By Dhananath Fernando
Originally appeared on The Morning
Anyone who has tried to send foreign exchange through a Sri Lankan bank knows the drill. The bank asks for the invoice, purpose, source of funds, and supporting documents. Sometimes the questions feel longer than the transaction.
That is why the allegation that as much as $ 1 billion was sent abroad as import payments, while the goods did not arrive, is difficult to digest. The Police has arrested four managers from four private banks. The investigation is still unfolding, and neither the final amount nor individual responsibility has been established by a court.
First, we must get the economics right. This was not $ 1 billion physically removed from the Central Bank’s reserves. Customers would have paid rupees and purchased foreign exchange through commercial banks.
If the allegations are correct, Sri Lankan wealth moved abroad illegally and extra demand was created for dollars. That is serious, but it does not mean our reserves would automatically be $ 1 billion higher today or that this incident caused the 2022 balance of payments crisis.
A TT is not the crime
The reported payments appear to have been advance Telegraphic Transfers, commonly called TTs. A TT is neither illegal nor unusual. A supplier may demand a deposit before building a customised machine that takes months to arrive. Small Sri Lankan importers often lack the bargaining power to refuse.
A letter of credit is not an iron shield either. Banks examine documents, not containers. If an invoice is fabricated, a company is a shell, or insiders collude, both TTs and letters of credit can be abused.
Misinvoicing includes underinvoicing to reduce tariffs, overinvoicing to move extra money abroad, and phantom imports where no goods arrive. High and complicated border taxes encourage underinvoicing. But the answer is not to label every importer or exporter a criminal. Our exporters need imported machinery, raw materials, and packaging.
The failure between institutions
The alleged fraud appears to have travelled through the gaps between institutions. A bank sees the customer and payment. Customs sees the goods. The company registry records directors and shareholders, the Inland Revenue Department sees turnover, and the Financial Intelligence Unit (FIU) sees suspicious patterns. Auditors and bank supervisors are expected to test the controls.
A connected system should see the whole pattern. Repeated large advances without matching Customs declarations should raise a red flag. So should a shell company sending amounts that do not match its business. If several institutions see warnings but no one connects them together, compliance exists only on paper.
Sri Lanka still operates under Customs Ordinance No.17 of 1869. Customs reform and digitisation have been attempted many times, but have faced resistance and delay. This is the price of postponing reform. The 2026 requirement for a unique transaction number for import-related foreign exchange payments is a sensible start, but it must connect the payment to the Customs declaration, arrival, delay, or refund.
The system must also understand genuine business. A delayed shipment is not automatically fraud. One delayed order may need an explanation. Repeated unmatched payments, hidden beneficial owners, and transfers inconsistent with turnover need immediate investigation.
Independent, but accountable
It would be easy to place the entire blame on the Central Bank. That would be neither fair nor useful. The Central Bank cannot inspect containers, while Customs cannot see the complete behaviour of a bank customer. Commercial banks and their boards are responsible for Know Your Customer (KYC), internal controls, and suspicious transaction reporting. Auditors, company regulators, and law enforcement also have duties.
But collective responsibility cannot become nobody’s responsibility. Bank supervision sits with the Central Bank, while the FIU collects, analyses, and disseminates information on suspicious transactions. The public deserves to know whether warnings were filed, patterns identified, and action taken. Banks, auditors, and Customs must answer the same questions.
The Central Bank is, comparatively, one of Sri Lanka’s better-managed public institutions. Its independence must be protected because monetary decisions should not serve short-term politics. However, independence is not immunity from scrutiny. Independence and accountability must travel together. Demanding answers should not become an excuse to weaken the institution.
The response should not be a blanket ban on TTs or a requirement that every importer use an expensive letter of credit. Such rules raise costs, hurt smaller businesses, and may push genuine transactions into informal channels. Modernise the Customs law, connect the databases, reveal the real beneficial owners, publish relevant audit findings, and hold individuals and institutions accountable where failures are proven.
Rather than criminalising deliberate unauthorised transfers, we have to look at the overall policy framework that has failed us. Creating an offence after the money has gone is weaker than a system that raises the warning before the next payment leaves.
This is not a story that trade is dangerous or that Central Bank independence has failed. It is a story of old laws, disconnected databases, and reforms delayed until they become headlines. When institutions work in silos, fraudsters work as a network.
The billion-dollar question is not only who sent the money. It is why the red flags did not rise together. Sri Lanka cannot postpone that reform again.