Nepal has once again come under international scrutiny as the Financial Action Task Force (FATF) places the country back on its grey list. The decision, made on February 21, 2025, in Paris, reflects growing concerns over financial crime, weak regulatory enforcement, and an expanding informal economy. This is not Nepal’s first experience with FATF monitoring, the country was previously on the grey list from 2008 to 2014 but managed to exit after implementing key financial reforms.

With Nepal now back on the list, there are pressing concerns regarding its economic stability, foreign investments, and banking sector integrity. The country must swiftly address these deficiencies to prevent further financial restrictions that could hamper growth.

Why Was Nepal Placed on the FATF Grey List?

Nepal was added to the grey list due to deficiencies in its anti-money laundering (AML) and counter-terrorism financing (CFT) measures. Key concerns raised by FATF include:

Weak regulatory enforcement in high-risk sectors such as real estate, cooperatives, and informal remittance systems (hundi).

Insufficient implementation of AML/CFT laws, despite having regulatory frameworks in place.

Lack of stringent monitoring over financial transactions, especially those linked to illicit money flows, corruption, and tax evasion.

This classification means Nepal must work closely with FATF and international bodies to implement reforms or face further economic risks.

Understanding the FATF Grey List

The FATF grey list includes countries that have deficiencies in their financial systems but are working to improve them. Being greylisted means Nepal is under increased international monitoring and must take corrective actions to avoid potential blacklisting, a scenario that could severely impact trade, foreign aid, and the overall economy.

What is the Financial Action Task Force (FATF)?

The Financial Action Task Force (FATF) leads global efforts to combat money laundering, terrorist financing, and proliferation financing by researching these illegal activities, promoting global standards to mitigate associated risks, and assessing the effectiveness of countries' actions. The FATF Recommendations offer a comprehensive framework of laws, regulations, and operational measures to enable national authorities to detect and disrupt financial flows that fuel crime and terrorism, ensuring that those responsible for illegal activities are punished.

The 40 Recommendations cover seven key areas: AML/CFT policies and coordination, money laundering and confiscation, terrorist financing and proliferation financing, preventive measures, transparency and beneficial ownership of legal entities, powers and responsibilities of competent authorities, and international cooperation.

Countries that fail to meet these standards face either:

Greylisting: Increased monitoring with time-bound reforms.

Blacklisting: Severe financial restrictions, currently imposed on Iran and North Korea.

Implications of Greylisting for Nepal

Although greylisting does not impose direct sanctions, it carries significant economic and financial risks:

Reduced Foreign Investment: International investors and institutions may view Nepal’s financial system as high-risk, limiting capital inflows.

Higher Transaction Costs: Cross-border banking transactions could become more expensive and time-consuming due to increased scrutiny.

Economic Slowdown: A decline in investor confidence could slow down business activity, affecting GDP growth and financial stability.

Countries like Pakistan and the Philippines have previously been greylisted, leading to billions of dollars in lost foreign investments. If Nepal fails to act swiftly, it could face similar consequences.

Lessons from Nepal’s Past Greylisting (2008–2014)

Nepal was on the FATF grey list from 2008 to 2014 due to weak financial regulations and lack of enforcement against money laundering. The country managed to exit by:

Implementing AML/CFT laws under the Assets (Money) Laundering Prevention Act, 2008.

Establishing the Financial Information Unit (FIU) to monitor suspicious transactions.

Strengthening banking sector compliance with FATF recommendations.

However, loopholes in enforcement and rising financial crimes have brought Nepal back under scrutiny in 2025.

What Nepal Needs to Do to Exit the Grey List

To exit the grey list, Nepal must demonstrate measurable progress on FATF’s 40 key recommendations. Currently, Nepal has met only 21 of these requirements, with deficiencies in the following areas:

Strengthening Legal Frameworks: Updating AML/CFT laws to close existing gaps.

Enhancing Financial Oversight: Nepal Rastra Bank (NRB) must enforce strict compliance across banks and cooperatives.

Combating Informal Money Transfers (Hundi): Regulating informal remittance channels and preventing illicit financial flows.

Recent success stories, such as the Philippines, show that timely policy action can help countries exit the grey list within 1–2 years.

What Happens If Nepal Fails to Act?

If Nepal does not implement FATF-mandated reforms within two years, the country risks being blacklisted—a scenario with severe economic consequences:

Severe banking restrictions: International financial institutions may cut ties with Nepalese banks, making transactions difficult.

Trade disruptions: Nepal’s global trade could face higher scrutiny and barriers.

Decline in remittances: As a remittance-driven economy, increased compliance costs could discourage inflows from Nepali workers abroad.

Countries like Iran and North Korea remain blacklisted, facing crippling financial sanctions that restrict global economic participation. Nepal must avoid a similar fate by taking swift corrective actions.

Key Stakeholders in Nepal’s AML/CFT Reforms

Several institutions play a critical role in implementing FATF-compliant reforms:

Nepal Rastra Bank (NRB): Strengthens banking compliance and monitors high-risk financial transactions.

Financial Intelligence Unit (FIU): Tracks and reports suspicious transactions to prevent money laundering.

Government & Law Enforcement Agencies: Enforces strict regulations and closes legal loopholes.

By improving inter-agency coordination, Nepal can accelerate financial reforms and restore global confidence in its financial system.

How Does This Affect Citizens?

While greylisting does not directly impact day-to-day banking, citizens may experience:

Increased scrutiny on international transactions.

Higher costs for remittances due to stricter compliance rules.

Slower economic growth affecting job opportunities and wages.

A strong and transparent financial system will benefit all Nepalese by ensuring stability, investor confidence, and sustainable economic growth.

Conclusion: The Road Ahead for Nepal

Nepal’s return to the FATF grey list is both a challenge and an opportunity. The government must take immediate, coordinated action to strengthen financial regulations and restore investor confidence. By learning from past experiences and adopting global best practices, Nepal can successfully exit the grey list and establish itself as a trusted financial destination. With decisive action and policy commitment, Nepal can not only avoid blacklisting risks but also pave the way for a stronger, more resilient economy. The next two years will be critical in shaping Nepal’s financial future.