risk, on an on going basis, and report the same to the ALCO;
 (vi) ensure the establishment of appropriate risk parameters for the ALCO and/or senior
management in the management of the foreign exchange risk;
 (vii) review the results of periodic stress tests to assess the potential impact of various shocks and
evaluate the bank’s capacity to withstand stressed situations in terms of profitability, liquidity
and capital adequacy;
 (viii) formulate an efficient Management Information System for reporting foreign exchange
related activities, with facilities to escalate all exceptional transactions to the Board or the
senior management as the case may be;
 (ix) ensure that the Board and senior management fully understand the risks involved;


Directions, Determinations, and Circulars issued to Licensed Commercial Banks  175
 (x) formulate procedures to seek and obtain separate independent professional advice where
necessary, in order to assist the Board of Directors to discharge its duties in this regard;
 (xi) approve the introduction of all new products, services and activities.
3.2 LCBs shall adhere to the rules applicable to Integrated Risk Management Committees as per the
rules set out in Direction No. 11 of 2007 on ‘Corporate Governance for Licensed Commercial
Banks in Sri Lanka’, since such rules have a general application with regard to the responsibilities
of the Board and senior management.
4. Risk Monitoring and Contr ol
4.1 LCBs shall:
 (i) document the procedures and internal controls to be performed by Front Office, Middle
Office and Back Office;
 (ii) establish a system to monitor their foreign exchange risks on an ongoing basis;
 (iii) report such risks on an ongoing basis to the ALCO;
 (iv) ensure the ef fective segregation of duties and responsibilities on trading, risk management,
measurement, monitoring, settlement, accounting, auditing and legal functions through:
 (a) the physical and functional separation of the Front Office/Trading Room and the
Middle/Back Office functions;
 (b) the establishment of a clear understanding of responsibilities and reporting obligations
to the operating staff;
 (c) the restriction of access to the trading room and each of the identified functional areas
to authorised personnel only;
 (d) the prevention of the application of undue influence by the Front Office on the Middle/
Back Office operations;
 (v) approve a list of acceptable instruments, approved brokers, authorised counterparties and
their limits. A proper system should be in place for the establishment of treasury dealing
limits for counter parties and regular reviews of such limits;
 (vi) establish a procedure for delegating authority to dealers;


(vi) establish a procedure for delegating authority to dealers;
 (vii) ensure that the prior approval of the Board of Directors/senior management is obtained for
transactions in excess of delegated limits;
 (viii) ensure the maintenance of deal blotters and regular independent reconciliation of positions
of Traders/Front Office with the General Ledger;
 (ix) establish a mechanism to ensure raising of a deal ticket for each and every deal conversation,
including cancelled deals, time stamp all deals, voice record, through a well functioning real
time and secured voice recording system, all conversations at the dealing room;
 (x) ensure that the Back Office confirms all dealing transactions prior to issuance of settlement
instructions to the counterparties;
 (xi) monitor , on a real time basis, the foreign exchange transactions and positions independent
of dealing and trading negotiations and implement a mechanism for timely reporting of all
exceptions, violation of limits to the Board/senior management;


176 Directions, Determinations, and Circulars issued to Licensed Commercial Banks
 (xii) ensure  that all transactions are executed at current market rates and that off-market or
historical rate rollover transactions are not permitted;
 (xiii) ensure that any irregularities in transactions, such as a large number of offsetting transactions,
long outstanding suspense balances, as identified by an independent risk monitoring division,
are reported promptly to the Board/senior management;
 (xiv) regularly marking-to-market of foreign exchange positions through a division independent
of Front Office and also independently verify revaluation rates and yield curves;
 (xv) ensure that compensation for traders is in line with the policy of the LCB and market rates,
and that such compensation levels are designed so as to avoid providing incentives for
excessive risk taking or recklessness;
 (xvi) strictly enforce an uninterrupted leave policy and ensure that traders on leave are prohibited
from engaging in any trading or having remote access during this period;
 (xvii) establish a suitable succession plan;
 (xviii) implement restrictive dealing after -hours or off-premises rules for designated dealers.
5. Framework of Limits
5.1 LCBs shall establish a comprehensive framework of fixing foreign exchange related limits,
including institution, dealer and transactions level to effectively manage foreign exchange risk
exposures, at different levels of seniority.
5.2 These limits shall be:
 (i) properly documented and approved by the Board of Directors;
 (ii) reasonable, and based on need after considering the funding, scale of business, risk tolerance
policy, the degree of market proficiency and the experience and position of the dealer;
 (iii) reviewed at least annually or more frequently as appropriate, considering the overall risk
tolerance levels, relative excess volatility in foreign currencies, counterparty risk rating or
market conditions.


market conditions.
5.3 T he respective limits structure recommended for foreign exchange operations shall include the
following:
 (i) open position limits on the aggregate of all currencies, both intra-day and overnight;
 (ii) open position lim its for individual currencies to which banks have material exposures, both
intra-day and overnight;
 (iii) limits for personnel involved in foreign exchange dealings, based on their experience and
expertise;
 (iv) limits for all counterparties covering the settlement and credit risks;
 (v) stop loss and/or management action trigger limits;
 (vi) country limits;
 (vii) forward foreign exchange mismatch limits;
 (viii) separate limits for the operations of the domestic banking unit and the off-shore banking
unit;
 (ix) maturity mismatch gap limits, under dif ferent time buckets, against all major currencies.


Directions, Determinations, and Circulars issued to Licensed Commercial Banks  177
6. Risk Measur ement and Reporting
6.1 LCBs shall ensure the following with respect to the measurement and reporting of foreign exchange
risk.
 (i) Regular reporting to Board/senior management/ group or parent companies, where necessary.
 (ii) Ensuring senior management’s active involvement and responsibility for foreign exchange
risk reporting.
 (iii) Linking the foreign exchange risk reporting system to the bank’s core systems and ensuring
the reconciliation thereafter with the core data.
 (iv) Ensuring that reports are clear and unambiguous, highlight key information and in particular
set out breaches or exceptions.
6.2 LCBs shall also ensure that the risk measurement and reporting systems have the ability to:
 (i) independently assess and evaluate all foreign exchange risk by maturity, on both gross and net
basis, arising from all assets and liabilities and off-balance sheet positions, including foreign
exchange options, preferably by the Middle Office;
 (ii) apply generally accepted financial models or methods for measuring risks and the conduct of
regular stress testing and scenario analysis;
 (iii) maintain accurate and timely data on current positions;
 (iv) monitor the foreign exchange counterparty credit risk and settlement risk on a real time basis
to ensure that limits are not exceeded;
 (v) document the assumptions, parameters and limitations on which the measurement systems are
based, with any material changes to the assumptions being documented, well supported and
approved by Board/senior management;
 (vi) maintain an accurate, reliable, informative and timely Management Information System
which includes indicators on market risk as well as operational risks arising from foreign
exchange operations.
7. Str ess Testing
7.1 LCBs shall m easure their vulnerability to losses arising from foreign exchange operations by


7.1 LCBs shall m easure their vulnerability to losses arising from foreign exchange operations by
conducting regular stress tests. Banks shall evaluate their capacity to withstand market or bank
specific stressed situations in terms of profitability, liquidity and capital adequacy.
7.2 The stress tests shall cover the major currencies to which the bank is exposed to and take into
account the effect of any possible large exchange rate or interest rate movements.
7.3 The stress tests shall be commensurate with the nature of the bank’ s portfolio and risks involved.
8. V aluation of Foreign Currency Positions
8.1 LCBs shall have systems in place to independently value their foreign currency positions on a
regular basis. In this regard, the following practices shall be adopted.
 (i) Net Open Position arising from customer and other trading activities shall be calculated on an
ongoing basis. In the calculation of Net Open Position the following should be noted.
– All unsettled spot transactions should be included.
– All outstanding forward transactions should also be included.


178 Directions, Determinations, and Circulars issued to Licensed Commercial Banks
– Net foreign exchange position in other foreign exchange contracts, such as currency
options, futures etc. should also be included separately.
– Exposure indicated against each currency should be considered ignoring signs to arrive at
gross exposure.
– The Net Open Positions of domestic banking unit and the of f-shore banking unit should
be calculated separately.
 (ii) Account for revaluation profit and loss on their foreign exchange position on a regular basis
or at least on a monthly basis.
 (iii) Cl early document the policy on exchange rates for valuation. Preferably, day end closing
mid market rates should be used. Ideally, these rates should be obtained, by staff other than
authorised dealing personnel, or, as a minimum, independently verified.
 (iv) Revalue forward transactions at the prevailing mid-market rate for the outstanding period to
settlement.
 (v) Revalue other appropriate foreign exchange related contracts through the Middle Office/Back
Office on a “mark to market” basis.
 (vi) Not depend upon valuations provided by their counterparties.
9. Internal Contr ols and Independent Audit
9.1 LCBs shall ensure that the Internal Audit Departments of LCBs conduct periodic reviews, at
least annually, of internal controls and risk management processes on foreign exchange business
to ensure their integrity, accuracy and reasonableness, as well as compliance with the prescribed
processes. The reviews shall ensure effective control over foreign exchange positions, including
the accuracy and completeness of recording transactions; effective segregation of duties; accurate
reporting of excesses of limits and other exceptions; compensation; all relevant internal controls are
in place; and all established procedures are adhered to.
9.2 The audit of the operations shall be carried out on a risk evaluation/assessment basis. All high risk


areas shall be audited by the internal auditors on a regular basis. The audit shall ensure that the
operating procedures are adequate to minimize settlement risk.
9.3 The audit shall ensure the adequacy and accuracy of management information reports regarding the
foreign exchange risk management activities.
9.4 LCBs shall respond promptly to any findings relating to violations of established procedures and
ensure that recommendations by the internal or external auditors are effectively implemented.
9.5 Internal audit and other risk control units shall be adequately staffed and possess sufficient expertise
and authority for reviewing the foreign exchange trading business.
10. Criteria to Assess the Fitness and Propriety of Persons Engaged in Foreign Exchange
Business
10.1 In order that a person qualifies to be considered fit and proper to be attached to a Front Office,
Middle Office or Back Office of an LCB in relation to the foreign exchange business of LCBs, the
following criteria must be fulfilled. For purposes of this Direction, such persons are described as
“persons engaged in foreign exchange business”. Non-compliance with any one of the criteria as
set out herein, shall disqualify a person from being appointed/assigned or continuing in foreign
exchange business in any capacity.


