Sri Lanka permits making online payments to foreign entities (outward remittances) using credit cards, debit cards or payment wallets. However, receiving online payments from foreign entities (inward foreign remittances) remains restricted in Sri Lanka, even though inward remittances are permitted through licensed offline channels such as banks. This restriction has limited the ability of Sri Lankans to receive foreign earnings online through payment wallets such as PayPal. Industry players have been lobbying to permit foreign currency inward remittances through online channels, however, there is only a little progress made to date. While Sri Lankans await PayPal inward remittances to be available in Sri Lanka, PayPal sees Sri Lanka as tightly regulated market with its draconian Exchange Control Act, leading to several complexities. On the other hand, Central Bank of Sri Lanka believes that PayPal is reluctant to enter Sri Lanka due to small market size, leading a tug of war between PayPal and Sri Lankan authorities. Nevertheless, the announcement by Central Bank of Sri Lanka to launch a mobile application called “SL Remit” for online inward remittances has created new ray of hope, while functionalities of the aforesaid application remain unclear.
Inevitability of Online Foreign Currency Inward Remittances
Despite the Government’s attempts to limit its use, online foreign currency inward remittances have become a necessity in the current context due to following reasons:
- Growth of Gig Economy
Gig economy refers to a labor markets that is characterized by the prevalence of short-term contracts or freelance work as opposed to permanent jobs. In a recent projection, payment giant MasterCard forecasts the size of global gig economy to reach USD 455 billion by end of 2023. Being in line with global growth trend, the gig economy in Sri Lanka is growing at a massive rate, with more software engineers, web developers and IT industry workers entering freelance workforce. As most of these freelancers enter into contracts with foreign clients, the online foreign currency inwards remittances are crucial to receive service fees. Many freelancers display frustrations with attempts to receive foreign currency remittances through banks, as freelancers do not fall into categories permitted to receive foreign exchange under the conventional banking system. Under KYC (Know Your Client) obligation, banks request details on source of funds through which gig economy workers are disqualified from opening foreign currency accounts in Sri Lanka. These restrictions on remittances pauses freelancers from entering into contracts with foreign clients, limiting the full potential of gig economy in Sri Lanka.
- Growth of Ecommerce Trading
According to the World Economic Forum, the global ecommerce industry is expected to grow at an average of 47% in the next five years. Participating in the global ecommerce industry requires trading with buyers from foreign countries and payments for goods are usually received in US Dollars. This process mandates Sri Lankan ecommerce traders to receive foreign currencies through online platforms. As foreign currency inwards remittances through online platforms are currently not available, Sri Lankan traders are at a disadvantage in the global ecommerce market.
Challenges to Deregulating Online Forex Inward Remittances
Despite the continuous lobbying, the Government is reluctant to relax restrictions on online foreign currency inward remittances due following reasons:
- Money Laundering
Permitting foreign inward remittances through online platforms could pave the way for money laundering. Sri Lanka is currently included in the “Improving Global AML/CFT Compliance: On-going process,” also known as the “grey list”, compiled by Financial Action Task Force (FATF); the global watchdog for money laundering. Similarly, EU included Sri Lanka in the blacklist of countries at high risk of money laundering, indicating severe problem of money laundering risk in the country. As EU and US tighten money laundering regulations, black money holders attempt to shift their currency assets to developing countries to avoid tracing of black money in aforesaid developed countries. Thus, enabling foreign currency inward remittances through online platforms could make it easier for such money laundering from developed countries to Sri Lanka, which could be problematic at the end. Nevertheless, one could argue that Sri Lankan regulators are being overprotective in terms of online inward remittances. Even though freelancers are barred from receiving money into Sri Lanka through online platforms, they still engage in contracts with fees in foreign currency, park their earnings in offshore bank accounts or use third party accounts overseas for savings, blocking the legal repatriation of foreign earnings of Sri Lankans. Thus, Sri Lanka is currently losing out significant amount foreign earnings that could have strengthen Sri Lankan Rupee in this hour of need.
