Nepal’s Struggle for Economic Good Governance and the Shadow of the FATF Grey List

The fact that Nepal’s economic good governance is in a precarious state is widely accepted, and experts predominantly attribute this to underlying political weaknesses and instability. A recent discussion featuring economist Dr. Bishwambhar Pyakurel shed light on the implications of the Financial Action Task Force (FATF) placing Nepal on its “grey list” – a designation that signals deficiencies in a country’s measures to combat money laundering and terrorist financing. Dr. Pyakurel emphasized the long-term detrimental effects of this listing on Nepal’s economic prospects and stressed the need for a concerted, serious, and meticulously prepared strategy to get delisted.

This analysis delves into Nepal’s current standing with the FATF, examining the reasons behind its grey listing and outlining the essential steps the nation must undertake to regain a clean financial reputation on the global stage.

Established in 1989 by the G-7 nations initially to tackle the escalating issue of money laundering, the FATF expanded its mandate in 2001 to also address the increasing threat of terrorist financing. This international watchdog sets global standards and assesses countries’ compliance. A significant development was the FATF’s decision in February 2025 to add Nepal and Laos to its grey list, while acknowledging the progress of the Philippines by removing it. This action underscores the FATF’s ongoing scrutiny of global financial systems.

The FATF’s framework for evaluating countries rests on 40 comprehensive recommendations, categorized into seven key areas. These recommendations serve as a blueprint for nations to establish robust legal, financial, and enforcement mechanisms to prevent and combat financial crimes. Countries finding themselves on the grey list are essentially under increased monitoring and face pressure to demonstrate tangible improvements. The path to delisting requires a clear commitment to enacting legal reforms, enhancing the rigor of financial oversight, ensuring transparent reporting of financial activities, taking decisive action against money laundering cases, and exhibiting strong political will to address the identified shortcomings. Despite the challenges, Dr. Pyakurel believes that with sincere effort, Nepal can indeed navigate its way off this list.

Currently, Nepal’s adherence to FATF’s standards reveals a mixed picture. A general assessment indicates that many criteria are only “Partially Compliant,” while some critical areas are deemed “Non-Compliant.” Although efforts are underway to reassess these standards and significant progress has been made in fully implementing several of them, Nepal’s overall position remains between these two concerning classifications. A particular area of focus is the need for financial institutions to proactively address the emerging risks associated with new technologies that could be exploited for illicit financial flows. Furthermore, these institutions must fortify their internal control systems to effectively counter money laundering and terrorist financing. The fact that Nepal has received a “Non-Compliant” rating in certain fundamental areas highlights the urgent need for more substantial reforms to strengthen its defenses against these financial threats.

Despite visible efforts and some progress in aligning with FATF standards – with a current status of 15 partially compliant, 16 largely compliant, and 5 fully compliant standards – the remaining three areas of non-compliance pose a significant hurdle.

The FATF report explicitly outlines 17 specific areas where Nepal must demonstrate tangible improvement. These recommendations span a wide range of crucial aspects, from developing a deeper understanding of its unique money laundering and terrorist financing risks and intensifying monitoring in high-risk sectors like casinos and real estate, to clamping down on informal and illegal financial networks such as Hundi. Enhancing the capabilities and coordination among investigative agencies, coupled with a significant increase in the number of money laundering investigations and prosecutions, is also paramount. Furthermore, Nepal needs to be more effective in identifying and confiscating assets derived from criminal activities and in implementing stringent measures to disrupt financial flows to terrorist groups and weapons proliferation. Strengthening the mechanisms for tracing the origins of illicit funds and improving the internal policies, staff training, and due diligence practices within banks and financial institutions are also critical. The rapid evolution of digital finance necessitates a thorough risk assessment and robust regulation of technologies like mobile banking and crypto currencies. Finally, strengthening customer identification processes, ensuring relevant authorities have easy access to necessary financial information, fostering greater international cooperation, enhancing transparency of company ownership, adopting a risk-based approach to financial monitoring, regulating digital financial services, and expanding public awareness and training on financial crime are all vital steps.

Despite visible efforts and some progress in aligning with FATF standards – with a current status of 15 partially compliant, 16 largely compliant, and 5 fully compliant standards – the remaining three areas of non-compliance pose a significant hurdle. The failure to establish robust economic good governance, ensure transparency in financial dealings, effectively implement regulations, and fulfill international commitments could severely impede Nepal’s chances of being removed from the grey list. The FATF report specifically points out weaknesses in the evaluation mechanisms in place for all types of financial institutions operating within Nepal. Moreover, there is a noted misalignment in the regulatory and supervisory frameworks applied by key financial authorities like Nepal Rastra Bank, the Cooperative Department, the Securities Board of Nepal, and the Insurance Authority, particularly concerning the effective implementation of AML (Anti-Money Laundering) and CFT (Counter-Terrorist Financing) objectives within core financial institutions. It is also imperative that supervisors across all financial sectors consistently review the money laundering and terrorist financing risk profiles of financial institutions and their conglomerates without any further delay.

Ultimately, the integrity of any governance system hinges on its independence and neutrality, free from political interference. A governance structure overseen by the Prime Minister could be perceived negatively on the international stage, potentially undermining efforts to improve Nepal’s image. With Nepal set to graduate from its Least Developed Country status in 2026, remaining on the FATF grey list could create substantial negative consequences for its economy, potentially deterring foreign investment, hindering international trade, and destabilizing its overall financial health.Therefore, a timely and thorough evaluation of these potential consequences, followed by decisive and well-coordinated action from key institutions such as the Ministry of Finance, the National Planning Commission, and Nepal Rastra Bank, is not just advisable but absolutely essential for Nepal’s future economic well-being.