Directions, Determinations, and Circulars issued to Licensed Commercial Banks  179
10.2 The following criteria shall apply to determine the fitness and propriety .
 (i) A  person engaged in foreign exchange business shall possess the following professional
qualification/s:
 (A) In the case of a Dealer;
 (a) The Dealing Certificate offered by the Financial Market Association (Association
Cambiste Internationale – ACI), or
 (b) A  Certificate in respect of a foreign exchange dealing course conducted by the
Center for Banking Studies of the Central Bank of Sri Lanka, or
 (c) Any other professional qualification acquired or possessed in respect of foreign
exchange dealing acceptable to the Monetary Board. The Monetary Board may
grant such approval on a case-by-case basis.
 (B) In the case of others engaged in Middle/Back Office work;
 (a) The Operations Certificate offered by the Financial Market Association (Association
Cambiste Internationale – ACI), or
 (b) A  Certificate in respect of a foreign exchange dealing/operations course conducted
by the Center for Banking Studies of the Central Bank of Sri Lanka, or
 (c) Any other professional qualification acquired or possessed in respect of foreign
exchange operations acceptable to the Monetary Board. The Monetary Board may
grant such approval on a case-by-case basis.
 (ii) A  person engaged in foreign exchange business as at 01 September 2009, (the day on which
these Directions come into force) will be required to obtain the relevant qualifications as
specified in 10(2)(i) above, on or before 31 August 2012.
 (iii) A  person engaged in foreign exchange business, shall undergo continuous training through
participation in training programmes that are appropriate and sufficient for the functions or
activities they are involved in/are expected to be involved in, and conducted by appropriate
professional, academic or educational institutions.


professional, academic or educational institutions.
 (iv) A  person engaged in foreign exchange business shall not have been found guilty by any
regulatory authority or supervisory authority, professional association, any Commission of
Inquiry, tribunal or other body established by law in Sri Lanka or abroad, to the effect that
such person has committed or been connected with the commission of, any act which involves
fraud, deceit, dishonesty or any other improper conduct.
 (v) A  person engaged in foreign exchange business shall not have been found guilty, after being
subject to an investigation or inquiry consequent upon being served with notice of a charge
involving fraud, deceit, dishonesty, any other similar criminal activity or improper conduct by
any regulatory authority or supervisory authority, professional association, any Commission
of Inquiry, tribunal or other body established by law, in Sri Lanka or abroad.
 (vi) A  person engaged in foreign exchange business shall not have been convicted by any Court in
Sri Lanka or abroad in respect of a crime committed in connection with financial management
or of any offence involving moral turpitude.
 (vii) A  person engaged in foreign exchange business shall not be an undischarged insolvent nor
have been declared a bankrupt in Sri Lanka or abroad.


180 Directions, Determinations, and Circulars issued to Licensed Commercial Banks
 (viii) A  person engaged in foreign exchange business shall not have failed to satisfy any judgment
or order of any Court whether in Sri Lanka or abroad, or to repay a debt.
 (ix) A  person engaged in foreign exchange business shall not have been declared to be of unsound
mind by a Court of competent jurisdiction in Sri Lanka or abroad.
 (x) A  person engaged in foreign exchange business shall not have been removed or suspended by
an order of a regulatory or supervisory authority from serving in a licensed bank or any other
financial institution in Sri Lanka or abroad.
10.3 All persons engaged in foreign exchange business shall submit a Declaration to the Director of
Bank Supervision, through the Chief Executive Officers of the respective banks, certifying that all
criteria set out in 10.2 above are complied with.
11. Intr oduction of New Products, Services and Activities
11.1 LCBs shall ensure that a clear policy is in place in relation to the introduction of new foreign
exchange products, services and activities.
11.2 The introduction of all new products/services/activities shall be recommended by the ALCO and
approved by the Board.
11.3 The procedure in introducing new products and services shall be in writing and approved by the
Board. The review notes to the Board seeking approval must be duly signed by relevant officials of
Treasury, Front Office, Middle Office, Back Office, Legal and Accounts, which clearly specifies and
identifies the trading process, evaluation of inherent risks and returns, valuation, legal implications,
recording and reporting formats. Special attention must also be given to the compatibility of the
new service/product with the bank’s core activities, risk profile and expertise.
12. Contingency Planning
12.1 LCBs shall have a contingency plan in place to ensure continuity of the foreign exchange settlement


operations, as part of the overall business continuity plan of the bank, in the event the main site
becomes unusable.
12.2 Such contingency plan shall be:
 (i) in line with the BCP Guidelines No. 01 of 2006 issued by the Payments and Settlements
Department of the Central Bank of Sri Lanka on 29 March 2006;
 (ii) documented and approved by the Board;
 (iii) tested and reviewed at least annually .
12.3 LCBs shall ensure that a system is in place to ensure timely access to key information on payments
made, received or payments in process.
13. Other  Requirements
13.1 LCBs shall ensure the availability of job descriptions duly signed and accepted by each dealer and
his superior.
13.2 All foreign exchange dealers shall accept and be guided by the Model Code of the Association
Cambiste Internationale (ACI Model Code). In the event of any ambiguity or conflict, the terms of
these Directions shall prevail over the ACI Model Code.


Directions, Determinations, and Circulars issued to Licensed Commercial Banks  181
13.3 L CBs shall submit to the Director of Bank Supervision, the particulars of persons engaged in
foreign exchange business employed by such LCBs on 01 September 2009, being the date of these
Directions, as per the attached format. Any changes in personnel or in the particulars provided shall
be informed to the Director of Bank Supervision within a period not exceeding one week from such
change.
13.4 L CBs are advised to evaluate their policies and risk management practices relating to foreign
exchange operations in line with these Directions. Any gaps shall be addressed on a priority basis
to ensure compliance with these Directions by 31 March 2010, except where extended compliance
dates have been specifically provided for in this Direction.
PERSONS ENGAGED IN FOREIGN EXCHANGE BUSINESS
NameDate
of
BirthAcademic /
Educational
Qualifi-
cationsProfessional
Qualifi-
cationsDate of
Joining
the
Bank Experience in
Foreign Exchange
Business
(dates and
positions held)Membership
in Sri Lanka
Forex
Association


182 Directions, Determinations, and Circulars issued to Licensed Commercial Banks
Directions issued by the Monetary Board of the Central Bank of Sri Lanka under Section 46(1) of the
Banking Act, No.30 of 1988, as amended.
Sgd. Nivard Ajith Leslie Cabraal
Chairman of the Monetary Board and
Governor of the Central Bank of Sri Lanka
Colombo
18 September 2012
BANKING ACT DIRECTION NO. 1 OF 2012
FOREIGN EXCHANGE TRADING ACTIVITIES OF
LICENSED COMMERCIAL BANKS IN SRI LANKA
In the exercise of the powers conferred by Section 46(1) of the Banking Act, No. 30 of 1988,
last amended by the Banking Act, No. 46 of 2006, the Monetary Board hereby issues the following
Directions on Foreign Exchange Trading Activities of Licensed Commercial Banks.
1(1) These Directions may be cited as the Banking Act, Direction No. 1 of 2012 .
2(1) These Directions shall be applicable to:
 (i) Licensed commercial banks authorised to engage in foreign exchange
trading activities.
 (ii) “Authorised Persons”, who are:
(a) Persons described as “persons engaged in foreign exchange
business” as per the Banking Act, Directions No. 3 of 2009 on
Risk Management Relating to Foreign Exchange Business of
Licensed Commercial Banks dated September 1, 2009; and
(b)	 Persons 	determined 	as	Officers	Performing 	Executive 	Functions
in licensed commercial banks and who are involved in foreign
exchange trading activities, in terms of Determination No. 3 of
2010 made by the Monetary Board on Assessment of Fitness and
Propriety	of	Officers	Performing 	Executive 	Functions 	in	Licensed
Commercial Banks dated November 24, 2010.
 (iii) All rupee/foreign currency trading activities in the market for CASH,
TOM, SPOT, FORWARD, SWAPS and other permitted foreign
exchange derivative transactions.
3(1) In order to maintain the smooth functioning and integrity of the market,
all licensed commercial banks and/or Authorised Persons shall:


all licensed commercial banks and/or Authorised Persons shall:
 (i) Undertake foreign exchange trading activities that are based on
underlying transactions only. For the purpose of these Directions, an
underlying transaction shall mean a current account transaction or a
permitted capital account transaction, in terms of the Exchange Control
Act, No. 24 of 1953, effected on the following basis: Citation.

Scope and
Applicability.
Market practices
and procedures
to be followed.


Directions, Determinations, and Circulars issued to Licensed Commercial Banks  183
(a) Purchase of foreign currency from non-commercial bank customers
such as exporters, foreign currency account holders, and persons
sending inward foreign currency remittances;
(b) Sale of foreign currency to non-commercial bank customers
such as importers and persons who are permitted by law to make
outward remittances in foreign exchange for approved purposes;
 (ii) Purchase and/or sell foreign currency subject to the limit of the
respective net open positions of the licensed commercial bank;
(iii) Adhere to the net open position at the end of each day , and also be
within	the	intra-day	net	open	position	limit	specified	from	time	to	time
by the Director of International Operations Department;
 (iv) Use clear and precise market terminology which is understood by all
counterparties, at all times;
 (v) Determine any annual performance-linked remunerations of the
Authorised Persons engaged in foreign exchange trading activities,
with the annual performance assessment;
 (vi) Establish claw back arrangements for pay-outs of performance-linked
remunerations;
 (vii) Ensure all remuneration payments are based on a documented
remuneration policy and avoid making any ad-hoc payments outside
the pre-determined remuneration structures.
3(2) In order to maintain the smooth functioning and integrity of the market, any
licensed commercial bank and Authorised Person shall not:
 (i) Un dertake any transaction for the purpose of concealing foreign
exchange 	p ositions 	including	transferring 	profits	and	losses,	which
may undermine the integrity of the foreign exchange market;
 (ii) Engage in manipulative or deceptive conduct, or any other form of
conduct which would give other users of the foreign exchange market,
a false or misleading impression as to the prevailing market conditions,
including price, supply or demand;


including price, supply or demand;
 (iii) Pressurise any other licensed commercial bank or Authorised Person by
duress, inducement, threat or promise, for information or action.
3(3) W hen quoting price/rates in the foreign exchange market, all licensed
commercial banks and Authorised Persons shall:
 (i)	 Ensure	a	clear	distinction 	between	firm	and	indicative 	quoted	prices;
 (ii) Set the relevant rates in a Foreign Exchange Swap transaction based on
the prevailing market rates.
3(4) When quoting price/rates in the foreign exchange market, any licensed
commercial bank and Authorised Person shall not:
 (i)	 Make	quotes	with	the	intention	of	distorting 	the	exchange 	rates;


