The Foreign Exchange Act, No. 12 of 2017, (the Act) serves as the principal legislation governing foreign exchange transactions in Sri Lanka. Non-compliance with the Act can result in significant penalties. Designed to promote a business-friendly environment, the Act aims to attract foreign investment while ensuring transparency and efficiency in currency transactions. It also aligns Sri Lanka’s foreign exchange practices with international standards, fostering economic growth and global integration.

The Central Bank of Sri Lanka (CBSL) is authorized under the Act to enforce penalties for violations, including breaches of its provisions and directives. These penalties may involve monetary fines for individuals or entities and the suspension or revocation of licences for authorized dealers (i.e., licenced banks) and for restricted dealers (i.e., money exchanges, etc).

A clear understanding of these penalties and strict adherence to the Act’s requirements are essential for individuals and businesses to avoid legal repercussions and maintain compliance with Sri Lanka’s foreign exchange regulations.

The following provides an overview of the key provisions related to penalties under the Act.

Non-compliance by an authorized dealer or restricted dealer of any provision of the Act or any Regulation, Order, Direction, Guideline.

Where CBSL is satisfied that an authorized dealer or restricted dealer has committed any of the following violations:

•    Engaging in foreign exchange transactions, whether current or capital, in contravention of the Act;

•    Dealing in foreign exchange related to foreign assets in breach of the Act;

•    Failing to comply with guidelines or directives issued by the CBSL; or

•    Violating any provision of the Act, or any related regulation or order,

the CBSL is empowered to take appropriate enforcement actions, which may include:

• • Issue Notice Directing Compliance | Section 11 (1)

Upon notifying the Minister in charge of the subject of the Central Bank, the CBSL may issue a notice directing the authorized dealer or restricted dealer to comply with the provisions of the Act, or any related regulation, order, guideline, or directive. This notice will specify a timeframe within which the dealer must rectify the non-compliance.

• • Temporary Suspension of authorization granted to authorized dealers | Section 11 (2)

If an authorized dealer or restricted dealer fails to comply with the notice within the specified period, the CBSL may temporarily suspend the authorization granted under Section 4 of the Act, which permits the dealer to engage in foreign exchange transactions.

• • Revocation of the authorization or permit granted | Section 11 (3) and Section 11 (4) 

If the temporary suspension of an authorization occurs, the CBSL may, after conducting an inquiry and giving the authorized dealer or restricted dealer a reasonable opportunity to be heard, revoke the authorization or permit with the approval of the Monetary Board.

Alternatively, if revocation is deemed unnecessary and considering all relevant circumstances, the CBSL may, after allowing the authorized dealer or restricted dealer a fair opportunity to respond, take one of the following actions:

a)    Require the authorized dealer or restricted dealer, who has engaged in dealings involving foreign assets in violation of the Act, to pay an amount as penalty to the CBSL. This amount, which must be paid within the specified time, may not exceed the value of the foreign exchange transaction / foreign asset in question or it can be a portion thereof. It must be paid in foreign exchange or Sri Lanka currency, along with expenses incurred by the CBSL for detecting and investigating the transaction and will be credited to the Consolidated Fund.

b)    Impose a limitation on the authorized dealer or restricted dealer, who directly or indirectly participated in the unauthorized transaction, restricting them from engaging in current or capital transactions related to foreign exchange for a period not exceeding twelve months.

In any case where the CBSL revokes an authorization or permit, requires payment, or imposes a limitation, it must communicate the decision or determination in writing, including the reasons, to the affected authorized dealer or restricted dealer.

Appeals against Revocation | Section 11 (7)

If an authorized dealer or restricted dealer is aggrieved by the revocation of their authorization or permit, by a requirement to pay a determined sum, or by a limitation imposed for up to twelve months, they may appeal the decision. The appeal must be lodged within thirty days of receiving the communication of the decision, and it will be heard by the Board of Inquiry in accordance with the procedure set out in Section 13.

Despite the appeal, the revocation of the authorization or permit or the imposed limitation will take effect from the date the order is issued, unless an Order is made on the appeal that provides otherwise.

Every investigation and inquiry under section 11 shall be concluded within a period of six months from the date of commencement of such investigation or inquiry unless an extension of time is obtained with the approval of the Minister.

