Nepal in FATF Grey List: Causes, Effects and Current Status

-CA Surya Prasad Sharma

The author is member of ICAN. He can be reached at: spsharma1091@gmail.com

 

Abstract/Key Words

Nepal was placed on the FATF grey list in February 2025 due to strategic deficiencies in the effectiveness of its AML/CFT/PF framework. While technical compliance remains broadly satisfactory, effectiveness is weak, with most Immediate Outcomes rated moderate or low. Key gaps persist in supervision, preventive measures, beneficial ownership transparency, investigations, prosecutions, and targeted financial sanctions, particularly in high-risk sectors such as cooperatives, DNFBPs, informal remittance systems, and NPOs.

 

Despite incremental progress following the 2023 Mutual Evaluation Report and 2024 Follow Up Report, re-rating requests for eight Recommendations were not granted as of 1 June 2025. Positive political commitment and policy focus have emerged, and macroeconomic impacts remain limited, supported by strong remittance inflows and concessional financing. Nepal’s exit from the grey list will depend on demonstrable and sustained enforcement outcomes by January 2027.

 

Introduction

 

 

The Financial Action Task Force (FATF) kept Nepal on the Grey List with effect from February 21, 2025 and given two years of time to come it out with the improvements as sought on the FATF's Recommendations.

Financial Action Task Force (FATF) is the Inter-Governmental Policy making body which has the primary purpose to combat money laundering (ML), Terrorist Financing (TF) and Proliferation Financing (PF) and sets the Anti Money Laundering (AML)/Combating the Financing of Terrorism (CFT)/Counter Proliferation Financing (CPF) standards. It has 37 member countries, 2 member organizations, 9 associate members (termed as FATF Style Regional Body-FSRBs) and 25 observers. Further, more than 200 jurisdictions around the world have committed to the FATF Recommendations through the global network of FSRB and FATF memberships. One of the FSRBs is the Asia/Pacific Group on Money Laundering (APG), which covers jurisdictions in the Asia‑Pacific region. Nepal falls under the APG’s geographic coverage and became a member of the APG in June 2002. As a result of this membership, Nepal came under the purview of the Financial Action Task Force (FATF).

APG had conducted Nepal’s Mutual Evaluation in December 2022, issued Mutual Evaluation Report (MER) in September 2023 and Follow up Report (FUR) in June 2024. Afterwards, Nepal was given time until October 2024 to meet FATF standards but the regional body found the country had not sufficiently addressed these deficiencies by the deadline. As a result, plenary meeting, held on Paris during February 2025, decided to include Nepal in FATF grey list.

 

This is the second time Nepal has been included in the grey list, with the first occurrence being from 2008 to 2014 AD. The grey list, officially termed as “jurisdictions under increased monitoring” is the list of countries with strategic deficiencies in their AML and CFT regimes, but which are actively working with the FATF to address these issues.

 

Basis of Evaluation & Results:

As per FATF guidelines, Mutual Evaluation is done on two parameters namely Effectiveness Ratings and Technical Compliance Ratings.

 

1.  Effectiveness Ratings

Under this assessment, 11 parameters (Immediate Outcomes-IO) are used to evaluate effectiveness. Based on the level of effectiveness achieved, jurisdictions are categorized into four levels, namely High, Substantial, Moderate, and Low, which represent the degree of effectiveness from the highest to the lowest level, respectively.

 

Nepal’s Effectiveness Ratings based on Mutual Evaluation Report, 2023 is as follows:

(As the 1^st Follow Up Report 2024 and 2^nd Follow Up Report 2025 have not changed on the ranking; so, the ranking of 2023 report prevails till date.)

