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Cablegate: Sri Lanka: The Ltte Builds a Financial

R 300602Z JAN 03
FM AMEMBASSY COLOMBO
TO SECSTATE WASHDC 4483
INFO DEPT OF TREASURY WASHDC
USDOC WASHDC
AMEMBASSY NEW DELHI
AMCONSUL CHENNAI
AMCONSUL MUMBAI
AMEMBASSY ISLAMABAD
AMEMBASSY DHAKA
AMEMBASSY OSLO
AMEMBASSY LONDON
AMEMBASSY TOKYO
AMEMBASSY MANILA
USCINCPAC HONOLULU HI
DIA WASHDC
NSC WASHDC

UNCLAS SECTION 01 OF 03 COLOMBO 000172

MANILA FOR USADB

E.O. 12958: N/A
TAGS: ECON PREL PTER PGOV CE
SUBJECT: SRI LANKA: THE LTTE BUILDS A FINANCIAL
INFRASTRUCTURE

REF: 02 COLOMBO 996 (NOTAL)

1. SUMMARY: DUE TO AN INTERNATIONAL CRACKDOWN ON
TERRORIST FINANCING POST SEPTEMBER 11, THE LIBERATION
TIGERS OF TAMIL EALAM (LTTE) HAS SHIFTED OVER THE PAST YEAR
FROM FOREIGN FUND-RAISING TO LARGELY DOMESTIC FINANCING.
WHILE THE LTTE TRADITIONALLY LEVIED TAXES IN AREAS UNDER
ITS CONTROL, RECENTLY IT HAS DEVISED NEW AND MORE
SOPHISTICATED MEANS OF RAISING REVENUE. ACCORDING TO
RECENT MEDIA REPORTS, THE FINANCE DIVISION OF THE LTTE IS
ONE OF THE MOST POWERFUL ARMS OF THE REBEL GROUP. THE TWO
KEY INSTITUTIONS OF THE LTTE FINANCE ARM ARE "EELAM
CUSTOMS" AND THE "TAMIL EELAM BANK," BOTH OF WHICH OPERATE
IN LTTE HELD AREAS IN THE NORTH. THE LTTE'S DEVELOPMENT OF
A DISTINCT FINANCIAL SYSTEM WITHIN THE BORDERS OF SRI LANKA
OFFERS AN INDICATION OF THE DEGREE OF AUTONOMY THE
ORGANIZATION WOULD LIKELY EXPECT IN ANY FEDERAL SOLUTION TO
THE ISLAND'S ETHNIC CONFLICT. END SUMMARY.

--------------------------
FUND-RAISING SHIFTS INWARD
--------------------------

2. IN THE YEARS SINCE LARGE-SCALE ETHNIC CONFLICT BROKE OUT
IN 1983, THE LTTE HAS FINANCED ITSELF MOSTLY THROUGH FUND-
RAISING ABROAD. SYMPATHETIC MEMBERS OF THE TAMIL DIASPORA
- PARTICULARLY IN CANADA, THE UK AND AUSTRALIA - DONATED TO
THE CAUSE OF A SEPARATE TAMIL HOMELAND. SINCE SEPTEMBER
11, 2001 THE LTTE HAS FOUND IT INCREASINGLY DIFFICULT TO
RAISE MONEY ABROAD. AS A DESIGNATED FOREIGN TERRORIST
ORGANIZATION (FTO), THE LTTE HAS SEEN ITS FUNDING DRY UP
SUBSTANTIALLY AMIDST THE US-LED INTERNATIONAL CRACKDOWN ON
TERRORIST FINANCE.

3. AS FOREIGN FUNDS HAVE EVAPORATED, THE LTTE HAS LOOKED
FOR WAYS TO RAISE MONEY AT HOME. WHILE THE LTTE HAS LONG
LEVIED TAXES IN AREAS UNDER ITS CONTROL, IT IS NOW BUILDING
A SOPHISTICATED FINANCIAL INFRASTRUCTURE THAT ALLOWS IT TO
COLLECT REVENUE AND REGULATE COMMERCE ON A LARGE SCALE.
WHILE THE LEVEL OF TAXATION IS AN ADDED BURDEN ON THE LONG-
SUFFERING RESIDENTS OF SRI LANKA'S NORTH AND EAST (SEE
REFTEL), THE LTTE DEFENDS ITS ACTIVITIES SAYING FUNDS ARE
NEEDED TO MAINTAIN THE ORGANIZATION AND ITS CADRES,
INCLUDING THE WAR WOUNDED.

