Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized PART II PART PART II ACCOUNTS AND OPERATIONS OF THE CENTRAL BANK OF SRI LANKA 1. Accounts and Finance 1 2. Bank Supervision 71 3. Centre for Banking Studies 76 4. Communications 76 5. Currency 78 6. Domestic Operations 81 7. Economic Research 84 8. Employees’ Provident Fund 87 9. Facilities Management 91 10. Finance 91 11. Financial Intelligence Unit 92 12. Foreign Exchange 94 13. Human Resources 98 14. Information Technology 101 15. Internal Audit 103 16. International Operations 103 17. Legal and Compliance 105 18. Macroprudential Surveillance 106 19. Payments and Settlements 108 20. Policy Review and Monitoring 110 21. Public Debt 111 22. Regional Development 113 23. Regional Office Management 117 24. Resolution and Enforcement 118 25. Risk Management 119 26. Secretariat 120 27. Security Services 121 28. Staff Services Management 122 29. Statistics 122 30. Supervision of Non-Bank Financial Institutions 125 31. Training and Development 129 Part II Accounts and Operations of the Central Bank of Sri Lanka 1. ACCOUNTS AND FINANCE Activity Report of the Monetary Board Advisory Audit Committee during and relating to the Financial Year 2019 1. Introduction Monetary Board Advisory Audit Committee (AAC) is a sub-committee of the Monetary Board. AAC advises the Monetary Board on policies and matters relating to financial reporting, internal controls, internal audit, external audit and any other matter assigned by the Monetary Board. The AAC reported its performance and recommendations to the Monetary Board on a quarterly basis. 2. Composition of AAC The AAC is chaired by an appointed member of the Monetary Board and is comprised of two other external audit professionals. The composition of the AAC as at 31st December 2019 was as follows: i. Mr. A N Fonseka - Chairman ii. Mr. H M A Jayesinghe - Member iii. Mrs. A I Mohotti - Member Secretary to the Monetary Board is the Secretary to the AAC and the Director of the Internal Audit Department is the Assistant Secretary to the AAC. The Internal Audit Department (IAD) provides secretarial facilitation to the AAC. The Audit Superintendent from the National Audit Office in-charge of the external audit of the Central Bank of Sri Lanka (CBSL), the Chief Accountant, the Compliance Officer and the Chief Risk Officer of the CBSL attend the AAC meetings as observers. Heads of the Department of the CBSL are invited by the Chairman of the AAC as and when necessary for discussions. The engagement partner of KPMG, the Audit Firm appointed by the Auditor General to carry out the external audit also attends when the financial statements of the CBSL are discussed. The AAC is required to meet at least six (06) times a year or as may be decided by the Chairman of the AAC or as directed by the Monetary Board. Meetings of the AAC are convened by the Secretary to the Committee. A quorum for a meeting is two (02) including the Chairman. 3. Activities carried out during and relating to the Financial Year 2019 The AAC held ten (10) meetings in 2019 and the major activities performed by the AAC during 2019 and in relation to the 2019 financial statements are indicated below. a) Financial Reporting and External Audit; The AAC reviewed, i. the Interim Issues Memorandum, the final Management Letter submitted by KPMG relating to the audit of the Financial Statements of the CBSL for the year ended 31st December 2018 and the management comments for the same. ii. the Report of the Auditor General on the Financial Statements of the CBSL for the year 2018 and the management comments for the same. iii. the Audit Plan of KPMG with regard to the audit of the Financial Statements of the CBSL for the year 2019. iv. the Interim Management Letter with regard to the audit of the Financial Statements of the CBSL for 2019 and the management comments for the same. v. Financial Statements of EPF for the year ended 31st December 2018 audited by the Auditor General. vi. Financial Statements of EPF for the year ended 31st December 2019 audited by the Auditor General. Central Bank of Sri Lanka Annual Report - 2019 Part II - 1 Accounts and Operations of the Central Bank of Sri Lanka Part II b) Internal Controls; The AAC, i. reviewed and advised on internal controls of the CBSL. ii. reviewed the implementation progress of AAC recommendations by the respective Heads of Department. c) Internal Audit; The AAC reviewed, i. the progress of conduct of audits in 2019 on quarterly basis. ii. the internal audit findings and the rectifications of the same. iii. the Strategic Audit Plan of IAD for 2020 - 2022 and the Annual Internal Audit Plan for 2020. iv. the staff requirements of IAD. Part II - 2 Central Bank of Sri Lanka Annual Report - 2019 Part II Accounts and Operations of the Central Bank of Sri Lanka Activity Report of the Board Risk Oversight Committee during and relating to the