184 Directions, Determinations, and Circulars issued to Licensed Commercial Banks
 (ii)	 Make	quotes	where	the	licensed	commercial 	bank	or	Authorised
Person has no intention of honouring, and merely to mislead market
participants.
3(5) When making transactions, all licens ed commercial banks and Authorised
Persons shall:
 (i) T ransact directly through the electronic platform, telephone, e-mail,
facsimile or through a money market broker recognised by the Central
Bank of Sri Lanka;
 (ii) Maintain records of the foreign exchange trading activities so as to
ensure a clear audit trail;
 (iii) Update interbank foreign exchange transactions in the on-line system
of the Central Bank of Sri Lanka, within the time prescribed by the
Director of International Operations Department of the Central Bank
of Sri Lanka;
 (iv) Ma intain and preserve documentary evidence, electronically or
otherwise, of the underlying transactions of customers on all foreign
exchange trading activities for a period of six years, and forward such
documents to the International Operations Department of the Central
Bank	of	Sri	Lanka,	as	and	when	required;
 (v) D isclose the profit generated through interbank foreign exchange
transactions 	separately 	in	the	audited	financial	statements.
3(6) When making transactions, any licensed commercial bank and Authorised
Person shall not enter in to transactions with the intention of manipulating the
market.
3(7) In respect of foreign exchange derivative transactions, in addition to these
Directions, licensed commercial banks and Authorised Persons shall comply
with the Directions on Financial Derivative Products issued on August 1,
2009.
3(8) In settle ment of foreign exchange transactions, licensed commercial banks
shall:
 (i) Use the Society for World-wide Inter-bank Financial Telecommuni-
cations (SWIFT) System;
 (ii) Ensure the minimizing of operational errors while preventing any
gridlock in the Real Time Gross Settlement (RTGS);


gridlock in the Real Time Gross Settlement (RTGS);
 (iii) Ef fect such transactions through NOSTRO Accounts only.
3(9) If and when an interbank transaction is to be cancelled, such cancellation may
be carried out only in exceptional circumstances and where all institutions to
the trade agree to such cancellation. Provided, however, that:
 (i) Both licensed commercial banks shall act in a reasonable manner in
such a situation;


Directions, Determinations, and Circulars issued to Licensed Commercial Banks  185
 (ii) Both licensed commercial banks shall separately report full details of
such cancelled interbank transaction, on the date of such cancellation,
to the Director of International Operations Department of the Central
Bank of Sri Lanka.
3(10)  Licensed commercial banks shall engage in foreign exchange trading
activities within the specified premises during the normal working hours
(8.00 a.m. to 5.00 p.m.) on bank working days subject to Direction 3(11)
hereof.
3(11)  Foreign exchange trading activities after hours and/or of f-premises,
if undertaken, shall be undertaken in accordance with the formulated policy
as established by the licensed commercial bank, which policy shall set out,
the procedure for such foreign exchange trading activities, which shall
include:
 (i) Names of Authorised Persons permitted to engage in such foreign
exchange trading activities;
 (ii) T ransaction limits;
 (iii) Establishment of the internal control system to ensure prompt recording
and	confirmation 	of	all	after-hours	and	off-premises 	foreign	exchange
trading activities.
4(1)  In order to preserve the integrity of the market, Authorised Persons shall:
 (i) Exercise skill, care and diligence, and act in good faith;
 (ii) E xercise due care when in possession of non-public price sensitive
information;
 (iii)	 Preserve 	confidentiality 	as	required	by	Section	77	of	the	Banking	Act;
 (iv) Comply with the Directions and established procedures when routinely
sharing information with other counterparties.
4(2)  In order to preserve the integrity of the market, any Authorised Person shall
not:
 (i) Deal on his own account, or on the account of the licensed commercial
bank which he represent, or induce another party to deal on the basis
of such information, when in possession of non-public price sensitive
information;


of such information, when in possession of non-public price sensitive
information;
 (ii)	 Enter	in	to	any	transaction	which	may	lead	to	conflict	of	interest,	or
insider trading, or front running;
 (iii) W illfully spread rumors or disseminate false or misleading information.
4(3)  Authorised Persons shall adhere to any Code of Ethical Conduct issued by
their institution so as to conduct themselves with integrity and uphold the
highest standard of professionalism.
4(4)  Licensed commercial banks shall implement internal policies and procedures
in order to prohibit any form of market misconduct.Ethics, standards
of conduct to
be followed and
practised, and
the knowledge
levels that need
to be maintained.


186 Directions, Determinations, and Circulars issued to Licensed Commercial Banks
4(5)  Licensed commercial banks and Authorised Persons shall, wherever not
specifically mentioned in these Directions, be governed by the International
Code of Conduct and Practice for the Financial Markets (ACI Model
Code) issued and revised from time to time by ACI – The Financial Market
Association.
4(6)  In order to ensure that the Authorised Persons are properly equipped to handle
their responsibilities, licensed commercial banks shall:
 (i) Ensure that a high level of awareness and understanding of market
practices and conduct is provided to Authorised Persons in their
institutions;
 (ii) E nsure that the professional knowledge of the Authorised Persons
in their institutions is maintained and systematically updated and
upgraded;
 (iii) Ensure that Authorised Persons in their institutions obtain the necessary
qualifications 	as	set	out	in	Direction 	10.2	of	the	Banking	Act,	Direction
No. 3 of 2009 on Risk Management Relating to Foreign Exchange
Business of Licensed Commercial Banks, issued on September 1,
2009.
4(7)  In the effort to control the practices of entertainment, granting of gifts and
favours, licensed commercial banks shall:
 (i) Formulate policies which protect against the receipt of unacceptable
entertainment, gifts or favours by any of the Authorised Persons in their
institutions, or persons connected to such Authorised Persons;
 (ii) Establish internal value thresholds for acceptance or grant of gifts
and/or	entertainment, 	the	acceptable 	frequency 	and	a	system	whereby
Authorised 	Persons	in	their	institutions 	are	required	to	disclose	all	such
gifts, favours and entertainment, as and when it exceeds the applicable
established internal thresholds;
 (iii) Ensure that Authorised Persons in their institutions do not solicit gifts
of any kind, and are under compulsion to immediately notify the


of any kind, and are under compulsion to immediately notify the
management of the licensed commercial bank, if any unusual favours
are offered to them by any other institution or person;
 (iv) Ensure that Authorised Persons in their institutions do not make or
arrange bets or indulge in gambling of any kind, in relation to foreign
exchange transactions with any person.
4(8)  In order to ensure recording of telephone conversations, licensed commercial
banks shall:
 (i) Establish internal policies with regard to the appropriate data and
tape recording of trading conversations and the retention of such
discussions, and ensure compliance thereof;
 (ii) Adopt appropriate policies to restrict the usage of mobile phones in
the dealing rooms, so as to ensure that mobile phones are not used to
circumvent the telephone recording system;


Directions, Determinations, and Circulars issued to Licensed Commercial Banks  187
 (iii) Ensure that access to tapes in use or in store, is strictly controlled
and are not tampered with.
5(1)  In the event any licens ed commercial bank and/or Authorised Person fails to
comply with these Directions, the Monetary Board may, after an investigation
carried out, take any one or more of actions as it may consider necessary,
including:
 (i) Reprimanding any Authorised Person who has been in non-compliance
with these Directions.
 (ii) Directing the licensed commercial bank to remove any Authorised
Person, who has been in non-compliance with these Directions,
from performing any function in relation to foreign exchange trading
activities in the respective licensed commercial bank.
 (iii) Re ducing the Net Open Foreign Exchange Position limits of the
non-compliant licensed commercial bank.
5(2)  In the event any licens ed commercial bank and/or Authorised Person fails to
comply with these Directions, and the Director of Bank Supervision of the
Central Bank of Sri Lanka after a preliminary investigation, is of the view that
the provisions of the Exchange Control Act, No. 24 of 1953, may have been
violated, such licensed commercial bank and/or Authorised Person shall be
reported to the Controller of Exchange for further investigation and action by
the Controller of Exchange.
6(1)  All licensed commercial banks shall fully comply with these Directions with
effect from 19 September 2012 except in the case of Directions 3(1)( v), (vi)
and (vii),	3(1 1),	4(5),	4(7)	and	4(8)	which	will	be	effective	from	1	November
2012 .Sanctions on
non-compliance
with these
Directions.
Transitional
Provision.
( Refer Explanatory Note 2/2012 – Foreign Exchange Trading Activities / FAQ )


188 Directions, Determinations, and Circulars issued to Licensed Commercial Banks
Ref. No. : 02  / 17 / 600 / 0035  / 001
Bank Supervision Department
19 September, 2012
To :  The CEOs of all Licensed Commer cial Banks
ADOPTION OF THE ACI MODEL CODE BY SRI LANKA
 Chief Executive Officers of Licensed Commercial Banks are hereby informed that the applicability
of the Circular issued under Ref. No. 105/09/002/0024/001 dated 11 August 2006 for Commercial Banks
on the above subject is revoked with effect from 19 September 2012.
Yours faithfully,
(Mrs.) T M J Y P Fernando
Director of Bank Supervision


Directions, Determinations, and Circulars issued to Licensed Commercial Banks  189
Ref. No. : 02  /17 / 600 / 0014  / 003
14 May 2010
To :  Chief Executive Officers of Licensed Commer cial Banks
DECLARATION TO BE SUBMITTED BY
PERSONS ENGAGED IN FOREIGN EXCHANGE BUSINESS
As announced at the monthly meeting of the Chief Executive Officers held on 29 April 2010,
it is observed that the Declarations of persons engaged in foreign exchange business furnished by
certain licensed commercial banks are not complete and consistent with the requirements of Direction
No. 3 of 2009, on Risk Management relating to Foreign Exchange Business. We, therefore, attach
herewith a format of the Declaration to be submitted by persons engaged in foreign exchange business.
Banks which have already submitted Declarations largely in line with this format are not required to re-
submit Declarations.
Yours faithfully,
Sgd. (Mrs.) T M J Y P Fernando
Director of Bank Supervision
Encl.
Copy to :  The Secretary-General
 Sri Lanka Banks’  Association (Guarantee) Ltd.


190 Directions, Determinations, and Circulars issued to Licensed Commercial Banks
To:  Dir ector of Bank Supervision
Name of Bank :  …………………………………………………………………………………………
Declaration to be submitted by the Persons engaged in Foreign Exchange Business
in terms of Banking Act, Direction No. 3 of 2009
on Risk Management relating to Foreign Exchange Business of
Licensed Commercial Banks
I, ……………………………………………………………………………………………… ( full name)
holder of National Identity Card No.  / Passport No. ……………….………..…… of………………….
………………………………………………………………………………………….………. (address)
being a (Buddhist  / Hindu do hereby solemnly, sincerely and truly declare and affirm  / Christian  /
Catholic  / Muslim make oath and state) as follows :
1. I am the …………………………… ( designation ) of………………………………………… (name
of bank) which is a licensed commercial bank under the Banking Act, No. 30 of 1988.
2. I possess the following academic and/or professional qualification  / s in terms of 10.2 ( i) of the
Banking Act, Direction No.3 of 2009 on risk management relating to foreign exchange business of
licensed commercial banks: / [I engaged in foreign exchange business as at 01 September 2009 and
will obtain the relevant qualifications as specified in 10(2)(i) of the aforementioned Banking Act,
Direction on or before 31 August 2012.]
3. I am in possession of the following qualification  / s in addition to (2) above:
  ………………………………………………………………………………………………………
  ………………………………………………………………………………………………………
4. The effective experience that I possess in banking, finance, business or administration or of any other
relevant discipline is as follows:
  ………………………………………………………………………………………………………
  ………………………………………………………………………………………………………
5. I shall undergo continuous training through participation in training programmes that are appropriate
and sufficient for the functions or activities they are involved in  / are expected to be involved in, and


conducted by appropriate professional, academic or educational institutions.
6. I have not been found guilty by any regulatory or supervisory authority, professional association, any
Commission of Inquiry, tribunal or other body established by law in Sri Lanka or abroad, to the effect
that I have committed or have been connected with the commission of, any act which involves fraud,
deceit, dishonesty or any other improper conduct.


