FATF Keeps Nepal on Grey List; Recommendations Highlight Need for Improved Understanding of Money Laundering
Image source: FATF
Contrary to hopes placed by the new government, Nepal has failed to exit the international monitoring list concerning money laundering and terrorist financing. FATF has identified an inadequate understanding of these issues within the country as a key reason.
Shortly after the government formation under Balendra Shah ‘Balen’, a delegation from the Asia/Pacific Group on Money Laundering (APG) visited Nepal to discuss necessary measures for removing the country from the ongoing monitoring list. The team met with key officials including Finance Minister Swarnim Wagle, Foreign Minister Shisir Khanal, and Nepal Rastra Bank Governor Bishwambhar Paudel.
APG is a regional body of the Financial Action Task Force (FATF) overseeing financial monitoring in the Asia-Pacific region.
A month after the delegation’s visit, FATF held a meeting in Paris, France, on June 19, deciding to keep Nepal on the ‘grey list’ and highlighted six major issues.
FATF pointed out the need to address Nepal’s existing “strategic deficiencies” in combating money laundering, terrorist financing, and the financial support of explosive weapons.
Image source: MOFA
What Are the Gaps in Understanding?
The first recommendation emphasizes the need to enhance Nepal’s understanding of the risks associated with money laundering and terrorist financing. But what exactly does this entail?
“There is a lack of comprehensive knowledge about where and what types of money laundering risks exist. For instance, a detailed understanding of money laundering processes within banks is necessary to identify these risks. The same applies to sectors like insurance, real estate, and gold and silver trade,” explained former law secretary and FATF expert Phanindra Gautam.
“FATF expects an assessment of risks across various sectors and subsectors of the economy.”
Experts note that money laundering is complex and technical, requiring regular training.
“Officials and policymakers in Nepal have not yet cultivated sufficient understanding of money laundering, which is the core issue in the first recommendation. Therefore, FATF urges Nepal to develop a national plan that clearly identifies risks and designs appropriate strategies,” stated former Nepal Rastra Bank Executive Director Narbahadur Thapa.
According to Thapa, Nepal implemented only four of the 11 recommendations issued by FATF last year, resulting in its re-inclusion on the monitoring list in February 2025.
He further added that the recent recommendations address problems that remain unresolved.
What Are the Other Reasons?
The second concern centers on the need to improve risk-based supervision of commercial banks, high-risk cooperatives, casinos, and the real estate sector.
“Nepal Rastra Bank must strictly supervise commercial banks and cooperatives. Currently, the central bank appears to be lagging in overseeing cooperatives,” Thapa added.
The third issue relates to the management of money transfer operations and informal remittance systems (Hundi), emphasizing the need to regulate these without negatively impacting financial inclusion.
The fourth recommendation calls for strengthening capacities and coordination for money laundering investigations.
The fifth recommendation suggests bolstering the investigation and prosecution processes.
Since the new government was formed, Finance Minister Wagle has presented money laundering investigations and arrests as efforts to exit the FATF list through good governance.
Experts, however, emphasize that FATF focuses not solely on prosecutions but on ultimate outcomes such as asset recovery.
“They do not concentrate on specific issues; what matters is whether sufficient cases reach the courts and lead to convictions. Previous discussions revealed that successful prosecution numbers were very low,” Gautam recalled.
The sixth concern highlights risk-based identification and confiscation of assets involved in criminal activity.
“These reasons and recommendations are not new. There are many complaints but a lack of effective implementation, which is why Nepal remains on the list,” Thapa explained.
Following a meeting with Nepalese officials in May, APG’s Deputy Secretary and team leader expressed commitment to promptly implement Nepal’s work plan.
“With new leadership at all levels, the government has shown strong support and commitment to officials for improving issues related to money laundering and terrorist financing,” they stated.
What Is FATF’s Grey List?
FATF places countries on the ‘grey list’—a high-risk monitoring list—that have strategic weaknesses in their frameworks against money laundering, terrorist financing, and financial support for explosive weapons, but have committed to addressing these weaknesses.
Nepal was first listed from 2009 to 2014.
“At that time, Nepal was emerging from a civil war and was removed relatively easily. However, FATF standards have become stricter since then,” said former secretary Gautam.
Nepal was re-listed in February 2025 and presented a 16-point action plan to exit within two years.
“Post Generation Z Movement, there were discussions about extending the deadline, but the new government’s emphasis on good governance raised hopes for removal from the list,” Gautam added.
What Are the Impacts of Being on the Grey List?
Being on the grey list seriously damages a country’s reputation.
Internationally, it raises concerns and jeopardizes bilateral and multilateral cooperation.
Economically, it complicates foreign direct investment and international banking arrangements.
It can discourage both domestic and foreign investors from investing.
Companies importing goods must obtain certificates or bank guarantees (LCs), which become difficult and costly for countries on the grey list.
This increases the cost of international financial transactions.
“Naturally, every country aims to exit the list as quickly as possible. Nepal has submitted a two-year plan, and if implemented within eight months, the government’s focus on good governance may facilitate removal,” Thapa said.