- Terrorism Financing
Permitting foreign currency inward remittances could lead to fund raising campaigns by the local terror outfits from international terrorism funding sources, as there is less scrutiny for online money transfers. Most of the time, terrorism financing activities that occur on internet go undetected, threatening the public security. For instance, a recent survey by United Nations Interregional Crime and Justice Research Institute (UNIRI) and Interpol has revealed that only 20% of counter terrorism and law enforcing agencies have advanced technologies such artificial intelligence to detect online terrorism financing. Thus, deregulating foreign currency inward remittances leaves Sri Lanka vulnerable to risk of terrorism financing, as developing country are only marginally equipped to handle evolving online terrorism financing activities.
Need of the Hour
Risks of money laundering and terrorism financing have delayed/blocked availability of foreign remittance to Sri Lanka through online platforms. However, the need of the hour is to increase the foreign earnings inflow to address following concerns:
- Pandemic Recovery
Covid-19 has adversely affected the economy of Sri Lanka by especially halting export earnings from traditional export goods such as apparel, leading to a deficiency in balance of payment. Similarly, economic growth is also slowed down due to pandemic as local production facilities were closed and production and consumption dropped drastically. However, as the gig economy workers continue to work from home during pandemic, permitting earning repatriation of gig economy workers and ecommerce trading could help to accelerate the economic recovery from the pandemic.
- Exchange Rate Crisis
Sri Lanka is facing an exchange rate crisis as a result of increased pressure on the Sri Lankan rupee arising from rising imports, decline in exports and various other macro-economic factors. Therefore, the country needs to attract more foreign inward remittances to strengthen the Sri Lankan rupee. Sri Lanka encourages inward foreign currency remittances made by Sri Lankan migrant workers. However, at the same time, freelancers are also discriminated by blocking their earning repatriations, which is extremely detrimental. Therefore, it is recommended to deregulate the foreign currency inward remittances through online platforms and thereby attract more foreign currency inward remittances. Such deregulation could help to address the present exchange rate crisis, while making freelancers heroes of the economy.
Recommendation: Use of Artificial Intelligence
Even though there are risks of money laundering and terrorism financing, permitting online foreign currency inward remittances is inevitable. Therefore, Sri Lankan regulators are compelled to find a solution to address money laundering and terrorism financing risks, where Artificial Intelligence (AI) can offer a solution, as capitalized by many developed countries.
- Use of AI
AI has the ability to process large amount of data and discover patterns/correlations that are unnoticed by human eyes. Using pattern recognition in AI, authorities can identify transactions that fall into the normal behavior of money transfers. The transactions that deviate from the normal behavior are detected under anomaly detection and such transactions can be further investigated into potential money laundering and terrorism financing offences. In other words, machine learning is capable of classifying transactions that fall into ordinary behavior (which could be payments received for freelance contracts or trading income from ecommerce platforms) and highlight deviations. This technology is more advanced than current use of mere transaction thresholds which flags high value transactions as suspicious transactions. Alternative to transaction thresholds, AI permits to look for suspicious and fraudulent behavior, irrespective of transaction value, even limiting criminal activities that could occur in smaller scale. Identification of suspicious transactions using AI can be further expanded by filing of Suspicious Activity Reports (SAR), which calculate the likelihood of transaction being fraudulent.
Practical Challenges of Using AI for Transaction Monitoring
Adaption of new technologies is inevitable but they come with challenges. However, banning or restricting use of technology due to aforesaid challenges is not the option. Ideally, countries must learn to adapt the technologies and learn to reduce associated risk by intelligently manuring available technologies. Therefore, it is recommended for Sri Lanka to liberalize by permitting inward foreign remittances through online platforms, while closely monitoring transactions using AI technologies. It is understood that use of AI for transaction monitoring is a totally new phenomenon to Sri Lankan regulators. However, Sri Lankan regulators are capable of adapting. As degree of technology readiness of regulators can become a challenge, it is recommended to develop AI capabilities and improve technology readiness in the monitoring agencies of Sri Lanka. Similarly, inter-agency coordination is required to implement AI for transaction monitoring, where SLCERT, CBSL, counter terrorism agencies, ICTA and other relevant Government agencies will need to work together to develop the supportive ecosystem and thereby reap benefits of online inward foreign remittances to Sri Lanka.