Nepal is once more at risk of being greylisted by the Financial Action Task Force (FATF) due to its inability to rectify significant deficiencies in its anti-money laundering (AML) and counter-terrorism financing (CFT) framework. The Asia/Pacific Group on Money Laundering (APG) strongly warned against Nepal’s grey-listing and in July 2023 it provided a one-year extension until October 2024 to enact reforms and compliance. Nonetheless, despite this vital respite one year later now, the same cautions are reemerging, indicating that Nepal’s advancement has been either inadequate or unproductive.
The critical inquiry, consequently, is whether Nepal has effectively employed this one-year timeframe or simply depended on superficial bureaucratic maneuverings and diplomatic strategies to delay its grey-listing. The answer is stark. Nepal has unequivocally failed to execute the structural, financial, and legal reforms required to adhere to global AML/CFT standards, consequently placing itself once more under international scrutiny. Nepal’s formal enacted financial laws seem strong but the primary challenge resides in their enforcement, the coordination among regulatory agencies, and addressing entrenched corruption and informal financial systems that render the country susceptible to illicit financial transactions.
Nepal has persistently struggled to effectively enforce and implement AML/CFT measures, despite its legal framework. The Financial Intelligence Unit (FIU), functioning under Nepal Rastra Bank, is underfunded, technically deficient, and politically restricted, rendering it unable to operate as an autonomous regulatory entity. The role of FIU should be to actively oversee suspicious transactions, recognize high-risk entities, and cooperate with law enforcement agencies. Its actions are predominantly reactive and bureaucratic, inadequately preventing illicit financial transactions prior to their occurrence.
Furthermore, law enforcement agencies and regulatory bodies experience inadequate inter-agency coordination, markedly diminishing their efficacy. Consequently, financial crimes, especially illicit remittance systems such as hundi, trade-based money laundering, and corruption driven by political motives, persist unabated. The informal economy in Nepal represents a significant structural vulnerability that has rendered financial regulation nearly unfeasible. Estimates indicate that Nepal’s shadow economy constitutes a substantial fraction of its GDP, and due to the insufficient adoption of formal banking, a considerable volume of transactions remains unrecorded. The informal hundi network, widely utilized for remittances, facilitates the continuation of illicit financial flows, encompassing money laundering and terror financing, without detection. This problem is not exclusive to Nepal. But the inability to incorporate informal financial activities into the formal banking system has rendered the country susceptible to FATF examination. Nepal should proactively incentivize businesses and individuals to transition into the formal economy by providing tax relief, streamlining financial regulations, and conducting awareness campaigns to promote compliance, rather than awaiting external pressure.
The political and institutional inertia in enforcing financial regulations continues to be a significant impediment. The corporate misgovernance in Nepal’s banking sector and the ineffectiveness of financial regulatory bodies have undermined enforcement efforts. Banks frequently exhibit inadequate customer due diligence procedures, allowing politically connected individuals to exploit vulnerabilities in the financial system for money laundering without apprehension of prosecution. The lack of a robust and autonomous financial crimes tribunal results in the indefinite postponement or dismissal of financial misconduct cases due to political interference. These systemic inefficiencies not only alert the FATF but also undermine Nepal’s credibility within the global financial system.
Furthermore, the FATF/APG framework is subject to criticism being a highly politicized, structurally biased, and inconsistent system that disproportionately affects developing countries such as Nepal, while neglecting to hold powerful countries accountable for analogous financial shortcomings. Although the FATF purports to be an impartial regulatory entity safeguarding global financial integrity, its actions frequently undermine its declared objectives, resulting in allegations of political partiality and economic coercion. The unequal focus on developing countries, coupled with leniency towards prominent global financial hubs, prompts critical inquiries regarding the legitimacy, impartiality, and operational equity of the FATF.
The governance framework of FATF is predominantly controlled by the G7 countries, granting those countries excessive sway over the organization’s decision-making procedures. This results in the selective targeting of economically disadvantaged countries while enabling larger countries to evade regulations through legal loopholes. For example, Pakistan was delisted from the grey-list in October 2022, despite persistent apprehensions regarding terror financing, whereas Nepalwhose money launderingissues are considerably less egregiousis currently confronting grey-listing due to relatively minor administrative inefficiencies on enforcing the enacted laws in a broader scale. These inconsistencies illustrate that the actions of FATF are frequently influenced by political factors rather than authentic financial risk evaluation.
A significant concern regarding FATF is its perpetually evolving compliance standards. Even when countries fulfill FATF’s standards, they are frequently instructed to “do more,” resulting in a scenario where complete compliance is nearly unattainable. This strategic ambiguity enables FATF to maintain developing countries in a continual state of susceptibility, threatening them with economic consequences should they fail to adhere to constantly changing guidelines.
Meanwhile, grey-listing is not simply a technical designation.It entails significant economic repercussions that can undermine a country’s financial stability. For Nepal, grey-listing may result in elevated remittance expenses for expatriate workers, more stringent conditions for foreign loans, diminished foreign direct investment, and heightened scrutiny of banking transactions. Nevertheless, the FATF assumes no responsibility for the economic harm it inflicts on the countries it grey-lists. It persists in functioning with unrestrained power, exhibiting minimal concern for the long-term repercussions of its actions on emerging economies.
In light of these circumstances, Nepal’s strategy should prioritize negotiating a fair and equitable regulatory agreement instead of simply adhering to the impractical and ever-changing demands of FATF. This necessitates a two-pronged approach to counter FATF’s unilateralism and to exhibit Nepal’s authentic dedication to financial integrity.
Nepal must prioritize a robust diplomatic and negotiation-oriented strategy to address FATF’s unilateral measures. This entails establishing a high-level FATF negotiation team comprising senior diplomats, financial experts, and legal scholars capable of directly interacting with FATF’s decision-making entities. Nepal should forge alliances with other developing countries that have encountered analogous challenges, thereby presenting a cohesive position against the inconsistencies of the FATF. Nepal should utilize its connections with India, China, and other countries to advocate against grey-listing and promote equitable regulatory assessments at the regional level.
Nepal must enhance its internal financial, legal, and institutional frameworks to exhibit its dedication to financial integrity. This necessitates rendering the FIU fully autonomous, augmenting its funding, and improving its technical capabilities to monitor and report financial crimes efficiently. Nepal must establish a transparent, real-time digital financial monitoring system to incorporate informal economic activities into the formal banking sector, thereby mitigating its susceptibility to illicit financial flows. Establishing a specialized tribunal for financial crimes with expedited prosecutorial authority is essential for the prompt and impartial resolution of financial crimes.
Nepal is at a crucial crossword where its fiscal integrity and economic stability are at stake. It should adopt a two-pronged approach in response to FATF’s pressures. Firstly, implementing a robust diplomatic and negotiation approach to counter FATF’s unilateralism. Secondly, undertaking internal financial, legal, and institutional reforms to exhibit Nepal’s authentic commitment to financial integrity. By adopting this approach, Nepal can spearhead discussions on financial regulation, highlighting its sovereignty, revealing the biases of the FATF, and ensuring a just and transparent regulatory framework. The period of passive acquiescence has concluded. Nepal must now implement decisive measures to safeguard its economy and its global financial reputation.