Public investment by SOEs - A significant proportion of public investment is undertaken through SOEs, but their oversight is fragmented. - The MoF, through its Public Enterprises Department, reviews the investment plans as well as financial performance reports of key SOEs, but "the value of the MoF’s review is not clear" (as flagged in the 2018 PIMA Report). - The MoF does not prepare consolidated reports of the SOEs’ financial performance and investment activities and does not undertake a systematic risk analysis of their operations. ### Recommendations on addressing governance weaknesses in public investment management (Table 14) - Measure 1: Submit to Parliament a new PFM Law, with an integrated PIM section with provisions that: - Establish a unified approach to prioritizing capital investment projects based on explicit criteria early in the budget process. - Require the Ministry of Finance to ensure that all projects included in budget documents are from the list of assessed and prioritised projects. - Authority: Ministry of Finance - Timeline: February 2024 - Measure 2: Establish an enhanced regulatory framework for treatment of unsolicited proposals including the manner in which such proposals can be received and evaluated. - Authority: Ministry Finance, NPC - Timeline: March 2024 - Measure 3: Publish on a government website a list of funded projects that have originated as unsolicited proposals every 6 months, along with information on lead contractor for the proposals, contract cost, and implementation progress. - Authority: Ministry of Finance - Timeline: March 2024 - Additional recommendations in text: - All projects implemented by the government should be included and prioritised in the PIP. - Adopting a medium-term fiscal framework will strengthen budget preparation and public investment by providing multiyear guidance and help in coordinating public investment. - Continue implementing the reforms recommended by the 2018 IMF PIMA, focusing on strengthening processes for project appraisal and selection. ### Procurement: scale and governance concerns - Public procurement is a major share of government expenditure; in 2017, Sri Lanka’s spend on public procurement constituted 5.3 percent of GDP. - The 2022 Interim Budget Speech identified procurement cost escalation (food, medicine, fuel etc.) as a key driver of increased expenditure in the revised budget 2022. - Procurement weaknesses identified include: - Lack of procurement planning. - Not using relevant procurement procedures stipulated by the Procurement Guidelines (PG). - Inadequate competitiveness in selection procedures. - Accepting unsolicited proposals for high value projects. - Poor contract management. - Lack of knowledge and capacity of procurement officials. - Poor monitoring and weak external oversight. - Incomplete coverage of independent complaints mechanisms. ### Case example: Lak Wijaya Coal Power Plant (Box 3) - The Auditor-General’s Department special audit found the coal procurement process for 2022-2025 awarded a tender to Black Sand Commodities company not in line with Government tender procurement procedure guidelines and violating fair opportunity principles; the coal supply tender had been continually awarded to the same supplier during 2009-2015. - Findings included repeated modification of bidding documents and repeated spot purchases from a limited list of suppliers without following applicable rules. - COPE ordered implementation of Auditor-General’s recommendations and announced a loss of RS 1.1 billion incurred due to not specifying coal quantity when calling for tenders for purchase by the Ceylon Coal Company (Pvt) Limited. - Parliamentary COPE example: in 2021 COPE directed investigation into sale of 85,000 MT of ilmenite sold at USD 147 per ton to the third-place bidder instead of the highest bidder who offered USD 165 per ton. ### Weak institutional and regulatory framework - There is no public procurement law in Sri Lanka; procurement is governed by Cabinet-approved Procurement Guidelines (PG) 2006 and associated manuals and standard bidding documents. - Ad hoc and frequent revisions to the Procurement Guidelines and Manual, with no unified updated version, undermine transparency and predictability; Verite Research notes "37 supplements and 25 circulars are applicable to PG and PM 2006" with overlaps. - Institutional changes: NPC established under the 19th Amendment (2015); NPC abolished in October 2020 with the 20th Amendment; the 21st Constitutional Amendment of 2022 reinstated the NPC but the Commission is yet to be appointed and begin to function. - Delay in restoring/strengthening NPC prevented development of procurement law and enabled deviations from prescribed practices. ### High degree of executive discretion in decision-making - Procurement process is fragmented among departmental, ministerial, and cabinet levels with no mechanisms ensuring procedural consistency, efficiency, or integrity. - Sri Lanka operates a highly decentralised procurement system; secretaries of respective line ministries execute procurements and set up technical and bid evaluation committees per delegation of authority. - PG requires a Cabinet Appointed Procurement Committee (CAPC) for procurements above certain limits; the 35th supplement to the Procurement Manual 2006 requires a CAPC for locally funded projects above LKR 500 million and foreign funded projects LKR 1,000 million. - Cabinet has high discretion and is not expressly required to accept CAPC recommendations; the Court of Appeal decision (Daewoo Engineering and Construction Co. Ltd V Amarasekara CA 251/06) ruled Cabinet decisions on contract allocation are not bound by the PG. ### Lack of monitoring and independent review - Procurement is not systematically monitored by the Department of Public Finance or the NPC; monitoring is particularly weak at departmental and ministerial levels. - Ministry of Finance gathers procurement monitoring data but there is no central database to produce standard analytical reports on procurement effectiveness. - Rule violations and financial losses are often revealed only through ex-post audits by the Auditor-General’s Department. - Appeals mechanisms are not independent: complaints can be lodged with NPC, Procurement Appeals Board (PAB), or the Supreme Court; ministerial-level appeals require submission to the relevant Ministry Secretary; PAB members are appointed by Cabinet and its findings do not need to be considered by Cabinet. ### SOE procurement corruption vulnerabilities - COPE identified significant issues in SOE bidding processes, including failure to follow competitive bidding. - Procurement Guidelines provide ethical standards and prohibitions on corrupt activities, conflict of interest, and acceptance of gifts, but these are not practiced consistently. - Absence of national procurement performance standards and a performance assessment system for procurement officials hampers good procurement management and timely delivery. ### Uncompetitive practices and limited transparency - Default award method is competitive tenders, but the extent of non-competitive selections is difficult to ascertain due to lack of comprehensive data. - Integrity risks are heightened by use of non-competitive procedures (direct contracting, emergency procurement) and accepting unsolicited proposals for large infrastructure projects. - Very limited transparency and oversight of procurement processes and outcomes: - Timely, accurate, relevant, and complete procurement statistics are very limited. - Absence of consolidated procurement plans and a fully functioning e-procurement system contributes to data gaps. - Government has little information on procurement progress or causes of delays; no publicly available information on contract awards. - Ad-hoc publication exists for defaulted suppliers/contractors; World Bank in 2003 identified lack of comprehensive blacklisting rules as a gap. ### Procurement planning and PROMISe (e-GP) - No consolidated procurement plan exists to integrate procurement and budgeting; NPC’s Annual Performance Report 2019 indicates ministries do not follow a standard format for procurement plans and action plans and documents were not always approved by the Chief Accounting Officer. - Frequent major amendments to initial Action Plans and Procurement Plans occur throughout the year; little monitoring of compliance between Procurement Plan and Action Plan. - PROMISe (Procurement Management Information System) is being developed and currently in a pilot phase; it has potential to improve integrity by enabling better processing, tracking, recording, reporting, and publicising procurement actions and outcomes. - The eventual impact of PROMISe/e-GP on corruption vulnerabilities will depend on deployment approach, competencies of officials and private sector users, and complementary reforms including audit transparency and stronger accountability mechanisms. *Source: IMF | Technical Report – Sri Lanka Governance Diagnostic Assessment (excerpts from the specified content unit).* ### 156. The PROMISe system currently has a limited coverage (only shopping procurements), ### The PROMISe system currently has a limited coverage (only shopping procurements), ### e-Government Procurement (PROMISe) and expected impact - PROMISe currently has a limited coverage (only shopping procurements). - The government plans to use PROMISe for all procurement matters in the future, including: - the submission of bids, - the payment of procurement-related fees, - complaints and appeal handling module, - contract administration and project monitoring, - and expansion to large infrastructure projects. - The low capacity of staff responsible for executing procurement and for managing the switch to PROMISe will be a key enabler to generating the expected impact of e-GP on corruption and actual results. - A rule-based procurement system, supported by an e-procurement platform, is recognized as associated with high performance and low levels of corruption. - Verite 2021: PF 08/2019 mandated all procuring entities to register with PROMISe before 31 January 2020; as of 24 December 2020, there are 1,032 confirmed registered vendors and 121 confirmed registered procuring entities. ### Limited procurement expertise (findings) - Procurement expertise is limited across government, including capacity for collecting, analysing, and disseminating procurement information. - There is no dedicated position of “procurement officer”; responsibility lies with secretaries of respective line ministries acting as Chief Accounting Officers (CAO). - Staff who manage procurement usually lack detailed knowledge of procurement guidelines or how to structure contracts to achieve greatest benefit. - Capacities are further limited in provincial authorities, especially where markets may be shallow. - Composition of technical evaluation and procurement committees does not reflect an appropriate skill mix; proper evaluation often requires staff with appropriate technical expertise and managers experienced in implementing similar projects. - Members of procurement committees handle procurement in addition to substantial regular responsibilities, causing delays in decision-making. - Cumbersome procedures, lack of capacity and empowerment (which elevates procurement decisions to senior management) are identified as reasons for significant delays by donors. - World Bank procurement data show a time lag of up to one year between the invitation for bids and the contract signing. ### Recommendations on addressing vulnerabilities in Public Procurement (Table 15) - Measure 1: Operationalise the NPC, with a clear mandate, authority, and responsibilities, including oversight of unsolicited proposals, and an 18-month Action Plan for standing up the agency. - Authority: Ministry Finance - Timeline: January 2024 - Measure 2: Enact a Public Procurement Law that reflects international good practice. - Authority: Ministry of Finance - Timeline: December 2024 - Measure 3: By March 2024, publish on a designated website: - (i) information on all public procurement contracts above LKR 1 billion, - (ii) a list of contracts above a designated threshold that were assigned without a competitive tendering process. - Information to be updated every 6 months. - Authority: NPC - Timeline: March 2024 - Measure 4: In December 2024, publish on a designated website a report on progress in increasing the proportion of competitive tendered procurement contracts in the 10 agencies determined to have the lowest level of competitive tenders in 2022. - Authority: NPC - Timeline: December 2024 - Measure 5: Move all public procurement transactions to an e-Government Procurement System by the end of 2025. - Authority: NPC, Ministry of Finance - Timeline: December 2025 ### Cash management: governance weaknesses and arrears - Cash management should ensure funds are available to meet obligations as they fall due, and any surplus funds are used efficiently. - Governance weaknesses arise when cash management mechanisms do not enable prompt payment of obligations; integrity risks emerge when rationing of scarce cash resources is done without procedural clarity, transparency, and oversight. - The Treasury Operations Department (TOD) has developed cash flow forecasting capability using an MS Excel based tool to project future balances based on prior revenue and expenditure patterns. - TOD forecasts balances for each day for the following month and the closing balance of each month remaining in the fiscal year. - A high-level cash management committee, chaired by the Secretary of the Treasury, includes representatives of treasury operations, budget, fiscal policy and debt management teams. - Key elements of a Treasury Single Account structure are in place: - Revenues are collected via agent banks and flow to a main revenue account of the Treasury on a daily basis. - Balances of funds in the transaction accounts of line ministries are swept to the main account of the Treasury at the end of each day. - Treasury holds accounts at the Central Bank of Sri Lanka; transactional banking undertaken by two state owned banks. - Issues with budget credibility lead to cash rationing and undermine governance over budget execution. - TOD estimates government arrears to suppliers to be in the order of LKR 126 billion as at March 2023. - Cash rationing means the executive arm (principally the TOD) decides which budgeted transactions are funded, undermining Parliament’s role and creating severe corruption risk. ### Commitment control: deficiencies and priority actions - Finance Regulations require that no commitments shall be incurred unless financial provision exists in the Annual Estimates and all commitments must be recorded; these instructions are not followed by all spending units and are often performed manually. - Commitments are not recorded when the event giving rise to the obligation to pay occurs; ministries frequently record commitments only when a payment must be made, preventing Treasury control over commitments. - Introduction of effective commitment control should be a priority to address arrears. - Arrears primarily reflect lack of budget credibility and should be addressed by implementing new fiscal rules and enhancing capacity for medium term fiscal planning. - Effective commitment control allows management of timing (if not quantum) of payments during budget execution and requires Treasury to define prioritization rules. - Protocols involve: 1. Ensuring transparent prioritization criteria (preferably determined by Parliament); and/or 2. Addressing poor macro-fiscal management so funds can be raised to meet obligations as they fall due. ### Box 4 — Commitment Control (main control steps) - 1. Appropriations control release of funds from the Consolidate fund. - 2. Warrants release the appropriations periodically during the year (based on cash flow forecasts and spending plans of line ministries, which confirm future availability of cash to meet the planned timing of payments associated with planned commitments). - 3. Commitments, in the form of purchase orders recorded in the ITMIS prior to executing a contract, are controlled against the available warrant. - 4. Payments are controlled against the commitment (payment vouchers are controlled against the purchase order in the ITMIS). - Where effective commitment control is in place, the Treasury can govern timing of payments to avoid arrears by receiving budget execution (cash flow) plans from line ministries and comparing these to Treasury cash flow projections; primary response is to raise additional funds (for example by borrowing); only where additional financing cannot