Nepal’s Economic Prospects at Risk Due to FATF Grey-Listing and Governance Concerns

The Financial Action Task Force (FATF) has once again placed Nepal on its grey list, citing deficiencies in the country’s legal framework and enforcement mechanisms to combat money laundering and terrorist financing. The decision was announced following the FATF plenary meeting in Paris from February 17 to 21, 2025, marking a decade of deteriorating governance since Nepal was last removed from the list in 2014.

The Implications of FATF Grey-Listing

Being placed on the FATF grey list designates Nepal as a ‘jurisdiction under increased monitoring,’ requiring it to implement a comprehensive action plan within two years. Although grey-listing does not result in direct sanctions, it sends a warning to international financial institutions about the potential risks of doing business in Nepal. This designation could severely impact Nepal’s fragile economy, which heavily relies on foreign aid, remittances, and imports.

Failure in Financial Oversight and Enforcement

The Asia/Pacific Group on Money Laundering (APG), a regional FATF-style body, highlighted Nepal’s failure to implement necessary reforms. The country lacks stringent laws to regulate illicit financial activities and has struggled with weak enforcement. Key deficiencies include:

• Lack of comprehensive anti-money laundering laws
• Inadequate mechanisms to track and prevent terrorist financing
• Weak financial regulations and ineffective implementation

Economic and Political Consequences

The grey-listing comes at a challenging time for Nepal’s economy. Prime Minister K.P. Sharma Oli, in his fourth term, is under mounting pressure as opposition parties call for his resignation. Economic experts warn that foreign investors may hesitate to engage with Nepal due to increased scrutiny and compliance risks. The misuse of foreign aid has further eroded confidence, prompting the U.S. to cancel $39 million in planned assistance, including $20 million for fiscal federalism and $19 million for biodiversity conservation.

Underlying Issues: Criminal Activities and Corruption

Nepal’s financial vulnerabilities stem from a range of illicit activities, including:

• Money laundering: Enabled by weak regulatory enforcement and porous borders
• Human and drug trafficking: The Terai region serves as a hotspot for organized crime
• Gold smuggling: Smugglers use Nepal as a transit hub to supply the Indian market
• Informal remittance channels (Hundi): Nearly 40% of remittances bypass official banking channels
• Counterfeit goods: Rampant trademark violations with fake products flooding markets

Mafia-style groups and political affiliates engage in systematic extortion and financial crimes, further exacerbating the problem. Political instability—ten governments in the past decade—has hindered the establishment of long-term reforms to address these issues.

Path Forward for Nepal

To regain international confidence and improve its economic outlook, Nepal must take decisive action:

1. Strengthen anti-money laundering and counter-terrorism financing laws
2. Enhance financial oversight and regulatory enforcement
3. Crack down on organized crime and illicit financial flows
4. Improve transparency in governance and public fund utilization
5. Encourage the formalization of remittances to prevent illicit transfers

The FATF grey-listing serves as a wake-up call for Nepal’s leadership to implement necessary reforms. If the government fails to act, the country risks further economic decline, loss of foreign investments, and global financial isolation. Addressing these issues proactively will be crucial for Nepal’s long-term economic stability and global standing.