Saturday, 4 April, 2020

Anti-Money Laundering & Cooperatives

Uttam Maharjan


The cooperative sector has been recognised as one of the three pillars of the national economy. The contribution of the cooperative sector to the national economy is not a small deal. There are around 35,000 cooperatives, including around 14,000 savings and credit cooperatives, in Nepal with financial resources running into around Rs. 300 billion. Cooperatives are scattered not only in rural areas but also in urban areas, including in the capital city of Kathmandu. The sheer number of cooperatives is enough to show their importance in the national economy.

However, the cooperative sector has largely remained unregulated. This has engendered malpractices and financial irregularities in some cooperatives. Promoters of some cooperatives decamping with depositors’ money are not a new phenomenon. And promoters of some cooperatives misusing depositors' money for their self-interests is also not new, either. This is all due to a lack of monitoring and regulation of cooperatives. Further, there is suspicion that ill-gotten money is deposited in cooperatives to make it look legitimate for lack of effective implementation of the Money Laundering Prevention Act, which was enforced in the cooperative sector about two years ago.
In the federal context, local bodies and states are given the responsibility for looking after cooperatives. Accordingly, around 29,000 cooperatives have been brought under the jurisdiction of local bodies. But for lack of adequate resources and required knowledge, such cooperatives have not been effectively monitored. The government is trying to regulate the cooperative sector at any cost. In this regard, the Department of Money Laundering Investigation has asked the Department of Cooperatives, the regulator of cooperatives, to draft and implement relevant anti-money laundering laws for the cooperative sector. The Department of Money Laundering Investigation is also considering enforcing the goAML software in cooperatives. The software has been in use in commercial banks since January 15, 2020.
In fact, the government is considering tightening the noose around the necks of cooperatives as far as curbing illegal transactions is concerned. People should not impugn the government's motive. As a matter of fact, the government itself is under pressure to implement anti-money laundering measures in all financial institutions, including in cooperatives. The Financial Action Task Force (FATF), the global anti-money laundering watchdog, will be reviewing Nepal's AML status in 2020. If the country is found amiss in implementing anti-money laundering measures effectively, the country may be placed on the black list. To recall, the FATF had warned the country in 2018 that if necessary anti-money laundering measures were not taken, the country could be blacklisted.
The critical areas where money laundering takes place to a great extent are the real estate, bullion market, share market and, of course, banking. The Department of Money Laundering Investigation has asked all land revenue offices across the country to report details of land deals in excess of Rs. 10 million to the Financial Information Unit (FIU) of Nepal Rastra Bank so that suspicious deals, if any, can be detected. In a similar vein, the department has also instructed bullion traders to report purchases of gold worth Rs. one million or above in a single day to the said FIU.
The Cooperative Act 2017 was enforced in October 2017 in the cooperative sector in order to curb illegal transactions and investments as many individuals use cooperatives as a safe haven to hide their ill-gotten money. Earlier, the Department of Cooperatives had enforced the Directive on Money Laundering Prevention for Cooperatives in March 2017. The directive is designed to detect and prohibit suspicious transactions. For this, cooperatives are required to keep adequate details about their members and not to carry on transactions through fake accounts. Any violation of the directive entails a fine ranging from Rs. one million to Rs. 50 million.
Most cooperatives are plagued by the absence of transparency, failure to meet compliance due to a lack of resources, both human and material, and, most importantly, poor knowledge about cooperatives on the part of promoters. In the changed context, cooperatives need to adopt risk management strategies, monitor business activities of members, detect suspicious transactions, carry on transactions remaining within the threshold and keep tabs on annual transactions over three million rupees, among others.
Although anti-money laundering laws have not been integrated with the Cooperative Act 2017, cooperatives have been asked to follow money laundering rules as in commercial banks. They have been asked to keep KYC details of their members. They have also been asked to seek sources of funds while accepting deposits of Rs. one lakh or above. It is believed that when anti-money laundering laws are strictly enforced in cooperatives as well, illegal transactions designed to convert black money into white money will drastically come down.

Worldwide problem
In fact, money laundering has become a worldwide problem. The FATF is gravely concerned about how to curb it. It is money laundering that has stoked terrorism financing. So the intergovernmental organisation has urged all its member nations to take effective measures to curb money laundering. Accordingly, the Government of Nepal has also taken anti-money laundering measures and is now expanding its anti-money laundering network, incorporating the cooperative sector.
It behoves cooperatives to give a lending hand to the government in its lofty anti-money laundering mission. Effective anti-money laundering measures will also act as a deterrent to corruption and financial irregularities. Today, corruption is raising its ugly head. Be it land usurpation or project execution or financing or financial irregularities, corruption is everywhere. So adoption of anti-money laundering measures in any financial institution may discourage money laundering and suchlike malpractices to a great extent.

(Former banker, Maharjan has been regularly writing on contemporary issues for this daily since 2000. He can be reached at 

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