be raised may the Treasury manage the value and timing of warrant releases to ensure commitments are established only when sufficient cash is forecast to be available. ### ITMIS and operationalising commitment control - The Integrated Treasury Management Information System (ITMIS) is a new financial management information system (commercially-acquired software suite) under implementation for a decade, facing challenges of resourcing and reform commitment. - The software can be configured to perform commitment controls as described; ITMIS is rolled out to 3000+ licensed users but suffers from system speed performance issues that limit utility. - ITMIS is being run in parallel to the existing Computerized Integrated Government Accounting System (CIGAS); in practice, neither system currently supports commitment control processes. - Recommendation: MoF should operationalise commitment control functions to manage timing of incurrence of contractual obligations so payments associated with each commitment occur when cash is forecast to be available. - The ITMIS project should ensure commitment control functions, including anticipated payment dates for approved commitments, are configured and rolled out and outstanding performance issues resolved. ### Recommendations on strengthening expenditure controls (Table 16) - Measure 1: Define a time bound roll out of the ITMIS project commitment control function of software, including anticipated payment dates relating to approved commitments. - Authority: Ministry of Finance - Timeline: December 2023 - Measure 2: Report, on a public website, progress in implementing the roll-out plan. - Authority: Ministry of Finance - Timeline: Sept 2024 ### Internal controls and external oversight (findings and recommendations) - An effective internal control system and a reliable internal audit function are essential for appropriate decision-making regarding public resources and prevention of corruption. - Internal control and audit function are governed by the Finance Regulations and the Audit Act: - Finance Regulations assign Chief Accounting Officers (Secretaries of Ministries) and Accounting Officers (heads of departments) responsibility for establishing an effective internal control environment (F.R.127 & 128), including establishment of an internal audit unit in each department (F.R. 133). - National Audit Act (No.18 of 2019) specifies internal audit reports to the CAO and guidance by an Audit and Management Committee reporting to the CAO; requirements extend to ministries, provincial councils and public corporations. - A Department of Management Audit (DMA) is establishing within MoF to guide internal audit development across government and has authority to issue circulars and guidelines. - DMA advises audit types to include financial, performance, systems audits and special investigations. - Existing information does not determine whether functioning internal audit units exist across government or the competencies of officials tasked with internal audit responsibilities. - DMA receives copies of all internal audit reports, but the extent to which management reacts and addresses findings is unclear; no publicly available information on internal audit reports or follow-up. - DMA prepared draft guidelines reflecting a modern risk-based approach to internal audit that should be formally issued as soon as possible. - External audit: An External Audit body established by the Constitution largely fulfills its function: - Article 152: Auditor-General (A-G) appointed by the President and reports to the legislature; A-G audits all public entities, audits conducted per Sri Lankan standards aligned with international standards, reports tabled in Parliament and published. - Audit coverage of Public Corporations is ongoing issue: less than one-half of public corporations submit financial statements on time; A-G is blocked from accessing a number of subsidiary entities (subject of legal action). - Links between internal and external audit: - A-G receives copy of all internal audit reports and is invited to observe Audit and Management Committee meetings. - CAOs are required by law to identify remedial actions in response to A-G findings. - Draft internal audit guidelines instruct committees to follow-up remedial actions, but current practices do not indicate such follow-up occurs. - Common themes in internal and external audit findings: - Weaknesses in cash management, contract management, revenue collection and procurement. - Deficiencies in management of assets, advances, physical assets and investment projects. - A-G reports include failure to follow procurement rules, assets not identified/valued appropriately, weaknesses in contract management, potential conflicts of interest in management of pension funds, and weaknesses in oversight and governance of public corporations. - A key weakness is repetition of audit findings, indicating failure of Accounting Officers and MoF to create changes to avoid re-occurrence. - Example: the FMIS is not fully operational after 10 years of development; procedures, business processes and systems are inadequate to support effective accounting for and management of government assets. - Urgent need for the Treasury to develop an action plan with specific responses to address the most common adverse findings of internal and external audit reports. - Strengthening the National Audit Office could improve effectiveness and accountability of public expenditures: - Auditor-General could be provided specific powers and a requirement to submit evidence of corrupt practice to law enforcement and/or anti-corruption entities with investigative authority. - Expansion of Auditor-General’s functions beyond financial audit and compliance to include performance matters is an important development. - A-G could be given an explicit mandate under the Audit Act to review PPPs. - Expanding expectations would require corresponding increases in financing and institutional competency. *IMF | Technical Report – Sri Lanka Governance Diagnostic Assessment* ### 173. The creation of a Parliamentary Budget Office (PBO) will enhance the efficient and ### The creation of a Parliamentary Budget Office (PBO) and SOE governance and oversight ### Parliamentary Budget Office (PBO): purpose and institutional design - Creation and rationale - The PBO will enhance the efficient and transparent use of public finance and reduce the influence of political bias on public finance decisions. - Control over public finances is vested in Parliament by article 148 of the Constitution. - Parliament’s budgeting role is exercised through deliberation on the annual budget and oversight of public expenditure via the Committee on Public Accounts (COPA) and the Committee on Public Enterprises (COPE). - COPA and COPE review financial statements and reports by the Auditor-General and provide oversight on managerial efficiency and financial discipline of the government and SOEs. - Legal status and expectations - Parliament has recently passed the Parliamentary Budget Office Law, which establishes the PBO. - The PBO will assist Parliament by providing independent economic and financial analysis. - Essential design features: transparent and merit-based processes for managing resources, staff, and work; impartial and independent operation; financial and operational independence; and a high degree of professional [capacity]. - Footnote: The Parliamentary Budget Office Bill has been published in the government gazette dated April 28, 2023, and it should be submitted for the approval of Parliament to fulfil the legal requirements. - Recommendations (internal controls and external oversight) - Adopt Guidelines for internal audit, and take steps to strengthen the competency and capacity of internal audit units to fulfil their function. - Authority: Ministry of Finance - Timeline: January 2024 - Publish on a government website an annual report on the operations of internal audit, including a review of main findings and observations, the interactions between internal and external audit, and the steps that have been taken by management to address internal audit recommendations. - Authority: Ministry of Finance - Timeline: June 2024 - Establish a requirement of the Auditor-General to submit evidence of corrupt practice to law enforcement and/or anti-corruption entities with appropriate investigative authority. - Authority: Ministry of Finance, National Audit Office - Timeline: March 2024 ### State-Owned Enterprises (SOEs): scale, governance weaknesses, and fiscal risks - Scale and classification issues - The Government of Sri Lanka maintains ownership and control over somewhere between 300 and 500 entities that it characterises as Public Corporations. - A Public Enterprises Division (within MoF) collates budgets, business plans, and financial reports of 52 SOEs considered most strategically important. - There is no definitive list of SOEs and a high degree of uncertainty over the exact portfolio. - Operative PFM rules vest responsibility and accountability for management of individual SOEs with the secretary of the respective line ministry. - SOEs are required to apply employment, procurement and financial controls defined for the central government, and are subject to audit by the Auditor-General. - Main governance weaknesses and vulnerabilities - Legal and definitional ambiguity - No clarity in the legal framework about what formally constitutes a State-Owned Enterprise. - The Constitution defines a Public Corporation and differentiates between public corporations and statutory institutions, but no specific law clarifies categories or typologies. - No practical distinction exists between entities created by legislation operating commercially and those pursuing non-market activities. - Corporate governance and transparency are weak - Board director appointment processes are largely unregulated, highly politicised, and not aligned with selecting people with appropriate expertise, experience, and integrity. - Department of Public Enterprises (PED) guidance on CEO selection exists but is often poorly followed by politicised boards. - Basic information on identity and background of executives and directors is not available; there is no process to hold executives or directors accountable for performance since most appointments are on a permanent basis. - Fewer than one-half of enterprises provided required financial data on time. - Advocata found that only 52 regularly publish financial data, and of these only one had tabled its mandated annual report to Parliament in each of the last 5 years. - Annual reports produced do not provide content required by the PED; SOEs provide little information pertaining to access to information required by RTI. - SOE audits frequently result in a qualified audit or disclaimer. - PED collates data but publishes no consolidated data or analysis of SOE performance. - Executive and ministerial interventions - Legal framework provides representatives of line ministry, the MoF and political leaders the ability to intervene in day-to-day operations of SOEs. - Part II of the Finance Act, No. 38 of 1971: each corporation’s budget must be approved by its board; any capital expenditure in that budget above a value of 500,000 rupees must be approved by the minister responsible for Planning and the Minister of Finance as well as the respective shareholding Minister. - Financial Regulations require ministry approval for recruitment and purchasing decisions during budget execution. - Managers indicate lack of clarity whether they report to their governing board or their responsible shareholding minister and/or the ministry of finance. - Evidence from CSOs, media, audit reports, and SOE management interviews indicates politically motivated board appointments, political interference in staffing and recruitment, inappropriate (corrupt) procurement interventions, and misuse of facilities and services for personal and political gain. - Fiscal and operational distortions - Central government has imposed unfunded quasi-fiscal operations on SOEs, severely impacting their financial sustainability. - Several large SOEs, including in the energy and petroleum sector, have operated at significant financial loss due to government regulated prices set well below cost-recovery level. - These entities borrow from the Treasury or state-owned banks under letters of support or guarantee from the Treasury to provide liquidity. - Largest SOEs have not provided financial returns in dividends and have accumulated large payment arrears to suppliers, including other SOEs. - Recent reforms, supported by the EFF, to have cost-reflective pricing in energy and petroleum SOEs are a step in the right direction and need to be reflected across SOE policies. - Transparency and accountability deficits - Central government approves SOE budgets but does not analyse planned performance of these entities. - SOE budgets are not presented to Parliament on either a stand-alone or consolidated basis or as supplementary information with the central government’s budget documentation. - Operations Manual rules on dividends, investment decisions, performance contracts, and Audit Committees exist but there are no mechanisms to monitor compliance or sanction non-compliance. - Prior IMF-assisted governance regime required formal statements of corporate intent with operational and financial performance targets; these have not been utilised in recent years. - SOE management reports no engagement from government regarding budgets and business plans; key performance targets are not required unless by their board. - Beyond financial statement preparation, there is no requirement to report performance against plans; within-year reporting is not scrutinised, consolidated, or made public. ### Policy prescriptions, reform agenda, and implementation measures - Distinguish legal categories - The Government should distinguish between non-commercial statutory bodies and commercial SOEs and establish a separate legal basis for: 1. Statutory bodies intended to remain under government ownership and not operate on a commercial footing (e.g., universities, regulatory agencies, culture and professional bodies). These would be categorised under the General Government sector within the IMF’s Government Finance Statistics (GFS). 