What is the legal framework in Sri Lanka regarding the exchange of foreign currency?
The legal framework can be found in the Exchange Control Act No 24 of 1953. This prohibits Sri Lankans and people in Sri Lanka from exchanging Sri Lankan rupees for foreign currency. Broadly speaking, in regard to this context, the restrictions are: no person can hold, borrow or make payments to the credit of a person outside Sri Lanka in foreign currency. Also, if a person owns foreign assets, they must be declared. If the person wants to dispose of the assets, it must be done so under the directions given by the Exchange Controller. No one can hold securities in companies outside Sri Lanka without the permission of the Exchange Controller and the Minister of Finance. (Permission was usually granted in the case of a business venture and took from three months to one year to obtain.) If you are given securities in an overseas company, it is still a foreign asset and must be declared. If you dispose of it, the Exchange Controller must be informed and the monies brought back into the country.

However, successive governments have liberalized the Act many times, commencing in the 80s and until the most liberal time – post 29 December 2015 and until April 2016. In the context of this conversation, the earliest liberalization was permitting persons living in Sri Lanka to send out payments for the purchase of goods and services. This is why you can use your credit or debit card to purchase something from eBay, for example.

Then, people in Sri Lanka of certain professions (like tourism) who earned in foreign currency were allowed to keep it, but for a specified limited period of time. Also, individuals or private companies were allowed to send up to $100,000 out of the country for the purpose of purchasing shares; in the case of a listed company, this was $500,000. Permission of the Exchange Controller was required to send out foreign currency for any other reason.

What happened after 29 December 2015?
After 29 December 2015 however, any person with a foreign exchange earner’s account (FEA) in Sri Lanka – exporters, lawyers, hoteliers and other professionals who earn through foreign currency – a resident foreign currency account (RFC), a non-resident foreign currency account (NRFC) and one other account were permitted to send out money freely. With the liberalization, people could even purchase a foreign asset and not be required to declare it. They could also send out currency to buy shares and were not required to obtain permission from the Exchange Controller or the Minister of Finance. The only limitation was that you can only send out what you have in your FEA. So what you are permitted to hold in foreign currency could be freely sent out, nothing more or less.

However, things changed again on 22 April 2016 when the Minister of Finance issued an Extraordinary Gazette Notification (1960/66) dated 1 April 2016 revoking the exemption granted for the payment of goods exported from Sri Lanka in the Extraordinary Gazette Notification No 759/15 of 26 March 1993. Exporters are no longer allowed to keep their foreign exchange overseas without restriction. They are now required to bring back any payments received (on or after 1 April 2016) within 90 days from the date of exportation of the goods.

In the case of the Panama Papers, however, the transactions had taken place much before 29 December 2015, which makes the 2016 liberalizations and subsequent rollback of sorts not valid in this instance.

[pullquote]It was legal to keep your earnings in a tax haven as long as the exit of the money was legitimate. For example, a company could have set up a company in a tax haven, with Exchange Control permission, because it wanted that company to be the vehicle for all its foreign investments[/pullquote]

What are legitimate reasons a Sri Lankan would have had an offshore account?
A number of professionals in some sectors need to maintain an offshore account. For example, exporters need to hold foreign currency outside Sri Lanka because of the nature of their business and were therefore permitted to send out money for the purchases of goods and services. A garment manufacturer would also need to purchase fabric or buttons, and would be expected to pay for those in dollars. They were, therefore, allowed to keep dollars in or out of Sri Lanka, but only use it for the purpose of their business. If there was any extra income, it had to be brought
back to the country.

There is also the case of parties in Sri Lanka who have companies in tax havens to remain anonymous. For example, say a certain shareholder owns 20% of shares of a company and wishes to own a further 10%, but does not want others to know that she does. She could then use an anonymous holding offshore to make the purchase. This is legal. However, if a person wants to purchase a further 10% anonymously through an offshore account when the legal threshold in that industry specified that 20% is the maximum allowed, that is a breach specified in the legal threshold of that industry and is illegal.

