Avoiding the FATF gray list

Anti-money laundering is an international network of laws, rules and procedures aimed at making money appear legitimate. For centuries, governments and law enforcement agencies have tried to fight crime by chasing money. 

The Financial Action Task Force (FATF), an international organization formed to combat money laundering, has given Nepal a year to avoid the ‘gray list’ in money laundering cases. 

 

Immediate assessment 

Nepal’s mutual evaluation group, the APG, is reviewing Nepal’s progress in January. 

Based on its report and Nepal’s response, the FATF will decide whether to keep Nepal on its ‘gray list’. As the deadline approaches, the government should not feel like it hastily amended the law. 

The FATF also identifies countries that lack adequate financial infrastructure to prevent corruption and other financial crimes. In the case of Nepal, it has recently become public that the government has proposed to amend the Cooperatives Act, 2074 and the Nepal Rastra Bank Act, 2058, less than a year after amendments. The recent Cabinet meeting passed an ordinance to amend some Nepal Acts related to cooperatives, indicating that the Cooperatives Act and the Nepal Rastra Bank Act may be amended. 

 

FATF blacklist 

The FATF blacklist is a list of countries that the financial watchdog has declared ‘non-cooperative’ in its efforts to address money laundering and terrorist financing concerns. The list helps identify financial weaknesses that hinder anti-money laundering compliance within an organization. 

Failure to meet the required action points in a timely manner places a country on the FATF blacklist as a ‘country under enhanced monitoring’. The blacklist is an official document based on findings related to financial crime and its prevention. Taking into account regulatory criteria, the FATF can remove a country from its blacklist based on the financial infrastructure of a particular sector. 

Due to the state of illegal activities related to terrorism and nuclear weapons, only a few countries are currently on the FATF blacklist. Looking back, the House of Representatives of Nepal unanimously passed the Money Laundering Bill paving the way for amendments to laws such as the Export-Import (Control) Act-2013, the Ship Registration Act-2027, the Revenue Act-2034, the Tourism Act-2035, the Building Construction Act-2013. Other relevant laws include the Securities Act-2063, Nepal Rastra Bank Act-2058, Human Trafficking and Transportation (Control) Act-2064, Criminal Assets and Equipment (Forfeiture, Control and Confiscation) Act-2070, Prevention of Money Laundering Act-2064, Prevention of Organized Crime Act-2070, 2079, Cooperatives Act-2074, Foreign Investment and Technology Transfer Act-2075 and the Electricity Regulatory Commission Act-2074. Looking back, the plenary session of the FATF held last June pledged to address the weaknesses pointed out by the APG by amending various laws. 

After the House of Representatives approved the Money Laundering Bill, Nepal took a major step to reduce the risk of being graylisted by the Financial Action Task Force (FATF). 

 

Institutional governance

In this context, the regional organization on money laundering—Asia Pacific Group (APG)—assessed that institutional governance in cooperatives was weak last year and the risk of money laundering was high. 

The government tried to amend the act to control the transactions of cooperatives. Last year, the government proposed to set a limit of personal savings in cooperatives at Rs 2.5m, but it was removed when it was passed by the parliament. Similarly, there is a provision for the regulation, monitoring and supervision of organizations with transactions up to Rs 250m by the local level, up to Rs 500m by the province, and more than Rs 500m by the federal department. 

The Nepal Rastra Bank Act was also amended to include the Nepal Rastra Bank in the financial governance and risk-based supervision of cooperatives with a share capital or annual turnover of more than Rs 500m, at the request of the department. 

Despite the increase in the number of cooperatives that are in trouble due to failure to return the savings of their members, the government has not been able to do anything for security. 

 

Advisory panel 

The advisory task force formed under a member of the National Planning Commission to solve the problems seen in cooperatives last year also suggested that the monitoring of large-scale cooperatives through Nepal Rastra Bank should be carried out immediately and a regulatory authority should be formed in the long term. The ‘Parliamentary Inquiry Committee on Misuse of Savings by Cooperatives’ formed under the Parliament had also suggested setting limits on savings and loan transactions by cooperatives and forming a regulatory authority. 

