13 June 2025, NIICE Commentary 11259
Bishnu Chaudhary & Biplove Pokhrel
Nepal’s inclusion in the Financial Action Task Force (FATF) grey list has become a warning call in the nation’s regulatory and financial history. While it is not as severe as being blacklisted, grey-listing, nevertheless, indicates that a country is under increased international monitoring due to deficiencies in its anti-money laundering (AML) and counter-financing of terrorism (CFT) frameworks. For Nepal, this listing is not just a technical issue; it is a reputational alarm bell that could reverberate across its economy, financial sector, diplomatic relations, and development aspirations.
Understanding the FATF Grey List
Financial Action Task Force is an international organization founded in 1989, with the main objective of establishing worldwide guidelines for preventing terrorist financing, money laundering, and other challenges for the stability of the global financial system. Countries placed on its grey list are actively working with FATF to correct their compliance shortcomings. At the same time, they are also subject to increased scrutiny and monitoring. Being on the grey list surely sends negative signals to the global financial community. It implies that the country's financial system is vulnerable to illicit financial activities and that it lacks the necessary legal, institutional, and operational frameworks to combat them effectively.
Economic and Reputational Impacts
Remittances, tourism, foreign aid, and international trade are all major drivers of Nepal's economy. Any interruption to these movements, especially those involving financial services and remittances, might have long term effects. Remittances account for almost 25% of Nepal's GDP, thus any delays or heightened monitoring of transactions might have an immediate effect on millions of families. Furthermore, foreign banks can be reluctant to keep up banking contacts with Nepali banks for possible regulatory sanctions or any potential harm to their reputation. Reduced ease of doing business, increased transaction costs, and slower processing times could result from this. Thus, Nepal's credibility is already being harmed on the reputational grounds since it is associated with high-risk jurisdictions by being on the FATF grey list.
Some factors responsible for putting Nepal on the Grey List:
The Asia/Pacific Group on Money Laundering (APG) found that Nepal had only followed 21 of the 40 points set out by the Financial Action Task Force (FATF). Since the evaluation, Nepal has amended and enacted additional laws to meet an additional 10 criteria. However, the evaluation found the country’s progress in effectively implementing laws to prevent money laundering to be very weak, and only ‘moderately compliant’ with four out of the 11 standards.
The competence to report, investigate and punish the wrongdoers is also severely lacking. In 2023, while banks and financial institutions reported details of 6,255 suspicious transactions to the Financial Intelligence Unit, cooperatives reported only two. Similarly, in the fiscal year 2022/2023, the Financial Intelligence Unit received 7,115 reports of suspicious transactions and activities and but only 505 cases were sent for the investigation.
The fact that Department of Money Laundering Investigation has taken only 12 cases to court during the first 6 months of this fiscal year and only investigated a dozen cases out of total involving Rs 1.74 billion last year also shows the incompetency of the institution, calling for serious overhaul. In addition, there is no monitoring oversight agency to see who is buying and selling real estate and at what price, as well as no official and effective legal framework to prevent money laundering in real estate.
Some recommendations for reforms
To exit the grey list and rebuild its international image, Nepal must implement a comprehensive and targeted set of reforms. Nepal must revise its anti money laundering acts to fully align with FATF standards, especially in defining predicate offenses and enabling non-conviction-based asset forfeiture. The law does not clearly specify which court should handle the prosecution of information obtained by the end of 12 April 2024. For instance, even when it's stated that prosecution should occur in the court handling the relevant offense, there's no clear provision for the court of prosecution concerning STRs received from the Financial Information Unit or requests for cooperation received from foreign countries. The exact structure of the department after the amendment of the act is also not yet certain.
The Department of Anti- Money Laundering Investigation does not have the practice of publishing its budget details, but it is understandable that whatever is being allocated seems seriously inadequate. Due to this inability to procure analysis-related software (for bank statements, communication, linkages, etc.) and digital forensic labs, investigation and prosecution efforts haven't been expedited and made effective. Additional budget is also needed for expanding staffs and improving inter-agency coordination. Nepal Rastra Bank needs to integrate real-time suspicious transaction reporting (STR) systems and connect with other national databases like tax and customs.
It is also recommended to conducting regular National Risk Assessments (NRA) and regulate informal money transfer systems by cracking down on hundi/hawala networks and integrating licensed remittance operators with national monitoring systems. Nepal can also seek technical assistance by collaborating with the IMF, World Bank, and Asia Pacific Group (APG) on capacity building and working with Interpol and FATF member countries to pursue illicit capital and enhance information exchange Furthermore, the government needs to encourage internal reporting mechanisms in banks and public institutions with legal safeguards for whistleblowers.
Nepal’s place on the FATF grey list represents a serious reputational and economic challenge. But it also provides a clear roadmap for institutional reform, financial modernization, and global re-engagement. If Nepal can move swiftly and strategically, it not only has the chance to be removed from the list but also to emerge stronger, more transparent, and better integrated into the global financial system. This reform process must be owned by the political leadership. Political instability, bureaucratic stagnation, or opposition from entrenched interests will only hinder advancement. Thus, Nepal’s reputation relies on its leaders' capacity to transcend immediate political gains and focus on lasting institutional changes.
Bishnu Chaudhary is a section officer at the Federal Parliament Secretariat, Singhdurbar & Biplove Pokhrel has a Master's Degree in International Relations and Diplomacy from DIRD, TU.