Financial Year 2019 1. Introduction The Board Risk Oversight Committee (BROC) is a subcommittee appointed by the Monetary Board (MB), overseeing CBSL’s overall Risk Management and Compliance Functions via a formal delegation from the MB. The BROC is responsible for laying the broad strategy and policies for the Bank’s risk management and compliance functions, while assisting the MB to ensure a dedicated focus on risk management and compliance in the Bank. 2. Composition of BROC The BROC is chaired by an appointed Board Member nominated by the MB (other than the Chairman of the Monetary Board Advisory Audit Committee) and comprises of two other Independent External Experts with relevant expertise who have not been involved in the Financial Services Sector for at least one year, prior to their appointments. The composition of the BROC as at 31.12.2019 was as follows: i. Mr. C P R Perera, Monetary Board Member (Chairman) ii. Mr. Priyan Fernando (Independent External Member) iii. Mr. Naomal Goonewardena (Independent External Member) The Secretary to the MB is the Secretary to the BROC and the Director of the Risk Management Department is the Assistant Secretary to the BROC. The Risk Management Department (RMD) provides secretarial facilitation to the BROC. The Senior Deputy Governor and all Deputy Governors, Director - Legal and Compliance Department and the Director – Internal Audit Department of the Central Bank attend BROC meetings in the capacity of Observers. The BROC is required to meet at least once every quarter or more frequently as may be decided by the Chairman of the BROC or as directed by the MB. Meetings of the BROC are convened by the Secretary to the Committee. A quorum for a meeting is two (02) members including the Chairman. 3. Activities carried out during and relating to the financial year 2019 The BROC held five (05) meetings in 2019 and major activities carried out are indicated below. i. Reviewed the Risk Management Policy Statement (RMPS) of the Central Bank providing relevant inputs and guidance to improve this document. ii. Guided RMD to obtain World Bank Technical Assistance (WBTA) to improve risk governance and operational risk management framework within the CBSL and was actively involved in the completion of the first Engagement in this regard. iii. Took initiatives to facilitate the implementation of the World Bank recommendations, with a view to nurture a risk culture within the Bank. iv. Reviewed the automated Incident Reporting System of the CBSL and related guidelines prior to deployment. v. Reviewed and provided inputs to improve the Operational Risk Management Guidelines of the CBSL, including the risk taxonomy, risk assessment scales and the risk matrix. vi. Reviewed and assessed the risk management and compliance information pertaining to the three funds monitored by RMD (the International Reserves, the Internal Investment Fund and the Employees’ Provident Fund), on a quarterly basis to ensure that they are within the parameters stipulated in the respective Investment Policy Statements, Strategic Asset Allocations and Investment Guidelines. vii. Reviewed the investment policies of the fund management activities of the three funds and provided constructive inputs to enhance these policies, from a risk management perspective, including the risk appetite /tolerance levels and other market and credit risk parameters. Central Bank of Sri Lanka Annual Report - 2019 Part II - 3 Accounts and Operations of the Central Bank of Sri Lanka Part II Central Bank of Sri Lanka Management Statement For the period ended 31 December 2019 Accountability and the Financial Performance of the Central Bank of Sri Lanka in relation to the Objectives The Central Bank was established as the authority follows that the Central Bank’s objectives of economic responsible for the administration, supervision and and price stability and financial system stability need to regulation of the monetary, financial and payment systems be distinguished and detached from the pure profitability of Sri Lanka under the Monetary Law Act. In accordance objective which should essentially be incidental or academic with this Act, the Bank is charged with the responsibility of only. securing the core objectives of economic and price stability and financial system stability. In this background, the Central Bank’s financial statements record gains and/or deficits in the implementation of its The basis of accountability for the Central Bank and monetary policy operations, exchange rate management, the success of its operations therefore would be the issuing of currency, etc. at the values as realized and hence, effectiveness of its policies and operations leading towards the financial performance as reported in these statements the achievement of its core objectives and not necessarily its needs to be interpreted and understood in that context.