 

S.N.	Effectiveness Parameters	Ranking
IO.1	Risk, policy and coordination	Moderate
IO.2	International cooperation	Moderate
IO.3	Supervision	Low
IO.4	Preventive measures	Low
IO.5	Legal persons and arrangements	Low
IO.6	Financial intelligence	Moderate
IO.7	ML investigation & prosecution	Moderate
IO.8	Confiscation	Low
IO.9	TF investigation & prosecution	Low
IO.10	TF preventive measures & financial sanctions	Low
IO.11	PF financial sanctions	Low

Source: | Asia / Pacific Group On Money Laundering, Nepal MER 2023 - published version

 

APG evaluated that out of the total 11 immediate outcomes, 7 have low level of effectiveness. As per FATF guidelines, a jurisdiction is generally expected to demonstrate at least 3 Immediate Outcomes at a High or Substantial level to avoid being classified as a country with strategic AML/CFT deficiencies (i.e., grey‑listed). Nepal failed to meet this threshold, as no Immediate Outcome was rated above Moderate.

 

Nepal’s low effectiveness ratings across the majority of Immediate Outcomes reflect systemic deficiencies in preventive, supervisory, and enforcement measures.

 

The APG found that risk‑based supervision is weak, especially for Designated Non-Financial Business and Professions (DNFBPs), with inadequate enforcement and limited AML/CFT compliance culture and poor and uneven implementation of preventive measures across sectors. The key DNFBPs are Real Estate Agents, Dealers in Precious Metals and Stones (Gold, Silver, Diamonds, etc.), Casinos, Legal Professionals (Lawyers/Advocates), Accountants and Auditors, Notary Publics, Trust or Company Service Providers. Further it has been highlighted that DNFBPs do not submit Suspicious Transaction Report (STR)/Suspicious Activity Report (SAR), severely undermining financial intelligence flows.

 

Other key deficiencies are; lack of transparency in Beneficial Ownership (BO), with the Office of the Company Registrar unable to verify, update, or ensure the accuracy of ownership information; minimal confiscation of criminal proceeds  and  pursued disproportionately to risks; very limited understanding, investigation, and mitigation of terrorist financing and proliferation financing risks, including weak implementation of targeted financial sanctions; and lack of mechanisms for timely freezing of assets, resulting in Nepal being unable to demonstrate effective outcomes in preventing misuse of the financial system for ML,TF, or PF purposes.

 

1. Technical Compliance Ratings

This is the test of FATF 40 Recommendations. Under this assessment, 40 technical parameters were evaluated and categorized into Compliant (C), Largely Compliant (LC), Partially Compliant (PC) and Non-Compliant (NC), which represent the degree of technical soundness from the highest to the lowest level, respectively.

 

Nepal’s Technical Compliance Ratings based on Mutual Evaluation Report 2023 (MER) and Follow up Report 2024 (FUR) is as follows:

 

(2^nd Follow Up Report 2025 has not changed on the Ranking; so the ranking of 2024 report prevails till date.)

Technical Compliance Recommendations	Ratings as per MER 2023	Ratings as per FUR 2024	Status on Follow up
R.1 - Assessing risk & applying risk-based approach	PC	PC	No Change
R.2 - National cooperation and coordination	PC	LC	Improved
R.3 - Money laundering offence	LC	LC	No Change
R.4 - Confiscation & provisional measures	LC	LC	No Change
R.5 - Terrorist financing offence	LC	LC	No Change
R.6 - Targeted financial sanctions – terrorism & terrorist financing	PC	PC	No Change
R.7 - Targeted financial sanctions – proliferation	NC	PC	Improved
R.8 - Non-profit organizations	NC	NC	No Change
R.9 - Financial institution secrecy laws	LC	LC	No Change
R.10 - Customer due diligence	PC	LC	Improved
R.11 - Record keeping	C	C	No Change
R.12 - Politically exposed persons	LC	LC	No Change
R.13 - Correspondent banking	LC	LC	No Change
R.14 - Money or value transfer services	LC	LC	No Change
R.15 - New technologies	NC	PC	Improved
R.16 - Wire transfers	LC	LC	No Change
R.17 - Reliance on third parties	LC	LC	No Change
R.18 - Internal controls and foreign branches and subsidiaries	LC	LC	No Change
R.19 - Higher-risk countries	PC	LC	Improved
R.20 - Reporting of suspicious transactions	C	C	No Change
R.21 - Tipping-off and confidentiality	C	C	No Change
R.22 - DNFBPs: Customer due diligence	PC	LC	Improved
R.23 - DNFBPs: Other measures	PC	LC	Improved
R.24 - Transparency & BO of legal persons	PC	PC	No Change
R.25 - Transparency & BO of legal arrangements	PC	PC	No Change
R.26 - Regulation and supervision of financial institutions	PC	PC	No Change
R.27 - Powers of supervision	C	C	No Change
R.28 - Regulation and supervision of DNFBPs	PC	PC	No Change
R.29 - Financial intelligence units	C	C	No Change
R.30 - Responsibilities of law enforcement and investigative authorities	LC	LC	No Change
R.31 - Powers of law enforcement and investigative authorities	PC	LC	Improved
R.32 - Cash couriers	LC	LC	No Change
R.33 – Statistics	LC	LC	No Change
R.34 - Guidance and feedback	PC	PC	No Change
R.35 – Sanctions	LC	LC	No Change
R.36 - International instruments	LC	LC	No Change
R.37 - Mutual legal assistance	LC	LC	No Change
R.38 - Mutual legal assistance: freezing and confiscation	PC	LC	Improved
R.39 – Extradition	PC	PC	No Change
R.40 - Other forms of international cooperation	PC	PC	No Change