----------------------------------
EELAM CUSTOMS: THE LTTE'S CASH COW
----------------------------------

4. ACCORDING TO REPORTS AND SOURCES IN JAFFNA, THE LTTE'S
TAX ARM IS REACHING INTO ALMOST EVERY FACET OF LIFE IN THE
NORTH, WITH THE MAIN SOURCE OF FUNDS COMING FROM THE LTTE
CUSTOMS DEPARTMENT. THE LTTE CUSTOMS OFFICE IS LOCATED IN
OMANTHAI ALONG THE A-9 ROAD, WHICH LINKS JAFFNA TO THE
SOUTH. ALL COMMERCIAL SHIPMENTS ENTERING THE NORTHERN
PROVINCE ARE UNLOADED, CHECKED AND TAXED AT THIS POINT.
THE LTE OPERATES A MULTI-BAND TAX STRUCTURE BETWEEN 5% AN
25%. FOOD ITEMS ARE GENERALLY TAXED AT 7%, CONUMER ITEMS
AT 10%, CONSTRUCTION MATERIAL AT 15% ND NON-ESSENTIALS
BETWEEN 20-25%. THERE IS A TAX OF 10% ON MOTOR VEHICLES
TAKEN TO THE NORTHERN PROVINCE FOR PERMANENT USE. MEDICINE
IS DUTY FREE. THE TAX SYSTEM WAS PUBLICLY ANNOUNCED IN
JUNE 2002 IN "SUDAROLI," A PRO-LTTE, TAMIL LANGUAGE DAILY.

5. IN ADDITION TO THE TAX ON GOODS, TRUCKS ARE CHARGED RS
2,500 (APPROX $25) PER TRIP. EVEN GOVERNMENT DEPARTMENTS,
SUCH AS THE COOPERATIVE WHOLESALE ESTABLISHMENT (CWE) WHICH
OPERATES A RETAIL STORE IN JAFFNA, PAY THE LTTE TAXES WHEN
TRANSPORTING GOODS BY ROAD. GOODS TRANSPORTED FOR OFFICIAL
USE SUCH AS TO GOVERNMENT BANKS, UNIVERSITIES AND DONOR-
FUNDED PROJECTS ARE EXEMPTED. ARTICLES MEANT FOR PERSONAL
USE ARE NOT TAXED EXCEPT FOR SOME ELECTRICAL ITEMS AND
LIQUOR. FURTHER, TRAVELERS TO THE NORTHERN PENINSULA ARE
TAXED RS 350 ($3.50) PER PERSON. EXPATRIATE TAMILS
TRAVELING TO JAFFNA THROUGH OMANTHAI ARE SUPPOSEDLY CHARGED
RS 500 ($5) PER FAMILY. GSL EMPLOYEES TRAVELING FOR
OFFICIAL WORK ARE SPARED THE TAX.

6. IN ADDITION TO THESE CUSTOMS LEVIES AT OMANTHAI, THE
LTTE IS TAXING COMMERCE IN SEVERAL OTHER WAYS. FOR
INSTANCE, TRADERS HAVE TO PAY THE LTTE A FIXED FEE, USUALLY
EVERY SIX MONTHS. GSL EMPLOYEES IN THE EASTERN PROVINCE
PAY A 7% INCOME TAX. A SOURCE AT A CONSTRUCTION FIRM
OPERATING IN JAFFNA CONFIRMED THAT THE COMPANY PAYS A TAX
OF 5% OF CONTRACT VALUE TO THE LTTE. GUESTHOUSES AND
INDIVIDUALS RENTING OUT ROOMS ARE ALSO TAXED. FURTHERMORE,
THE LTTE OCCASIONALLY CONDUCTS SPECIAL CAMPAIGNS AND
RALLIES TO COLLECT MONEY FROM TRADERS, BUSINESSMEN AND
WORKERS. WHEN THE LTTE TAX COLLECTOR KNOCKS ON YOUR DOOR
FOR A "SPECIAL CAMPAIGN," THE SENSIBLE CITIZEN READILY PAYS
UP.

--------------------------------------------- ---
BANK OF TAMIL EELAM: SRI LANKA'S OTHER STATE BANK
--------------------------------------------- ---

