Sri Lanka Customs, the country’s frontline agency for import and export regulation and a key source of government revenue, has been hit by a damning National Audit Office report exposing serious administrative lapses, opaque financial practices, and policies that undermine state coffers. The findings raise urgent questions about governance failures inside one of Sri Lanka’s most powerful institutionsan agency responsible for collecting nearly 37% of national tax revenue.
At the centre of the audit is a complex network of funds run by Customs, including the Reward Fund, Management and Compensation Fund, and the Overtime and Cargo Examination Fund, along with four additional sub-funds. While these funds are meant to incentivize performance and support operational needs, auditors found that they operate with minimal oversight, weak policy guidance, and structures that create perverse incentives for officers.
Distorted Penalty Sharing System
The most alarming revelation relates to how penalties from customs offences are shared. When an import-related offence is detected, only 30% of the net penalty after internal deductions—is ultimately credited to the Consolidated Fund. In some cases, this 30% is even lower than the legitimate customs duty that should have been charged. From 2012 to August 2023, just Rs. 14.53 billion reached the Treasury under this formula, while Rs. 24.22 billion was paid out as rewards to officers and informants.
Irregular Reward Schemes
The audit also uncovered that rewards have been distributed for 35 years based on internal departmental ordersnot on a scheme approved by the Minister of Finance as legally required. Even routine operational detections, which do not qualify as offences, were treated as revenue-generating “offence detections,” granting officers eligibility for significant reward payments. This effectively allows staff to receive salaries, incentives, overtime, and extra benefits simply for reporting to work.
Penalty Mitigation and Revenue Losses
A separate concern is the drastic mitigation of penalties. Between 2017 and 2023, 17 major penalties originally totaling Rs. 7.61 billion were reduced to just Rs. 481.69 million. As a result, the government received only Rs. 144.5 million, leading to a revenue loss of Rs. 181.5 million compared to the tax that was attempted to be evaded. Auditors linked these reductions to discretionary relaxations by investigating officers and powers exercised by senior Customs officials.
The report also points to a striking disregard for basic administrative discipline. Despite a 2017 circular mandating fingerprint-based attendance for all public servants, Customs continues to rely on handwritten registers, leaving room for manipulation.
Meanwhile, the overtime system is riddled with abuse90% of the overtime fund is paid directly to officers regardless of whether they worked beyond normal hours, with only 10% going to the state. In 2021 and 2022 alone, officers received Rs. 948 million and Rs. 938 million, while the government received just Rs. 85.7 million and Rs. 83.6 million.
The audit paints a stark picture of an institution weakened by outdated policies, unchecked internal controls, and a reward-driven culture that prioritizes personal gain over national interest. With billions in potential revenue slipping away amid lax management and discretionary decision-making, the report underscores the urgent need for sweeping reform in Sri Lanka Customs before further damage is done to the country's already strained public finances...