It was also legal to keep your earnings in a tax haven as long as the exit of the money was legitimate. For example, a company could have set up another company in a tax haven, with Exchange Control permission, because it wanted that company to be the vehicle for all its foreign investments. The Central Bank would have allowed this, but would have imposed conditions: any income will have to be declared and if income was not going to further investment, it had to be brought back.

Other reasons were generally illegal such as ill-gotten wealth and evading paying tax, etc.

From 29 December 2015 to 1 April 2016, exporters could legally send out the money brought back into their FEAs, no tax clearance required. However, when the money reaches the FEA, there is a trace of it as the bank knows. Obviously, this has taken place before the 2016 liberalization.

Considering that the Panama Papers reveals what transpired before 29 December 2015, what action can the Sri Lankan Government take with regard to those named in the documents?
The Department of Exchange Control has the right to take action, but that action is severely limited. For the most part, the Exchange Controller can only inquire about the investment from the suspected party. While banks in Sri Lanka do have relationships with corresponding banks overseas, the exchange of customer information is not allowed, except in the case of evidence for serious criminal offences.

No Sri Lankan is permitted to hold an account in a bank or an institution that conducts banking activities outside Sri Lanka. If, as an innocent example, you opened a bank account while a student in a foreign country, you are legally required to have closed it before you left, and declare the account balance at the time of closing. Lots of former students do have dormant accounts, and if found, the Exchange Controller will likely ask them to close the account and they would not face consequences. However, if you cannot substantiate as to why you have an account and if it doesn’t appear to be dormant, then on the face of it you are in violation of the Exchange Control Act.

If, as seen previously, the individual was to offer the excuse of the account being dormant, the Exchange Controller cannot learn how much money is in the account and will be forced to take you at your word. It can advise you to close your account, which you can do by withdrawing the money and/or transferring it elsewhere, without the knowledge of the Exchange Controller.

If you are a corporate or taxpayer, and there are significant sums of money flowing out on a regular basis (because the Inland Revenue Department has access to your bank statements), you can be asked what it is for. But if the money is not going through regular banking channels or if you are not a taxpayer, then it is for the government to figure out how much money is being sent out.

In the case of a company named, the impact on the reputation of the company could be severely adverse, especially if it does business all over the world. The Exchange Controller will also always be vigilant because of the allegation made and it would be on the corporate to show that the allegation is baseless. In the case of high net worth individuals, it can go through bank transfers, but if money has not gone through regular banking channels, then tracing it would be difficult.

The Extraordinary Gazette Notification No 1960/66 announced on 22 April 2016 (and dated 1 April 2016) repealing the exemption granted to exporters on holding money outside the country appears to be a reaction by the government with regard to the Panama Papers and the issue of tax evasion, etc. Whether this action actually prevents illegal offshoring of monies is another discussion altogether.

[pullquote]No Sri Lankan is permitted to hold an account in a bank or an institution that conducts banking activities outside Sri Lanka. If, as an innocent example, you opened a bank account while a student in a foreign country, you are legally required to have closed it before you left, and declare the account balance at the time of closing[/pullquote]

So, what should I have done to get named in the Panama Papers?
Gone to Mossack Fonseca and told them the purpose of the monies to be held. Probably asked them to hold it in the British Virgin Islands, which is where most of the Panana Papers’ monies were found. The firm would have put the money into a fund there, where you would have acquired shares of the fund and thereafter invested fund monies, and your income grown over time. You’d either have sent the money out of Sri Lanka in small amounts that would not have been flagged through legal channels or used illegal channels. Taking money out in a suitcase is risky.

You could have got someone to pay it for you out of Sri Lanka and then settled them in Sri Lanka. Or used multiple banking channels. You would have had to be very careful about sending out the funds because it would leave a trail. Authorized foreign exchange dealers in Sri Lanka are essentially agents of the Central Bank and are quite vigilant; big sums get flagged. You would have probably given power of attorney to the law firm or someone in the British Virgin Islands who manages the day-to-day stuff. When you travel abroad, you can take the money out from there and use it as you please.