Sri Lanka's battle to rebuild its economy faces an increasingly dangerous challenge from underground money transfer networks that continue to operate beyond the reach of regulators, draining billions in foreign exchange while exposing the country to serious international financial risks.
Despite repeated attempts by the Central Bank of Sri Lanka (CBSL) to bring Hawala and Undiyal operators into the formal financial system, the Parliamentary Committee on Public Finance (CoPF) has revealed a startling reality: not a single local operator has registered under the country's new licensing framework.
The CBSL reduced the minimum capital requirement for registration from Rs. 20 million to Rs. 15 million in an effort to encourage compliance. Yet the response has been virtually non-existent. Only three foreign-registered remittance providers submitted applications before the March 2026 deadline, leaving the domestic informal market untouched.
Financial experts warn that this failure could have severe consequences as Sri Lanka undergoes its third Financial Action Task Force (FATF) Mutual Evaluation.
The Financial Intelligence Unit identifies informal remittance systems as high-risk channels capable of facilitating tax evasion, narcotics financing, underground cryptocurrency transactions and money laundering. Unless authorities demonstrate stronger enforcement, Sri Lanka risks returning to the FATF Grey List, increasing international scrutiny over its financial sector.
Legal weaknesses further complicate enforcement efforts.
Officials informed Parliament that the Foreign Exchange Act of 2017 removed automatic criminal liability for many foreign exchange offences. Investigators now face significant hurdles because prosecutions often require evidence linking operators to larger offences such as money laundering or organised fraud.
Recognising these weaknesses, the Government is preparing legislative amendments that would restore criminal penalties for serious foreign exchange violations.
Meanwhile, the economic impact continues to deepen.
Millions of dollars in remittances reportedly bypass licensed financial institutions every day through parallel settlement systems. Instead of strengthening official foreign reserves, these funds circulate within an underground economy where foreign currency is matched against domestic payments for questionable imports and undocumented commercial transactions.
To counter this trend, authorities have introduced incentives aimed at attracting migrant workers back to formal banking channels.
These include market-based exchange rates that eliminate the pricing advantage once enjoyed by Hawala operators, concessional housing loans administered through the Sri Lanka Bureau of Foreign Employment, a contributory pension scheme for overseas workers and specialised banking products linked directly to foreign currency remittances.
The Government has also established an Anti-Money Laundering and Counter-Terrorist Financing operational committee involving 25 state institutions to accelerate legal reforms before the FATF assessment.
Whether these measures can dismantle Sri Lanka's deeply entrenched shadow remittance economy remains uncertain. However, economists caution that failure to act decisively could undermine the country's foreign exchange recovery and weaken investor confidence just as the nation struggles to emerge from its worst financial crisis.
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