2. State-owned enterprises intended to operate on a commercial basis in competitive markets (e.g., Sri Lankan Airlines). These would be categorised under the Public Non-Financial Corporations sector as defined within GFS. - Governance and reporting requirements for non-commercial statutory bodies - For non-commercial statutory bodies that remain under government ownership: - Ensure a minimum level of management autonomy as implied by the establishing act, with internal controls akin to those in central government. - Governing boards should be accountable for internal control regimes (rather than the ministry secretary). - Required engagements with PFM framework: - participate in the planning and budget process of the central government (even where funds reside outside the consolidated fund), - prepare budget estimates to be included within the central government’s budget documentation (for information rather than approval), - undertake financial and performance reporting similar to a ministry, - maintain an operational internal audit function, - be subject to audit by the Auditor-General, - require approval of the Minister of Finance in advance of any significant transaction involving specified financial risks (borrowing, investments etc). - For such entities, the existing central government control framework over execution of the approved budget should serve as a reference point only. - SOE Reform Policy and holding company (HoCo) model - The Government has approved a State-Owned Enterprise Reform Policy which envisages a modern Law on State-Owned Enterprises and creation of a State Holding Company (HoCo). - Principal reforms envisaged: - All commercial SOEs shall be registered under the Companies Act; - All commercial SOEs shall comply with the tenets of Good Corporate Governance; - All Commercial SOEs will compete on a level playing field with market competitors; - HoCo and all commercial SOEs will, subject to a time bound exit strategy, ease, and then cease, dependence on State assisted borrowing; - All Commercial SOEs, where this is the case, will unbundle Regulator and Operator Functions; - All Commercial SOEs that are required to provide a public service obligation (PSO) will have the costs of this service provision financed by way of transfers from the Treasury. - Legislative timetable and caveats - The Government expects to promulgate a SOE Act in the coming months to give legislative authority and operational effect to this policy. - Key caution: a policy sentence suggesting the holding company will be responsible for the “ongoing operational management” of subsidiaries is problematic. The HoCo should set governance policies and performance-oriented governance arrangements but should not engage in day-to-day operations. Responsibility and accountability of subsidiary boards and management must be preserved. - Risks and institutional safeguards - Success of HoCo depends on its governance; a poorly structured HoCo could add an extra layer of governance and further undermine transparency and accountability. - The reform policy assigns a critical role to an “advisory committee” in appointment and oversight of the HoCo; proposed Articles provide for appointment of the Advisory Committee devoid of political influence. - Adopting these Articles will be critical to establish a competent and independent Advisory Committee, contributing to proper governance of the HoCo and its subsidiaries. - Recommended actions for Cabinet and Parliament in drafting the SOE Law - Ensure appropriate composition and strong mandate of the advisory committee overseeing the HoCo. - Require the HoCo, working with the PED, to define clear and rigorous rules for appointment of boards of directors and to establish rigorous mechanisms for monitoring and enforcing compliance with rules. - Establish model performance contracts to support effective leadership of state companies. - Require all commercial SOEs to publish quarterly accounts and an annual report similar to listed entities. - Continue SOE appearances before COPE. - Extend PED capacity to consolidate SOE data and analyse and report on sector performance to improve governance of HoCo and SOEs. - Recommendations on reducing corruption vulnerabilities in SOE management (Table 18) - Publish an authoritative list of all public entities, clearly distinguishing statutory non-commercial public corporations from SOEs that are (or intended to be) commercial entities operating in a competitive market. - Authority: Ministry of Finance - Timeline: December 2023 - Implement the SOE Reform Policy, including associated government policies ensuring that the HoCo and the Advisory Committee are comprised of skilled, independent, and professional staff. The policies of the HoCo should prevent it from intervening in non-strategic operational decisions. - Authority: Ministry of Finance - Timeline: March 2024 - Publish the names of the Chief Executive for the 52 largest SOEs, and the names of all Board Members of those SOEs by December 2023. Ensure publication of the names of all executives and directors for all commercialised state-owned companies. - Authority: Ministry of Finance - Timeline: December 2023 - Establish regulations for the selection of General Directors and Board members that reflect principles of good practice in nominating qualified individuals with appropriate expertise, experience, and integrity. - Authority: Ministry of Finance - Timeline: March 2024 - Establish within the PFM legal framework an appropriate governance framework for non-commercial public entities, including rules for fiscal planning, performance management, internal controls, and reporting. - Authority: Ministry of Finance - Timeline: April 2024 *IMF | Technical Report – Sri Lanka Governance Diagnostic Assessment* ### Section V. Tax Policy ### Section V. Tax Policy ### Introduction and recent revenue trends - Total tax revenue collections have historically been below average and deteriorated significantly following the implementation of major tax cuts in 2020. - Total tax revenue amounted to 11 percent of GDP, on average, between 2007 and 2019 in Sri Lanka. - Comparator groups’ average collections remained at around 15 percent, while Sri Lanka’s tax to GDP ratio plummeted to 7.5 percent following the implementation of major tax cuts in 2020. - Fenochietto and Pessino (2013) estimate Sri Lanka’s tax capacity at 22 percent of GDP. - On average, Asia-Pacific countries reach 60 percent of their tax capacity; if Sri Lanka were to achieve that level, a revenue ratio to GDP of 13 percent would be reached. ### Governance vulnerabilities in tax policy and system complexity Findings: - Sri Lanka’s tax system has been suffering from constant change, driven by shifting beliefs about potential prospects of certain business sectors or taxpayers, leading to a multitude of sector- and taxpayer-specific exemptions. - Repeated tax amnesties and the imposition of additional tax, sometimes retrospectively, on compliant taxpayers have undermined taxpayer trust, reduced predictability, distorted decisions, and complicated administration. - The government implemented an aggressive upward adjustment of the PIT rate schedule and eliminated many sectoral incentives under the CIT in 2021 by amending the law. - Withholding taxation of several income types has been made non-final, which poses challenges for the IRD, which has no systems in place to pay refunds. - New indirect taxes have been introduced (such as the Social Security Levy – a substitute for the Nation Building Tax) or increased (such as on betting and gaming or an increase in the financial VAT). - Complexity and multiple, opaque, taxpayer-specific treatments increase rent seeking, abuse of power, and administrative costs, while eroding investor confidence. Boxed observations (Sectoral CIT variation): - The IRA of 2017 (effective from 2018) left the standard CIT rate at 28 percent but had granted sector-specific rates for tourism, education, export-income, SMEs, and agriculture. - In 2020, some reduced rates were further cut to zero (export of services, Agro-farming, IT-services) while additional reduced rates were introduced for construction, health care and renewable energy. - Rate variation across sectors facilitates tax avoidance, complicates administration, and aggravates economic distortions by creating varying wedges between private and social returns and increasing efficiency losses and avoidance opportunities. Anti-corruption safeguards: - The rewritten and modernised IRA (effective 2018) contains modern provisions reflecting international good practice, including removal of discretions (e.g., to grant tax incentives) and exposure of tax avoidance and corrupt acts to appropriate penalties (see Chapters XVII and XVIII of the IRA and section 192 of the IRA). - Other tax Acts do not contain similar provisions necessary to effectively deter corruption. ### Centralised and principle-based decision making within the Ministry of Finance Findings: - Tax system design and administration are fragmented across various government bodies: Department of Fiscal Policy (DoFP), Inland Revenue Department (IRD), Excise Department, Customs Department, Board of Investment (BoI), and Department of Investment and Trade for special commodity levy and customs duties. - Fragmentation and lack of centralised decision making hinder implementation of a principle-based taxation system; objectives of different departments often compete and sustained revenue mobilization is not a key priority for all stakeholders. - There is no centralised tax policy unit with sufficient authority to evaluate and explain the rationale behind all tax policy changes. - Reliance on Gazette notifications for implementing major policy changes increases opacity and corruption vulnerabilities because tax rates, scope of taxes, and granting of tax incentives can be implemented through Gazette notifications rather than primary law. Case example — special commodity levy: - The special commodity levy can displace other indirect taxes (no other indirect taxes apply when it does) and its scope and rates can be changed overnight by signature of the Minister of Finance. - In October 2020, the finance minister reduced the levy on several goods, including sugar, from RS 50 to Rs 0.25 overnight. - Subsequently, an unusually large amount of sugar was imported by a well-connected entrepreneur; the levy reduction led to large windfall gains for the importer while the consumer price of sugar remained unchanged. - The Auditor-General quantified revenue losses within the first 5 months at LKR 16 billion, raising questions on the intent of the policy change. Policy recommendations: - The DoFP should guide the design process of all taxes that form part of the government budget, including customs duties and the special commodity levy. - Prior approval by the DoFP should become a prerequisite before the publication of ordinances in the official Gazette; for new tax Acts, the DoFP should be required to at least issue an opinion. - DoFP involvement should extend to any tax policy changes deliberated at borders (customs-related taxes and incentives). - In the medium term, the special commodity levy should be replaced by transparent and stable taxes. ### Design, management, and evaluation of tax expenditures Findings and recent reforms: - Until 2022, the tax system was fragmented by a multiplicity of sectoral exemptions and reduced rates that applied to different activities, contributing to misallocation of resources. - With effect from April 2023, most companies are subject to a 30 percent corporate income tax. - Incentives granted under the Board of Investment (BoI) Act have been restricted to import tariff exemptions since 2016. - Companies that still benefit from tax exemptions have recently had those exemptions published on a government website to increase transparency. - To address governance and fiscal leakage concerns, the modernised IRA (effective 2018) included a provision stating that tax exemptions provided under any other laws or agreements after the commencement of the new IRA would have no legal effect if not specifically provided for by the IRA (subsection 9(2) of the IRA). Processes to change tax parameters (summary): - Tax law changes occur via law amendments (including drafting new Acts) or updating regulations (Ordinances or Gazette notifications). - Law amendments typically involve quality control (evaluation by DoFP and IRD), legal drafting (DoFP/IRD -> legal draftsmen -> Attorney General), and enactment (Cabinet approval, Gazette publication, presentation to Parliament after 7 days). - Updating regulations is a much shorter process: after an Ordinance is signed by the Minister, it becomes law upon Gazette publication; the initial quality control phase is not part of this process. - There is no standardised process ensuring revenue implications of tax law changes are consistently evaluated when changes are made via Gazette notifications. Key technical/legal notes: - Tax incentives are provided under the Internal Revenue Act (IRA) and three dedicated acts: the Board of Investment (BoI) Act (introduced in 1978), the Strategic Development Projects (SDP) Act of 2008, and the Colombo Port City Act of 2021. *Source: Section V. Tax Policy, 1lkaea2023002* ### 200. However, the Strategic Development Projects (SDP) Act continues granting wide- ### Strategic Development Projects (SDP) Act, Tax Policy, and Revenue Administration Vulnerabilities ### SDP Act and tax exemptions - The SDP Act continues granting wide-ranging tax exemptions without scrutiny. - Strategic development projects are selected by the BoI and approved by the Investment Ministry in consultation with the Ministry of Finance. - Projects for the Port City (which is itself an SDP project) will be selected by a dedicated Commission, which will recommend those projects to the President or Minister (if the Port City should be assigned to a Minister). - There is no definition of what criteria need to be satisfied for a project to be of strategic relevance. - The revenue forgone from such projects is not systematically contrasted against their potential benefit in a transparent process. - The DoFP is not involved in the selection or evaluation of projects, and any data that may exist is not shared with the department. - While concessions differ across companies benefitting from the SDP Act, the revenue consequences are likely significant. - Footnote details retained in the source: - The BoI offered tax holidays for 3 to 15 years for a variety of sectors; the authority to provide those concessions was removed in 2016, and most companies’ tax holidays have been run out by now. - Existing 17 companies or projects receive a corporate income tax exemption for 10 to 25 years, typically followed by time-bound reduced rates and exemptions from many other taxes and fees. - Three projects established under the SDP Act – a pharmaceutical manufacturing zone, a textile manufacturing zone, and Colombo Port City – are given authority to grant tax concessions to companies operating in these zones. - The Port City Act will grant wide ranging exemptions for up to 40 years to offshore financial services, information technology and communication operations, and the tourism sector. - An incomplete tax expenditure report for Sri Lanka was published once in 2019, but no documentation on underlying calculations exists and public expenditures for providing tax concessions has not been quantified or reported since. ### Evaluation, transparency, and data needs for tax expenditures - Recommendation: The SDP Act should be abolished or suspended until the structures and processes are in place to evaluate the effectiveness of the offered incentives. - Rationale: Deciding viability requires a holistic, impartial, and transparent analysis of benefits versus social costs (which include revenue forgone, an increase in administrative costs, market distortions, and perceptions of unfairness). - The BoI lacks understanding of the wider fiscal framework and budgetary needs necessary to evaluate net social value. - The DoFP should evaluate and guide the design of all tax incentives, including those based on the SDP Act and the Port City Act. - No further projects should be approved until data sharing protocols and legal documents that assign authority to the DoFP are prepared. - The budgetary impact of all tax expenditures should be systematically quantified and published on a government website. - Tax expenditures should be computed for all provisions of the IRA on a regular basis. - Costings must use all available information and be based on a thorough understanding of how different taxes work (example: VAT exemption costing must consider that input credits will be paid back to registered taxpayers). - Once tax expenditure estimates are available, all deviations from a clean CIT system should be evaluated to assess whether benefits exceed costs. - Effectiveness assessment: - Tax expenditures aim at changing behaviour or supporting redistribution; effectiveness must be assessed qualitatively or quantitatively against a counterfactual. - Example from source: Agro-farming has benefited from a reduced rate since 2018, but the tax exemption and associated policies likely had a limited impact since then; gross value added in Agro-farming as a percentage of total gross value added (GVA) seems to have remained quite stable since 2017. When using GVA in wholesale and retail as a control, the relative increase in GVA in Agro-farming seems negative. - Data sharing and analytical capacity: - Analysis of taxpayer-level data is critical for tax policy decisions to understand distributional impacts, revenue implications, and behavioural responses. - The DoFP currently has insufficient access to data; some data (such as from the IRA) is available often with substantial delay, while other data (e.g., profits of firms still benefiting from BoI tax holidays) are not shared at all. - Data sharing protocols need to be established between DoFP and all tax administrators – including Customs, Excise Department, IRA, BoI – to allow DoFP to analyse taxpayer-level data in a timely manner. - Robust anonymization procedures should be put in place to secure taxpayer confidentiality. ### Table 19 — Recommendations to Increase Transparency and Address Corruption Risks in Tax Policy (selected items and exact timelines) - 1. Enact a Tax Administration Act that applies to all taxes and that contains provisions that effectively deter corruption by imposing stricter penalties (including criminal charges) on taxpayers as well as on tax officials for taking bribes or aiding tax avoidance. - Authority: Ministry of Finance - Implementation Timeline: March 2024 - 2. Require that the DoFP issues and post on a government website an opinion on each tax law amendment or new tax Act. - Authority: Ministry of Finance - Implementation Timeline: December 2023 - 3. Make prior approval by DoFP a prerequisite for any substantive change in the scope or rate of a tax that is