-By A Staff Writer
(Lanka-e-News -05.Dec.2024, 11.20 PM) Sri Lanka, long celebrated for its dazzling gemstones and thriving gem trade, faces a growing crisis. Once a symbol of national pride and a key contributor to the economy, the gem industry is now under scrutiny for its alleged role as a hub for money laundering and illicit activities. Financial Intelligence Unit (FIU) reports and expert testimony paint a troubling picture of a sector struggling with widespread non-compliance with Anti-Money Laundering (AML) and Countering the Financing of Terrorism (CFT) regulations.
A significant portion of gem transactions in Sri Lanka operates in cash, bypassing formal banking systems and regulatory oversight. According to the FIU, the majority of gem traders fail to issue legal receipts for transactions, leaving authorities unable to track the flow of funds or ensure compliance with Value Added Tax (VAT) requirements.
While the export of gems and sales to tourists are subject to VAT, domestic transactions have largely evaded this obligation. Experts estimate that enforcing an 18% VAT on local gem sales could generate over 38 billion rupees in annual revenue for the treasury—funds sorely needed in the country’s strained economy.
Illegal gem exports have emerged as another major concern. Despite the existence of laws designed to regulate gem exports, authorities have identified at least 45 regular smugglers who transport high-value gems to Bangkok and other Far Eastern destinations. These smugglers remain untouched due to alleged heavy bribes paid to customs officials, allowing them to operate with impunity.
Adding to the complexity, gemstones from Madagascar and Burma are being imported illegally into Sri Lanka and falsely marketed to tourists as authentic Sri Lankan gems. This not only tarnishes the country’s reputation but also raises ethical concerns about misleading buyers.
The unethical practices extend beyond trade to the mining sector itself. Certain temples and devalayas, revered for their cultural and spiritual significance, are reportedly involved in gem mining and sales. These operations often undervalue the gemstones, depriving the nation of significant tax revenue and undermining efforts to preserve these gems as part of Sri Lanka’s national heritage.
Unlike countries like Brazil, where gemstone extraction is regulated to benefit the national treasury, Sri Lanka’s lax policies allow miners to claim ownership without appropriate taxation or valuation. Critics argue that gemstones should be treated as national treasures, with their value taxed and directed to public welfare.
The bustling gem markets of Ratnapura and Beruwala, the heart of Sri Lanka's gem trade, reportedly handle over 10 billion rupees in transactions daily. Yet, only 12% of these trades are conducted through legal channels. This high level of informality has attracted foreign buyers who often use the hawala system—an informal money transfer network—to finance gem purchases. These funds bypass formal banking channels, further complicating efforts to regulate the industry.
Dr. Ayesh Ariyasinghe, Additional Director of the FIU, has noted that while the gem and jewelry sector’s exposure to money laundering (ML) and terrorist financing (TF) risks has reduced since 2014, it remains a medium-risk sector. According to the 2021/22 ML/TF risk assessment, this classification reflects a combination of a medium threat level and medium vulnerability.
Dr. Ariyasinghe attributes the reduction in risk to measures introduced since 2018, including enhanced AML/CFT supervision of registered gem and jewelry dealers. However, the FIU acknowledges that significant gaps remain, particularly among unregistered traders who dominate the market.
Reviving the integrity of Sri Lanka’s gem trade requires a multi-pronged approach that combines stricter enforcement of existing laws with increased transparency and accountability:
Mandatory Receipts and VAT Enforcement: All gem transactions, whether local or export, should be accompanied by legal receipts, with VAT strictly enforced. This alone could bring billions of rupees in untapped revenue into government coffers.
Crackdown on Smuggling and Corruption: Strengthening customs oversight and implementing independent monitoring systems are crucial. Punitive measures against both smugglers and complicit officials must be enforced to restore trust in regulatory bodies.
Ethical Mining Practices: The government should regulate gem mining as a nationalized activity, ensuring fair valuation and taxation. Collaborative models, such as those in Brazil, could serve as a blueprint.
Digital Transactions and Traceability: Encouraging the use of formal banking systems and digital payment methods will enhance traceability, reducing opportunities for money laundering.
Public-Private Partnerships: A coordinated effort involving government agencies, gem traders, and international stakeholders is essential to modernize the industry and restore its global reputation.
The Sri Lankan gem trade is at a crossroads. With its storied history and global reputation as the “Island of Gems,” the country has much to lose if the industry continues to be tarnished by corruption and illegality. Addressing these challenges will not only safeguard the industry’s future but also ensure that its wealth benefits the nation as a whole, rather than being siphoned off through illicit channels.
The time for reform is now. Failure to act risks turning one of Sri Lanka’s proudest traditions into an international scandal. However, Sri Lanka’s export contribution to the economy is yet to match the other global stakeholders such as Thailand, which is an international trading hub for gem and jewellery and generates around US $ 12 billion in export revenue and Hong Kong notches US $ 30 billion.
As per the Central Bank annual report 2022, Sri Lanka earned US $ 450 million as export income from gems, diamonds and jewellery during 2022 while the annual average for the past five years was US $ 298 million.
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by (2024-12-05 18:34:13)
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