Directions, Determinations, and Circulars issued to Licensed Commercial Banks  191
7. I have not been found guilty , after being subject to an investigation or inquiry consequent upon being
served with notice of a charge involving fraud, deceit, dishonesty or other similar criminal activity or
improper conduct, by any regulatory authority, supervisory authority, professional association, any
Commission of Inquiry, tribunal or other body established by law, in Sri Lanka or abroad.
8. I have not been convicted by any Court in Sri Lanka or abroad in respect of a crime committed in
connection with financial management or of any offence involving moral turpitude.
9. I am not an undischar ged insolvent nor have I been declared a bankrupt in Sri Lanka or abroad.
10. I have not failed, to satisfy any judgment or order of any Court whether in Sri Lanka or abroad, or to
repay a debt.
11. I have not been declared to be of unsound mind by a Court of competent jurisdiction in Sri Lanka or
abroad.
12. I have not been removed or suspended by an order of a regulatory or supervisory authority from
serving in a licensed bank or any other financial institution in Sri Lanka or abroad.
DECLARATION TO BE FILLED BY THE PERSON ENGAGED IN
FOREIGN EXCHANGE BUSINESS
I am the [affirmant  / deponent] above named and I confirm that the information contained herein are to
the best of my knowledge and belief, true and complete and also I undertake to inform of any change of
any of the above information, within a period not exceeding one week from such change.
Date : ………………  ……………………………………………
  Signatur e
  Name : …………………………………………
TO BE FILLED BY THE CHIEF EXECUTIVE OFFICER
Any other explanation  / information in regard to the information furnished above and other information
considered relevant for assessing the suitability of the person engaged in the foreign exchange business.
Date : ………………  ……………………………………………
  Signatur e of Chief Executive Officer
  Name : …………………………………………


192 Directions, Determinations, and Circulars issued to Licensed Commercial Banks
Ref. No. : 02  /17 / 800 / 0006  / 01
25 May 2009
To :  Instructions to Licensed Commer cial Banks
 Appointed as Authorised Dealers
FORWARD SALES AND PURCHASE OF FOREIGN EXCHANGE
Authorised Dealers are hereby informed that the operating instructions issued under Ref.
No. 02/17/800/0006/01 dated 31/10/2008 and 19/03/2009 on the above subject are withdrawn with
effect from 25.05.2009.
Yours faithfully,
 Controller of Exchange  Director of Bank Supervision


Directions, Determinations, and Circulars issued to Licensed Commercial Banks  193
Ref. No. : 02  / 04 / 004 / 0009  / 001
Bank Supervision Department
8th Floor, Renuka Building
41, Janadhipathi Mawatha
Colombo 1.
16th July, 2001
Instructions to Licensed Commercial Banks
 Appointed as Authorized Dealers in Foreign Exchange
Dear Sirs,
FORWARD SALES AND PURCHASES OF FOREIGN EXCHANGE
Further to our Operating Instructions dated 29.01.2001 and 19.03.2001 and the clarifications
contained in our Operating Instructions dated 14.02.2001 on the above subject.
The requirement that a margin of not less than 25 per cent should be obtained from customers
when entering into a forward contract for the sale of foreign exchange is withdrawn, with effect from
16th July, 2001.
However, for prudential reasons, banks may continue to obtain deposits from customers for
forward sales of foreign exchange, based on their assessment of customer risk.
Contracts for forward sales and/or purchases will continue to be for a maximum of 180 days and
only for the purpose of payments and receipts in foreign exchange in respect of trade in goods and
services.
Yours faithfully,
 Controller of Exchange  Director of Bank Supervision


194 Directions, Determinations, and Circulars issued to Licensed Commercial Banks
Ref. No. : 02  / 04 / 004 / 0009  / 001
Bank Supervision Department
8th Floor, Renuka Building
41, Janadhipathi Mawatha
Colombo 1.
19th March, 2001
Instructions to Licensed Commercial Banks
 Appointed as Authorized Dealers in Foreign Exchange
Dear Sirs,
FORWARD SALES AND PURCHASES OF FOREIGN EXCHANGE
Further to our Instructions dated 29.01.2001 and the clarifications contained in our Operating
Instructions dated 14.02.2001 on the above subject.
We wish to inform you that the 50% deposit referred to in sub-item (iii ) of item (3) of the above
mentioned Instructions dated 29.01.2001 has been reduced with immediate effect to 25% of the value
of the contract in Sri Lanka Rupees in respect of forward contracts to be entered into with customers
for the sale of foreign exchange.
Yours faithfully,
 Controller of Exchange  Director of Bank Supervision


Directions, Determinations, and Circulars issued to Licensed Commercial Banks  195
Ref. No. : 02  / 04 / 004 / 0009  / 001
Bank Supervision Department
8th Floor, Renuka Building
41, Janadhipathi Mawatha
Colombo 1
14th Febuary, 2001
Operationg Instructions to Licensed Commercial Banks
 Appointed as Authorized Dealers in Foreign Exchange
Dear Sirs,
FORWARD SALES AND PURCHASES OF FOREIGN EXCHANGE
We have received inquiries from banks seeking clarifications on the contents of our Operating
Instructions dated 29th January 2001, on the above subject. Accordingly, the following clarifications
are made for your information.
1. The Operating Instructions will not apply to
 (i) Inter -bank forward contracts (local and foreign),
 (ii) Forward contracts where a foreign currency is purchased with another foreign currency ,
 (iii) Purchases of foreign exchange in respect of share trading transactions specified in the item 3
in the Operating Instructions No. EC/74/92(C&F) dated 28/07/1992 issued by the Controller
of Exchange.
2. Subject to 1( iii) above, forward contracts with customers should be permitted only in respect of
trade in goods and services. Forward contracts in respect of capital transactions should not be
permitted.
3. In the case of renewal or extension of a contract, the maximum period of forward contract should
be 180 days inclusive of the period that has already elapsed. In cases where the period exceeds 180
days, a fresh contract should be entered into which requires a 50 per cent of deposit in case of a
forward contract for the sale of foreign exchange.
4. In case of an importer, the margin already obtained in respect of Letters of Credit, if any, should
not be treated as the deposit required for a forward contract for the sale of foreign exchange and,
therefore, a fresh deposit of 50% of the value of the contract in Sri Lanka rupees is required for the
forward contract.
5. The banks may pay interest on the 50% mar gin as a deposit.


forward contract.
5. The banks may pay interest on the 50% mar gin as a deposit.
6. The attach ed format should be used in future to report details regarding daily position of forward
transactions to the Bank Supervision Department.
Yours faithfully,
 Controller of Exchange  Director of Bank Supervision


196 Directions, Determinations, and Circulars issued to Licensed Commercial Banks
Annex
FORWARD TRANSACTIONS IN FOREIGN CURRENCY
Name of the Authorised Dealer : ………………………………….
Date: ………………..
 Outstanding Balance  New Contracts  Total Margin  Total Contracts  Outstanding
 at the beginning  Entered during  Deposit  Matured during  position at the
 of the day  the day  Accepted  the day  end of the day
 (Rs. Mn.)  (Rs. Mn.)  (Rs. Mn.)  (Rs. Mn.)  (Rs. Mn.)
Total
Forward
Sales
Total
Forward  Not applicable
Purchases
I certify that information given above is correct.
Date: …………………..  ………………………………………
 Signature of the Authorised Dealer


Directions, Determinations, and Circulars issued to Licensed Commercial Banks  197
Instructions to Licensed Commercial Banks Appointed as
 Authorized Dealers in For eign Exchange
January 29, 2001
Dear Sirs,
FORWARD SALES AND PURCHASES OF FOREIGN EXCHANGE
The Central Bank is concerned that in view of the weaknesses of the forward market in foreign
exchange in Sri Lanka, licensed commercial banks that are Authorised Dealers under the Exchange
Control Act (Authorised Dealers) could be undertaking heavy risks by engaging in forward transactions
in foreign exchange which are unrelated to trade transactions, which would be detrimental to the
interests of the depositors of such banks and to the economy. Therefore, in the interest of the depositors
and to stabilise the foreign exchange market, it is considered necessary to streamline the operations
in the forward market in foreign exchange, pending the development of an efficient forward market.
Hence, both from a prudential standpoint and from considerations relating to the stability of the foreign
exchange market, it is desirable that forward foreign exchange contracts by banks with their customers
should, for the time being, be in respect of transactions concerning payments and receipts in foreign
exchange relating to trade in goods and services and for a period reasonably adequate to meet the needs
of trade transactions.
2. In view of the foregoing, Authorised Dealers are hereby informed that the authority conferred on
them to enter into forward contracts for the sale and/or purchase of foreign exchange for a period up to
360 days irrespective of the purpose by paragraph B(ii)(a) of Operating Instructions No.EC/41/93(D)
of 29.03.1993 issued by the Controller of Exchange is hereby withdrawn with immediate effect.
3. Therefore, without prejudice to the permission granted to Authorised Dealers for the release of


3. Therefore, without prejudice to the permission granted to Authorised Dealers for the release of
foreign exchange for all current (non-capital) international transactions by Operating Instructions
No.EC/06/94 of 18.03.1994 of the Controller of Exchange, and pending the development of an
efficient forward market in foreign exchange in Sri Lanka, Authorised Dealers shall, with immediate
effect, comply with the following conditions when entering into forward contracts in foreign exchange
(including renewal of existing contracts) with their customers, until further notice;
 (i) forward contracts for the sale and/or purchase of foreign exchange should only be for a period
up to 180 days and only for the purpose of payments and receipts in foreign exchange in
respect of trade in goods and services;
 (ii) an Authorised Dealer entering into a forward foreign exchange contract should satisfy himself
that the transaction relates to a genuine commercial contract involving trade in goods and
services;
 (iii) an Authorised Dealer who enters into a forward contract for the sale of foreign exchange with
a customer should obtain at the time the contract is entered into, a deposit of not less than
50% of the value of the contract in Sri Lanka rupees, which should be retained until the date
of performance of the contract;
 (iv) the date of performance  of the forward foreign exchange contract should not be beyond the
date of payment or receipt in foreign exchange, as the case may be, in terms of the relevant
commercial contract underlying the forward exchange contract; and
 (v) as at present, any cancellation of a forward foreign exchange contract by the customer
should be subject to a penalty, at least to fully compensate the loss arising therefrom to the
Authorised Dealer.
4. Details relating to forward transactions in foreign exchange on any day should be reported at the


end of the same day (not later than 6.00 p.m.) to the Director of Bank Supervision on fax No.325824
in the form set out in the Annex hereto. Please contact Mr. P. Samarasiri, Deputy Director of Bank
Supervision on telephone number 344838 for any clarification.
Yours faithfully
 Controller of Exchange  Director of Bank Supervision