Source: | Asia / Pacific Group On Money Laundering, 1^st Follow up report Mutual Evaluation of Nepal, June 2024

 

The APG assessed Nepal’s technical compliance with the 40 FATF Recommendations and assigned the following ratings:

• Compliant (C): 5
• Largely Compliant (LC): 23
• Partially Compliant (PC): 11
• Non‑Compliant (NC): 1

 

APG rated Nepal as Non‑Compliant with FATF Recommendation 8, identifying significant gaps in the prevention of terrorist financing abuse of NPOs, including the absence of a targeted, risk‑based approach, failure to conduct a dedicated TF risk assessment of the NPO sector, lack of proportionate mitigation mechanisms, and weaknesses in information sharing, TF investigation, and international cooperation. This deficiency represented the sole Non‑Compliant rating in Nepal’s technical compliance profile.

 

Under the FATF Methodology, a jurisdiction is generally expected to achieve at least 21 FATF Recommendations rated as “Compliant (C)” or “Largely Compliant (LC)” in its Technical Compliance assessment to demonstrate a sufficient legal and regulatory framework and to reduce the risk of being identified as having strategic AML/CFT deficiencies (i.e., placement on the FATF grey list).

 

Nepal met this indicative threshold by achieving enough Compliant and Largely Compliant ratings, thereby demonstrating a broadly adequate level of technical compliance with the FATF Recommendations.

 

Combining both assessments (Effectiveness and Technical Compliance), Nepal achieved following results as per APG's Mutual Evaluation and Follow up Report.

S.N.	Parameters	Total Counts	Categories	Nepal's Result (Counts)	Final Assessment
1	Effectiveness Ratings (Immediate Outcomes)	11	High, Substantial Moderate, Low	Moderate - 4 Low - 7	Not Satisfactory
2	Technical Compliance (FATF Recommendations)	40	Compliant (C) Largely Compliant (LC) Partially Compliant (PC) Non-Compliant (NC)	(C) -      5 (LC) -   23 (PC) -   11 (NC) -   1	Satisfactory

As reflected in the above table, Nepal achieved a satisfactory outcome in Technical Compliance, surpassing the indicative FATF threshold with 28 out of 40 Recommendations rated as Compliant or Largely Compliant. However, Nepal’s low effectiveness performance, with no Immediate Outcomes rated High or Substantial, indicated significant gaps in the practical implementation of AML/CFT measures. This deficiency in effectiveness was a key factor for Nepal’s inclusion in FATF increased monitoring (grey list).

 

Summary of Mutual Evaluation

In addition to the weaknesses identified under the Effectiveness (Immediate Outcomes) and Technical Compliance (FATF Recommendations) assessments, the Asia/Pacific Group on Money Laundering (APG) highlighted several cross‑cutting systemic vulnerabilities, accompanied by broad recommendations for improvement. The key areas of concern are outlined below.