It should be recalled that the APG, in its mutual evaluation report, pointed out the need for Nepal to pass an amendment that would give the authority to investigate money laundering to the relevant criminal investigation agency. 

Once adopted, Nepal should accelerate implementation and significantly enhance the capacity of effective competent authorities to carry out new/modified functions.

 

Nepal and the gray list 

Nepal was on the Gray List from 2008 to 2014. A series of improvements in the anti-money laundering regime, including the Anti-Money Laundering Act, 2008, and other laws, finally removed Nepal from the list in 2014. 

Although FATF does not enforce regulations or impose penalties, its recommendations and guidelines play an important role in helping financial institutions combat money laundering and terrorist financing. 

FATF Gray List Jurisdictions under enhanced monitoring—also known as the FATF Gray List—include countries with “strategic weaknesses” in combating financial crime. Countries on the list represent a high risk of money laundering and terrorist financing; they are required to formally commit to improving the regulatory infrastructure to prevent financial crime. 

These efforts include creating an action plan to address the need for anti-money laundering measures across the country, developing a central regulatory unit that works with other financial institutions and businesses to combat illicit flows of money, and effectively implementing the “anti-money laundering” standards. 

In addition to efforts to effectively implement the “anti-money laundering” standards, graylisted countries are increasingly monitored by the FATF itself or other regional bodies designated by the FATF. 

These bodies report on the country’s progress in meeting anti-money laundering compliance. Although graylisted countries represent a lower risk than the jurisdictions on the blacklist, the World Bank and other financial institutions may impose certain restrictions. 

Like the blacklist of countries graylisted by the FATF, the FATF Gray List is updated regularly to take into account the state of financial crime in a particular country. 

In 2020, the FATF Gray List included around 18 countries. Laundering laws on the legalization of inherited wealth should be softened, and self-declaration of inherited wealth should be made more explicit. The lawmakers also raised the question of whether the accountability is to FATF or to the Nepali people. 

It is said that Nepal has failed in implementation—the system for investigation, prosecution, asset seizure and prevention of money laundering is not efficient. 

A country like ours cannot remain isolated from the international economy. Similarly, foreign donors can impose more stringent conditions on aid and grants after the country is blacklisted. 

If the ordinance is brought before the next FATF plenary meeting, it will be considered a major step forward. Enacting a law will be even better.  

Otherwise, Nepal will remain a country that has failed to fulfill its commitments. Nepal must continue to implement its action plan to address these shortcomings, namely: adequately criminalizing money laundering and terrorist financing; establishing and implementing adequate procedures to identify and freeze terrorist assets; implementing adequate procedures to confiscate money related to money laundering; implementing and enforcing appropriate mutual legal assistance laws; ensuring a fully operational and effectively functioning Financial Intelligence Unit. It seems that adequate suspicious transaction reporting obligations should be established to prevent money laundering. 

Overall, the responsibility of the concerned bodies to take the necessary initiatives to protect Nepal from the gray list lies with the concerned bodies. 

If strong policies and government lobbying are required for this, initiatives should be taken at the regional and bilateral levels for liberalization in Nepal. 

Corruption, tax evasion and human trafficking are the biggest ML threats in Nepal. 

They have the greatest potential to generate income and produce negative economic and social impacts. According to the opinion of some people, there should be no provision in the current provision to allow some unaccounted assets to be made white by paying taxes on illegally acquired assets. This is also related to VDIS and ancestral property. 

Recently, the government has decided to form a seven-member task force to make the work against money laundering and terrorist financing more effective. According to the decision taken by the meeting of the Money Laundering Control Committee, the coordinator of the National Coordination Committee will be the coordinator of the task force. The task force is also expected to coordinate among agencies involved in money laundering and terrorist financing control.