Nepal placed on FATF Grey List

 

KATHMANDU, FEBRUARY 21: The Financial Action Task Force (FATF), the global body responsible for combating money laundering and terrorist financing, has placed Nepal on its Grey List. This decision, made during the ongoing FATF meeting in France, categorizes the country as a jurisdiction under increased monitoring for the next two years due to concerns over the effectiveness of its anti-money laundering and counter-terrorist financing (AML/CFT) measures.

Nepal’s inclusion in the said list stems from shortcomings in implementing its AML/CFT framework. While an official declaration is yet to be made, FATF is expected to formally announce its decision by soon organising a press conference.  Those countries that fail to establish and enforce adequate AML/CFT policies and regulations are subject to Grey Listing.

Implications of Being on the Grey List

Following this designation, the Himalayan nation will have one year to demonstrate progress in strengthening its AML/CFT regime, with mandatory progress reports every three months. The country previously faced the risk of being grey-listed in 2010 and 2014, but diplomatic interventions helped avert it on those occasions.

Nepal has been a member of FATF’s Asia-Pacific Group on Money Laundering (APG) since 2002 and subsequently enacted the Anti-Money Laundering Prevention Act. However, due to inadequate compliance with international standards, it has now been placed under increased monitoring.

FATF had already subjected the country to enhanced scrutiny last year. Although the Nepali authorities committed to reforms within the given timeframe, their failure to implement the required measures led to Grey Listing. The deadline for improvements expired in the last mid-October, and FATF had identified 77 key indicators for Nepal, of which 52 required immediate action.

Potential Economic and Financial Consequences

Nepal’s Grey Listing is expected to have significant repercussions on financial costs, foreign trade, remittances, and foreign direct investment. Such repercussions are briefly discussed below:

Increased financial transaction costs
International financial institutions assess transaction costs based on risk exposure. A Grey Listing signals elevated financial risk, leading to higher compliance costs and transaction fees. As a result, Nepalese banks and financial institutions are expected to face increased risk premiums, raising service costs for businesses and individuals.

Delays in financial transactions and business operations
Being on the Grey List subjects Nepal’s financial sector to heightened regulatory scrutiny from global institutions. Stricter due diligence measures and additional compliance requirements could prolong transaction processing times, causing delays in payments, trade settlements, and cross-border transactions. This may undermine Nepal’s attractiveness as an investment destination and disrupt businesses reliant on efficient financial services.

Decline in foreign investment
Foreign investors typically prioritize jurisdictions with stable financial systems and lower regulatory risks. Nepal’s Grey Listing could erode investor confidence, resulting in reduced capital inflows and slower economic growth. Additionally,  the increased due diligence costs may further deter foreign investment.

Adverse impact on remittances and international trade
Remittances have long been helping Nepal’s shaky economy buoy up. If international money transfers become more expensive or delayed due to additional compliance checks, the remittance inflows could decline. Nepalese workers abroad could well face higher transaction fees, potentially shifting funds toward informal channels such as hundi, which could exacerbate financial integrity concerns.

Similarly, stricter financial scrutiny and longer processing times for international trade transactions might increase operational costs for businesses engaged in global commerce, creating barriers to Nepal’s economic growth.

Challenges in international banking relationships
A Grey Listing signals concerns over illicit financial activities, including money laundering and terrorist financing. As a result, there is a possibility of foreign banks facilitating Nepal’s international transactions imposing stricter compliance measures such as enhanced due diligence and more extensive Know Your Customer (KYC) requirements.

These additional regulatory processes increase both time and operational costs for Nepalese banks. In some cases, international banks may reconsider their relationships with Nepalese financial institutions, potentially severing banking ties. Even if relationships are maintained, the increased compliance costs could be passed down to local banks, affecting their profitability and the broader financial system.

Nepal now faces the urgent task of addressing FATF’s concerns by strengthening its AML/CFT measures. Effective policy reforms, stricter enforcement mechanisms, and increased regulatory oversight will be crucial in securing Nepal’s removal from the Grey List and mitigating the economic and financial risks associated with this designation.