Global watchdog evaluates Sri Lanka’s anti-terror financing framework amid concerns over proposed NGO regulations and civil society space.
Sri Lanka is undergoing a critical mutual evaluation by the Financial Action Task Force (FATF) and its regional body, the Asia/Pacific Group on Money Laundering (APG), focused on potential loopholes in its legal system relating to terrorist financing. The process, led domestically by the Financial Intelligence Unit of the Central Bank, comes as the government advances legislative and administrative measures targeting non-governmental organisations. International observers and local civil society groups are watching closely, given the country’s previous experience on the FATF grey list and the high economic stakes involved.
Representatives from the evaluation team have sought views from Sri Lankan civil society on proposed legislation to monitor and regulate NGO activities. The timing coincides with government efforts to secure a compliant rating under FATF standards through reforms that officials argue are necessary. Yet these steps have sparked debate over whether they align with the global body’s risk-based requirements or risk over-regulating a sector that plays a vital role in development and social services.
FATF Evaluation and Historical Context
The FATF, the intergovernmental body setting international standards to combat money laundering and terrorist financing, recognises the important contribution of non-profit organisations to economies and social systems. At the same time, it has long identified the potential for terrorists to exploit such organisations to raise or move funds, provide logistical support, or gain legitimacy. Countries are expected to implement focused measures to prevent abuse without unduly disrupting legitimate activities.
Sri Lanka was placed on the FATF grey list of jurisdictions with strategic deficiencies in 2017 following earlier reviews. The listing contributed to heightened scrutiny, including by the European Commission, before the country was removed in 2019 after remedial actions. An adverse outcome in the current evaluation could raise borrowing costs, complicate correspondent banking relationships, and increase compliance burdens for the financial sector and wider economy. The present mutual evaluation assesses both technical compliance with FATF’s 40 Recommendations and the effectiveness of measures against key immediate outcomes.
Government participation is coordinated through the Central Bank’s Financial Intelligence Unit. Civil society representatives have presented their perspectives on the proposed Non-Governmental Organisations (Registration and Supervision) Bill during meetings with evaluators. The Asia/Pacific Group’s visit occurs as Sri Lanka implements legislative reforms aimed at achieving compliance.
Proposed NGO Legislation Under the Spotlight
The draft Non-Governmental Organisations (Registration and Supervision) Bill 2026 is intended to replace the 1980 Voluntary Social Services Organisations Act. Successive versions have added provisions on monitoring NGOs for compliance with anti-money laundering and counter-terrorist financing standards. Officials present the bill as necessary to modernise oversight and meet international obligations ahead of the evaluation.
Critics, including four United Nations Special Rapporteurs, have warned that several provisions appear inconsistent with both the right to freedom of association and FATF standards. In a communication to the Sri Lankan government, the experts highlighted concerns over mandatory registration for a broad range of entities, significant fines, powers of warrantless entry, and requirements potentially linking organisational activities to government policy alignment. They noted that the government’s own January 2026 national risk assessment rated the inherent terrorist financing risk in the NGO sector as low to medium, with limited evidence of proven abuse.
FATF Recommendation 8, revised in recent years, requires countries to identify organisations falling within the non-profit definition, assess their specific terrorist financing risks, and apply focused, proportionate, and risk-based measures. The standard emphasises protecting organisations from abuse while avoiding disruption of legitimate work. Blanket regulation of the entire sector is widely viewed as contrary to this approach.
New Guidelines and Red-Flag Indicators for NGOs
In parallel, the National Secretariat for Non-Governmental Organizations has issued an amendment to its Anti-Money Laundering and Countering the Financing of Terrorism Guidelines for NGOs. The updated annex is designed to help organisations identify circumstances that may warrant closer examination for potential money laundering or terrorist financing risks and to strengthen internal risk management and reporting.
Key red-flag indicators listed include unusual or substantial donations from unverifiable sources, unexplained repayment arrangements or suspicious donor conditions; unusual refunds, use of multiple foreign accounts or substantial cash transactions without operational justification; false or unverifiable identification, concealed control of partners, suspicious invoices or discrepancies in records; obstruction of monitoring, unverified project activities or credible complaints that assistance is not reaching beneficiaries; information pointing to diversion of resources to terrorist organisations or misuse of facilities; and matches against sanctions lists, attempts to circumvent restrictions, or digital-asset transactions that obscure fund flows.
These guidelines build on earlier administrative measures, including information-sharing arrangements between the Financial Intelligence Unit and the NGO Secretariat, and circulars affecting banking relationships with non-profits. Civil society reports indicate that many organisations have faced difficulties accessing financial services and receiving foreign funds, with some banks requiring registration with the Secretariat even where not mandated by law.
Civil Society Perspectives and Shadow Reporting
Sri Lankan civil society organisations have submitted a detailed shadow report to the evaluation process through the Sri Lanka CSO FATF Network. The document argues that FATF standards are being applied in ways that constrain non-profit activity and shrink civic space through legislation, administrative directions and practices. It points to the absence of publicly reported prosecutions or convictions of NGOs for terrorist financing or money laundering, contrasting this with vulnerabilities identified in the banking sector.
A 2025 survey of more than 100 non-profits found that a significant majority experienced problems receiving foreign funds. Organisations have raised concerns that measures framed as FATF compliance sometimes exceed what the standards require and risk treating the sector as inherently suspect. Similar points have been made by international groups monitoring civic space.
United Nations Resident Coordinator Marc-André Franche has cautioned that applying anti-money laundering rules as broad restrictions rather than targeted, risk-based measures could undermine both security and development objectives. He emphasised that the revised Recommendation 8 aims to avoid the unintended consequences of earlier, more sweeping approaches that strained legitimate charitable work.
Balancing Security, Development and International Standards
The evaluation process highlights a broader tension faced by many countries: strengthening financial integrity frameworks while preserving an enabling environment for civil society. Non-profit organisations in Sri Lanka deliver essential services in health, education, humanitarian response, human rights monitoring and community development, particularly in the aftermath of economic crisis and past conflict. Overly broad controls can affect funding flows, operational capacity and public trust.
FATF guidance stresses that most non-profits present minimal risk and that self-regulatory or targeted measures often suffice for lower-risk entities. Governments are expected to periodically assess risks and adjust responses accordingly, ensuring that oversight does not discourage legitimate activity. International experience shows that excessive de-risking by banks and blanket registration requirements can produce financial exclusion with real human costs.
Sri Lanka’s reforms, including amendments to the Prevention of Money Laundering Act, Financial Transactions Reporting Act and Convention on the Suppression of Terrorist Financing Act passed in mid-2026, have expanded certain investigative and asset-freezing powers. These changes form part of the package under review. Assessors will examine both the design of the legal framework and its practical effectiveness and proportionality.
Access to Global Banking Networks
The outcome of the mutual evaluation will carry weight for Sri Lanka’s international financial standing and domestic regulatory trajectory. A positive assessment could support continued access to global banking networks and lower compliance costs. Shortcomings, particularly if linked to over-implementation of standards on non-profits, could complicate economic recovery efforts.
The episode illustrates how global financial standards intersect with national governance, civic freedoms and development priorities in emerging economies. The quality of consultation with civil society, the evidence base for risk assessments, and the precision of regulatory tools will shape whether measures genuinely reduce terrorist financing risks or create new frictions.The balance struck in Colombo will be watched as a test case for risk-based implementation of FATF Recommendation 8 across the region.
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