Nepal unlikely to dodge FATF's Grey List

KATHMANDU, FEBRUARY 7: Nepal faces a high probability of being placed on the Grey List by the Financial Action Task Force (FATF) due to its ineffective enforcement of anti-money laundering laws. The country’s failure to implement necessary legal measures has drawn closer scrutiny from FATF, an international monitoring body on financial crimes.

Currently, Nepal is undergoing its third mutual evaluation of anti-money laundering measures. The final ranking will be decided based on this assessment, with FATF set to announce the results within this February. However, an official from the Ministry of Finance indicated that regardless of government efforts at this stage, Nepal is unlikely to avoid the Grey List. The official emphasized that the focus should instead be on making improvements to exit the list in the future.

One-Year Window for Reforms
If placed on the Grey List, Nepal will be given one year to implement reforms, with progress reviewed every three months. Countries that fail to meet FATF’s compliance standards are subjected to stricter financial monitoring and higher transaction costs in global banking.

Nepal’s History with the Grey List
Nepal has been a member of the Asia/Pacific Group on Money Laundering (APG) under FATF since 2002 and introduced the Anti-Money Laundering Act soon after. However, due to a lack of tangible efforts to meet international standards, Nepal now risks being downgraded.

This is not the first time Nepal has faced this threat. In 2010 and 2014, the country narrowly avoided being placed on the Grey List due to strong diplomatic lobbying. However, this time, Nepal has failed to implement key reforms despite a one-year extension granted by FATF in 2023.

Nepal’s Compliance Ratings
There are 11 indicators for effectiveness evaluation, which focus on law enforcement and investigative aspects. Similarly, there are 40 indicators for technical compliance evaluation, covering legal frameworks and institutional mechanisms.

Under effectiveness evaluation, the 11 indicators are categorized into four ratings: 'Highly Compliant' (Full Compliance), 'Substantial Compliance' (Adequate Compliance), 'Moderate' (Medium Compliance), and 'Low' (Minimal Compliance).

Countries like Nepal must achieve at least three ratings of 'Full Compliance' or 'Adequate Compliance' to meet the required standards. However, the Himalayan nation has received a 'Moderate' rating in four indicators and a 'Low' rating in seven indicators, with none rated as 'Full Compliance'.

A Nepal Rastra Bank official noted that a 'Moderate' rating is almost equivalent to a 'Low' rating. Since FATF considers a 'Moderate' rating as a low score, Nepal has little reason for complacency. In contrast, the southern neighbour-India- has secured 'Adequate Compliance' ratings in six out of 11 effectiveness evaluation indicators, while five indicators were rated as 'Moderate'.

Similarly, in technical compliance evaluation, the 40 indicators are assessed under four ratings: 'Compliant' (Full Compliance), 'Largely Compliant' (Adequate Compliance), 'Partially Compliant' (Partial Compliance), and 'Non-Compliant' (Non-Compliance). A country like Nepal can avoid placement on the Grey List if it achieves a 'Compliant' or 'Adequate Compliance' rating in at least 21 indicators. However, Nepal has secured 'Full Compliance' in 16 indicators, 'Compliant' in five, 'Partially Compliant' in 16, and 'Non-Compliant' in three indicators.

By comparison, the southern neighbour has received 'Full Compliance' ratings in 11 indicators, 'Adequate Compliance' in 26, and 'Partial Compliance' in three indicators.

Consequences of Being on the Grey List
If Nepal is added to FATF’s Grey List, it will face serious economic and financial consequences: These are briefly discussed below:

Increased Transaction Costs
International financial institutions impose higher risk premiums when dealing with Grey List countries. Nepali banks may have to pay higher fees for global transactions, affecting remittances and trade.

Delays in Financial Transactions
International transactions will be subject to stricter scrutiny, increasing delays in trade and business payments. This will make Nepal a less attractive destination for foreign companies seeking fast and efficient financial services.

Decline in Foreign Investment
Foreign investors prefer financially stable countries. Being on the Grey List raises concerns about money laundering risks, discouraging investments.

Negative Impact on Remittances and Trade
Nepal’s economy heavily depends on remittances. If transaction costs rise and delays occur, remittance inflows could decline. Informal money transfer methods (hundi) may increase, leading to further regulatory concerns.

Risk of Losing Correspondent Banking Ties
Foreign banks that facilitate Nepal’s international transactions may sever ties or impose stricter compliance rules. This could increase costs for Nepali financial institutions and negatively impact their profitability.

Weak Law Enforcement in Nepal
In its August 2023 report, FATF pointed out that Nepal has failed to implement essential anti-money laundering laws, leading to minimal legal action against financial crimes.

Over the past years, Nepal’s Financial Intelligence Unit (FIU) received 7,628 suspicious transaction reports. Of these, 82% come from banks and financial institutions, 9% from remittance companies and 5% from development banks.

Despite this, enforcement remains weak, with zero major prosecutions for money laundering violations.

Conclusion
With FATF set to announce its decision soon, Nepal’s placement on the Grey List seems almost certain. While the government failed to meet compliance standards in time, its focus must now shift toward implementing urgent reforms to exit the list and restore financial credibility on the global stage