198 Directions, Determinations, and Circulars issued to Licensed Commercial Banks
Annex
FORWARD TRANSACTIONS IN FOREIGN CURRENCY
Name of the Authorised Dealer: ……………….
Date: ………………..
Outstanding
Balances at the
beginning of the Day
(US dollar
equivalent Mn)Total
Transactions
during the day
(US dollar
equivalent Mn)Total
Margin Deposit
Accepted
(SL Rs. Mn)Outstanding
position
at the end of the day
(US dollar
equivalent Mn)
A. Total
Forward
Sales
B. Total
Forward
PurchasesNot applicable
I certify that information given above is correct.
Date: …………………..  ………………………………………
 Signature of the Authorised Officer


Directions, Determinations, and Circulars issued to Licensed Commercial Banks  199
Explanatory Note: 2/2012
Direction No.1 of 2012 on Foreign Exchange Trading Activities
Frequently Asked Questions (FAQs)
These Frequently Asked Questions (FAQs) have been developed to assist the licensed commercial banks
(LCBs) in complying with the Direction No. 1 of 2012 on Foreign Exchange Trading Activities of LCBs
issued on 19 September 2012 and to clarify the provisions and the potential queries relating to these
Directions.
Q1 Is there a real need for another regulation on Foreign Exchange Trading Activities as CBSL
issued detailed Directions dated 1 September 2009 and agreed to observe ACI model code as
per circular dated 11 August 2006?
A1 The purpose of the Direction No. 3 of 2009 dated 1 September 2009, is to standardise and strengthen
the foreign exchange risk management in LCBs. The applicability of the circular dated 11 August
2006 for commercial banks is revoked with effect from 19 September 2012.
Q2  Does this Dir ection apply only for non-commercial bank customer transactions or can an
authorized person carry out inter-bank trading for his own needs? [Direction No. 3(1)( i) and
(ii)].
A2 LCBs  are allowed to carry out inter-bank trading for their own needs, within the NOP limit.
Q3  What is the underlying transaction for SWAPs as those are commonly used for funding balance
sheet	mismatches 	and	short	term	liquidity	deficits?  Can an Authorised Person buy foreign
currency from the market to cover a usance bill due for settlement in the future? [Direction
No. 3(1)(i) and (ii)].
A3 LCBs are allowed to carry out foreign currency trading activities for market making, future
settlements of usance bills and SWAPs transactions for funding balance sheet mismatches and short
term liquidity deficits as these transactions constitute underlying transactions.
Q4	 Will	enforcing	this	Direction	significantly 	reduces	market	depth	and	liquidity	and	the	ability


to quote competitive prices to customers? Does this preclude market making or two-way price
without underlying transactions? [Direction No. 3(1)(i)(a)].
A4 This Direction imposes clarity that will lead to further development in the market and facilitate
market making activities. It will not reduce market depth and liquidity.
Q5 How and when will CBSL  determine Net Open Position (NOP) limits? [Direction No. 3(1)( iii)].
A5 Banks should comply with the existing NOP  limits. However, the Director of International
Operations Department of CBSL will determine the NOP limits from time to time considering the
developments in the foreign exchange market.
Q6  How and when CBSL  determine intra-day position limits and whether the intra-day limit will
be	sufficiently 	large	enough	to	accommodate 	large	customer 	transactions 	for	international
trade	and	equity/	fixed	income	investment? 	[Direction 	No.	3(1)( iii)].
A6 The Director of International Operations Department of CBSL will determine the intra-day position
limits from time to time considering the size and the behavior of the transactions.
Q7 Is it not discriminatory to make claw back arrangements applicable only to dealers? Shouldn’t
it be established for pay-outs of performance based, unvested and deferred awards rather
than for remuneration and rewards paid out in cash? [Direction No. 3(1)(vi)].
A7  LCBs may develop remuneration policies for the bank covering the basis, scope, acceptable vesting
period and the coverage of the claw back arrangements.


200 Directions, Determinations, and Circulars issued to Licensed Commercial Banks
Q8 Ar e the following provisions of the Directions relating to the smooth functioning and the
integrity of the market vague and ambiguous as they cover routine functions? [Direction No.
3(2)(i), (ii) and (iii)].
(a) Undertake any transaction for the purpose of concealing foreign exchange positions
including 	transferring 	profits	and	losses,	which	may	undermine 	the	integrity	of	the
foreign exchange market;
(b) Engage in manipulative or deceptive conduct, or any other form of conduct which would
give other users of the foreign exchange market, a false or misleading impression as to
prevailing market conditions, including price, supply or demand;
(c) Pressurise any other licensed commercial bank or Authorised Person by duress,
inducement, threat or promise, for information or action.
A8 This Regulation is aimed at further improving the smooth functioning and integrity of the foreign
exchange trading activities in Sri Lanka.
Q9 Some times dealers quote wide bid/offer rate to avoid inter-bank transactions. Would this
be construed to be a distortion of market rates? If so, this will lead to loss of market making
activity and liquidity in the market. [Direction No. 3(4)(i) and (ii)].
A9 Y es. Quoting wide bid/offer rate to avoid inter-bank transactions will distort the market rates.
Hence, off market rates cannot be accepted.
Q10 Does CBSL  maintain a list of approved brokers? [Direction No. 3(5)( i)].
A10 CBSL  has disclosed in its web site a list of Money Brokering Institutions recognised by CBSL.
Q11 “When making transactions, LCBs and Authorised Persons shall not enter into transactions
with the intention of manipulating the market”. Would there be a time limit for making these
claims or can they be applied retrospectively without a time bar? [Direction No. 3(6)].
A11 Claims can be applied without a time bar .


A11 Claims can be applied without a time bar .
Q12  Under  what circumstances does the CBSL envisage the requirement for cancellation of a deal?
Does this lead to more relaxed attitude and a practice of cancelling deals at will? [Direction
No. 3(9)].
A12 CBSL  does not encourage cancellation of deals. However, only in exceptional circumstances a
deal can be cancelled provided that both licensed commercial banks  to the trade agree to such
cancellation.
Q13 Although CBSL requires adopting appropriate policies to restrict the usage of mobile phones
in the dealing rooms, so as to ensure that mobile phones are not used to circumvent the
telephone 	r ecording 	system,	it	is	difficult	to	entirely	fool-proof	usage	of	mobile	to	circumvent
the recording system. [Direction No. 4(8)(ii)].
A13 Banks should have a mechanism to ensure that all the deal conversations are recorded.
Issued on 26 September 2012.


Directions, Determinations, and Circulars issued to Licensed Commercial Banks  201
Directions issued by the Monetary Board of the Central Bank of Sri Lanka under Section 46(1) and
76(J)(1) of the Banking Act, No.30 of 1988, as amended.
Sgd. Nivard Ajith Leslie Cabraal
Chairman of the Monetary Board and
Governor of the Central Bank of Sri Lanka
Colombo
21 December 2012
BANKING ACT DIRECTION NO. 2 OF 2012
OUTSOURCING OF BUSINESS OPERATIONS OF
A LICENSED COMMERCIAL BANK AND
A LICENSED SPECIALISED BANK
In the exercise of the powers conferred by Sections 46(1) and 76(J)(1) of the Banking Act, No. 30
of 1988, last amended by the Banking (Amendment) Act, No. 46 of 2006, the Monetary Board hereby
issues the following Directions on Outsourcing of Business Operations of a Licensed Commercial Bank
and a Licensed Specialised Bank, respectively (hereinafter referred to as a Licensed Bank).
1(1) These Directions may be cited as the Banking Act, Directions No. 2 of 2012.
2(1) An ‘outsourcing arrangement’ is an agreement between a licensed bank and
a third party ‘service provider’, whereby the service provider performs an
activity, function or process connected with the operations of a licensed bank.
2(2) ‘Service provider’ includes the  Head Office, parent institution, another
branch or related company of a Licensed Bank, or an unrelated institution,
whether located in Sri Lanka or elsewhere.
2(3) These Directions shall not apply to outsourced arrangements that are not
directly related to the provision of financial services such as Mail, Courier
services, Catering of staff, Housekeeping and janitorial services, Security
of premises, Printing services ( e.g., Application forms, brochures etc.),
Recruitments on contract and temporary basis and Communication services.
2(4) Outsourcing arrangem ents shall be entered into only with service providers
who have specialised resources and skills to perform the related activities.


who have specialised resources and skills to perform the related activities.
2(5) Outsourcing arrangements shall not be entered into with a service provider
of which the majority of the ownership is held by employees and/or close
relatives of an employee of the respective licensed bank.
2(6) Every Licensed Bank that decides to outsource its functions/operations shall
comply with Directions 3 to 9 below.
3(1) A  Licensed Bank may outsource its functions/operations other than the
following functions/operations or activities:Citation.
Outsourcing –
definition and
applicability.
Functions or
activities that can
be outsourced.


202 Directions, Determinations, and Circulars issued to Licensed Commercial Banks
 (i) Services associated with acceptance of deposits and withdrawals
excluding the agency arrangements approved under the provisions of
section 12(1)(b) of the Banking Act.
 (ii) Assets and Liabilities management
 (iii) Compliance function
 (iv) Customer due diligence and Know Your Customer (KYC) procedures
 (v) T reasury functions, foreign exchange trading and management
 (vi) Risk Management
 (vii) Strategic planning and decision-making
 (viii) Sanctioning of loans except where the basis of approval has been
previously approved by the Board
 (ix) Internal Audit Function subject to Directions 3(2) and 3(3) below
 (x) Information Technology (IT) related services subject to Directions
3(4) and 3(5) below.
3(2) A  Licensed Bank shall not outsource its Internal Audit Function other than in
keeping with the following:
 (i) A Licensed Bank may outsource its Internal Audit Function, where
the size of the bank and the extent of the risks do not justify the
internal audit function to operate with a full time internal audit staff.
 (ii) A Licensed Bank may outsource certain activities or specialised areas
of its internal audit function such as branch and/or department audits,
Information System (IS) audits, where the bank is in a position to
justify	the	cost	savings,	improved 	efficiency 	and	better	management
of resource constraints.
3(3)  The outsourcing of the internal audit function or activities as per 3(2)( i) and
3(2)(ii) above shall be subject to the following conditions:
 (i) The responsibility and control of the outsourced audit assignments
in the case of 3(2)(ii) above shall continue to be with the Head of
Internal Audit.
 (ii)	 The	selection	of	audit	firms	or	staff	shall	be	made	from	the	panel	of
external auditors approved by the Central Bank of Sri Lanka (CBSL)
other than the bank’s own external auditor.


other than the bank’s own external auditor.
 (iii) Any such appointment as per 3(3)( ii) above shall be made after a
“cooling	of f” 	period	of	2	years	if	such	audit	firm	or	staff	had	been
previously engaged in the external audit assignment of the bank.
 (iv) The internal audit service provider shall not perform any management
function	or	act,	directly	or	indirectly ,	in	a	capacity	equivalent 	to	that
of a member of management or an employee of the bank.Outsourcing of
Internal Audit.


