Nepal’s inclusion in the Financial Action Task Force (FATF) gray list marks a major setback for the country’s financial credibility on the global stage. The inclusion in the gray list implies that Nepal has significant deficiencies in its anti-money laundering (AML) and counter-terrorism financing (CFT) frameworks. As a result, the country will now face heightened scrutiny from international financial institutions. This status not only discourages foreign investment but also complicates access to global banking networks, leading to increased transaction costs. The failure to implement sufficient reforms has now placed Nepal in a precarious position, necessitating urgent corrective measures to prevent long-term economic damage.
Countries placed on the FATF gray list face more than just reputational damage—it signals weaknesses in combating money laundering and terrorism financing. There are other far reaching consequences as well. Pakistan, which was added to the FATF gray list from 2018 until 2022, lost almost $38 billion in GDP over the course of 10 years, from 2008 to 2019, primarily due to sharp declines in foreign investment. Pakistan had to go through international pressure, particularly from Western powers including the US, UK, Germany, all of which supported the FATF decision. Pakistan was required to implement a comprehensive 27-point action plan to enhance its entire legal framework and operational capabilities to align with international standards for financial governance. Previously graylisted Afghanistan suffered the same fate.
Countries typically find themselves on the gray list due to several critical deficiencies. These include inadequate anti-money laundering and combating the financing of terrorism (AML/CFT) laws, weak regulatory frameworks for financial institutions, ineffective financial intelligence units (FIU), insufficient Customer Due Diligence (CDD), absence of transparency and failure to address identified deficiencies. If a country fails to show sufficient commitment or progress in addressing identified deficiencies, it risks being placed on the FATF gray list. Nepal was previously on the gray list from 2008 to 2014, during which it faced numerous challenges related to its anti-money laundering (AML) and counter-terrorism financing (CFT) frameworks. To address these issues, Nepal implemented several corrective measures, including amendments to the Anti-money Laundering Act of 2008, the enactment of additional laws to strengthen financial oversight and compliance, and the establishment of a dedicated investigation unit for financial crimes. These efforts ultimately led to Nepal’s removal from the gray list on February 28, 2014.
During the period, Nepal lost significant trade opportunities as international businesses were reluctant to engage with gray-listed countries due to perceived risk. Transaction costs also increased, which deterred foreign direct investment and complicated financial dealings. Whether due to reputational damage or the fear of being blacklisted, Nepal experienced a substantial loss in investment and financial growth during that time.
In early 2023, Nepal received warnings about its compliance with FATF standards. But they were largely ignored. The country managed to fulfill only 21 out of 40 key FATF recommendations, leading to its current predicament. Despite having the necessary legislation in place, the enforcement of AML laws remained ineffective. Government officials have acknowledged that implementation had been challenging and fell short of FATF standards due to issues like inadequate reporting, weak supervision and slow compliance progress.
Nepal was already at high risk of being placed on the gray list in the past. Although an extension was granted until October 2023 to improve its compliance with FATF standards, progress remained sluggish. Nepal narrowly avoided gray listing back then but could not escape this time.
Being on the gray list means increased monitoring by FATF, ensuring that agreed-upon reforms are implemented within a specified timeframe. Gray listing can deter FDIs due to heightened perceived risks, leading to economic setbacks. It also affects Nepal’s international standing and credibility in global financial markets, potentially limiting access to credit from international institutions.
The FATF Plenary held in Paris on February 17-21 placed Nepal on the gray list for the second time.
The current situation can be attributed to various factors, including rising corruption, Hundi-based transactions, crypto trading and tax avoidance can be blamed for the situation that is approaching. However, above all, the lack of a strong determination by the regulator played a crucial role. Ignoring early warnings contributed significantly to these consequences. Inefficiencies in overseeing high-risk industries - such as gold trading, real estate cooperatives and casinos - also played its part.
The actual loss that Nepal faced during its previous gray listing is not officially recorded, but it was undoubtedly significant. Even before this gray listing, the United States had suspended its financial assistance to Nepal. Now, with Nepal on the gray list, securing funds from international financial Institutions like the World Bank, International Monetary Fund or the Asian Development Bank will be even more difficult. Nepali financial institutions must prepare for the unavailability of external borrowing facilities from foreign banks. Additionally, foreign investor confidence will decline, leading to a drop in Foreign Direct Investment (FDI). Nepal’s exclusion from open markets will further strain its economy, while the credibility of Nepali banks regarding Letters of Credit (LC) may also weaken in international spaces. The achievements Nepal has made in areas such as the credit rating now risk being undermined by the gray listing.
Moving forward, Nepal has to focus on establishing sustainable compliance practices. Implementing the agreed-upon FATF action plan is essential, requiring financial regulatory bodies to address identified strategic deficiencies within set deadlines. Regular reporting, maintaining transparency and demonstrating commitment to reforms will be necessary. While this process may be burdensome, Nepal must be prepared to navigate these challenges effectively.
The question of what financial achievements Nepal has made after all its political maneuvers is now more relevant than ever. come to light. The weakening Indian currency, rising dollar price, unrecorded but real inflation, increasing gold price and surging imports have long been key concerns for Nepal’s financial stability. Meanwhile, the gap between the rich and the poor continues to widen, with wealth deposits in Swiss banks from Nepal showing an increasing trend. The persistent lack of integrity and widespread corruption has further aggravated the situation.
While news headlines suggest various ways to exit the gray list, implementing these measures is far more challenging in reality. Government officials must work toward removing the country from the gray list by 2026. However, Nepal should be aware that failing to make sufficient progress in the next two years could lead to an even worse scenario—being placed on FATF’s black list.
Now that Nepal is on the gray list, the government must take decisive action over the next two years by strengthening legislation and taking serious actions against money laundering practices. Although Nepal has prior experience in exiting the gray List, studying the strategies taken by the Philippines or Pakistan could provide valuable insights for a successful exit.
(Regmi is a Deputy Manager at Rastriya Banijya Bank Ltd, working in the Treasury Department.)
(This opinion article was originally published in March 2025 issue of New Business Age Magazine.)