implemented through updated regulations. - Authority: Ministry of Finance - Implementation Timeline: December 2023 - 4. Transfer authority for the design of customs duties and the special commodity levy to the DoFP. - Authority: Ministry of Finance - Implementation Timeline: March 2024 - 5. Consider replacing the Special Commodity Levy with other, more stable, taxes in the medium term. - Authority: Ministry of Finance - Implementation Timeline: January 2025 - 6. Amend tax legislation to eliminate or restrict ministerial authority to introduce tax changes without prior parliamentary approval and ensure that such changes do not generate revenue losses. - Authority: Ministry of Finance - Implementation Timeline: June 2024 - 7. Report the revenue forgone for each SDP project on a yearly basis on a public website. - Authority: Ministry of Finance - Implementation Timeline: December 2023 - 8. Abolish or suspend the SDP Act until explicit criteria are established to evaluate all proposals, including the provision of public information on projected benefits and costs, and a transparent process is defined to apply the criteria. - Authority: Ministry of Finance - Implementation Timeline: (not specified in table) - 9. Require the DoFP to independently quantify the costs of all existing tax expenditures in a transparent and coherent manner and report them, in a disaggregated format annually on a public website. - Authority: Office of the President - Implementation Timeline: January 2024 - 10. Establish regulatory requirement to produce and publish a review of the effectiveness of incentives on a regular (at least every 2 year) basis, along with potential alternative approaches. - Authority: Ministry of Finance - Implementation Timeline: June 2024 - 11. Establish a Competition Agency with mandate to identify and require the elimination of illegitimate barriers to competition that serve to reduce growth and public revenue generation. - Authority: Ministry of Finance - Implementation Timeline: September 2024 ### Governance weaknesses and corruption vulnerabilities in revenue administration - Overview: - Sri Lankan revenue administration has a reputation of being highly prone to corruption and rent-seeking. - Three separate revenue collection departments of the Ministry of Finance (Inland Revenue, Customs, and Excise) operate within the government framework of the public service commission (PSC) and broadly operate separately with little interaction other than sharing import/export data by Customs with Inland Revenue. - Points of corruption vulnerability: - Vulnerabilities occur where revenue officials interact with the public and exercise discretion without adequate safeguards: assessing income or expenses, classifying goods and tax rates, or granting concessions. - Cumbersome procedures open to abuse and collusion between officials create incentives for taxpayers to offer and officials to solicit bribes. - Accountability and staffing issues: - There appears to be little, if any, accountability or consequence for corrupt actions; promotions are almost exclusively based on seniority with no regard to merit or integrity. - Revenue departments are predominantly closed institutions with little employment mobility, constrained by the civil service system overseen by the PSC. - IRD is unable to recruit specialist information technology staff and data analysts needed for modernization. - Leadership instability: IRD Commissioners-General have typically had an average tenure of around one year. - Evidence on investigations and cases: - With more than 2,000 staff in each of the Customs and IRD departments, no cases against corrupt tax officials have been made or reported in recent years. - The 2021 Customs Department report noted 11 preliminary disciplinary cases being investigated but not concluded and two formal cases similarly still under investigation. - CIABOC acknowledges revenue related cases are relatively rare. - Weaknesses in integrity promotion: - Little effort or resources devoted to promote integrity; Customs remuneration is augmented by proceeds of seizures; IRD operates a complex incentive scheme that supplements base salaries for meeting revenue and other operational targets. - Promotion driven by seniority and academic requirements, with merit or performance having little relevance; corruption allegations are rarely referred to the PSC for resolution. - The IRD developed a comprehensive Code of Ethics and Conduct in 2005 that has not been operationalised. - Suggested departmental integrity measures: - Launch internal campaigns emphasising strict staff integrity expectations and zero tolerance to corrupt behaviour, led from the top. - Simplify and update departmental codes of conduct; require integrity/ethics training every two to three years and an annual affirmation of compliance. - Establish small Internal Affairs units in each department reporting to the department head to investigate allegations of corruption for referral to the PSC and/or CIABOC. - Promote external stakeholder messaging to discourage offering or responding to bribe requests and provide secure and confidential reporting mechanisms. - Transparently provide details of anti-corruption measures, detected cases, and post-investigation outcomes via annual reporting and websites. ### Digitization, business processes, and operational vulnerabilities - Digitization benefits and gaps: - Effective digitization can reduce corruption vulnerabilities; ASYCUDA-supported import clearance processes have increased electronic entries and payments and use risk management for inspection selection. - Excise operations remain entirely based on antiquated and vulnerable manual processes. - RAMIS (Revenue Administration Management Information System): - Since 2014, IRD has been developing RAMIS; plagued by delays and problems, but FAD experts in March 2023 assessed it as providing a solid future foundation once pending functionality is delivered and a strategy executed to transfer operational responsibility from the foreign vendor to local capacity. - A review and streamlining of business processes that RAMIS was programmed to automate is urgently needed to reverse unintended consequences that resulted in more discretion and interaction between revenue officials and taxpayers and misutilization of scarce IRD resources. - Opportunities for stronger separation of duties were not instituted due to union objection (example: same audit officials interact with assigned taxpayers across multiple administrative functions that should be separated). - Transactional and refund processes: - Rent-seeking vulnerabilities are magnified by cumbersome tax return and refund assessment processes that entail unnecessary interactions between taxpayers and IRD officials who exercise too much discretion in the absence of CRM protocols. - Principles of self-assessment are undermined by time-consuming manual verification and cross-checking when tax returns are filed and refunds requested, leading to multiple exchanges and discretionary negotiations and delays. - Excessive transactional data must be submitted with tax returns (e.g., schedules of all purchase and sales invoices and import entries for VAT) and are subject to detailed manual cross-matching regardless of materiality. *IMF | Technical Report – Sri Lanka Governance Diagnostic Assessment | 87* ### 213. Improvements to online tax return filing can reduce human interaction between ### 1lkaea2023002 - 213. Improvements to online tax return filing can reduce human interaction between ### Online tax filing and user interface - Findings: - Tax returns can be electronically filed via an Internet portal and is mandated for corporate income tax and all large taxpayers. - Take-up by other taxpayer segments and tax types needs to accelerate to reduce human interaction in the filing process. - The current user interface for on-line filing onerously replicates complex tax return design features rather than being reengineered and simplified from the perspective of the majority of users. - Many individuals would only need to provide a handful of data points for their personal income tax return but must unnecessarily navigate the complexity of all possible elements of the paper-based tax return. - Implementation insight: - Streamlining the online filing experience would be a relatively quick and inexpensive undertaking according to the RAMIS vendor. - If instituted, simplification could justify a policy of mandating electronic tax return filing for all taxpayers with commensurately fewer interactions with IRD officials. ### Tax expenditures (exemptions, tax holidays, concessions) - Findings: - Tax expenditure management is fragmented, prone to misuse, with little, if any oversight. - IRD advises they are duly informed of exemptions approved by the MoF; MoF advises all exemptions are communicated to the IRD via the Board of Investment (BoI) and gazette publishing, suggesting there is no clarity or process for information. - IRD has no apparent system to record and track exemptions other than within individual taxpayer files. - As such there is currently no way to quantify exemptions, have consistent approaches, and ensure that they are permitted according to the parameters they were granted (e.g., expiry dates, what concessions apply to, who is entitled). - Revenue and corruption vulnerabilities exist for businesses with a mix of concessional and non-concessional operations. Some BoI approved firms may sell up to 20 percent of their production into the local market but subject to non-concessional tax treatment (VAT, CIT on portion of profits attributed to local sales). ### Data sharing, fiscal analysis, and tax policy formulation - Findings: - Effective fiscal analysis and tax policy formulation is undermined by unnecessary restrictions (unjustly determined by IRD) on the sharing of anonymised taxpayer data by IRD with the MoF Fiscal Policy Department. - Evidence-based monitoring of outcomes resulting from implementation of tax policy measures is macro-critical to ensure delivery of the revenue-driven fiscal adjustment commitments under the EFF. - The ability to fine-tune and adjust tax policies in response to changing economic circumstances is predicated on reliable and timely taxpayer data. - MoF oversight of IRD performance is essential to monitor revenue and compliance outcomes to identify causes of revenue leakage including from integrity vulnerabilities. - IRD should be fully engaged in fiscal forecasting. - Legal note: - Section 100 of the Inland Revenue Act 2017 mandates strict secrecy provisions in the administration of taxpayer data, but s. 100(b) empowers the Minister of Finance to grant these powers within the MoF in the supervision of the IRD that would be further safeguarded through the anonymization of any taxpayer-specific information for analytical purposes. - S100 excerpt: - “(...) every person having a duty under this Act or being employed in the administration of this Act, shall regard as secret and confidential all information and documents the person has received in an official capacity in relation to a specific taxpayer, and may disclose that information only to the following persons:- (a) the employees of the Department and of the Customs Department in the course, and for the purpose, of carrying out their duties; (b) the Minister in charge of the subject of Finance in the course, and for the purpose, of carrying out supervision of the Department (...)”. ### Inter-agency working relationship, accountability, and taxpayer engagement - Findings: - The working relationship between the Fiscal Policy Department and IRD has broken down and become dysfunctional; Inland Revenue has been reluctant to share vitally needed tax data with the MoF. - While primacy for formulation of tax policy rightly resides in the MoF, policy should benefit from input and views of revenue departments who implement policies and can explain administrative and compliance challenges. - Revenue forecasting should be developed with inputs from revenue departments to account for taxpayer compliance in the current economic climate. - Effective revenue administration requires the three revenue departments to cooperate and work together more collaboratively, including inter-departmental operations targeting serious non-compliance of taxpayers/traders that are clients across multiple departments. - As a line department of the Ministry of Finance, Inland Revenue should be accountable to and subject to robust government oversight; IRD operates autonomously and is subject to insufficient scrutiny for the revenues it collects (or doesn’t collect). - Revenue departments must act on findings of the Auditor-General, particularly recurring issues and recommendations repeated over multiple years. - Private sector proposals: creation of a Tax Ombudsperson, and development and implementation of a Taxpayer Charter. - IRD could consider commissioning an objectively undertaken baseline survey of taxpayer perceptions, including corruption, to be periodically repeated to gauge changing perspectives and build transparency and tax morale. ### Table 20 — Revenue Administration Recommendations (measures, authority, timeline) - Measure 1: Minimise interactions between taxpayers/traders and revenue officials to reduce discretionary opportunities and corruption vulnerabilities. - Actions: - Restrict revenue official interactions with taxpayers to narrowly defined and fully documented circumstances, and assign different officials to interact on different issues (e.g., filing-compliance, audit, collection, appeals, and interpretations/rulings); - Streamline and overhaul tax return assessment processes to accept returns as filed without extensive pre-assessment cross-checking and data matching, and limit auditor engagement to cases selected on a compliance risk management basis; - Simplify and mandate online tax return processing. - Authority: IRD Commissioner-General (accountable to Secretary to the Treasury) - Timeline: Sept 2024 - Measure 2: Institute short-term anti-corruption measures within each revenue department. - Actions: - Launch high-profile anti-corruption programs advocated by revenue department heads that emphasise zero-tolerance; - Update and operationalise staff Codes of Conduct (Ethics) with regular training and annual written confirmation of understanding/compliance by every staff member; - Establish Internal Affairs units in each revenue department to investigate staff corruption allegations transmitted via secure and confidential reporting channels with links to CIABOC; - Launch internal/external outreach programs with anti-corruption messaging. - Authority: IRD Commissioner-General; DG Director-General Customs; Director-General Excise - Timeline: December 2023 - Measure 3: Strengthen Revenue Department oversight and inputs to revenue forecasting and tax policy and strengthen revenue department oversight and transparency. - Actions: - Ensure Inland Revenue provides the MoF anonymised tax data for fiscal modelling; - Invite and include revenue department views and analysis for MoF revenue forecasting and for development of tax policy considerations and options; - Strengthen MoF Revenue Department supervision and Auditor-General oversight; - Improve information flow of approved tax concessions and develop a robust Inland Revenue monitoring/reporting capacity for tax expenditures; - Improve tax morale by creating a Tax Ombudsperson and a Taxpayer Charter. - Authority: IRD Commissioner-General (accountable to Secretary to the Treasury) - Timeline: March 2024 --- ### Central Bank (CBSL) — Legal framework, governance, and accountability (Sections VII A–C) - Legal framework and autonomy - Findings: - The Monetary Law Act (MLA) dated back to 1949; a Bill of amendments approved by Parliament in July 2023 resulted in the CBSL Act of 2023 (CBSL Act). - Shortcomings in the MLA included inadequate safeguards for autonomy (e.g., government voting representation on the Monetary Board and lack of eligibility criteria for decision-making members). - The CBSL Act strengthens the CBSL mandate with primacy given to price stability, the bank’s autonomy, governance framework, and accountability requirements. - Expected changes: - The Monetary Board will be renamed Governing Board and restructured. - Government’s voting representation at the Board will be removed. - Provisions prohibit members and employees from seeking and taking instructions from third parties. - Appointment and dismissal safeguards: - The double veto appointment procedure for non-executive Board members is retained and now extends to the appointment of the Governor: appointments are made by the President