Experts have warned that Nepal’s economy will face severe consequences after the Financial Action Task Force (FATF) placed the country on its grey list for failing to effectively control money laundering.

They caution that grey listing will negatively impact domestic investment, foreign direct investment (FDI), and aid, as it harms Nepal’s international reputation. The FATF, which sets global standards for combating money laundering and terrorist financing, categorizes countries into red and grey lists based on their level of non-compliance.

Speaking at a policy dialogue organized by Kathmandu University School of Management (KUSOM) on Saturday, money laundering expert Hari Nepal said capital investment in Nepal could decline by over 7%. “A study by the International Monetary Fund (IMF) found that capital investment in grey-listed countries drops by an average of 7.6%. We may face a similar impact,” he said.

The 2021 IMF study also reported that foreign direct investment in grey-listed countries declines by 3%, cross-border payments via SWIFT decrease by 10%, and cross-border bank liabilities fall by 16%.

A money laundering expert warned that grey listing would gradually affect the general public. “Its impact is like slow poison—it spreads everywhere over time,” he said. However, he suggested Nepal could use this as an opportunity, citing the example of the Philippines, which saw a surge in foreign investment after exiting the grey list. He emphasized the need for stronger implementation of Nepal’s legal and institutional frameworks for combating money laundering and terrorist financing.

Nepal Rastra Bank Director Arya Joshi noted that financial costs would rise due to grey listing. She explained that when Nepali banks open Letters of Credit (LCs) for imports, foreign banks may demand guarantees from multiple banks, increasing transaction costs.

Meanwhile, Suman Dahal, Director General of the Department of Money Laundering Investigation, stated that investigations and prosecutions related to money laundering have intensified. While some argue that enforcement remains weak, he revealed that cases worth Rs 75 billion have been filed in the current fiscal year. He noted that money laundering investigations take time due to their complexity.

The FATF placed Nepal on the grey list during its recent plenary and working group meeting in Paris, France, following a re-evaluation of Nepal’s performance. The Asia-Pacific Group (APG) had conducted a mutual evaluation in 2022 and provided Nepal a year to improve its compliance.

The FATF has approved Nepal’s seven-point action plan for exiting the grey list. While the FATF has set a two-year timeframe, government officials claim efforts are underway to achieve removal within a year.

Nepal was previously grey-listed in 2008 and removed in 2014.