The full report is provided in PDF format at the end of the article.
A civil society report says Sri Lanka FATF (Financial Action Task Force) NGO rules have led to banking restrictions, surveillance and excessive controls on non-profit groups.
COLOMBO — A civil society network has accused successive Sri Lankan governments of using anti-money laundering and counter-terrorist financing requirements to impose excessive financial controls, surveillance and administrative restrictions on non-profit organizations, arguing that some measures go beyond what the Financial Action Task Force requires.
The Sri Lanka CSO FATF Network, in an August 2026 shadow report prepared for Sri Lanka’s mutual evaluation, says laws, Central Bank directives and NGO registration procedures have collectively created what it describes as a highly monitored and securitised environment for civil society organisations.
The report’s central argument is that legitimate measures intended to prevent money laundering and terrorist financing have been applied too broadly to non-profit organizations, particularly those receiving foreign funding or working on human rights, minority rights and other politically sensitive issues. It characterizes this as the “weaponization” of FATF standards.
That is the assessment of the civil society network rather than a finding by FATF itself or a court.
The Government, by contrast, has said recent amendments to Sri Lanka’s anti-money laundering laws are intended to strengthen the country’s framework against money laundering, terrorist financing and financial crime while bringing it into line with international standards. Parliament passed three key amendment Bills on July 9, with the Speaker subsequently endorsing the Acts on August 4.
FATF itself warns against excessive controls
The dispute comes at a significant moment because FATF has itself revised its approach to non-profit organisations.
In 2023, FATF amended Recommendation 8, which deals with the risk that non-profit organisations could be abused for terrorist financing. The organisation says the revised standard is intended to ensure that governments use focused, targeted and risk-based measures rather than subjecting the entire non-profit sector to blanket controls.
FATF has explicitly acknowledged that over-application of its standards can cause financial exclusion, de-risking and suppression of legitimate civil society activity. Its current guidance says safeguards should protect relevant NPOs from terrorist financing abuse without unnecessarily disrupting or discouraging their legitimate activities.
That international position forms the foundation of the shadow report’s challenge to Sri Lanka’s regulatory approach.
The report says a draft NGO law circulated in July would require a wide range of organizations involved in non-profit activities to register with a central authority, even where some are already regulated under other legal structures.
According to the document, the proposed framework covers NGOs, trusts, companies limited by guarantee, associations, foundations, movements, microfinance institutions and even groups of five or more people engaged in voluntary social service or other non-profit activity.
It further claims the proposed law would give a designated Competent Authority and police significant powers, including access to organizational premises and records and the ability to suspend registration in certain circumstances. The report argues that applying one regulatory structure across such a broad range of organizations conflicts with FATF’s risk-based approach.
Because the NGO legislation remains a draft, those provisions should not be treated as existing legal powers.
Three anti-money laundering laws amended
The report also sharply criticises amendments made in 2026 to the Prevention of Money Laundering Act, Financial Transactions Reporting Act and Convention on the Suppression of Terrorist Financing Act.
Parliament formally passed all three measures on July 9. The Prevention of Money Laundering amendment secured the required special majority in relation to Clause 14 following the Supreme Court determination, while the other two Bills were passed with the procedures recorded by Parliament.
The civil society network argues that the amendments concentrate substantial administrative and investigative power in a limited number of state officials while providing insufficient procedural safeguards.
Its report raises particular concerns over powers to freeze funds, suspend transactions and exchange financial information, arguing that these could disproportionately affect civil society if applied without sufficiently clear thresholds or independent safeguards.
The report acknowledges, however, that the legislation went before the Supreme Court.
Its account states that the Court did not accept several constitutional objections to the Financial Transactions Reporting amendment and found adequate safeguards in important areas. On the money laundering legislation, the Court identified constitutional problems with parts of the proposed framework and outlined amendments or special-majority requirements before enactment.
That judicial history is important because the shadow report’s contention that the measures exceed FATF requirements is separate from the question of whether Parliament enacted them constitutionally.
2019 Central Bank circular under scrutiny
A major part of the report focuses on the relationship between civil society organisations and Sri Lankan banks.
On May 23, 2019, the Financial Intelligence Unit of the Central Bank issued Circular No. 01/19 to licensed banks.
The circular refers to existing customer due-diligence rules requiring enhanced scrutiny of NGOs, NPOs and charities. It also directs banks to monitor and report organizations receiving direct foreign funds where they are not registered with the National Secretariat for Non-Governmental Organizations or are registered through certain other institutions.
Crucially, the circular does not itself say that every foreign remittance to an unregistered organisation must automatically be rejected.
The shadow report alleges that banking practice has nevertheless gone considerably further. It says some organizations have been told they cannot receive foreign money unless they register with the NGO Secretariat, while others have faced repeated requests for project agreements, donor information and beneficiary details.