Non-compliance by any other person not being an authorized dealer or restricted dealer | Section 11 (5)

If any person, or class of persons, other than an authorized dealer or restricted dealer violates the provisions of the Act, the CBSL, after informing the Minister and providing the person with a reasonable opportunity to be heard, may issue a written requirement for the payment of a penalty.

This penalty can be:

•    A sum not exceeding rupees one million; or

•    An amount not exceeding the value of the current or capital transaction, or the value of the foreign asset involved, either in foreign exchange or Sri Lanka currency.

Additionally, the penalty shall include the expenses incurred by the CBSL for detecting and investigating the transaction, with all amounts credited to the Consolidated Fund.

If a person, other than an authorized dealer or restricted dealer, is aggrieved by the imposed penalty, they may appeal the requirement to pay the penalty. This appeal must be submitted within thirty days of receiving the penalty notice and will be determined by the Board of Inquiry in accordance with the procedure outlined in Section 13.

Appeals and Board of Inquiry | Section 13

The Minister shall appoint a Board of Inquiry to handle appeals made by aggrieved parties as outlined above.

The Board will consist of:

•    A retired judge of the Supreme Court or the Court of Appeal, who will serve as the Chairman; and

•    Two individuals with expertise in international financial or exchange transactions, who have held senior managerial roles in the public or private sector and are recognized for their integrity and reputation.

The Board of Inquiry must make a determination on the appeal within thirty days of receiving it. The appellant may appear in person or with an authorized representative. After hearing the appeal, the Board may confirm, vary, or reverse the original decision. The Board’s written decision, along with the reasons, will be communicated to the appellant and a report will be submitted to the Minister.

Liability of bodies corporate or unincorporated| Section 14

If a body corporate or unincorporated entity is required to pay a sum of money or penalty to the CBSL under Sections 11 or 13, every director, member, or partner of that entity will be personally liable, jointly and severally, to pay the specified amount and related expenses.

However, a director, member, or partner can avoid liability by proving that the act or omission leading to the penalty occurred without their knowledge or that they exercised due diligence to prevent it.

Liability to Pay a Penalty and Recovery of sums due to Government| Section 15

If a person fails to pay the required sum or penalty, the Governor of the Central Bank will issue a certificate detailing the amount owed. This sum will be treated as a debt owed to the Government. The CBSL may then present the certificate to the District Court in the district where the debtor resides to recover the amount. The certificate, signed by the Governor, will be admissible as evidence without needing signature verification and will serve as prima facie proof of the stated debt. Any amount recovered will be deposited into the Consolidated Fund.

Penalties Where No Penalty is Prescribed | Section 26

Any person who acts in contravention of the provisions of the Act or any regulation Order or direction issued or made thereunder for which no penalty is prescribed, may be required in writing by the CBSL to pay as a penalty a sum not exceeding one million rupees, within such period as may be specified in the notification of such requirement.

Any person who is aggrieved by an imposed penalty may, within thirty days of being notified of the requirement to pay the penalty, appeal the decision to the Board of Inquiry. The appeal will be determined by the Board in accordance with the procedure outlined in Section 13.

Conclusion

Through these provisions, the CBSL plays a crucial role in fostering a well-regulated and transparent foreign exchange environment in Sri Lanka. The Act grants the CBSL the authority to monitor and oversee all foreign exchange transactions, ensuring that they comply with established legal frameworks. This oversight is essential for preventing unauthorized or illegal transactions that could destabilize the financial system or harm the broader economy.

By providing clear mechanisms for enforcement and penalties, the Act holds individuals and entities accountable for violations, thereby promoting greater compliance with the rules. The ability to impose fines, suspend or revoke licenses, and place limitations on dealers ensures that those who engage in improper activities face significant consequences, thereby deterring potential misconduct.

Moreover, the provisions for appeal and inquiry offer an important safeguard, ensuring that parties aggrieved by decisions made by the CBSL have a fair opportunity to present their case. This further strengthens the system’s fairness and transparency, giving both businesses and individuals confidence in the regulatory framework.

Ultimately, the CBSL’s role in closely regulating foreign exchange transactions not only reduces the risk of illegal or illicit activities but also supports the stability and integrity of Sri Lanka’s financial system. This creates a more secure environment for both domestic and international investors, contributing to economic growth and integration into the global financial community.