As the Financial Action Task Force (FATF), the global standard-setter for anti-money laundering and counter-terrorism financing, plenary meeting begins in Paris on Wednesday, concerns are mounting that Nepal may once again be placed on its grey list.  

Nepal was previously on the FATF grey list from 2008 to 2014 but was removed after implementing legal and institutional frameworks. However, government officials now warn that while some legal improvements have been made, weak enforcement has heightened the risk of Nepal being re-listed.  

A 2023 mutual evaluation by the Asia/Pacific Group on Money Laundering (APG) identified significant gaps in Nepal’s compliance with FATF standards. Despite subsequent legal reforms aimed at curbing money laundering and terrorist financing, a 2024 follow-up report found that enforcement remains inadequate.  

For instance, Nepal has yet to implement measures to prevent illicit financial flows through non-profit organizations or require them to comply with anti-money laundering regulations. 

The APG also flagged shortcomings in Nepal’s legal framework for controlling financial contributions to terrorist activities, though it acknowledged minor progress in preventing the proliferation of weapons of mass destruction.  

The Ministry of Home Affairs, which oversees these issues, admitted during a press conference on Monday, February 17, that ministry’s failure to meet key requirements, too, has contributed to the risk of grey listing.  

Ministry spokesperson Ram Chandra Tiwari cited two critical shortcomings: the delayed development of a targeted financial sanctions software for tracking terrorist financing and the lack of a regulatory system for monitoring non-profit organizations. He assured that efforts were underway to address these issues.  

“The financial sanctions software has already been developed and implemented, while the Terms of Reference (TOR) for the non-profit regulation software have been finalized, and it is currently under development,” Tiwari stated.  

Nepal also lacked a mechanism to track individuals under financial sanctions, raising concerns about the potential entry of blacklisted persons into the country.  

On January 27, Deputy Prime Minister and Finance Minister Bishnu Paudel admitted to the shortcomings in Nepal’s efforts to enforce AML laws. He was speaking at an event organized by the Department of Money Laundering Investigation (DMLI) to mark the National Day for the Prevention of Money Laundering.

“While we have made strides in legislation, regulations, structural reforms, investigations, and prosecutions, our implementation remains insufficient to present Nepal strongly on the global stage,” Paudel said. We should have been better prepared for the third phase of evaluation, but we have fallen short, added Paudel, emphasizing the need for stronger coordination among agencies, timely action, and heightened awareness to prevent Nepal from being placed under international monitoring.  

Prime Minister KP Sharma Oli, has claimed that Nepal faced grey listing risks due to delays in legal reforms under the previous administration. 

Similarly, Nepal Rastra Bank Governor Maha Prasad Adhikari recently suggested that despite efforts to prevent grey listing, Nepal might still be placed on it.  

In an interview with New Business Age last month, Adhikari noted that while Nepal has made significant strides in legal and policy development compared to previous evaluations in 2005 and 2010, more work is needed on implementation and effectiveness.  

“Nepal's technical compliance with FATF’s 40 Recommendations is satisfactory, but its effectiveness, as measured by the FATF’s Immediate Outcomes (IOs), still requires improvement,” he said.  

“Most countries are placed in phase one after a mutual evaluation…Even if Nepal is listed, it has laid the groundwork for future improvements and eventual removal,” he added.  

Potential Consequences of Grey Listing  

Experts warn that grey listing would make international financial transactions more difficult for Nepal. According to the International Monetary Fund (IMF), being placed on the grey list signals a risk of future blacklisting, which could restrict Nepal’s access to global banking services.  

Without strong correspondent banking relationships, informal trade could rise, shifting transactions into the grey market and making them harder for the government to regulate. Additionally, Nepali workers abroad might face difficulties in sending remittances home.  

A report by the think tank, Tabadlab , estimates that Pakistan suffered a financial loss of approximately $38 billion due to reduced consumption, exports, and foreign direct investment during its FATF grey listing from 2008 to 2019.  

Nepal, too, could face challenges in securing loans and financial assistance from institutions like the IMF, World Bank, and Asian Development Bank.  

Economist Chandramani Adhikari stressed the urgency of swift legal reforms to avoid grey listing.  

“Nepal’s failure to heed FATF’s warnings has increased the risk of being listed,” he said. “The government must now accept FATF’s conditions, implement policy reforms, and ensure effective enforcement.”