The Central Bank issued another circular in April 2025 establishing a “Confirmation Letter of Eligibility for Registration as a Non-governmental Organization” that can be used while the registration process is continuing. The official form states that final registration follows clearance reports from relevant stakeholders.
The civil society network contends that this system effectively makes NGO Secretariat registration a gateway to ordinary banking services for organisations that may already possess another valid legal form.
Survey documents widespread banking difficulties
The report supports its claims with a survey conducted in 2025.
A total of 102 organisations from across Sri Lanka responded to a trilingual questionnaire about their experience accessing financial services during the previous five years.
Respondents primarily worked in areas including human rights, poverty reduction, livelihoods, health and education, with some serving ethnic and religious minorities and LGBTIQ communities. Twenty-one per cent identified themselves as women-led organizations.
According to the report, 69% experienced difficulties receiving foreign funds.
At least 42% said banks told them they needed NGO Secretariat registration to receive foreign funds, while 37% were asked to provide additional documents, 32% experienced transaction delays, and 22% reported difficulties withdrawing or depositing money.
Nearly half encountered problems when attempting to open new bank accounts. Only 17% of respondents reported experiencing none of the identified difficulties.
Those banking problems reportedly had consequences beyond paperwork.
The survey found that 45% said delays affected their ability to comply with donor or project timelines. Another 37% reported difficulties paying salaries or said they had been forced to terminate staff, while 31.5% reported reputational damage and 29% said delays directly affected services to beneficiary communities. Pasted text (2)
These figures are findings of the network’s own survey. The report itself notes limitations, including fear of reprisals among potential respondents and the possibility that reliance on online survey tools underrepresented smaller organizations in remote areas.
Organisations describe surveillance and frozen funds
Five anonymised case studies provide a more detailed account of how organisations say the system operates in practice.
One minority-led humanitarian organisation said scrutiny became markedly more intense after the 2019 Easter Sunday attacks and described repeated requests for grant agreements, project information and beneficiary details.
A human rights organisation working in the North and East said a bank once blocked transactions over the absence of NGO Secretariat registration and alleged that another remittance remained frozen for almost a year while the bank sought confidential project information.
That organization also said it had challenged banks to identify the legal provisions underpinning some demands and claimed officials became more flexible when asked to put those requirements in writing.
An LGBTIQ organisation said it had experienced difficulty opening and maintaining accounts and alleged that one bank eventually returned a foreign donor remittance because it was not registered with the NGO Secretariat.
Its registration application had remained pending for more than two years, the organization said, while its staff and activities were subjected to scrutiny from several state bodies.
These accounts are anonymous testimonies collected by the authors and have not been independently adjudicated. They nevertheless form an important part of the evidence the network intends FATF evaluators to consider.
Broader argument over national security
The report places the banking restrictions within a much longer history of tension between Sri Lankan governments and sections of civil society.
It argues that organisations receiving foreign funding, human rights defenders and groups operating in the North and East have repeatedly been viewed through a national-security lens.
The document says this intensified after the end of the war in 2009 and again following the Easter Sunday attacks in 2019, when Muslim organizations and charities came under increased scrutiny.
It also points to recommendations made by Parliament’s Sectoral Oversight Committee on National Security in 2020 calling for closer coordination between the Financial Intelligence Unit, intelligence authorities and the NGO Secretariat to monitor foreign funding.
The report argues that this security-oriented approach risks treating legitimate civic activity as inherently suspicious.
Supporters of stronger AML/CFT measures, on the other hand, point to the need to protect financial channels from exploitation by terrorist organizations and other criminal actors. FATF itself recognizes that some NPOs can be vulnerable to terrorist financing abuse and requires states to assess those risks and take appropriate action.
The key disagreement is therefore not whether safeguards are necessary, but how broadly they should be applied and whether Sri Lanka’s measures are proportionate to demonstrated risks.
Report calls for laws and circulars to be reversed
The Sri Lanka CSO FATF Network concludes with a series of recommendations to both the Government and FATF.
It calls on the Government to reverse the 2026 amendments to the three principal AML/CFT laws, withdraw the draft NGO legislation, rescind Central Bank Circulars 01/2019 and 01/2025, strengthen due-process protections in FIU interactions with civil society and remove the Ministry of Defence from involvement in NGO oversight.
It also asks FATF to ensure that Sri Lanka complies with the organisation’s risk-based standards without using them to restrict legitimate NPO activity.
Whether FATF evaluators accept that argument will depend not only on the legal wording of Sri Lanka’s regulatory framework but on evidence of how those measures work in practice.
FATF’s own revised guidance makes one point clear: governments must protect the non-profit sector from genuine terrorist financing risks, but those controls should be targeted and proportionate and should not become a mechanism for suppressing legitimate civil society.
SOURCE:- Global NPO Coalition on FATF