on the recommendation of the Minister and with the approval of the Constitutional Council. - Eligibility criteria for appointment enhanced to include relevant professional or academic experience. - Discretionary or subjective criteria for dismissal removed; removal process enhanced with a required hearing. - Remuneration safeguards: remuneration for members of decision-making bodies will not be reduced during their terms of office. - Financial autonomy risks and safeguards: - CBSL equity position has deteriorated partly due to exposure to the government through significant financing, depreciation of the domestic currency, and depletion of foreign reserves. - CBSL Act introduces prohibition on monetary financing, including purchases of government securities on the primary market. - An improved capital framework is proposed to include stronger recapitalization and profit distribution requirements. - Recommendation: In the medium-term, the CBSL Board should approve a plan to strengthen the central bank’s financial position to ensure its continued ability to fulfil its mandate. - Governance arrangement and oversight - Structural changes: - New Governing Board expected to retain a non-executive majority; Governor will be chairperson and the Board will have six non-executive members. - Board empowered to establish specialised boards and sub-committees (e.g., audit, risk management, ethics). - Governing Board should have collective expertise including finance, economics, risk management, financial reporting, legal, and information technology. - Board governance practices: - Secondary legal documents (board and committee charters) should be aligned to the CBSL Act, reflecting conflict-of-interest requirements and enforcement mechanisms. - Requirement for periodic self-assessment of the full Board and its committees is recommended. - Executive decision-making: - Collegial decision-making via dedicated committees (Corporate Management Committee; committees covering Financial System Stability, International Reserves, Information Technology Oversight, Non-Financing Risk Management, Training) is the practice and is enshrined in the amendments. - Governor to carry out day-to-day operations and implement policy decisions in consultation with Deputy Governors. - Clarified responsibilities: - The CBSL Act establishes a separate Monetary Policy Board tasked with formulating monetary policy. - The Governing Board’s oversight functions explicitly include: (i) approving the budget of the central bank; (ii) overseeing financial reporting; (iii) risk management; (iv) compliance; and (v) security and internal controls of the CBSL. - Remaining conflict-of-interest risks: - Debt Management office: domestic borrowings are executed from within the central bank under existing practice, creating perceived conflict of interest; amendments remove this function from the central bank but lack a concrete alternative to achieve transition. - Sri Lanka committed under the Memorandum of Economic and Financial Policies of the EFF to improve debt management by completing necessary legislative requirements and establish a public debt management agency by December 2023, and 2024, respectively. - Employee Provident Fund (EPF): Monetary Board carries governance and decision-making roles for EPF, creating potential conflict-of-interest and time-commitment risks when EPF invests in equity of banks or other supervised financial institutions. - Accountability and transparency - External audit and reporting: - External audits are assigned to the Auditor-General and subcontracted to international audit firms; audits are conducted in accordance with International Standards on Auditing (ISA) with unmodified (clean) audit opinions. - Financial statements are prepared under International Financial Reporting Standards (IFRS) and audited financial statements are published on the CBSL’s website. - Internal accountability: - Internal audit is independent and follows a risk-based approach under international professional standards. - Risk management has progressed with World Bank technical assistance and implementing elements of the risk management process, including establishing a policy with governance structures and systems. - Both internal audit and risk management functions need to continue evolving to ensure adequate capacity and expanded coverage of financial risk management. *IMF | Technical Report – Sri Lanka Governance Diagnostic Assessment* ### 229. The AAC conducts audit and control oversight. The committee comprises one member of ### 1lkaea2023002 - 229. The AAC conducts audit and control oversight. The committee comprises one member of ### AAC audit and control oversight - The AAC conducts audit and control oversight. - The committee comprises one member of the Board and two external experts. - Currently, the two experts have audit and accounting background: - one is a former member of an IFAC committee - the second is the Director General of Sri Lanka’s audit oversight body. - The AAC meets very frequently and is active in the oversight of internal and external audits, as well as financial reporting. - The AAC publishes an activity report in the CBSL’s annual report on the discharge of its function. ### Proposed recommendations (Table 21 excerpt) - Measure: Following a broad consultative process, produce a Cabinet policy paper on options for establishing new management arrangements for the Employee Provident Fund that terminates direct CBSL management. - Authority: Ministry of Finance - Implementation Timeline: June 2024. ### Major changes to the Central Bank Law (from a governance perspective) — summarized points from Box 7 - Removal of government representative from the Board to reduce risk of government influence; prohibition on influencing members or employees from performing their powers, functions or duties. - Strengthened appointment process for the Governor: recommendation by the Minister, approval by the Constitutional Council, and appointment by the President; applies also to non-executive Board members. - Introduction of eligibility criteria and increase in the number of non-executive Board members: - Eligibility criteria include accounting and auditing, law or risk management. - Disqualification criteria include where the person is a member of Parliament, is a public officer or judicial officer or official of a political party. - Number of non-executive Board members increased from three to six to ensure sufficient oversight. - Board given explicit oversight powers over administration and management, including financial reporting, risk management, compliance, IT, security and internal control systems. - Prohibition of monetary financing and phasing out of non-core activities (subject to transitional provisions) to protect financial autonomy and avoid conflicts with the CBSL’s mandate. - Removal of debt management function: responsibility for management of the public debt by the CBSL as agent of the government will be transferred to a public debt management agency or office. - Collegial decision-making in executive management: Governor required to carry out duties in consultation with the Deputy Governors. ### Financial Sector Oversight — overview and governance weaknesses (Section VIII) - Purpose: Analysis of key governance weaknesses in financial sector oversight (FSO) that can constrain supervision of banks and non-bank financial institutions and be associated with corruption. - Framework: Governance framework for FSO drawn from the Basel Core Principles for Effective Banking Supervision (the BCPs). - Focus: Governance weaknesses with potential to be associated with corruption, and forward-looking assessment to monitor whether new practices change behavior. ### Key findings on FSO constraints and sector structure - Constraints on CBSL independence: - Certain supervisory decisions require approval or concurrence of the Ministry of Finance, which may impair the independence of the CBSL. - The Finance Business Act No 42 of 2011 allows the Minister to issue general or special directions to the CBSL Monetary Board, which further impairs CBSL powers and independence. - Supervisory capacity issues: - Banking and non-bank supervision remains not fully effective due to insufficient human resources in both number and capacity. - State ownership and influence: - Specific risks and vulnerabilities for banks and Non-Bank Financial Institutions with Government direct or indirect ownership require more attention; such institutions are typically subject to political influence over their operations, potentially increasing vulnerabilities to corruption. - Sharp rise of NPLs observed in state-owned banks’ portfolios mostly due to loans granted to connected or related parties, and SOE lending has not always been classified as NPLs despite non-performance. - Sector composition and statistics: - The Sri Lankan banking sector accounts for 72% of the total financial sector assets. - The banking sector comprises 24 Licensed Commercial Banks (LCBs) and 6 Licensed Specialised Banks (LSBs). - Two largest commercial banks are state-owned and represent 36.1% of the assets of the banking sector and are considered Domestic Systemically Important Banks (DSIBs). - The largest privately-owned commercial bank represents 12.5% of the assets of the banking sector and has almost 19% of state-related ownership. - The second largest privately-owned bank represents 9% of the assets of the banking sector and has almost 26% of state-related ownership. - Non-Bank Financial Institutions (NBFI) comprised 36 Licensed Finance Companies (LFCs) and one Specialised Leasing Company (SLC). - NBFIs represent 5.2% of the total assets of the financial sector, with finance leases representing 41.6% of the total loans and advances. - Market entry and consolidation: - Except for the license of Bank of China in 2017, no new licence has been granted in the last ten years. - Since 2020, following a Masterplan for LFCs/SLCs to build a resilient sector of 25 LFCs, the Department of Supervision of Non-Bank Financial Institution (DSNBFI) has cancelled several LFC licences or encouraged amalgamations. ### Governance-related prudential framework and supervisory recommendations - Need to further align prudential framework to international standards and best practices. - Strengthen regulatory framework for banks’ corporate governance and enhance supervisory oversight by: - Developing a comprehensive supervisory methodology. - Addressing capacity constraints. - Strengthening regulatory and supervisory frameworks on banks’ transactions with related parties. - Strengthening fit and proper assessment of banks’ board members and senior management. - Note on recent legal changes: - The adoption, in September 2023, of the CBSL has introduced significant improvements in governance arrangements; analysis of governance weaknesses and corruption vulnerabilities should be revisited to determine whether implementation changed behavior. ### Risks specific to state-owned and state-influenced institutions - Large share of the financial sector is under public ownership; EPF, ETF, and state-owned Sri Lanka Insurance Corporation portfolios exert indirect influence. - State-owned banks may be exposed to political influence despite being subject in principle to the same laws and regulations as other commercial banks; some statutory provisions may suggest otherwise. - Disclosure and nomination transparency concerns: - Annual reports of banks with state-related ownership do not provide much information on the role of state-related shareholders in nomination of directors. - Banking expertise and experience of SOB Boards and executive management varies widely. - Recommended supervisory focus for public banks (drawing on IMF paper “Regulating, Supervising, and Handling Distress in Public Banks”): - Ensure no supervisory forbearance. - Identify and address specific risks and challenges from state ownership in a timely manner. - Ensure effective implementation of good corporate governance framework and practices, including board composition, nomination and appointment processes for directors and senior managers, fit and proper assessments of directors and key management personnel (KMP), and assessment of individual and collective board performance. - Regulatory framework applying to public banks should be no less stringent than that applying to private banks. - Ownership arrangements should be designed to avoid conflict of interest. ### Governance of supervisory agency and legal framework issues - Revision of the Banking Act 1988 is necessary to address constraints in effective oversight. - Historical legal context: - Under the past Monetary Law Act No 58 of 1949, the CBSL was empowered to conduct continuous and periodical examination of banks and required the Monetary Board to establish and maintain a Department of Bank Supervision. - The Banking Act No 30 of 1988 empowers the Monetary Board with licensing of banks and issuance of regulatory and prudential regulations, but sets that banking licences are issued by the Monetary Board with the approval of the Ministry of Finance. - Potential impairments to independence: - Government representation on the Monetary Board and requirement for Ministerial approval of banking licences may impair Central Bank independence. - Finance Business Act No 42 of 2011 gives full discretion to the Monetary Board over Licensed Finance Companies but contains provisions that may also impair the power of the Monetary Board. *IMF | Technical Report – Sri Lanka Governance Diagnostic Assessment | excerpt from the source content provided* ### 240. There is a need to further foster the independence of the central bank as the supervisory ### There is a need to further foster the independence of the central bank as the supervisory authority ### Legal and institutional independence: pending amendments and specific proposals - The amendments to the 1988 Banking Act are still pending fundamental revision, although the Government has indicated its intention to introduce amendments in early 2024. - It is important that the Government’s voting representation be removed from the Monetary Board and a prohibition imposed on all members of decision-making bodies and CBSL employees from seeking and taking instructions from third parties. - Recommendation from the text: remove from the Banking Act the provision regarding the approval or concurrence from MoF for licensing or transfer of ownership of banks, and remove from the Finance Business Act the possibility for the MoF to give general or special directions to the CBSL as a supervisory authority. - The authorities indicated that cabinet approval was received in principle for the areas proposed to be amended in June 2023 and amendments to the Banking Act are expected to be implemented in January 2024. - The Monetary Law Act has been revised many times (the 8th revision took place in 2014) and section 33 authorises the central bank to “establish and maintain such other departments as it may consider necessary for the proper and efficient conduct of the business of the Central Bank”. ### Harmonisation of regulatory and supervisory requirements - The fundamental revision of the Banking Act should be an occasion to harmonise the regulatory and supervisory requirements for banks and non-bank deposit-taking financial institutions. - Current situation: different sets of regulations for each type of financial institution (commercial banks, specialised banks, LFCs), requiring CBSL to issue different sets of directions and circulars. - Recommendation: subject banks and LFCs conducting similar operations to similar regulatory and supervisory requirements to avoid regulatory arbitrage and ensure an adequate level-playing field. - Apply proportionality: larger and more sophisticated financial institutions should be subject to tighter regulatory and supervisory requirements; non-bank deposit taking can have proportional rules commensurate with simpler business models, smaller size, and the size, complexity, risk profile and business model of each institution. ### Evolution toward Risk-Based Supervision (RBS) and supervisory tools - CBSL has been evolving towards a more risk-based supervision approach of banks. - Following implementation of Pillars 2 and 3 of the Basel frameworks, the CBSL decided to implement a Supervisory Review Process (SRP) to assess each year the capital adequacy of the banks through the review of the Internal Capital Adequacy Assessment Process (ICAAP) that each bank needs to produce on an annual basis. - BSD has developed an Operation Manual, to be updated annually, covering roles and responsibilities of BSD divisions, including Continuous