Directions, Determinations, and Circulars issued to Licensed Commercial Banks  203
 (v) The internal audit service provider shall not provide consultancy
services to a function or activity of the bank it is expected to audit or
vice versa  within a period of 2 years.
 (vi) The Head of Internal Audit shall ensure that, whenever practicable,
one or more members of the bank’s internal audit staff are also
involved in the bank’s internal audit related work of the internal audit
service provider with the view to gather the relevant knowledge to
perform such work by themselves in the future.
 (vii) The Licensed Bank shall be able to provide the internal audit plan,
follow-ups, reports and related working papers, etc., to CBSL as and
when	required.
3(4)  A  Licensed Bank may outsource the following IT and business processing
functions:
 (i) Application/Systems development, testing, maintenance and support
 (ii) T echnology infrastructure management, maintenance and support,
Help Desks
 (iii) Maintenance and support to data centre operations
 (iv) Network administration
 (v) Disaster recovery support services
 (vi) Data entry operations
 (vii) Database maintenance and support
 (viii) Data warehousing
 (ix) Statements printing
 (x) Electronic banking systems ( e.g., Internet banking, Mobile banking
and Tele-banking) development, maintenance and support
 (xi) W eb hosting and maintenance
 (xii) Credit/Debit/A TM card printing.
3(5)  A  Licensed Bank shall ensure in its security policies, procedures and controls
that a service provider exercises a high standard of care and diligence to
protect the confidentiality and security of banks’ sensitive information
especially relating to customers, hardware, operating systems and application
software.
4(1) A  Licensed Bank shall have a comprehensive policy to guide the assessment
as to how its operations are to be outsourced. The policy shall contain at least
the following:


as to how its operations are to be outsourced. The policy shall contain at least
the following:
 (i) The placing of overall responsibility on the Board of Directors or
the Audit Committee and senior management for the outsourcing of
activities and for the formulation of policy therefor. Outsourcing
of Information
Technology.
Outsourcing
Policy.


204 Directions, Determinations, and Circulars issued to Licensed Commercial Banks
 (ii)	 A	framework 	for	identification	and	effective	management	of	risks	that
could arise from outsourcing of activities.
 (iii)	 Cost-benefit 	analysis	on	each	activity	or	function	or	process	to	be
outsourced.
 (iv) T ender procedures to be followed for the procurement of outsourced
services.
 (v) Setting up of a monitoring and control unit in the event of having
several outsourcing arrangements.
 (vi) A  framework to conduct KYC and due diligence process on the
service provider.
 (vii) A  procedure to assess the service provider’s capacity, capability
and mode/basis of payment to perform the obligations under the
outsourcing arrangement.
 (viii) A  format of the legally binding contract/agreement for outsourcing
arrangement which should include at least the following:
 (a) Service standards,
 (b) Rights, responsibilities and expectations of all parties,
 (c) Dispute resolution mechanism,
 (d)	 Confidentiality 	and	security	of	information,
 (e) T ermination of contract,
 (f) Subcontracting, if involved, and
 (g) Business continuity management.
 (ix)	 A	specific	contingency 	plan	to	bring	the	outsourced 	activity	back
in-house in an emergency situation which could arise due to service
provider’s inability to provide, and the costs, time and resources that
would be involved.
 (x) A  framework for cross-border outsourcing, taking into account the
differences in country environments.
 (xi) Limits on maximum exposure to a single service provider both in
terms of value and the number of contracts.
5(1) A  Licensed Bank shall ensure that the bank’s Business Continuity Plan (BCP)
contains all relevant operations including outsourcing arrangements.
5(2) A  Licensed Bank shall ensure that the service provider has a satisfactory BCP
and performs regular tests on its BCP.
6(1) A  Licensed Bank shall have a specifically designated unit/division at the Head


6(1) A  Licensed Bank shall have a specifically designated unit/division at the Head
Office to handle all outsourcing arrangements. A Licensed Bank incorporated
outside Sri Lanka shall have the designated unit/division at the local Head
Office.Business
Continuity
Management.
Monitoring &
Control.


Directions, Determinations, and Circulars issued to Licensed Commercial Banks  205
6(2) The monitoring unit s hall handle complaints, maintain records of such
complaints and carry out periodic supervision over outsourced activities.
6(3) A  Licensed Bank shall establish an effective management information
system that would on a regular basis provide information such as the type of
outsourced service activity, costs, volume, deliverables and expiry or renewal
dates of the contracts, the complaints, and the financial and operational
conditions of the service providers.
7(1) A  Licensed Bank shall be responsible for submitting transactions reports and
suspicious transactions reports to the Financial Intelligence Unit (FIU) in
respect of its customer transaction activities, even if such activities are under
outsourced arrangements.
8(1)  A  Licensed Bank shall ensure that marketing and recovery personnel
employed by the service providers are properly trained to handle their
responsibilities with care and prudence.
9(1) A  Licensed Bank shall inform the proposed outsourcing arrangements during
a particular calendar year to CBSL by 31 January of that year for concurrence.
9(2) A  Licensed Bank shall use the format annexed to this Direction for its
reporting requirements at 9(1) above to CBSL.
10(1)  The Banking Act Directions No. 7 of 2010 on Outsourcing of Business
Operations of Licensed Commercial Banks and the Banking Act Directions
No. 8 of 2010 on Outsourcing of Business Operations of Licensed Specialised
Banks, issued on 02 November 2010 are hereby revoked.Reporting to
FIU.
Outsourcing
arrangements
relating to
Marketing &
Recovery.
Reporting
Requirements.
Revocation of
previous Directions


206 Directions, Determinations, and Circulars issued to Licensed Commercial Banks
Annex
Business Operations that are to be Outsourced during the year …………..
Name of the Bank : ……………………………………………………………………………………………………………...
Activity/Function/
Process
to be OutsourcedName of the
Service ProviderAddressDate of
Commence-
mentPeriodNo. of persons
involved/
authorisedDeliverables/
ServicesCost
(per annum)
1.
2.
3.
4.
……………………………………………  ……………………………………………
 CEO / CCO / GM  Compliance Officer
Date : …………………………………  Date : …………………………………


Directions, Determinations, and Circulars issued to Licensed Commercial Banks  207
Ref. No. : 02  / 04 / 004 / 0012  / 001
08 October 2008
To CEOs of all Licensed Banks
USE OF BANKING SYSTEM BY INSTITUTIONS AND PERSONS
NOT AUTHORISED TO ACCEPT DEPOSITS
 A number of institutions and persons, that are not authorised to accept deposits from the public,
are mobilising funds from the public in the guise of offering investment products/schemes.  We find that
such institutions and persons have used the banking system for their operations and that some banks have
accommodated these transactions without identifying the legality of these transactions or the potential
risks.
 As you are aware, permitting these institutions and persons to use the banking system to resort to
such practices can tarnish the image of your institution and thereby weaken public confidence in the
banking system.
 In this regard, we wish to draw your attention to the Circulars on Customer Due Diligence dated
3 December 2001 and Know Your Customer Procedures dated 19 January 2007 issued by the Director
Bank Supervision and Know your Customer and Customer Due Diligence Rules issued by the Director,
Financial Intelligence Unit dated 18 May 2007. We wish to emphasise that special attention should be
paid to strengthen Customer Due Diligence and Know Your Customer Procedures and to comply with
such Circulars/Rules to ensure that sources of income and movement of funds are monitored, as required
in these instructions.
Yours faithfully,
 H A Karunaratne  B D W A Silva
 Dir ector of Financial Intelligence Unit  Director of Bank Supervision


208 Directions, Determinations, and Circulars issued to Licensed Commercial Banks
Ref. No. : 02  / 17 / 800 / 0007  / 01
Bank Supervision Department
06 November 2008
To: The CEOs of All Licensed Commercial Banks and
       Licensed Specialised Banks
Dear Sirs,
REGULATIONS MADE UNDER THE PUBLIC SECURITY ORDINANCE
PROSCRIPTION OF TAMIL REHABILITATION ORGANISATION
 We write to inform you that His Excellency the President has promulgated Emergency (Proscription
of Tamil Rehabilitation Organisation) Regulations, No. 9 of 2007 on December 26, 2007 proscribing the
Tamil Rehabilitation Organisation in Sri Lanka. A copy of the relevant Extraordinary Gazette  No.1529/13
dated December 26, 2007 is attached herewith for your information.
 In this regard, w e wish to draw your special attention to Regulation 3 of these Regulations and advise
you to refrain from carrying out any transactions with the above proscribed organisation.
Yours faithfully,
Actg. Director of Bank Supervision
Encl:
cc: Secretary-General / SLBA


Directions, Determinations, and Circulars issued to Licensed Commercial Banks  209
PART I : SECTION (I) – GENERAL
Government Notifications
CF 1/64
THE PUBLIC SECURITY ORDINANCE (CHAPTER 40)
REGULATIONS made by the President under Section 5 of the Public Security Ordinance
(Chapter 40).
Mahinda  Rajapaksa ,
President.
Colombo,
26th December, 2007.
REGULATIONS
1. These regulations may be cited as the Emer gency (Proscription of Tamil Rehabilitation Organization)
Regulations, No.9 of 2007.
2. For the purposes of ensuring public security, for the preservation of public order and for upholding
the Rule of Law, the Organization styled as the “Tamil Rehabilitation Organization” is hereby
proscribed.
3. From and after the date of the coming into operation of these regulations, any person who,–
 (a) wears any uniform, dress, symbol or other emblem, which signifies or indicates any association
with, or membership of, or adherence to the “Tamil Rehabilitation Organization” (hereinafter
referred to as the “proscribed organization”) ; or
 (b) summons or attends any meeting of the proscribed organization or participates or engages in
any activity of, or any activity connected with or related to the said proscribed organization ;
or


210 Directions, Determinations, and Circulars issued to Licensed Commercial Banks
 (c) s upports the proscribed organization, by inviting or exhorting persons to be enrolled as members,
or by contributing or collecting funds, or by furnishing information or securing any other
assistance to the said proscribed organization ; or
 (d) harbours, conceals or in any other manner assists any member of the proscribed organization,
with intention thereby to prevent, hinder or interfere with the apprehension, trial or punishment
of such member ; or
 (e) makes, prints, distributes or is in any way connected with or concerned in the making, printing,
distribution or publication of any written or printed matter, which is or which purports to be
printed, by or on behalf of the proscribed organization or by any member thereof ; or
 (f) communicates or attempts to communicate to any other person in any manner whatsoever, any
order, decision, declaration or exhortation made or purported to have been made by the proscribed
organization or by any member thereof, or any information relating thereto, for the purpose of
advancing the objectives of the said proscribed organization,
shall be guilty of an offence and shall on conviction be liable to imprisonment for a period not
exceeding fifteen years.
4. (1) Where the Minister is satisfied, after such inquiry as he thinks fit, that any person has custody
of any money, securities or credits which are being used or which are intended to be used, for
the purposes of the proscribed organization, the Minister may by order in writing declare that
such moneys, securities, and credits as are in the custody of such person, or any such moneys,
securities and credits which may come into his custody after the making of such order and any
other movable or immovable property belonging to the said proscribed organization, shall be
forfeited to the State.


forfeited to the State.
 (2) The decision of the Minister under paragraph (1) shall be conclusive and shall not be called in
question in any court by way of writ or otherwise.


