KATHMANDU: The Financial Action Task Force (FATF), the global watchdog for money laundering and terror financing, has officially placed Nepal on its grey list once again, highlighting the failure of Prime Minister KP Sharma Oli’s government to take effective action against terrorism and its associated ecosystem.

As opposition parties in Nepal demanded Oli’s resignation for bringing shame to the country, the move underscores that Nepal has significant deficiencies in its anti-money laundering (AML) and counter-terrorism financing (CTF) frameworks that urgently require reform.

This marks Nepal’s second time being placed on the grey list, with the country previously remaining on the list from 2008 to 2014.

While this inclusion does not result in immediate financial sanctions, it raises concerns about the country’s economic stability, investor confidence, and international reputation.

What is FATF?

The FATF is an intergovernmental organization established in 1989 to combat money laundering, terrorist financing, and other financial crimes.

Nepal relies heavily on remittances from its migrant workers. The grey listing could lead to stricter scrutiny of remittance channels, potentially making it harder for Nepali workers abroad to send money back home.

It sets international standards to prevent illicit financial activities and ensures compliance through mutual evaluations.

Countries that fail to meet FATF’s criteria are placed on the grey list (under increased monitoring) or the blacklist (high-risk jurisdictions facing sanctions).

Being on the grey list can impact a country’s economy, investor confidence, and banking relations.

To avoid such consequences, nations must strengthen their anti-money laundering (AML) and counter-terrorism financing (CTF) frameworks and cooperate with FATF’s recommendations.

Understanding FATF Grey List

The FATF grey list includes countries under increased monitoring due to deficiencies in their anti-money laundering (AML) and counter-terrorism financing (CTF) frameworks.

These nations have committed to improving their regulatory measures but require closer scrutiny.

To exit the list, they must implement FATF-recommended reforms, such as enhancing financial regulations, strengthening enforcement mechanisms, and improving transparency.

Failure to comply may lead to blacklisting, which carries severe economic consequences, including international financial restrictions and economic isolation.

Possible Reasons for Nepal’s Inclusion

By placing Nepal on the grey list, FATF acknowledges that the country has committed to improving its AML/CTF measures but still has considerable work to do.

Countries that remain on this list for extended periods face greater scrutiny, potential loss of investor confidence, and increased costs for international transactions.

Several key factors contributed to Nepal’s placement on the FATF grey list:

• Nepal’s banking and financial system has been criticized for lacking stringent AML/CTF measures, making it susceptible to illicit financial flows. The country has struggled to implement a robust framework for monitoring suspicious transactions, particularly in the informal financial sector.
• While Nepal has enacted several laws against money laundering and terror financing, enforcement remains weak due to limited institutional capacity and resources.
• The FATF has raised concerns about certain non-governmental organizations (NGOs) operating in Nepal, which may be vulnerable to misuse for illicit financial activities.
• Nepal’s significant informal economy and issues related to corruption have further complicated efforts to establish an effective financial monitoring system.

Political Row

Since Nepal was placed on the FATF grey list, the South Asian nation has witnessed political turmoil, with opposition leaders accusing the government of inaction regarding asset laundering and terrorist activities.

Communist Party of Nepal (CPN-Maoist Centre) MP Madhav Sapkota, speaking at the House of Representatives last Sunday, said that due to the government’s inaction, lack of will to improve the financial sector, and neglect of good governance, Nepal has reached a “shameful” situation.

He expressed regret and condemnation for being on the grey list due to money laundering and terrorist activities. The MP stated that this event is a clear sign that the government has failed and is not in favor of good governance.

“This event is not in favor of the government’s good governance, and we should take it as a sign that the government has completely failed. The government should morally step down,” Sapkota said, adding that Parliament should take this issue seriously because it tarnishes the dignity of the entire country.

The CPN-Maoist Centre has also called for Prime Minister KP Sharma Oli’s resignation. Meanwhile, Nepali Congress lawmaker Arjun Narshingh KC suggested demonetizing NPR 500 and 1000 banknotes to combat illicit financial activities, according to a report in Resonant News.

He also stressed the importance of parliamentary debates and corruption probes to protect Nepal’s global reputation.

Impact on Nepal’s Economy

The grey listing has significant implications for Nepal’s economy and financial sector.

Foreign investors are often wary of doing business in grey-listed countries due to higher compliance risks and concerns about financial instability. Nepal may witness a decline in foreign direct investment (FDI) as businesses hesitate to engage with a country under enhanced scrutiny.

International financial institutions and correspondent banks may impose stricter due diligence requirements on transactions involving Nepal. This could lead to higher transaction costs, delays in remittances, and additional burdens on businesses that rely on cross-border trade.

Nepali banks may face difficulties in maintaining relationships with international banks due to the perceived risks associated with a grey-listed country. This can restrict access to global financial markets and impact Nepal’s ability to engage in international trade.

Strengthening bilateral cooperation in financial governance will not only help Nepal address FATF concerns but also restore investor confidence, ensuring long-term economic stability and credibility in the global financial system.

Nepal relies heavily on remittances from its migrant workers. The grey listing could lead to stricter scrutiny of remittance channels, potentially making it harder for Nepali workers abroad to send money back home.

Being placed on the grey list signals to the global community that Nepal has governance and regulatory issues that need to be addressed. This could affect Nepal’s standing in international forums and its ability to negotiate favorable trade and financial agreements.

According to experts, the consequences of being on the FATF grey list could be severe.

Another South Asian nation, Pakistan, continues to grapple with the aftermath of its FATF grey list designation, as low investor confidence hampers economic recovery.

Persistent financial scrutiny and regulatory challenges have deterred foreign investments, exacerbating economic instability. The country’s struggle to restore trust and implement reforms remains crucial for overcoming these economic hurdles.

What’s Next?

Nepal’s inclusion in the FATF grey list is a wake-up call for policymakers and financial institutions, highlighting the urgent need for financial reforms and stronger anti-money laundering measures.

Given the economic risks associated with this status, Nepal should actively and immediately seek support from neighboring countries like India, known for its stable economy and benchmark in ethical economic practices, experts suggest.

India, with its robust regulatory framework and experience in tackling financial crimes, can provide valuable guidance on policy reforms, compliance mechanisms, and financial transparency.

Strengthening bilateral cooperation in financial governance will not only help Nepal address FATF concerns but also restore investor confidence, ensuring long-term economic stability and credibility in the global financial system.