Supervision Division (Off-site) and Examination Division (On-site). - Off-site surveillance uses CAMEL-based risk profile indicators and each bank has a focus point within the CSD to review prudential returns. - Examination Division uses the BSRI (Bank Sustainability Rating Index), an in-house risk assessment tool combining quantitative and qualitative indicators, to assign supervisory ratings and determine scope and frequency of on-site examinations and to establish an Annual Examination Plan. - Current limitation: CBSL supervision remains largely compliance-based; Continuous Supervision Division role appears limited to compiling ratios and indicators rather than substantive qualitative review. - Further move toward RBS would require more qualitative analysis of corporate governance and risk management practices, starting with thorough review of banks’ detailed annual reports. ### BSD organisation, capacity constraints, and use of third parties - BSD organisation: a Hybrid model where most staff are allocated to Continuous Supervision and Examination divisions; five Deputy Directors have dual responsibility for division management and supervision of on-site teams. This hybrid complexity may hamper effective RBS. - Alternative considered: group banks into clusters with similar risk profiles (DSIBs, State-Owned, medium private, small private, Islamic, foreign, etc.) to improve effectiveness given staff shortages. - Resource constraints and exact staffing figures: - The Banking Supervision Department has only 48 staff compared to a budget of 80. - Among the 41 who are supervisors, 15 have less than 3 years of experience and 11 less than five years. - The DSNBFI has more resources (58) but of the 46 supervisors, 15 have less than three years of experience and 7 less than 5 years. - In a context of strict budget constraints, CBSL reports no possibility to increase staff allocated to supervisory function nor to transfer staff from other departments; CBSL is envisaging contracting staff from accounting firms to some supervisory functions. - International standard note: Third-party use is permissible under BCP 9 EC 11 provided there is a clear and detailed mandate and the supervisor does not outsource prudential responsibilities; the supervisor should assess whether third-party outputs can be relied upon and consider biases. ### Transparency, accountability, and public communication - CBSL needs to further improve public accountability and transparency of its supervisory mandate; accountability is essential for transparency, legitimacy and independence and can help prevent corruption and abuse. - CBSL published its 2021 Road Map (on its 70th anniversary) presenting initiatives: strengthening the financial sector through non-banking sector consolidation, reducing dependence on state-owned banks, encouraging SOBEs to diversify borrowing sources, stop funding certain losses in SOBEs by state banks, maintain adequate capital and liquidity buffers, and improve operational risk resilience. - CBSL website provides information on regulatory and supervisory framework, organisation, and news on appointments and promotions; recommendation to reinforce positive steps with additional details and clearer materials on steps to enhance transparency. ### Banks’ licensing, corporate governance and related parties - Licensing: - Sri Lanka has a formal structure for licensing banks and NBFIs; licensing process broadly in line with generally accepted practices. - No bank licensed for almost 10 years except Bank of China in 2017. - BSD responsible for due diligences during the licensing process for commercial banks (LCBs) and specialised banks (LSBs) with approval of the Monetary Board and the Minister; NBFI Department responsible for due diligences for finance companies. - Corporate governance: proposed revisions to the Banking Act should strengthen governance-related prudential framework by introducing provisions such as: - (i) the duty for the board is to oversee the governance framework and the management of the bank; - (ii) the board is ultimately responsible for ensuring that the business of the bank is carried on in compliance with all applicable laws and consistent with safe and sound banking practices; - (iii) the appointment, election or nomination of a director of a bank should not take place without the prior written approval of the CBSL; - (iv) the number of members of the board of a bank could be determined by the Monetary Board notwithstanding to the contrary in any other written law; - (v) the independent directors shall be not less than one third of the board; - (vi) the chairperson shall be a non-executive director and may be an independent director. - CBSL should review the corporate governance framework to ensure alignment with the Basel Principles for effective corporate governance for banks issued in 2015, with focus on board qualification, composition and selection, risk governance and culture, independence of directors, and implementation of the three lines of control model. - Current regulatory instruments: - Corporate Governance Directions No 11 of 2007 (LCBs) and No 12 of 2007 (LSBs) were issued under Section 46 of the Banking Act 1988; these directions cover responsibilities, composition and committees of the board, fit and proper criteria, and disclosures, but do not include many 2015 Basel Committee principles (e.g., three lines of defence and independence of control functions). - Direction No 5 of 31 December 2021 under the Finance Business Act No 42 of 2011 for NBFI incorporates more of the 2015 Basel principles. - Harmonisation recommendation: corporate governance arrangements should be similar across LCBs, LSBs, and NBFIs; CBSL should consider harmonizing provisions and apply proportionality so arrangements are commensurate with size, complexity, and risk profile. - Specific governance observation: boards in Sri Lanka should not have less than 7 and more than 13 directors; as a result, largest state-banks may have in theory 7 directors while smallest banks sometimes have 13; directors are spread into many committees which may question their capacity to allocate enough time to responsibilities. *IMF | Technical Report – Sri Lanka Governance Diagnostic Assessment* ### 252. The CBSL should monitor the process of appointment of directors and ensure that banks ### 252–261: The CBSL should monitor the process of appointment of directors and ensure that banks... ### Succession planning and board appointments - The CBSL should monitor the process of appointment of directors and ensure that banks and other financial institutions have succession planning for both directors and management, including the heads of the control functions. - Except for unavoidable circumstances, since the end of the mandates of members of the board and key management personnel is known well in advance, the CBSL should ensure that due diligences are completed in due time by banks and other financial institutions and there is no vacancy in the boards. - Observation: At the time of the Governance Diagnostic Assessment, some of the largest state-owned financial institutions had only 2 or 3 directors for months, due to the delay in submitting names and proper documental by the banks for fit and proper assessment by the CBSL, with board seats of the banks left unattended for extended periods of time. ### Corporate governance guidance and supervisory role - The 2015 BCBS principle requires supervisors to provide guidance to financial institutions to ensure robust corporate governance policies and practices. - The CBSL should, in addition to the Corporate Governance directions, issue guidelines clarifying notions to be considered at nomination and when assessing individual and collective suitability and performance of directors. - Guidance areas identified: - time commitment; - adequate individual and collective knowledge; - diversity in skills and experience; - notions such as honesty, integrity, and independence of mind. - Good practice example observed: one bank decided that major shareholders will not nominate directors; instead directors would be proposed to the Annual General Meeting by a Nomination Committee responsible for ensuring criteria (diversity in skills, knowledge, time commitment, etc.) are satisfied. ### Fitness and propriety assessments and enhancing substantive review - The fitness and propriety process used by the CBSL to review affidavits appears relatively formal and should focus on qualitative reviews based on a risk-based analysis. - Legal and regulatory references: - Section 12 (1B) of the Banking Act 1988: Monetary Board must determine whether an individual or the directors of a corporate body acquiring a material interest are fit and proper persons considering criteria set out in Section 42 of the Banking Act. - Sections 42, 43 and 44(A) of the Banking Act 1988 require assessment of suitability of board members and senior management, on a new and ongoing basis. - Section 3(3) of the Banking Act Direction No 11 and 12 of 2007 on Corporate Governance for LCBs and LSBs and Banking Act Direction No 8 of 2019 provide instructions for fitness and propriety assessment of directors, CEOs and KMPs. - Finding: The assessment takes the form of review of an affidavit that appears more formal than substantial. - Recommendation: Strengthen the fit and proper framework to be more aligned with international standards and to include assessment of potential conflicts of interest (personal, professional, financial, and political). - Note: Authorities indicated that many qualitative factors are considered in assessing fitness and propriety and additional checks are carried out referring to other relevant regulators on an annual basis or when needed, but no evidence was provided to the mission. ### Corporate governance disclosure and supervisory assessment methodology - Current disclosure requirement: Section 3(1) xvi of Directions No 11 of 2007 for LCBs and No 12 of 2007 for LSBs require the board to publish in the bank annual report a corporate governance report setting out compliance with the Corporate Governance Directions. - Finding: Banks publish lengthy, detailed compliance-oriented disclosures that emphasize board composition, board committees, biographies and activities of directors and senior management, which makes it relatively difficult to find essential information (for example, on shareholders). - Recommendation: The CBSL should adopt a more risk-based approach to corporate governance information published in the annual report with more emphasis on qualitative aspects, such as the board assessment of its collective and individual contribution to oversight of the bank, its management, and its risks. - Supervisory methodology recommendation: - Provide supervisors a methodology to conduct comprehensive assessments of corporate governance framework and practices, following the structure of the Basel Principles 2015. - Develop specific guidance for each topic describing objectives, issues supervisors may encounter, and provide detailed assessment templates with potential observations/conclusions. - Assessments should be performed during on-site examinations and from an off-site perspective through appropriate questionnaires and returns. - Build capacity so supervisors develop expertise to conduct comprehensive governance assessments. ### Related-party transactions and beneficial ownership - Finding: The regulatory framework and supervisory oversight of banks’ related-party policies and practices should be enhanced to prevent abuses. - Current practice: Related party credit exposures must be reported by banks and other financial institutions on a quarterly basis (amount, rate of interest and securities values) and are examined by the CBSL during on-site examinations. - Recommendation: The CBSL should add to its prudential framework limits on related party exposures. - Draft Banking Act amendments: Some provisions of the draft amendments to the Banking Act 1988 could reinforce the framework on related party transactions; preliminary reading suggests the provisions on ‘related party’ are expected to be strengthened, with a broadening of the coverage of ‘related party transactions’. - Existing Sri Lanka definition of related party (as cited): - “any person that maintains any of the following relationships with respect to a bank; director or key management personnel; a substantial shareholder; a subsidiary, affiliate, holding company, parent company, and any party (including their subsidiaries and affiliates) that the licensed bank exerts control over or that exerts control over the licensed bank; director or key management personnel of a related party; a close relative of a natural person described above; a concern in which a shareholder, director or any of their close relations has material interest.” - Further strengthening recommended to align with international standards by adding: - the concept of arm’s length; - governance requirements such as: - transactions with related parties made on same terms and conditions as comparable non-related counterparties; - transactions only completed with formal board approval; - periodic reporting to the board for monitoring; - board oversight of related-party transactions. - Particular supervisory attention: loans granted by state-owned banks where a sharp rise of NPLs has been observed, mostly due to loans granted to connected or related parties. - Beneficial ownership: - There is no definition of the beneficial owner in the Banking Act 1988. - The identification of ultimate beneficial owners of banks is important from a related party perspective. - Guidelines 04/2018 from the Financial Intelligence Unit provide guidance to financial institutions on rationale and need to identify the beneficial owner. - Recommendation: Incorporate those Guidelines 04/2018 into the supervision manual of the BSD and DSNBFI so examiners can ensure financial institutions incorporate beneficial ownership identification in the scope of their examinations. ### Key recommendations excerpted from the report (Measures 1–4) - Measure 1: Enhance the governance of the CBSL in its role as banking supervisor. - Strengthen the independence of the CBSL by: - remove the Government voting representative from the Monetary Board (amendments to the Monetary Act); - eliminate from the Banking Act the provisions regarding approval or concurrence from the MoFMOF for licensing or transfer of ownership of banks, and the authority for the MoFMOF to give general or special directions to the CBSL as a supervisory authority; - remove from the Finance Business Act the provisions providing the MoFMOF with authority to give general or special directions to the CBSL as a supervisory authority. - Adequately staff supervision departments for banks and NBFI in terms of numbers and capacity to implement a risk-based approach and undertake comprehensive assessments of banks’ corporate governance and related parties with more qualitative analysis. - Align the regulatory framework for banks and NBFI. - Initiate consolidated/conglomerate supervision by the CBSL. - Implementation timeline: Short-term; Medium-term for consolidated supervision. - Measure 2: Continue strengthening governance-related prudential regulatory and supervisory frameworks by aligning closer with international standards. - Align corporate governance framework for financial institutions with the Basel Principles for Corporate Governance for banks 2015 (board qualification and composition, risk governance and culture, independence of directors, three lines of control). - Harmonize prudential and regulatory requirements across categories of financial institutions and apply proportionality. - Increase on-site inspections targeted on bank and NBFI governance and off-site reviews of designed returns. - Strengthen CBSL capacity and supervisory methodologies to conduct comprehensive assessments. - Strengthen fitness and propriety framework for suitability assessment of board members and senior management. - Implementation timeline: Short-term and Medium-term. - Measure 3: Further enhance corporate governance framework and practices for banks and NBFI. - Make nomination process for senior management and board members of public banks transparent. - Ensure directors and senior managers are accountable for failures to undertake duties effectively. - Prevent government officials from intervening in day-to-day operational decisions. - Give supervisors clear authority to evaluate corporate governance in public banks. - Strengthen board qualification criteria and modernize supervisory fit and proper assessment regime. - Ensure appointments and dismissals are