The Financial Action Task Force (FATF) has retained Nepal on its Jurisdiction under Increased Monitoring list, commonly known as the gray list, citing persistent strategic deficiencies in the country’s anti-money laundering (AML) and counter terrorist financing (CFT) regime.
Issuing a statement after its plenary session last Friday, the global watchdog said while Nepal made a high-level commitment to strengthen its AML/CFT framework earlier this year, the progress has not been sufficient to warrant removal from the gray list. It said Nepal should continue to work on implementing its action plan to address its strategic deficiencies.
After the plenary, the FATF has said that Nepal most improve its understanding of money-laundering and terrorist-financing risks remains limited; enhance supervision of higher-risk sectors such as banks, cooperatives, casinos, real-estate and dealers in precious metals and stones; and demonstrate the identification and sanctioning of materially significant illegal hundi providers without affecting financial inclusion.
Additionally, Nepal has been told to increase capacity and co-ordination of competent authorities to conduct money laundering investigations; demonstrate an increase in such investigations and prosecutions; demonstrating measures to identify, trace, restrain, seize, and, where applicable, confiscate proceeds and instrumentalities of crime in line with the risk profile; and address technical compliance deficiencies in its targeted financial sanctions regime for terrorism financing and proliferation financing.
Nepal had previously exited the gray list back in 2014 after a roadmap of reforms was implemented. Earlier in February, the government had signaled strong political commitment to bolster its AML/CFT systems. Despite some legislative progress, implementation has remained uneven and structural reform has lagged. In particular, Nepal's regulatory oversight of non-financial businesses, beneficial-ownership transparency and enforcement action remain deficient.
About three years ago, the Asia Pacific Group on Money Laundering (APG) conducted a Mutual Evaluation Report on Nepal’s system for preventing money laundering and terrorist financing, and submitted its findings to the Financial Action Task Force (FATF).
The APG’s annual plenary meeting, held in Vancouver, Canada, from 9-14 July 2023, endorsed Nepal’s mutual evaluation report. Based on that assessment, the FATF in Oct 2023 placed Nepal under a one-year observation period. During the assessment, it identified 40 areas for improvement.
Nepal was expected to implement the FATF’s recommendations and demonstrate progress sufficient to avoid being placed on the gray list during this period. However, the country failed to make significant improvements within the one-year timeframe, leading to its eventual placement on the gray list.
Although being on the FATF’s gray list does not automatically impose sanctions, it acts as a red flag to the international financial community. Banks, foreign investors and correspondent-banks tend to apply heightened due diligence when dealing with entities in gray-listed jurisdictions.
Building trust through strong anti-money laundering and countering the financing of terrorism frameworks will be critical for Nepal as it seeks to maintain international financial credibility and attract foreign capital.
