Nepal Rastra Bank (NRB) has indicated that capital flight may be occurring through the practice of over-invoicing during the process of opening letters of credit (LC). The central bank recently cautioned the chairpersons of bank and financial institutions (BFIs), expressing concern over the escalating trend of over-invoicing when utilizing LCs for importing goods and services from overseas. Over-invoicing has emerged as one of the methods employed in trade-based money laundering schemes, facilitating the transfer of a larger sum from the importer to the exporter. Opening letters of credit (LCs) is a mandatory procedure when importing goods and services from foreign countries. However, officials from the central bank have revealed that they have received reports indicating that certain BFIs and businessmen have been opening LCs at inflated prices exceeding the actual value of the goods, resulting in the outflow of capital abroad. Although the central bank has not made any public statements regarding capital flight through over-invoicing, NRB Governor Maha Prasad Adhikari warned the chairpersons of BFIs during an interaction on Tuesday, saying that action would be taken against any BFIs found to be facilitating capital flight through the practice of over-invoicing.

"It has been found that a group of BFIs and businessmen has been involved in the practice of opening LCs at prices surpassing the actual value and the capital has been illicitly transferred out of the country. This is a serious matter," said one of the BFIs' chairmen quoting Adhikari. "It is necessary to stop this trend immediately. If the BFIs do not stop it, we will be forced to take action against the concerned banks," Adhikari further said.

Central bank officials have confirmed that Governor Adhikari indeed issued a warning to the BFIs' chairpersons regarding the issue of capital flight. The officials acknowledged that in the initial stage, the BFIs have been cautioned about their involvement in such activities. However, central bank officials also stated that if this trend persists, further measures will be taken to bring both the BFIs and businessmen engaged in this practice under the purview of the law. The timing of the central bank's warning is significant as Nepal's anti-money laundering regime is currently under review by the Financial Action Task Force (FATF), an international watchdog focused on combating money laundering and terrorist financing. According to the US-based think tank Global Financial Integrity (GFI), trade mispricing accounts for the majority of illicit outflows from least-developed countries (LDCs) like Nepal. In a report published by the GFI, it was revealed that Nepal experienced a significant capital flight between 2001 and 2010, resulting in a staggering loss of $8.01 billion for the country. The report, titled 'Illicit Financial Flows from Developing Countries: 2001-2010,' states that, on average, approximately $801.4 million left Nepal annually during that period.