 

1. Inadequate Regulation and Supervision of High‑Risk Sectors

APG noted insufficient regulation, supervision, and monitoring of several high‑risk sectors, including:

• Cooperatives
• Real estate sector
• Remittance providers and informal money transfer systems (Hundi operators)
• Designated Non‑Financial Businesses and Professions (DNFBPs), particularly:
  • Casinos
  • Dealers in precious metals and stones
• Non‑Profit Organizations (NPOs)

The lack of risk‑based oversight in these sectors increases Nepal’s exposure to money laundering (ML) and terrorist financing (TF) risks.

 

1. Exposure to Broader Predicate Crimes and Terrorism Risks

APG identified Nepal’s vulnerability to a range of high‑risk predicate offences, including:

• Corruption and tax evasion
• Human trafficking and narcotics trafficking
• Environmental crime and wildlife trafficking

Additionally, Nepal’s open and porous borders were assessed as a potential risk factor, which may be exploited as a transit or staging point by regional criminal or terrorist actors.

 

1. Weaknesses in Enforcement, Investigation, and Prosecution

Significant deficiencies were identified in the enforcement and criminal justice response to financial crimes, such as:

• Very few ML investigations, prosecutions, and convictions related to major high‑risk predicate offences by Department of Money Laundering Investigation (DMLI). Most convictions relate to self‑laundering linked to banking offences, rather than complex or organized ML cases.
• The Financial Intelligence Unit (FIU) required:
  • Increased human and technical resources
  • Expanded scope and effectiveness in STR reporting and analysis, especially from DNFBPs

 

1. Limited Capacity to Identify and Address Terrorist Financing

APG found that Nepal has a limited ability to identify and disrupt terrorist financing, largely due to:

• Inadequate integration of TF risk considerations into Nepal’s broader counter‑terrorism framework.
• Weak operational‑level cooperation and coordination among approximately 13 investigative and enforcement agencies.
• Limited recognition of the possibility that financing of certain domestic political or ideological activities may carry TF risk elements under FATF standards.

 

Forecasted Challenges and Actual Experience:

At the time of inclusion in grey list, it was widely forecasted that Nepal would face higher transaction costs, particularly in the remittance sector, along with difficulties in conducting foreign business transactions such as import/export operations and execution of cross border payments. Concerns were also raised regarding potential challenges in accessing international financial assistance, loans, and foreign investment.

 

However, after the passage of one year of grey‑listing, Nepal did not experience the anticipated adverse impacts to the extent originally projected. Remittance flows, foreign trade transactions, and access to international funding largely continued without significant disruption, indicating that the practical consequences of grey‑listing were more moderate than initially feared.

According to Nepal Rastra Bank’s Current Macroeconomic and Financial Situation based on eight months’ data (mid‑July 2025 to mid‑March 2026), total remittance inflows reached approximately NPR 1,449.65 billion, registering a strong year‑on‑year growth of about 37.7 percent, which helped support external sector stability during the review period. In terms of FDI, foreign direct investment inflows (equity only) amounted to NPR 10.84 billion, up from NPR 8.47 billion in the corresponding period of the previous year, indicating only a modest improvement in capital inflows. Further, the World Bank has approved concessional financing totaling USD 197 million, while the Asian Development Bank (ADB) has approved USD 140 million in loans to Nepal during the period from March 2025 to date.

 

These all data and decisions indicates that international donor agencies continue to extend concessional financing to Nepal in the normal course, despite the country being under FATF grey‑listing. Further, remittance inflows have not been significantly affected by Nepal’s placement on the FATF grey list, continuing to grow strongly and thereby supporting external sector stability. However, foreign direct investment-particularly in large‑scale and capital‑intensive projects-may have been adversely impacted, reflecting heightened risk perceptions, increased compliance requirements, and procedural delays associated with the grey‑listing. At the same time, small‑scale investments, especially in the IT and service sectors, appear to be increasing, as these sectors typically involve lower transaction complexity, smaller capital commitments, and faster approval processes, making them relatively less sensitive to the constraints arising from enhanced international financial scrutiny.