well-established and merit based; ensure boards are accountable for strategy, financial soundness, and key personnel decisions. - Implementation timeline: Short-term and Medium-term. - Measure 4: Strengthen regulatory framework and supervisory oversight of transactions with related parties to ensure: - definitions of ‘related parties’ and ‘related party transactions’ are in line with Basel standards; - transactions are made on an arm’s length basis; - transactions are only completed with formal board approval; - transactions are monitored with periodic reporting to the board; - boards provide regular oversight of these transactions. - Implementation timeline: Short-term. *IMF | Technical Report – Sri Lanka Governance Diagnostic Assessment | Sections 252–261* ### 265. The Constitution does not explicitly express the separation of powers and guarantee of ### 1lkaea2023002 - 265. The Constitution does not explicitly express the separation of powers and guarantee of ### Separation of powers and judicial independence - The Constitution does not explicitly express the separation of powers and guarantee of judicial independence. - A UN Special Rapporteur assessment on the independence of judges was conducted in 2017 and found that some aspects of safeguarding judicial independence could be enhanced and there has been pressure applied on the judiciary by the Executive during certain periods. - Constitutional amendments and reversals affecting institutional independence: - 18th amendment (2010) removed a number of established legal constraints on the exercise of political power and reduced the independence of key institutions, including the judiciary. - 19th amendment restored many provisions of the 17th amendment, enabling the Constitutional Council to set up independent commissions. - 20th amendment (2020) eroded constitutional constraints with appointments through executive and unchecked power. - 22nd amendment (2022) reinstituted the Constitutional Council. ### Stability of the legal framework - Findings on legal certainty and legislative practice: - Frequent changing and amending of the constitution calls into question legal certainty and the rule of law. - Movement of decision-making into poorly regulated and opaque processes has paralleled steps that reduce legal certainty. - Sri Lanka’s operative legal framework is subject to substantial amendment, often introduced in an ad-hoc manner with scarce public consultation, risking fragmentation and inconsistencies in the law. - Key legislation is subjected to multiple revisions, often indicating a lack of planning and sufficient review and consultation. - Secondary legislation and regulations are issued in a disorganised manner, often without proper consideration of harmonisation with existing legislation. - Legislative activity data (as of end-March 2023 and 2022): - As of the end-March 2023: - 54 amendments or new Acts being processed - 38 policy approvals received - 4 amendments/Bills at Parliament being Gazetted - 2 pending at Cabinet - In 2022: - 29 new or amendments, rules and orders - Recommendation implied: - Increased meaningful stakeholder participation in formulation of policy and legislation could mitigate the need for subsequent amendments and revisions. ### Functioning of the judiciary — structure and staffing - Court system composition and staffing (as of 31st of December 2022 unless otherwise stated): - Supreme Court - Court of Appeal - High Courts (such as the Commercial High Court) - Municipal Courts - Primary Courts - 203 Courts of first instance (33 District Courts, 54 magistrates’ courts, 52 DC/MCs, 25 Circuit Magistrate courts and 39 Labor Tribunals) - Court of Appeal and 22 civil appellate high courts, 34 high courts and 2 special high courts totaling 59 courts - 54 judicial districts - Judges: - 241 judges of first instance - 111 appeal court judges - 17 Supreme Court judges - 29 Presidents of Labor tribunals - Commercial court particulars: - A Commercial High Court established; a Small Claims court had not been established as of March 2023. - Commercial High Court handles Intellectual Property issues, commercial and company matters with a value over 50mLKA and arbitration. - Only 3 research assistants for all 4 courts/judges (1 roll court and 3 trial) in the Commercial High Court. ### Case backlog and inflow/outflow statistics - General: - Backlog is the most pressing issue; immense backlog restricts clearing of current cases and contributes to added backlog. - The Minister of Justice stated in 2020 there were 800,000 pending cases, which would take 15 years to clear at the current rate of resolution. - At the District Court of Colombo: - 45,000 pending cases involving recovery of money from broken contracts - On average, 10,000 such cases are registered each year - Currently 10 judges handling each 2000 cases, at any given time - Table 23 — Inflow and Outflow of cases (Municipal and District Courts) (figures) - Civil cases: - Brought forward (as at 01.01.2022): 222,352 - Inflow as at 30.09.2022: 49,252 - Outflow as at 30.09.2022: 43,998 - Pending as at 30.09.2022: 227,606 - Land cases: - Brought forward (as at 01.01.2022): 33,937 - Inflow as at 30.09.2022: 3,580 - Outflow as at 30.09.2022: 2,915 - Pending as at 30.09.2022: 34,602 - Criminal cases: - Brought forward (as at 01.01.2022): 770,943 - Inflow as at 30.09.2022: 520,104 - Outflow as at 30.09.2022: 512,220 - Pending as at 30.09.2022: 778,827 - Tax Cases: - Brought forward (as at 01.01.2022): 1,906 - Inflow as at 30.09.2022: 0 - Outflow as at 30.09.2022: 106 - Pending as at 30.09.2022: 1800 - Commercial court inflow/outflow (Commercial court figures) - Commercial Cases: - Brought forward (as of 01.01.2022): 7,723 - Inflow as of 30.09.2022: 6,292 - Outflow as of 30.09.2022: 5,786 - Pending as at 30.09.2022: 8,229 - Source: Ministry of Justice, March 2023 ### Court-level commercial case details (Commercial High Court as of March 31, 2023) - Table 24 — Commercial High Court Case Numbers - Court no. at Commercial High Court — Pending trials — Calling Matters - 1 — 159 — 283 - 2 — 341 — 733 - 3 — 439 — 441 - 4 — 12 — 6057 (mainly arbitration) - Source: High Commercial Court of Colombo (during Governance Diagnostic mission March 2023) - Table 25 — Number of cases at 2 of the 4 courts in the High Commercial Court by breakdown of case category - Court 1 — Trial cases / Calling cases - Money recovery: 141 / 182 - IP: 6 / 24 - Company matters: 8 / 41 - REM (shipping): 4 / 36 - Arbitration: 0 / 0 - Total: 159 / 283 - Court 2 — Trial cases / Calling cases - Money recovery: 304 / 604 - IP: 15 / 39 - Company matters: 22 / 78 - REM (shipping): 0 / 5 - Arbitration: 0 / 3 - Total: 341 / 733 - Source: High Commercial Court of Colombo (during Governance Diagnostic mission March 2023) ### Court processing delays, administration, and case management weaknesses - Workload and staffing ratios: - MoJ cites approximately 15 judges per million population. - For comparison: India has around twenty-one judges per million population. - Workload: - District judges: around 2000 cases per year - Magistrates: over 5000 cases per year - Administrative duties consume judges’ time; judges of first instance court approval responsibilities could be outsourced to registrars and administrators. - Registrars functioning as Deputy Fiscals delay enforcement; example: only 10 Registrars/Deputy Fiscals in Colombo. - Impact on enforcement and language staffing: - Enforcement often delayed due to long travel distances for registrars and defendants not resident in Colombo. - Much commercial litigation needs to be conducted in English; staffing competent in English is limited. - Case processing: - Average time to enforce a contract: 6-7 years. - A 2014 BASL survey highlighted court delays, procedure, and corruption as “extremely serious”. - Pre-trial conferencing introduced (2017 amendment) but not sufficiently or comprehensively administered; lacks strict timetables and sufficient stakeholder sensitization. - Arbitration provisions exist in High Commercial Court, but arbitration is being conducted almost in the same manner as court cases and thus is not relieving pressure as intended. - Adjournments and timeline adherence: - Case Management practices are generally weak and standards are not respected. - Adjournments are common and not well regulated, causing at least 3-month postponements that add to backlog. - Pre-trial procedures (targets cited elsewhere): - Small Claims Court timing: time from defendant coming to court to conclusion should not exceed 18 months. - Pre-trial procedure of 2017 targets: 3 weeks to fix pre-trial, 2 months for the pre-trial and 4 months to finish the pre-trial. ### Identified remedies and policy recommendations - Backlog reduction: - Establish a special court dedicated to clearing backlog, targeting cases prior to a predetermined date handled by a separate process. - Heavy utilization of Alternative Dispute Resolution (ADR) mechanisms such as mediation, conciliation and arbitration for backlog cases. - ADR and specialized panels: - Use ADR more systematically in contract and money recovery cases; estimate that 70 percent of cases exclusively involve interest payments and mode of calculation and could be resolved through ADR. - Mandate simple money recovery cases to first be referred to a panel (for example, a panel of accountants and banking professionals) before proceeding to courts; would require amendment to the civil procedure code. - Judicial administration and staffing: - Outsource administrative tasks from judges to registrars and court administrators so judges focus on adjudication. - Increase number of Registrars/Deputy Fiscals and court administrative staff to improve enforcement efficiency. - Enhance staffing in the Commercial High Court, including research assistants and English-competent personnel. - Process reforms: - Establish civil pre-trial court houses and consider an investor dispute high court as a specialist division of the Commercial High Court. - Amend pre-trial conferencing 2017 procedure to include requirements for strict timetables and determination of number of witnesses. - Issue a judicial circular specifying guidelines for adjournments and consider mechanisms to impose costs for adjournment to disincentivise unjustified requests. - Comprehensive review and revision of court processes to incentivise early settlement and reduce trial time, and to enhance availability and effectiveness of ADR mechanisms. *IMF | Technical Report – Sri Lanka Governance Diagnostic Assessment | excerpt from chapter section covering constitutional separation of powers, legal framework stability, and functioning of the judiciary (case backlog, court processes, and recommendations).* ### 282. Additional amendments to the civil procedure code such as introduction of summary ### 282. Additional amendments to the civil procedure code such as introduction of summary ### Summary trial, interim payments, and ADR to clear case backlog - Additional amendments to the civil procedure code such as introduction of summary trial, and provisions for interim payments on court orders would speed up the clearance of cases and incentivise parties to settle. - The MoJ has been encouraged to establish a minimum value for arbitration cases at the High Commercial Court to reduce the number of cases involving small values. - Systematic use of ADR mechanisms (in particular mediation and conciliation) could greatly contribute to reducing the pressure on the court system and clearing the backlog of older cases. - ADR is currently used as a separate procedural process, but it could also be incorporated formally into court procedure to facilitate early settlement and reduce cost of litigation. - Introduction of an overarching legislative framework for encouraging and formally incentivizing use of multitude ADR mechanisms would be important to improve speed of settlement by resolving some cases and freeing up resources in the courts. ### The Judicial Service Commission (JSC) and professionalization - The JSC is largely responsible for professionalization of the sector but its capacity is limited. - JSC responsibilities: appointment of judges of first instance (i.e., magistrates, districts), promotion, transfer and disciplinary control; makes recommendations to the President on nomination of judges to the High Court. - Staffing and governance constraints: - The JSC is staffed by three justices, all from the Supreme Court, and one secretary, vesting extraordinary responsibilities and discretion on a very limited number of people. - There is no system to evaluate the performance of judges of first instance courts or documented criteria to support promotions, transfers and career progression. - The absence of clear and transparent procedures for selection and appointment of senior judges encourages resort to non-transparent methods in the appointment process. - Disciplinary and conduct issues: - The JSC has the power of investigation and currently has 2 indictments pending against High Court judges, 13 pending for District Judges and magistrates (with a further 8 concluded but not yet tabled) and 50 pending against court staff. - There is no code of conduct to establish clear standards and expectation of appropriate behaviour. - There is no separate law or constitutional provision on the sanctioning and dismissal of judges. - Regulation gaps among legal professionals: - The Bar Association does not have a disciplinary function and does not actively engage in overseeing and regulating the behaviour of legal professionals. - The JSC is not able to pro-actively monitor and oversee the performance of Deputy Fiscal Registrars in executing court orders given resource constraints. - Recommendation: The JSC and the Bar Association should ensure existence and observance of criteria for hiring, promotion and dismissal of judicial officers, including the disbarment of attorneys found to have violated professional codes of conduct. Their independence should be guaranteed so that they may regulate the sector effectively. ### Inadequate statistical collection and data limitations - The JSC is largely unable to collect and analyse data on the performance of the sector or on individual performance due to capacity and lack of established systems, protocols, and reporting. - Limited publicly available and verifiable court statistics: - Some data is collected quarterly by the MoJ from various courts (such as case load, case type at a high level) and used to prepare progress and performance reports tabled in Parliament, but the data collected is sparse and of limited analytical use. - There is currently no breakdown of data by category of types of cases and hard data on clearance rates, case turnover ratio and other valuable data to allow for identification of causes for delays in commercial cases. - Each court maintains a record of court order executions, but there is no centralised database where all the information can be collated and analysed for performance metrics. - Access to legal information is limited, dispersed, and not widely accessible in a useable format to help advance legal literacy of the general public. ### Enforcement of property rights — key weaknesses and causes - Overall assessment: Enforcement of property rights is weak and the land administration system gives rise to multiple vulnerabilities to corruption. - Reported impacts: - Access to State land is among key challenges in improving Sri Lanka’s competitiveness. - Process of obtaining permits and grants for land approvals takes on average 18 months. - Fragmented institutions and unclear policy: - Lack of clear and decisive land policy; multiple agencies are responsible and governed by their own acts and regulations. - The Ministry of Tourism and Land, Land Commissioner’s General Department, Land Title Settlement Department, Survey Department, Land Use and Policy Planning department and Land Reforms Commission all play roles. - Around 82% of land is administered by government institutions (e.g., Sri Lanka Railways Department, Sri Lanka Forestry Department, Mahaweli Development Authority, Urban Development Authority). - Legal complexity and lack of a unified land use policy: - There is no legally empowered land use policy; multiple sources of law exist with no clarity on devolution of responsibilities among different authorities. - Data fragmentation and lack of sharing: - No clear procedure for systematic data collection; land data repositories are fragmented and siloed across agencies and not integrated or accessible. - Anecdotal reports of documents ‘going missing’ and then ‘reappearing’ indicate rent-seeking opportunities. - Dual titling and deed registration