Directions, Determinations, and Circulars issued to Licensed Commercial Banks  211
Ref. No. : 02  / 04 / 004 / 0012  / 001
Bank Supervision Department
23rd July 2003
To : All Licensed Commercial Banks and
        Licensed Specialised Banks
Dear Sir  / Madam,
ACCEPTANCE OF CERTIFICATES OF DEPOSIT (CD s)
Further to our even numbered letters dated 12 June and 16 June 2003 on the above subject, and
the discussions at the monthly meeting of the Chief Executive Officers of Licensed Commercial Banks
(LCBs) and Licensed Specialised Banks (LSBs).
All LCBs and LSBs are hereby informed that the requirement to maintain details pertaining
to customer identification of persons encashing CDs shall not apply in respect of CDs issued before
30 June 2003.
Yours faithfully,
Director of Bank Supervision


212 Directions, Determinations, and Circulars issued to Licensed Commercial Banks
Ref. No. : 02  / 04 / 004 / 0012  / 001
Bank Supervision Department
16th June 2003
To : All Licensed Commercial Banks and
        all Licensed Specialised Banks
Dear Sir  / Madam,
ACCEPTANCE OF CERTIFICATES OF DEPOSIT
Further to our letter No. 02/04/004/0012/001 dated June 12, 2003 on the above subject, all
licensed commercial banks and licensed specialised banks are hereby informed that they should satisfy
themselves with KYC in respect of customers who invest in CDs with banks, and maintain records of
adequate details pertaining to customer identification of the persons making investment in CDs with
the banks, and of persons encashing the CDs from the banks at the date of maturity. The banks are
requested to refrain from advertising the issue of CDs with anonymity.
The operating instructions BD/13/93 dated 5/10/1993 issued by the Central Bank on the Scheme
of Certificates of Deposit will remain effective.
Yours faithfully,
Actg. Director of Bank Supervision


Directions, Determinations, and Circulars issued to Licensed Commercial Banks  213
Ref. No. : 02  / 04 / 004 / 0012  / 001
Bank Supervision Department
12th June 2003
To : All Licensed Commercial Banks and
        all Licensed Specialised Banks
Dear Sir  / Madam,
ACCEPTANCE OF CERTIFICATES OF DEPOSIT
We refer to the discussions held at the Bank Managers’ meetings on the above subject and the
need to adhere to Know-Your-Customer rules (KYC) in respect of acceptance of certificates of deposits
(CDs).
All licensed commercial banks and licensed specialised banks are hereby informed that they may
satisfy themselves with KYC in respect of customers who invest in CDs with banks, and maintain
records of adequate details pertaining to customer identification of the persons making investment in
CDs with the banks, and of persons encashing the CDs from the banks at the date of maturity. The
banks are requested to refrain from advertising the issue of CDs with anonymity.
The operating instructions BD/13/93 dated 5/10/1993 issued by the Central Bank on the Scheme
of Certificates of Deposit will remain effective.
Yours faithfully,
Actg. Director of Bank Supervision


214 Directions, Determinations, and Circulars issued to Licensed Commercial Banks
Operating Instruction : BD/13/93  Banking Department
 Central Bank of Sri Lanka
 P O Box 590
 Colombo 1
 October 05, 1993
To :  All Commercial Banks
SCHEME OF CERTIFICATES OF DEPOSIT WITH MATURITY PERIODS
OF NOT LESS THAN FOUR YEARS
Commercial banks are hereby informed that they may issue Certificates of Deposits with a maturity
period of not less than four years subject to the following terms and conditions  : –
(a)  The face value of each Certificate of Deposit shou1d not be less than Rupees One Hundred
Thousand (Rs. 100,000/-).
(b) The funds mobilized through the Certificates of Deposit should be channelled only for
long-term lending for capital investment such as purchase of machinery and equipment and
construction.
(c) Separate accounts should be maintained in respect of funds mobilized through the Certificates
of Deposit, long-term lending for capital investment utilizing such funds, and interest earned
on such lending.
2. For the purpose of mainta ining statutory reserves, the paid-up value of each deposit accepted against
a Certificate of Deposit should be treated –
 (i) as a Time Deposit from the date of receipt of funds up to and including the day before the
date on which the deposit becomes payable/encashable whether the day before the date of
redemption/encashment is a bank holiday or not, and –
(ii) as a Demand Deposit on and after the date on which the deposit becomes payable until a
certificate of Deposit is redeemed by the Bank.
3. Certificates of Deposit issued for periods of not less than four years, which are not encashed prior to
their maturity dates, are exempted from stamp duty in terms of the Stamp Duty Act as amended by
the Stamp Duty (Amendment) Act, No. 29 of 1993
4. Certificates of Deposit issued for periods of not less than four years, but encashed prior to their dates


of maturity, are subject to the payment of stamp duty at the point of encashment.  The commercial
banks are required to ensure that stamp duty at the prevailing rate is deducted and remitted to the
Commissioner-General of Inland Revenue in the event of such premature encashment.
5. Interest accruing to banks on lendings under paragraph 1(b) will be exempted from Turnover Tax.
6. Any commercial bank which wishes to issue Certificates of Deposit under this Scheme is required to
inform the Chief. Accountant of the Central Bank of Sri Lanka and obtain the approval of the Central
Bank.
 M. B. Dissanayake
Chief Accountant


Directions, Determinations, and Circulars issued to Licensed Commercial Banks  215
Bank Supervision Department
16 June 2006
To :  CEOs of All Licensed Banks
Dear Sirs,
CONDUCT OF NON-GOVERNMENT ORGANIZATIONS (NGOs) ACCOUNTS
BY LICENSED BANKS
Further to our circular dated 31 May, 2006 on the above subject, the attention of all licensed banks
is drawn to the following:
• In order to scrutinize the legitimacy of financial transactions undertaken by NGOs who receive
funding assistance from external sources, the Ministry of Finance & Planning has requested
the relevant line Ministries to establish a proper monitoring procedure and ascertain the work
undertaken by them.
• Accordingly all licensed banks are requested to obtain a clearance letter from the relevant line
Ministry and External Resources Department before releasing such funds to the respective
NGOs, where it is evident that such NGO is operating outside its scope of activity. Copy of
clearance letter may be forwarded to Central Bank of Sri Lanka.
Yours faithfully,
Sgd, Director of Bank Supervision


216 Directions, Determinations, and Circulars issued to Licensed Commercial Banks
Bank Supervision Department
31 May 2006
To :  All Licensed Banks
Dear Sirs,
CONDUCT OF NON-GOVERNMENT ORGANIZATIONS (NGO) ACCOUNTS BY
LICENSED BANKS
The immediate attention of all licensed banks is drawn to the need to observe strict due diligence
and the “Know Your Customer” (KYC) Rules with regard to inward remittances and outward transfers
or withdrawal of funds from accounts operated by NGOs.
In this regard the attention of all licensed banks is drawn to the provisions of Section 15
subsection (2) of the Financial Transactions Reporting Act, No.6 of 2006 and Section 3 of the
Convention on the Suppression of Terrorist Financing Act, No.25 of 2005 which are annexed for ease of
reference.
Yours faithfully,
Sgd, Director of Bank Supervision
Encl.


Directions, Determinations, and Circulars issued to Licensed Commercial Banks  217
Section 15 subsection (2) of the Financial Transactions Reporting Act, No. 6 of 2006 reads as
follows:–
15 (2)  Where the Financial Intelligence Unit has reasonable grounds to suspect that a transaction or
attempted transaction may—
(a) involve the proceeds, which are attributable to any unlawful activity ; or
(b) be connected to the commission of the money laundering offence under the Money
Laundering Act, No.5 of 2006; or
(c) be prepara tory to the commission of an offence under the Convention on the Suppression of
Terrorist Financing Act, No.25 of 2005,
it may direct the Institution in writing or by telephone to be confirmed in writing within twenty-
four hours, not to proceed with the carrying out of that transaction or attempted transaction or any
other transaction in respect of the funds affected by that transaction or attempted transaction for
a period to be determined by the Financial Intelligence Unit, which may not be more than seven
days, in order to allow the Financial Intelligence Unit —
 (i) to make any necessary inquiries concerning the transaction or attempted transaction; and
 (ii) if  the Financial Intelligence Unit deems it appropriate, to consult or advise the relevant law
enforcement agency in the inquiries.
  (3)  T he Financial Intelligence Unit may make an ex-parte  application to the High Court of the
Western Province,  holden in Colombo, for an extension of the period of time stipulated in
subsection (2) setting out the grounds for such application.
 For the purposes of subsection 15 (2) (a) quote above “ unlawful activity ” interalia includes: –
 (a) .
 (b) any law or regulation  for the time being in force relating to the prevention and suppression
of terrorism
Hence, in view of the above provisions of law, if there is adequate proof that funds transferred


Hence, in view of the above provisions of law, if there is adequate proof that funds transferred
from a company to an individual would finance terrorism, it is possible for the FIU to inform the
Bank concerned which holds the funds for the company which proposes to release such funds
to an individual to carry out any act of terrorism, to suspend the account for a period of 7 days.
Before the expiry of 7 days, the FIU should apply to the High Court of Colombo for an extension
of the time if the time is insufficient to take in appropriate action to seize the funds in the account.
Further, Section 3 of the Convention on the Suppression of Terrorist Financing Act, No.25 of 2005
reads as follows:–
3. (1)  A ny person who, by any means, directly or indirectly, unlawfully and willfully provides or
collects funds, with the intention that such funds should be used, or in the knowledge that they
are to be used or having reason to believe that they are likely to be used, in full or in part, in order
to commit, –
 (a) an act which constitutes an offence within the scope of, or within the definition of any one
of the Treaties specified in Schedule I hereto;
 (b) any other act, intended to cause death or serious bodily injury, to civilians or to any other
person not taking an active part in the hostilities, in a situation of armed conflict, and the
purpose of such act, by its nature or context is to intimidate a population or to compel a
government or an international organization, to do or to abstain from doing any act,
shall be guilty of the offence of financing of terrorists or terrorist organizations:


218 Directions, Determinations, and Circulars issued to Licensed Commercial Banks
Provided that, for an act to constitute the offence set out above, it shall not be necessary to show
that the funds collected were actually used in the commission of an offence.
(2) Any person who–
 (a) Attempts to commit;
 (b) Aids or abets the commission of; or
 (c) Acting with a comm on purpose with another person or a group of persons, contributes to the
commission of,
the offence of financing of terrorists or terrorist organizations, shall be guilty of an offence under
this Act.
In this subsection “ abet” has the same meaning as in sections 100 and 101 of the Penal Code.
(3) Where an offence specified in subsection (1) or subsection (2) of this section is committed
by a body of persons, then, every member, Director, Manager, Secretary, officer or servant of
such body of persons shall be guilty of such offence, unless it can be proved that the offence
was committed without their knowledge or that they exercised all due diligence to prevent the
commission of such offence.
(4) A  person guilty of an offence under subsection (1) or subsection (2) of this section, shall on
conviction after trial on indictment by the High Court, be punished with imprisonment for a term
not less than fifteen years and not exceeding twenty years, and also be liable to a fine.
4. (1)  On indictment of any person in the High Court, for an offence under this Act, all funds collected
in contravention of the provisions of section 3, shall, with effect from the date of filing of such
indictment –
 (a) if such funds are lying in an account with any Bank, be subject to an order of freezing; or
 (b) if such funds are in the possession or control of any person be liable to seizure;
(2) The freezing or seizure of funds in terms of subsection (1) shall be in force until the conclusion
of the trial.
(3) On the filing of indictment, the Attorney-General shall notify the Central Bank of the freezing or


seizure as the case may be.
(4) The Central Bank shall thereupon take steps to give adequate publicity to the order of freezing or
seizure as the case may be, as it shall think fit.


