Call To Get Nepal Out Of Grey List

Nepal’s economy, which was already struggling to recover from the COVID-19 pandemic, is now facing another challenge - it has fallen into the grey list of the Financial Action Task Force (FATF) due to its failure to curb financial crimes. The grey list is a warning for a country to make better laws against money laundering, terrorist financing and proliferation financing.  The FATF is an international watchdog against money laundering. This task force is formed by the G7 countries, which contribute about 28 per cent to the global economy. The FATF watches countries' financial activities. If their economic transactions smell a rat, they are monitored and given action plans to fix their weaknesses within a specific time frame. If they fail to do so, they end up on the grey list.

Nepal was placed on the grey list in 2008 and remained there till 2014 owing to some flaws in its laws, poor enforcement, and a lack of supervision in money laundering and terrorist financing. Nepal amended its legislation to come off the list. The Anti-Money Laundering Act, 2008 was implemented. Nepal also created a mechanism called the AML investigation unit. Again, after a decade in February 2025, Nepal has been placed on the grey list. The FATF found that Nepal has related laws, but they have not been implemented. A very low number of investigations have been carried out in this regard. It concluded that there is a high risk in investing here in the absence of transparency.

Factors 

There are several factors why Nepal is on the grey list. This results from neglect, poor implementation of laws and lesser political priority. Nepal has several laws and agencies, such as the Department of Money Laundering Investigation (DMLI) and the Financial Information Unit (FIU) under Nepal Rastra Bank (NRB), which control money laundering. However, these agencies are underfunded and poorly coordinated. Many cases are investigated very slowly or ignored. Nepal’s politics is highly unstable. The frequent changes in the government make it difficult to conduct investigations smoothly. When the leaders are found to have been involved in some questionable financial decisions, the NRB's institutions hesitate to take action.

Areas such as real estate, casino, gold trade and non-governmental organisations, which have been used to launder black money, are not well monitored. There is also a lack of digital tracking systems or trained investigators who can control such issues. Nepal has a 1700-km-long open border with India, which makes it easy for people to do illegal trades. Customs offices and border security do not have modern equipment to check everything that crosses the border. Some people also use fake invoices in trade (import and export) to secretly move money across borders. Strong border control and better cooperation will help Nepal build trust and protect its financial system.

The impact of being on the grey list will cost Nepal huge losses. It can affect every aspect of the economy. One of the major impacts will be on foreign funding and investments. The investors want to invest their money in something from which they can earn a profit and make returns. The grey list increases Nepal's risk profile. Foreign investors will think twice before investing.  Banks around the world are required to follow strict FATF rules. When a country is listed on the grey list, foreign banks tend to become extra cautious. They need to check each transaction and see if the country is linked to any illegal activities. Small businesses and traders will struggle to depend on quick cash flow.

Around 25 per cent of Nepal's Gross Domestic Product (GDP) depends upon remittance. Now that Nepal is on the grey list, it might be difficult to transfer money from abroad, which might prompt people to use some different channels, like hundi. Families depending on remittances could face difficulties. Nepal’s banks are already facing challenges like liquidity shortages. The FATF's grey list adds another layer of pressure to the existing one. Banks will now have to follow strict laws and verification rules for every transaction.

Inflation 

Nepal can also lose credibility globally. Other countries could start seeing Nepal as a risky or poorly governed one. It takes years to repair a damaged reputation, even after the country is removed from the list. If foreign investments and remittances slow down, Nepal’s supply of foreign currency will decrease. This could create pressure on Nepal’s balance of payments and the value of the Nepali rupee. The prices of imported products could rise due to increasing inflation.

However, this setback can also be taken as an opportunity to bring strong laws, build capable institutions that work against money laundering. Falling into the grey list should, therefore, be treated as a wake-up call for Nepal to build a cleaner and more transparent future. With stronger institutions, honest leadership, and effective implementation of laws, Nepal can regain global confidence and move toward a more transparent and stable economy.

(Tandan is currently pursuing a Chartered Accountant degree.)