Colombo High Court Confiscates Rs. 201 Million from Chinese National Over Illegal Gem Trade: Unearthing the Illicit Gem Trade in Sri Lanka

A recent verdict by the Colombo High Court, ordering the confiscation of over Rs. 201 million from a Chinese businessman’s bank account due to unlicensed gem trading and money laundering, has brought to light merely the tip of a deeply entrenched problem. Chinese nationals have systematically established a parallel gem trading economy in Sri Lanka, largely operating outside the purview of local authorities and regulations, posing a severe threat to the nation’s economy and legitimate businesses.
Sri Lanka, globally celebrated for its high-quality gemstones like the famed Ceylon sapphires, sees approximately 99% of its gem industry’s value addition occurring locally, making it a vital contributor to national wealth and employment. However, the escalating illegal trade, significantly exacerbated by Chinese involvement, siphons off these domestic economic benefits, leading to substantial revenue losses and undermining the formal sector.
The illicit activities are concentrated in traditional gem hubs such as Ratnapura and Beruwala, extending to mining areas like the Walawe River Basin. The modus operandi of Chinese involvement is systematic and multi-faceted. A prominent method is operating without mandatory licenses from the National Gem & Jewellery Authority (NGJA), as evidenced by the case of the Chinese businessman who operated illicitly for nearly 12 years. Foreign buyers, particularly Chinese individuals, frequently enter Sri Lanka on visit visas and conduct extensive gem trading activities, preferring direct cash transactions to bypass regulatory oversight and tax collection. This creates an opaque “parallel economy” where financial tracking and VAT enforcement become exceptionally challenging.
Chinese traders also exploit local communities by directly accessing gem mining areas, bypassing traditional regulated local traders. They leverage “new class of young intermediaries” who buy directly from miners for cash, incentivizing them to forgo documentation due to the heavy taxes and regulations faced by legitimate Sri Lankan dealers. This practice not only circumvents formal channels but also exacerbates social inequality, enriching a select few while primary laborers remain impoverished and vulnerable to issues like land tenure insecurity, poverty, and mining accidents.
The economic ramifications are disastrous. The illegal trade intensifies unfair competition for legitimate local traders, who are subjected to all taxes and regulations, unlike their illicit counterparts. This has led to a noticeable shift in international buyer preferences, with European and American buyers increasingly opting for alternative hubs like Thailand, damaging Sri Lanka’s international reputation. The country faces substantial losses in government tax revenue and foreign exchange, with an estimated Rs. 38 billion in annual VAT alone being lost due to informal and untaxed transactions.
The illegal gem trade is also a significant conduit for money laundering. The Financial Intelligence Unit (FIU) of the Central Bank of Sri Lanka (CBSL) has identified the gem sector as a medium risk for money laundering, facilitated by the widespread use of informal financial systems like hawala. These systems bypass formal banking channels, obscuring the origin and destination of funds and allowing illicit proceeds to integrate into the formal economy. Sri Lanka has previously been flagged by global banks as a high-risk jurisdiction for money laundering and financial crimes.
Beyond the recent High Court case, numerous incidents underscore the pervasive nature of this problem. A Chinese couple was arrested attempting to smuggle 175 gemstones valued at Rs. 50 million. In another instance, a Chinese father and daughter were apprehended at Bandaranaike International Airport (BIA) with 689.5 grams of various high-value gemstones concealed in their undergarments, valued at Rs. 17.45 million. Undervaluation of gemstones for export is another sophisticated tax evasion mechanism, as seen in a case where a consignment worth over USD 778,987 was declared at merely USD 77,817.
These patterns in Sri Lanka are not isolated. They mirror a broader, systemic approach to illicit mineral acquisition and trade by Chinese actors in other resource-rich developing countries. In the Democratic Republic of Congo (DRC), over 450 mining companies, predominantly Chinese-operated, engage in illegal activities, lacking permits, untraced production, and widespread corruption, often fueling conflict and instability. Similarly, in Southeast Asia, illegal exports of Rare Earth Elements (REEs) to China have reached billions, with Chinese companies operating in or near mining areas despite local prohibitions. This global modus operandi leverages weak governance, instability, and insufficient regulatory frameworks to secure critical minerals.
To curtail these activities, Sri Lanka must adopt a holistic approach. This includes strengthening legal and regulatory frameworks, updating the Customs Ordinance and NGJA Act to clarify ambiguities and address modern illicit trade methods, and fully implementing FATF recommendations for AML/CFT compliance. Enhancing enforcement capacity and inter-agency coordination is crucial, requiring increased manpower, specialized training for agencies like CID and Customs, and addressing systemic corruption and political interference within regulatory bodies.
Furthermore, policies must promote formalization and support legitimate local traders. This means re-evaluating the 18% VAT on gemstones and exploring VAT refund mechanisms to incentivize formal trade. Empowering local artisans and miners with education on gem valuation and supporting their access to wider buyer and seller networks are also vital. Finally, robust international cooperation and intelligence sharing, particularly with countries like China and Thailand, are indispensable to combat this transnational organized crime.
If Sri Lanka fails to act decisively, the “snake of money laundering” and illicit trade will continue to bite, causing irreparable harm to its economy, social fabric, and national resources