Directions, Determinations, and Circulars issued to Licensed Commercial Banks  219
My No. : 02  / 04 /004 / 0012  / 001
Your No. :
Bank Supervision Department
19 January 2007
To : All Licensed Commercial Banks and
  all Licensed Specialised Banks
Dear Sirs,
CUSTOMER DUE DILIGENCE – ‘KNOW YOUR CUSTOMER’ PROCEDURES
In view of the potential risks on the banking and financial system stability that may arise from cross-
border financial transactions, all licensed banks shall conduct due diligence on all customers involved in
cross-border financial transactions and ensure that all requirements under the relevant statutes including
Prevention of Money Laundering Act, No.5 of 2006, financial Transactions Reporting Act, No.6 of 2006
and Convention on the Suppression of Terrorist Finance Act, No.25 of 2005 and the Exchange Control Act,
No.24 of 1953 are complied with.
Accordingly, the licensed banks shall report any transaction of suspicious nature to the relevant
authorities in terms of the above statutes immediately.
Yours faithfully,
Sgd, P. Samarasiri
Director of Bank Supervision


220 Directions, Determinations, and Circulars issued to Licensed Commercial Banks
Bank Supervision Department
Central Bank of Sri Lanka
3rd December, 2001
To :  All Licensed Commer cial Banks and
 Licensed Specialised Banks
CUSTOMER DUE DILIGENCE –
‘KNOW YOUR CUSTOMER’ PROCEDURES
Your attention is drawn to the discussion on the above subject at the Bank Managers’ Meetings
held in the months of October and November 2001. Please find enclosed a Guideline on Customer Due
Diligence - ‘Know Your Customer’ procedures, which set out the minimum criteria to be adopted by
banks.
These guidelines will be effective immediately.
Yours faithfully,
Director of Bank Supervision


Directions, Determinations, and Circulars issued to Licensed Commercial Banks  221
Ref. No. : 02  / 04 / 004 / 0012  / 001
Bank Supervision Department
Central Bank of Sri Lanka
3rd December, 2001
To :  All Licensed Commer cial Banks and
 Licensed Specialised Banks
GUIDELINES ON CUSTOMER DUE DILIGENCE –
‘KNOW YOUR CUSTOMER’ PROCEDURES
In order to prevent the unchecked use of the financial system for money laundering and
transactions related to terrorism and subversive activities, it is recommended that all banks follow these
guidelines on customer identification at the time of opening an account for a prospective customer,
or before establishing a business relationship with a prospective customer, or thereafter when there is
a material change in the way an account is operated. In addition to minimising the risk of use of the
banking system for illicit activities, the adoption of these guidelines will provide protection against
possible frauds, and enable the timely recognition of suspicious transactions and protect the bank from
reputational, legal and financial risks.
1. All banks are encouraged to document their policies on customer acceptance, customer
identification/risk management and monitoring of high risk accounts.
2. In order to ‘know their customers’ the banks are expected to:
 (i) Have sufficient information on the identity of the customer .
 (ii) Be satisfied that a prospective customer is who he/she claims to be. If the customer is acting
on behalf of another, sufficient evidence on the identity of both parties should be obtained.
 (iii) Ensure that information obtained in respect of a customer in the normal course of business is
used effectively for the prevention of money laundering/terrorism funding.
3.	 Customer 	Identification
3.1 Personal Accounts
 The following information should be obtained from all prospective personal customers:
• Customer ’s name from an original of a document issued by an official authority, preferably


• Customer ’s name from an original of a document issued by an official authority, preferably
bearing a photograph of the customer, such as the national identity card, passport or the
driving license. The reference number of such document should be recorded by the bank.
• Cust omer’s permanent mailing address and supporting evidence which should be
confirmed through correspondence.
• The authenticity and integrity of an introducer and his own identity should be established
to the satisfaction of the bank.
• I ndependent verification of introducer’s address should be made and filed with the
mandate.
3.2 Corporate Customers
 The following documents should be obtained:
• Certificate of Incorporation, Memorandum and Articles of Association or Partnership
Agreement, as appropriate, to establish the legal status of the customer


222 Directions, Determinations, and Circulars issued to Licensed Commercial Banks
• Resolution by the Board of Directors
• Duly completed application form containing authorised specimen signatures
• The identity of each director and those authorised to operate the account, should be
established.
• For companies, businesses or partnerships registered outside Sri Lanka, similar documents
should be obtained, taking into consideration any soft regulatory system in the country of
origin.
3.3 In the case of accounts operated by:
• A  Power of Attorney
• Joint account holders
• Partnerships
• T rust accounts/Fiduciary accounts
The identity should be established in respect of each signatory to the account.
3.4 More  stringent customer identification policies should be established in the following
circumstances:
• Accounts opened by post or in any other circumstances where there is no face to face
contact with the customer.
• In the case of one-off transactions for non-account holders of the bank, in particular where
such transactions involve large amounts of cash, or the receipt of unusually large foreign
remittances, the customer should be asked to produce documentary evidence of identity,
and copies of such documents should be retained by the bank.
• Where safe custody facilities are made available to non-account holders, identification
procedure for non-account holders, as above, should be followed.
• In accommodating requests for remittances of funds between accounts using electronic
payment systems, where such transactions are of a large size, the bank should establish the
identity of the sender and ascertain the identity of the recipient.
4. In instances where the bank cannot establish the true identity of the customer to its satisfaction, it
should not commence any business relationship with such customer.
5. Other  Recommendations
5.1 In respect of all types of accounts, returned letters and statements should be followed-up.


5.1 In respect of all types of accounts, returned letters and statements should be followed-up.
5.2 Where after opening an account, the features of the transactions, as known at the time of
opening of the account changes significantly, causing grounds for suspicion of criminal
activity, inquiries should be made with regard to the changes in the financial position and
nature of activities, which should be recorded.
5.3 Retention of records: All evidence of identification as set out above should be maintained for
a minimum period of five (05) years even after an account is closed.
5.4 Where the officer handling the account opening has reasons to believe that a new relationship
may expose the bank to significant reputational risk, he may refer such request to an officer of
higher authority before opening the account.
5.5 The internal controller/auditor may be required to ensure compliance with the bank’s policies
on customer acceptance and identification.
P. T. Sirisena
Director of Bank Supervision


Directions, Determinations, and Circulars issued to Licensed Commercial Banks  223
Ref. No. : BS/7/87
Bank Supervision Department
Central Bank of Sri Lanka
Renuka Building
41, Janadhipathi Mawatha
Colombo 1.
25 March 1997
To : All Commercial Banks
Dear Sir/Madam,
DISHONOURED CHEQUES
I wish to draw your attention to the high incidence of cheque returns which has become a serious
matter of concern, in view of the impact it would have on the integrity and efficiency of the payment
system.
The commercial banks are therefore requested to :
 (a) draw the attention of their customers to the legal consequences that may be encountered in the
event of a cheque return,
 (b) Screen the prospective customers before opening current accounts, by calling for information
from other banks about their status.
Yours faithfully,
Sgd. Y. A. Piyatissa
Director of Bank Supervision


224 Directions, Determinations, and Circulars issued to Licensed Commercial Banks
Bank Supervision Department
20th October 2003
To : All Foreign Bank Branches
Dear Sir,
INTERNAL AUDIT FUNCTION
The Basel Committee on Banking Supervision has continuously emphasised the importance of
the internal audit function as a vital component of an efficient internal control mechanism in banks.
Internal auditing is defined as an “independent, objective assurance and consulting activity designed to
add value and improve an organisation’s operations. It helps an organisation accomplish its objectives
by bringing a systemic, disciplined approach to evaluate and improve the effectiveness of risk
management, control, and governance processes”.
An effective internal audit function within a bank would be a valuable source of information for
bank management and supervisors, as it would indicate the quality of the internal control system of the
bank.
In the light of the foregoing, I am directed by the Monetary Board to ensure that all banks have
an effective internal audit function in place. Accordingly, all branches of Foreign Banks operating in
Sri Lanka are hereby requested to ensure that an Internal Audit Unit of their own is established, or in
the absence of the same the Head Office or the Regional Office of such bank carries out an audit of the
branch at least annually.
Yours faithfully,
Director of Bank Supervision


Directions, Determinations, and Circulars issued to Licensed Commercial Banks  225
Bank Supervision Department
13 June 2006
To :  CEOs of All Licensed Banks
Dear Sirs,
PREVENTION OF FRAUDS USING ELECTRONIC CARDS
Recent reports have highlighted the use of credit cards and ATM cards for fraudulently withdrawing
large sums of money from banks in many countries, especially in the South East Asian region.
The Presidential Secretariat, by its letter dated 06 June 2006 has drawn the attention of the Central
Bank to the need to take precautionary measures to avert the possibility of such attempts being made
even in Sri Lanka, considering the particular danger of terrorist groups using them as a means of creating
a sense of insecurity in a vital sector of the economy.
Accordingly, Licensed Banks that issue electronic cards to customers should, as soon as is
practicable take steps to:
1. Introduce security features such as tamper-proof micro chips for electronic cards, and in the
interim-
2. T ake appropriate steps to educate their customers with regard to the safety of their electronic
cards and remind them at regular intervals the steps that should be taken by them, in order to
avoid being victims of fraudulent use of such cards.
3. Ensure that adequate provision is made annually for the necessary investment in technology .
The banks are also encouraged to introduce other relevant security measures in respect of ATM
cards/machines. It is suggested that CCTV cameras be installed at all ATM outlets in order to enhance
the surveillance at ATM outlets.
Your views on this matter are welcome for discussion at the forthcoming monthly meeting of CEOs
on the 22 June 2006.
Yours faithfully,
Director of Bank Supervision