systems: - There are 50 district land registries managed by the Registrar General’s Department of the Ministry of Public Administration and Management (MOPAM). - Around 2 million land transactions registered per year in the deed system. - Registration of deeds does not prove title to the land; reputable financial institutions require title reports attested by an accredited lawyer. - Registration is not accepted as evidence for collateral purposes; instances of duplicate records, multiple fake deeds, land grabbing and bribes are reported. - Registration of Title Act (1998) and limited progress: - The Registration of Title Act (1998) intended to formalise certification of land title but has not made sufficient progress and both systems (deed and title) continue operating. - Out of the full cadaster system of 2 million plots, around 800,000 titles have been certified. - No mandate for universal titling; titling and deed registration co-exist and could be conducted in parallel for the same plot. - One study found around 65 acts and regulations influencing the titling process to some degree, with multiple agencies able to influence the process. - Delays and dispute resolution: - Property rights disputes on average take 10-20 years to resolve. - In the District Court of Colombo there are 650 pending cases in the Land Court with some cases 40+ years old. - The Mediation Boards Act No. 72 of 1988 institutes Mediation Boards; there are 329 mediation Boards in Sri Lanka. - In 2015 special land mediation boards were set up in districts highly affected by the 30-year civil war (districts of Jaffna, Kilinochchi, Trincomalee, Batticaloa and Anuradhapura). - The Land Acquisition Act No. 09 of 1950 provides a limited grievance redress mechanism via a Board of Review and is presently under review. ### Recommended institutional and technical reforms for land administration - A serious overhaul of the current land administration practices is necessary. - A Land Use Policy has been drafted and a committee appointed for formulation of the Land Policy. - Amendments undertaken or in process: - The Land Development Ordinance and the Regulations of State Lands Ordinance was amended in 2022. - Sri Lanka is in the process of amending the Land Acquisition Act and the Land Title Registration Act. - Proposed technical solution: - Collating all related data in a central publicly accessible place would allow more accurate and efficient use of land data and minimise rent-seeking risks. - Establish an integrated automated database system, publicly accessible and easily disseminated, to integrate and harmonize existing data and create a comprehensive system of land and geospatial records. - A proposal has been submitted to Cabinet to establish an interoperable database integrating and harmonizing the existing data. - Implementation of such a database (if using funds from foreign investors) must be in accordance with Government of Sri Lanka’s national priorities, legislation and governance safeguards to ensure no land grabbing. ### Table 27 — Selected recommendations for Rule of Law (exact wording preserved) - Recommendation: Introduce specific procedure for adequate public consultation of new legislation with relevant stakeholders to avoid repeat legislative amendments and unexpected implications of new legislation/regulation - Responsible Party: Attorney General’s Office/Ministry of Justice - By When: December 2023 - Priority: Long-term - Recommendation: Set up a specialised court for clearing backlog of cases. - Responsible Party: Ministry of Justice - By When: January 2024 - Priority: Short-term - Recommendation: Establish and implement a plan to expand the resources and skiils available to the Judicial Services Commission in order to enhance their ability to carry out their function and define potential options for modifying governance arrangements in the Justice sector to strengthen oversight, monitoring, and proper sector development. - Responsible Party: Ministry of Justice/JSC - By When: December 2024 - Priority: Medium-term - Recommendation: Introduce mechanisms areas to improve efficiency of commercial claims including by reviewing current court processes and amend to encourage early settlement when appropriate - Responsible Party: Ministry of Justice - By When: April 2024 - Priority: Short-term - Recommendation: By December2024, establish an on-line digital land registry, and publish, on a designated website, report on progress in implementing published Plan for registering/titling all state land. - Responsible Party: Ministry of Lands - By When: December 2024 - Priority: Long-term *IMF | Technical Report – Sri Lanka Governance Diagnostic Assessment* ### Annex 2. Concerning the creation of an independent ### Annex 2. Concerning the creation of an independent prosecution service for Sri Lanka ### Purpose and scope - Provides information relevant to the consideration of the option of establishing an independent prosecution service in Sri Lanka. - Stated intent: "It is provided for informational purposes only and does not advocate for the adoption of the organizational arrangement." ### Importance of prosecutorial independence - Quoted principle from the Crown Prosecution Service of England & Wales: "The independence of the prosecutor is central to the criminal justice system of a democratic society. Prosecutors should be independent from persons or agencies that are not part of the prosecution decision-making process. Prosecutors must be free to carry out their professional duties without political interference and must not be affected by improper or undue pressure or influence from any source".158 - United Nations guidance: Guidelines on the Role of Prosecutors adopted at the Eighth Congress on the Prevention of Crime and the Treatment of Offenders in 1990.159 - International Association of Prosecutors (IAP): established in June 1995 with almost 180 jurisdictions in its membership.160 - Emphasis on heightened need for independence where prosecutors handle alleged illegal behaviour of State actors, including senior government officials: prosecutors should "control State actions by bringing to the attention of the courts any instance of unlawful or corrupt behaviour by agents of the State or other officials in positions of authority and by prosecuting such offenders to the full extent of the law. In cases involving corruption, abuse of power, grave human rights violations, and other crimes committed by public officials, the role of prosecutors is particularly important and delicate".161 ### Broader public functions of prosecutors - Prosecutors ensure offenders are brought to justice and victims and witnesses have their rights upheld. - Prosecutors contribute to maintaining the social compact between individuals and the State, particularly where perceptions that senior government officials or "political elites" operate with impunity exist. ### Definitions and distinctions of 'prosecutorial independence' - Two distinct meanings: - Independence of the prosecution institution from other organs of the state. - Functional independence of the individual prosecutor. - Institutional independence can coexist with hierarchical internal organization, where individual prosecutors may be subject to instructions from senior colleagues. - In some systems, the prosecution is modelled on, or part of, the judiciary. - The annex focuses on the prosecutor’s independence from the Executive, noting that "in Sri Lanka there is no independent prosecution service." ### International guidance and standards (IAP) - IAP's role: sets best practice international standards and provides guidance to jurisdictions considering prosecutorial arrangements. - 1999 IAP document: "Standards of Professional Responsibility and Statement of the Essential Duties and Rights of Prosecutors" serves as an international benchmark.162 - Article 2 ("Independence") excerpts: - 2.1 "The use of prosecutorial discretion, when permitted in a particular jurisdiction, should be exercised independently and be free from political interference." - 2.2 "If non-prosecutorial authorities have the right to give general or specific instructions to prosecutors, such instructions should be: - transparent; - consistent with lawful authority; - subject to established guidelines to safeguard the actuality and the perception of prosecutorial independence." - 2.3 "Any right of non-prosecutorial authorities to direct the institution of proceedings or to stop legally instituted proceedings should be exercised in similar fashion." - Article 3 ("Impartiality") opening line: - "Prosecutors shall perform their duties without fear, favour, or prejudice. In particular they shall: - 3.1 carry out their functions impartially;" *IMF | Technical Report – Sri Lanka Governance Diagnostic Assessment | Annex 2* ### 3.2 remain unaffected by individual or sectional interests and public or media pressures and shall have ### 1lkaea2023002 - 3.2 remain unaffected by individual or sectional interests and public or media pressures and shall have ### Prosecutorial independence: core finding - Prosecution decisions should "remain unaffected by individual or sectional interests and public or media pressures and shall have regard only to the public interest." - The Sri Lankan system lacks transparency and published guidelines to "safeguard the actuality and the perception of prosecutorial independence". - The absence of transparency and independence (whether actual or perceived) has prompted repeated public calls for a national independent prosecution service. ### Current prosecution architecture in Sri Lanka - Prosecutions are conducted by: - prosecutors of the Attorney General’s Department (Criminal Division); - the Commission to Investigate Allegations of Bribery or Corruption (CIABOC) for bribery, corruption, assets, and asset declaration related offenses; - for minor offenses, officers from Sri Lankan police and other government departments. - There is no independent national prosecution service in Sri Lanka. ### The Attorney General: powers, role, and concerns - The Attorney-General of Sri Lanka is the Island’s chief prosecutor. - Appointment and institutional links: - Appointed by the President of Sri Lanka, upon advice of the Constitutional Council. - Since 2015 the Attorney General’s Department is a Department of the Ministry of Justice, linking it closely to the Executive branch. - Between 2005 and 2015, the Attorney General’s Department came within the purview of the Presidential Secretariat. - Key powers vested exclusively in the Attorney General: - Sole power to decide whether to issue indictments (except limited CIABOC powers). - Sole, non-delegable power of nolle prosequi (to discontinue criminal proceedings before a High Court) which can be exercised without Court permission and without recording reasons. - Role conflicts and perceptions: - The Attorney General simultaneously acts as the government’s chief legal advisor and chief public prosecutor, and in many instances defends official government positions in Court. - Close institutional and political association of the AG raises risks of politicization, conflict of interest, and undermines public trust in prosecution decisions. - The Special Rapporteur on the Independence of Judges and Lawyers (Monica Pinto, mission to Sri Lanka in 2016) expressed concern that the AG's dual role "undermines the independence and credibility of the prosecution, particularly in politically sensitive cases." - Criticism and reform discourse: - Extensive criticism exists regarding the AG’s dual role and perceived executive influence over prosecutorial functions. - Studies since 2019 highlight that a Public Prosecutor’s Office would strengthen public perception of prosecutorial independence, particularly for corruption-related criminality by members of the Executive. - Other research concludes only legislative amendment is necessary to introduce a Public Prosecutor (no constitutional amendment required). ### CIABOC: role, powers, and transparency gaps - CIABOC is Sri Lanka’s dedicated Anti-Corruption agency with both investigative and prosecutorial powers. - Commission decision-making: - The decision to prosecute is made largely by the Commissioners, based on cases prepared by CIABOC investigators and prosecutors. - The Commission may require the Director-General to institute criminal proceedings where the Commissioners consider proceedings justified (see s.18 of the Anti-Corruption Act no. 1 of 2023). - Interaction with the Attorney General: - CIABOC can seek the view of the Attorney General and request assistance from the AG’s Department (see ss.65(7) and 69 of the Anti-Corruption Act no.1 of 2023). - Many CIABOC prosecutions in senior courts are assisted by officers from the Attorney General’s Department. - Transparency and guidance gaps: - No published policy sets out the basis on which CIABOC arrives at prosecution decisions or when it will involve the Attorney General. - No published guidance concerning prosecution charging standards (legal/evidential tests or public interest considerations) is available across CIABOC’s investigative and prosecutorial functions. - CIABOC cannot point to any internal (non-published) guidance on these issues; there appears to be no data collected or records of decision-basis. This is a significant absence of transparency for critical decision-making. ### Lessons from other common-law jurisdictions - Many common-law jurisdictions have separated prosecutorial functions from the Attorney General to protect independence. Examples discussed: - England & Wales: - The Prosecution of Offenses Act 1985 created the Crown Prosecution Service, headed by the Director of Public Prosecutions (DPP), de-linking the Attorney General from prosecutorial decision-making. - The "Code for Crown Prosecutors" prescribes objective criteria such as the "Full Code Test" and the "Threshold Test". - Kenya: - The Office of the Director of Public Prosecutions (ODPP) was delinked from the Attorney General's Office in 2011 following the 2010 Constitution to secure actual and perceived independence. - Trinidad & Tobago: - The Director of Public Prosecutions position, created by Chapter VI of the Constitution in 1976, is functionally independent of the Attorney General’s Office although not financially independent. - Cross-jurisdictional lesson: any independent prosecutions office must have significant financial independence, subject to appropriate scrutiny (e.g., through a Parliamentary committee process). - Sri Lanka is an outlier among common-law jurisdictions in retaining the prosecution function within the Attorney General’s remit. ### Policy recommendations and possible reforms - Minimum (immediate) recommendation: - Introduce a comprehensive series of published guidelines for the AG’s Department and CIABOC to address public perception of opacity and political influence and to improve prosecutorial consistency and effectiveness. - Guidelines should include charging standards, legal and evidential tests, public interest criteria, and criteria for involving external prosecution assistance. - Preferable (structural) recommendation: - Create an independent prosecution service (e.g., an independent Public Prosecutor’s Office) tailored to Sri Lanka’s context, delinking prosecutorial decision-making from the Attorney General. - Ensure the new office has functional and a significant degree of financial independence, subject to appropriate parliamentary scrutiny. - If structural separation is not immediately pursued: - Structure and constrain AG discretion through clearly established, published guidelines regarding institution, maintenance, and withdrawal of prosecutions in line with IAP guidance to safeguard independence and perception of independence. ### Strategic rationale and anticipated benefits - CIABOC is central to the Anti-Corruption Act of 2023 and to disrupting corrupt practices in Sri Lanka, but its effectiveness depends on clarity of functional relationships with the Attorney General’s Department. - Lack of transparency has produced sub-optimal results and a significant lack of public trust; rebuilding that trust is necessary for Sri Lanka’s governance and anti-corruption agenda. - Establishing clear, published prosecutorial standards—or preferably an independent prosecution service—would: - Reduce perceptions of political influence; - Improve consistency of prosecutorial decisions; - Enhance public trust required for effective prosecution of corruption and other serious crimes. *IMF | Technical Report – Sri Lanka Governance Diagnostic Assessment (excerpt).* --- _Source: https://www.imf.org/-/media/files/publications/cr/2023/english/1lkaea2023002.pdf_