Black, white and grey

Nepal Rastra Bank Governor Maha Prasad Adhikari said last month that an assessment by the Asia/Pacific Group on Money Laundering (APG) had put Nepal at risk of being placed on the grey list of the Financial Action Task Force (FATF), the global money-laundering watchdog.

The final decision will be made during the FATF plenary 17-21 February in Paris. The country was previously greylisted from 2009-2014.

The watchdog had advised legal, policy and structural reforms for Nepal to implement within a year. And while some laws were amended, implementation is another story. 

“Nepal’s FATF rating has deteriorated due to the inaction against major cases of corruption, tax evasion, and abuse of financial institutions,” explains Rup Narayan Bhattarai, former Director General of the Department of Money Laundering Investigation. 

Sticking to the tradition of blame game, Prime Minister KP Oli, has blamed the delay in legal reforms on the previous Pushpa Kamal Dahal government.

The APG— of which Nepal has been a member since 2002— is an associate member of the FATF. The organisation had already placed Nepal on the observation list for failing to amend and implement necessary laws to prevent money laundering after an evaluation last year. 

The assessment looked into Nepal's efforts to combat money laundering in two parts: the first one being technical compliance— the legal and structural reforms to prevent money laundering— and the second being the effectiveness of their implementation.

Nepal has achieved relatively satisfactory results with technical compliance— the assessment found that the country had abided by at least 21 of the 40 criteria laid out by the FATF. Since the evaluation, Nepal has amended and enacted additional laws to meet an additional 10 criteria. 

However, the evaluation found the country’s progress in effectively implementing laws to prevent money laundering to be very weak, with Nepal only ‘moderately compliant’ with four out of the 11 standards.

Bhattarai points to the lack of transparency and commitment to preventing money laundering. “It is not enough to just make laws and regulations, they must be implemented and produce noticeable results,” he says. “But we have failed to see such results, due to which our country’s international standing has deteriorated.”

Cooperatives and real estate transactions have also long been used to conceal and legitimise ill gotten wealth. Cooperatives are reluctant to provide details of suspicious financial transactions.

Read also: Cooperatives leave Nepalis high and dry, Ramesh Kumar

“International authorities have taken issue with the absence of a strong legal and structural system to prevent money laundering in cooperatives and real estate,” says a government insider. “They are well aware of the absence of political will to monitor these sectors.”

In 2023, while banks and financial institutions reported details of 6,255 suspicious transactions to the Financial Intelligence Unit, cooperatives reported only two.

Following an objection by the APG last year regarding large amounts of black money circulating in cooperatives, legislators introduced a proposal to amend the Cooperatives Act to set an individual deposit limit of Rs2.5 million in cooperatives.

But the proposal was rejected after pressure from lobbyists as well as parliamentarians connected to the cooperatives sector. 

In December, the government issued an ordinance to amend cooperative-related laws which included a provision allowing depositors to save up to Rs5 million in cooperatives depending on the scope of the institution. 

Meanwhile, real estate agents in Nepal do not require a licence, and the government’s flexibility to accommodate wealthy businessmen has meant there are no institutions to keep track of land and property dealings and investigate the suspicious financial activity. 

“There is no monitoring to see who is buying and selling real estate at what price, and there is no legal framework to prevent money laundering in real estate,” says the Nepal government official. 

Casinos are also a breeding ground for laundering money, also lack a strong regulatory system.

Another shortcoming pointed out by the APG are delays in and ineffectiveness of investigations and prosecutions relating to money laundering. There has been international attention on scams like the Nepal Airlines Corporation Airbus 330 purchases.

In fiscal year 2022/2023, the Financial Intelligence Unit received 7,115 reports of suspicious transactions and activities and sent 505 cases for investigation. But only a few of them were ever investigated.

The Department of Money Laundering Investigation only took 12 cases to court during the first 6 months of this fiscal year and had similarly taken only a dozen cases involving a total of Rs1.74 billion last year. 

The department was hastily set up in 2011 after the FATF warned that Nepal would be blacklisted, but so far, it hasn’t gone beyond appeasement and whitewashing.

“If money laundering cases are to be investigated, they would involve either those at the upper echelons of power or those connected to them,” a former government official who worked at the department told us, “How then would any investigation move forward?”

The Home Ministry has also been slow to prepare a list of people suspected of terrorist activities and make such a list available for monitoring even though it is an international requirement. 

Nepal has also not worked on a new assessment report to recommend measures to prevent money laundering since the last report was prepared in 2020.

Nepal will most certainly be on that grey list later this month, and this will negatively impact the country’s reputation on the global stage as well as its foreign investment prospects. 

In December, Nepal had received a ‘BB-’ rating from the US credit rating agency Fitch, becoming the second-highest rated country in South Asia, after India. Government officials have been suggesting that this raiting would help attract foreign investment.

As it stands, financial institutions here may bear the brunt of the grey list status. Banks may find it difficult to conduct international transactions, and transaction costs may rise, which will in turn make imports more expensive and hinder exports. 

Nepal being on the FATF grey list also means that the government will find it more difficult to obtain financial assistance and concessional loans from donor countries and international organisations. Interest rates on loans taken by Nepal’s government and private financial institutions from abroad will also go up.

Additionally, as soon as Nepal is placed on the grey list, financial institutions will begin to closely monitor transactions made by the diaspora around the world, which will affect Nepali students and migrant workers seeking to open accounts in foreign banks, as well as those sending remittances back home. 

“Any obstacles in the flow of remittance through official channels will spell a disaster for Nepal’s economy,” a government official told us. 

Nepal government and relevant authorities must actively try to get out of the grey list as soon as possible. The FATF and APG will give Nepal a year to get off the list of countries at risk, failing which Nepal will be placed on the blacklist and be isolated from the global stage. 

Says Bhattarai: “It is not enough to have made laws, we need results. Nepal must be committed to acting against leaders, lobbyists, and those with access and connections involved in criminal financial dealings.”