KATHMANDU: Nepal has been placed on the Financial Action Task Force (FATF) grey list.
The decision, made during the FATF meeting in Paris from February 19 to 21, highlights Nepal’s insufficient commitment to combating money laundering and terrorist financing.
FATF Chair Elisa de Anda Madrazo announced that Nepal was placed on the high-watch list, also known as the FATF grey list.
“This week, both Nepal and the Lao People’s Democratic Republic were added to the grey list,” she said.
Nepal will remain on the grey list for the next two years, until January 2027.
According to Chairperson Madrazo, this decision follows an assessment by the Asia-Pacific Group (APG) and underscores the need to address several key weaknesses in Nepal’s financial system.
FATF identified seven critical areas for improvement, including better understanding of money laundering and terrorist financing risks, closer monitoring of risks in banking and real estate sectors, and stricter penalties for illegal hundi transactions.
Finance Minister Poudel, however, has stated that the government is moving forward with a new action plan and expects Nepal to be removed from the grey list within the next six months.
The FATF also noted that Nepal must enhance its investigative capacity regarding money laundering, increase the number of related cases, and improve its financial sanctions system to address the challenges of financing terrorism and proliferation.
Following the grey-listing, Finance Minister Bishnu Prasad Poudel assured that Nepal would take the necessary actions to remove itself from the list in a timely manner.
A Shared Responsibility: Government and Private Sector
Former Finance Secretary Rameshwor Khanal believes that Nepal’s placement on the grey list is due to the combined failure of both the government and the private sector.
Khanal criticized the private sector’s persistent stance advocating for investments without scrutiny of the source of funds.
“The private sector has consistently pushed for no questions to be asked about the origin of wealth, and this has contributed to the situation,” he said.
“The FATF report mentions that money laundering has created problems for foreign diplomats and banks, where some individuals suspected of laundering money were involved in banking operations. The private sector refused to acknowledge the issue of money laundering.”
Khanal also pointed out that political leadership has failed to take a firm stance against money laundering, treating the issue with a lack of seriousness.
“No nation has prospered through black money; they achieve success through transparency,” he said, adding, “Nepal was grey-listed because both the government and private sector failed to understand this.”
Diplomatic Failures and Economic Consequences
Another economist argued that Nepal’s grey-listing is also a result of diplomatic incompetence.
The economist claimed that Nepal failed to engage in effective lobbying with its neighbors, India and China, as well as the United States, to avoid this outcome.
“India, China, and the US all have powerful influence,” he explained. “If these countries had supported Nepal, it might have been saved from the grey list. If Nepal had stronger ties with its neighbors, the situation could have been different.”
He also suggested that Nepal’s placement on the grey list could have been avoided if laws had been reformed and diplomatic efforts had been initiated earlier.
“The Prime Minister, Finance Minister, and Foreign Minister have been unable to act effectively,” he added.
What Needs to be Done Next?
The FATF has acknowledged some progress in Nepal since the mutual evaluation report approved in August 2023, particularly regarding legal assistance and strengthening the Financial Investigation Unit.
However, to address the FATF’s concerns, both the government and the private sector must take more effective actions.
According to Rameshwor Khanal, the grey-listing is a result of ineffective implementation of existing laws, not a lack of them.
Khanal emphasized that key government bodies, including the Office of the Prime Minister and Council of Ministers, Home Affairs, Finance, Land Management, and Nepal Rastra Bank, must collaborate to address the FATF’s recommendations if Nepal hopes to be removed from the list.
FTF Implementation Focuses on Terrorist Financing, Ministry of Home Affairs Urged to Take Action
According to Khanal, many of the issues raised by the FATF primarily focus on terrorist financing, and much of the responsibility for implementing necessary reforms falls on the Ministry of Home Affairs.
“The most important task lies with the Ministry of Home Affairs. The identification and scrutiny of the money sources for individuals involved in terrorist activities is not being properly carried out,” he said.
“When people arrive at the airport, there is no process in place to check if they are involved in terrorist activities.”
Additionally, Khanal pointed out the lack of a system to identify the true beneficiaries when opening an industry or firm.
He stated that the Ministry of Industry is responsible for implementing this system.
Without it, people can set up companies in someone else’s name, allowing others to benefit.
“There is a need for the Ministry of Industry to take action, especially in the industrial sector. When registering a company or firm, it is not clear who the real beneficiary is,” Khanal explained.
While acknowledging that Nepal has made significant progress in terms of policy and legislation, Khanal noted that the issue lies in implementation.
“Nepal has done a lot of work in terms of policy and law, and there are no fundamental weaknesses in that regard,” he said.
“However, criminal assets have not been confiscated, which is a responsibility of the Ministry of Home Affairs. Although a new office has been set up for this, complaints suggest it has not been effective.”
Khanal also emphasized that the Ministry of Finance and Nepal Rastra Bank should take the lead in addressing FATF’s concerns about the cooperative sector.
Khanal shared an example where a remittance from the United States failed to reach its destination in Nepal due to the grey-list status, and the concerned bank cited this as the reason for the delay. As a result, remittance inflows could be slower and more costly in the future.
He mentioned that there is a prevailing belief that money earned through illegal activities must be seized.
Contrasting Approaches: Political and Private Sector Stance on Black Money
Khanal observed that while political leaders in Nepal express openness to investment from black money, the private sector continues to lobby against disclosing the sources of investment, arguing that these practices do not align with anti-money laundering principles.
Finance Minister Poudel, however, has stated that the government is moving forward with a new action plan and expects Nepal to be removed from the grey list within the next six months.
Impact of the Grey List on Nepal’s Economy
The grey-listing of Nepal may affect foreign investment, remittance inflows, and international financial relations.
Khanal warned that being on the grey list could have a significant impact, particularly in areas like foreign remittances.
He noted that when Nepal was on the grey list from 2011 to 2014, some individuals involved in economic activities faced difficulties. One of the major concerns now is that the cost of transferring money to Nepal may increase.
“We were on the grey list from 2011 to 2014, and while it may not directly impact financial assistance, the cost of money coming to Nepal from abroad could rise,” Khanal explained.
“Foreign banks dealing with Nepal may face restrictions, and some may be instructed to either cease operations or proceed with caution. As a result, the cost of doing business in Nepal could increase.”
He also noted that the fees and commissions for money sent to Nepal could rise, and transactions could be delayed.
Khanal shared an example where a remittance from the United States failed to reach its destination in Nepal due to the grey-list status, and the concerned bank cited this as the reason for the delay. As a result, remittance inflows could be slower and more costly in the future.
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