FATF: Nepal Fails to Exit Grey List, Cited Lack of Understanding on Money Laundering
Image source, FATF
Contrary to expectations of the new government, Nepal has failed to exit the Financial Action Task Force’s (FATF) grey list related to money laundering and terrorist financing. The FATF attributed the failure mainly to Nepal’s insufficient understanding of these issues.
Within two months of the Balendra Shah ‘Balen’ led government formation, a delegation from the Asia/Pacific Group on Money Laundering (APG) visited Nepal. They met with top officials including Finance Minister Swarnim Wagle, Foreign Minister Shisir Khanal, and Nepal Rastra Bank Governor Bishwabhusan Poudel to discuss Nepal’s continued placement under enhanced monitoring and explore measures for removal.
The APG is the regional body of the FATF for the Asia-Pacific region, which oversees international financial monitoring.
A month after the APG delegation’s visit, the FATF meeting held on June 19 in Paris decided to keep Nepal on its grey list, citing six reasons.
The FATF issued various recommendations to address existing ‘strategic deficiencies’ in measures against money laundering, terrorist financing, and the financing of proliferation of weapons of mass destruction.
Image source, MOFA
What Does Lack of Understanding Mean?
The first recommendation by FATF emphasizes that Nepal needs to improve understanding of risks related to money laundering and terrorist financing within the country. But what exactly does that entail?
“There seems to be an incomplete understanding of where and what the risks of money laundering are. For example, it is necessary to deeply comprehend the procedures of money laundering within banks. Similarly, sectors such as insurance, real estate, and gold and silver trading also require attention,” said Phanindra Gautam, former Law Secretary and FATF expert.
“FATF has repeatedly pointed out the need to evaluate risk levels across various sectors and subsectors in your economy.”
Experts explain that continuous training is vital because of the technical and complex nature of money laundering.
“Nepalese officials and policymakers have inadequate knowledge of money laundering, which was the first point noted. Therefore, FATF has instructed Nepal to prepare a national strategy identifying risks and outlining how to address them,” said Narbahadur Thapa, former Executive Director of Nepal Rastra Bank.
According to Thapa, among 11 previous recommendations, only four had been implemented; hence Nepal was placed on the grey list again in February 2025.
He attributes the failure to implement these suggestions as the main reason for the continued listing.
What Are the Other Reasons?
The second reason highlighted by the FATF concerns improvements needed in risk-based supervision across commercial banks, high-risk cooperatives, casinos, and real estate sectors.
“They particularly emphasized better supervision of commercial banks and cooperatives by Nepal Rastra Bank. Our central bank tries to maintain some distance regarding cooperatives,” Thapa remarked.
The third concern involves managing money value transfers and the hawala system, recommending that controls be implemented without negatively impacting financial inclusion.
Fourth, the FATF stressed the need to enhance capacity for investigating money laundering and improve inter-agency coordination.
Fifth, they called for increased efforts in investigation and prosecution.
Since its formation, the new government has prioritized good governance, with Finance Minister Wagle presenting money laundering investigations and arrests as key steps toward removal from the FATF list.
However, experts note that the FATF now also focuses on the final decisions of prosecutions and the amount of money the state manages to recover, not just the number of prosecutorial actions.
“They don’t focus on any particular case. It was uncomfortable for us during discussions because we lacked data on cases underway or those concluded by courts,” recalled Gautam about past FATF meetings.
The sixth reason relates to addressing the risk environment, from identification to confiscation of assets used in crime.
“These reasons and recommendations are not new. Due to previous assurances but lack of actual implementation, Nepal remains on the monitoring list,” Thapa emphasized.
Following the APG delegation’s meeting with Nepal’s senior officials in May, the team leader and APG Deputy Executive Secretary David Shannan noted Nepal’s commitment to implementing the proposed action plans swiftly.
“All leaders and the new government appeared committed to strong leadership and development and support of key officials to improve measures against money laundering and terrorist financing,” he stated.
What is the FATF Grey List?
Countries identified with strategic deficiencies in combating money laundering, terrorist financing, and proliferation financing—but actively working on solutions—are placed on the FATF’s enhanced monitoring list, commonly known as the ‘grey list.’
Nepal was first placed on this list from 2009 to 2014.
“At that time, Nepal was recently out of conflict, so removal from the list was relatively straightforward. However, the criteria have since become more stringent,” explained former Secretary Gautam.
Nepal once again fell onto the grey list in February 2025 and has since developed a 16-point action plan aiming to exit within two years.
“After the recent Janajati protests, there was consideration of requesting more time, but we emphasized the importance of prioritizing good governance to create a conducive environment,” Gautam added.
Currently, 22 countries remain on the grey list globally. Bosnia-Herzegovina and Iraq were newly added, while Algeria and Namibia removed themselves from the list.
Myanmar, North Korea, and Iran remain on FATF’s blacklist.
What Happens When a Country is on This List?
Being on the grey list chiefly harms the country’s international reputation.
Global partners may question the country’s credibility, which can affect bilateral and multilateral assistance.
Challenges arise in attracting investment and conducting international banking transactions.
Both domestic and foreign investors might be discouraged from investing or conducting business in a monitored country.
Importers face stricter requirements such as certificates or opening letters of credit guaranteed by banks, making trade more difficult or costly for listed countries.
Consequently, international financial transaction costs rise for countries on these lists.
“Hence, every country strives to exit this list as soon as possible. With roughly eight months remaining to implement Nepal’s two-year action plan, effective and swift action by the new government could enable Nepal to be removed,” Thapa expressed hope.
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