7. THE LTTE ALSO OPERATES A BANKING NETWORK UNDER THE NAME
BANK OF TAMIL EELAM (BOTE). ACCORDING TO PRESS REPORTS AND
SOURCES IN JAFFNA, THE BANK HAS FIVE BRANCHES IN LTTE
CONTROLLED AREAS, ALTHOUGH IT HAS NO LICENSE FROM THE
CENTRAL BANK OF SRI LANKA, WHICH IS THE SOLE MONETARY
AUTHORITY IN SRI LANKA. BOTE WAS FIRST ESTABLISHED ABOUT
10 YEARS AGO WHEN THE GSL IMPOSED ECONOMIC SANCTIONS ON
LTTE CONTROLLED AREAS. IN THE LTTE ADMINISTRATIVE CAPITAL
KILINOCHCHI, THE BOTE IS SITUATED JUST OPPOSITE THE
BRANCHES OF TWO GSL STATE OWNED BANKS, BANK OF CEYLON AND
PEOPLE'S BANK. THE BOTE BRANCH IN KILINOCHCHI HAS OVER
10,000 ACCOUNT HOLDERS, MOSTLY RETURNING REFUGEES.
ACCORDING TO MEDIA REPORTS, THE LTTE ENCOURAGES PEOPLE TO
BANK WITH THE BOTE, AND MUCH OF THE BOTE BALANCE SHEET
CONSISTS OF LTTE DEPOSITS (PROCEEDS FROM TAX COLLECTION).
BOTE'S SUCCESS IN ATTRACTING DEPOSITS IS ALSO ATTRIBUTED TO
HIGHER INTEREST RATES, A VARIETY OF CREDIT FACILITIES AND
CONVENIENCE. FOR INSTANCE, THE BANK IS OPEN EVEN ON PUBLIC
HOLIDAYS WHEN OTHER BANKS ARE CLOSED. IN SPITE OF
FUNCTIONING WITHOUT GOVERNMENT APPROVAL, THE BANK OFFERS
MANY CONVENTIONAL BANKING FACILITIES SUCH AS FIXED
DEPOSITS, CURRENT ACCOUNTS, SAVING ACCOUNTS AND FOREIGN
EXCHANGE SERVICES. IT ALSO OFFERS PAWNING FACILITIES, AND
LOANS FOR HOUSING AND BUSINESS. AS IN ANY OTHER BANK, IT
ISSUES CHEQUE BOOKS AND MONTHLY STATEMENTS TO CUSTOMERS.

8. PRESIDENT CHANDRIKA KUMRANATUNGA RAISED THE ISSUE OF
LTTE TAXES IN SEPTEMBER 2002 AFTER THE JAFFNA MUNICIPAL
COUNCIL AND SEVERAL OTHER LOCAL BODIES IN THE NORTH PASSED
RESOLUTIONS CONDEMNING THE ILLEGAL TAXES. A GROUP OF
PARLIAMENTARIANS HAVE ALSO RAISED THE ISSUE OF THE ILLEGAL
OPERATION OF THE BOTE. THE GSL HAS NOT SO FAR INTERFERED
WITH THE ILLEGAL BANKING OPERATIONS, CLAIMING IT DOES NOT
HAVE CONCLUSIVE PROOF OF THEIR EXISTENCE. THE DIRECTOR OF
BANK SUPERVISION OF THE CENTRAL BANK OF SRI LANKA TOLD THE
EMBASSY THAT THE CENTRAL BANK HAS NOT INVESTIGATED
OPERATIONS OF THE BOTE IN LTTE CONTROLLED AREAS. POLICE
SOURCES HAVE SAID THAT BOTE IS NOT FUNCTIONING IN AREAS
UNDER GSL CONTROL.

-------
COMMENT
-------

9. THE LTTE APPEARS TO BE METHODICALLY DEVELOPING A
PARALLEL FINANCIAL SYSTEM WITHIN SRI LANKA'S BORDERS.
UNFORTUNATELY, THE LTTE IS BUILDING A HEAVILY REGULATED,
HEAVILY TAXED AND LARGELY CLOSED ECONOMY. THE OFFICIAL SRI
LANKAN ECONOMY, BY CONTRAST, IS TRADE-BASED AND BY FAR THE
MOST OPEN IN SOUTH ASIA. THESE DIVERGENT FINANCIAL SYSTEMS
THREATEN TO INCREASE THE ALREADY ALARMING DISPARITY IN
STANDARDS OF LIVING IN COLOMBO VS. THE NORTH/EAST - A
WORRYING PROSPECT FOR THE FUTURE OF THE PEACE PROCESS.

10. MOREOVER, THE LTTE SHOWS NO SIGNS OF BEING WILLING TO
DISMANTLE THE FINANCIAL INFRASTRUCTURE IT IS DEVELOPING.
THE LTTE'S HOMEGROWN ECONOMIC POLICY - COMPLETE WITH
CUSTOMS DUTIES TO ENTER "EELAM" TO A "STATE"-RUN BANK -
SHOWS THE DEGREE OF REGIONAL AUTONOMY IT LIKELY ENVISAGES
AS PART OF ANY FEDERAL SOLUTION TO THE ETHNIC CONFLICT. IT
IS A VISION OF REGIONAL AUTONOMY THAT MAY BE FAR DIFFERENT
FROM THAT OF GSL - A YAWNING GAP THAT ILLUSTRATES THE
CHALLENGES AHEAD IN THE PEACE PROCESS.


WILLS

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