 

International research and empirical studies generally indicate that grey‑listing by the FATF may lead to a decline in GDP growth and foreign direct investment (FDI), primarily due to increased compliance costs, heightened risk perception, and cautious behavior by international investors and correspondent banks.

 

Experiences across countries, however, have not been uniform. In the cases of Pakistan and Malta, grey‑listing was associated with economic slowdown, reduced capital inflows, and increased pressure on the financial sector, contributing to a contraction or stagnation in certain economic indicators. In contrast, the United Arab Emirates (UAE) presents a divergent experience: despite being grey‑listed, the UAE’s economy continued to grow and, in some sectors, strengthened, supported by strong economic fundamentals, investor confidence, and proactive reforms.

 

This contrast suggests that while grey‑listing can pose macroeconomic risks, its actual impact depends significantly on country‑specific factors, including economic resilience, institutional capacity, reform momentum, and communication with international stakeholders.

 

Timeline with Target of Tasks to be Performed as Simplified by APG & Progress Hereon:

The two‑year implementation period has been divided into five quarters (technically involving 4 months), considering that the Financial Action Task Force (FATF) meets and reviews progress on a quarterly basis. Accordingly, the concerned country has been provided with time‑bound milestones aligned with each FATF review cycle, allowing for periodic reporting and assessment of progress under the agreed action plan.

 

First Quarter: Falgun 2081 to Jestha 2082

The first quarter focused on the reporting of normal inquiries, including the collection, consolidation, and submission of required information as part of the initial compliance and reporting process under the FATF framework.

This is just the initial reporting which is performed by the corresponding authority.

 

Second Quarter: Ashad 2082 to Ashoj 2082

During the second quarter, instructions were to be issued regarding individuals and entities included in the United Nations sanctions lists.

 

In accordance with this requirement, the Nepal Rastra Bank, the Securities Board of Nepal, and the Insurance Authority has issued relevant guidelines governing financial transactions involving sanctioned individuals and entities, thereby strengthening compliance with targeted financial sanctions.

 

Third Quarter: Kartik 2082 to Magh 2082

The third quarter emphasized making investigation and prosecution more effective in relation to:

• The production and expansion of weapons of mass destruction,
• Money laundering and other financial crimes, and
• Enhancement of the supervisory capacity of regulatory bodies.

This phase involves particularly complex and challenging work, requiring strong coordination among investigative, prosecutorial, and supervisory agencies to demonstrate effectiveness rather than mere legal or institutional existence. In this regard, no progress has been made.

 

Fourth Quarter: Falgun 2082 to Jestha 2083

The fourth quarter focuses on ensuring effective supervision, investigation, and prosecution, especially in high‑risk areas. Key activities include:

• Strengthening supervision and enforcement in the cooperative sector,
• Conducting and utilizing the National Risk Assessment (NRA) across all sectors of the economy,
• Enhancing the supervisory capacity of banks and the wider financial sector, and
• Intensifying investigation and prosecution related to Hundi (informal remittance) operations.

In this regard, some co-operative related governing bodies are formed and newly formed government also promised to pay the deposit of small depositors within 100 days. The main effectiveness relies on Government of Nepal’s ability to prove that the country has zero tolerance against ML, TF, PF activities.

 

Fifth Quarter: Ashad 2083 to Ashoj 2083

The fifth quarter will concentrate on consolidation and outreach, including:

• Increasing information dissemination and understanding of the National Risk Assessment,
• Adopting further measures to control criminal and illicit financial activities,
• Strengthening supervision of designated non‑financial businesses and professions, particularly casinos, real estate, and gold and silver sectors, and
• Issuing directives and operational guidance to ensure consistent and effective implementation.

In this regard, several Money‑Laundering‑related cases specifically related to capital market have been filed against high‑net‑worth individuals who possess income and property disproportionate to their known and justifiable sources of earnings, with investigations focusing on unexplained wealth and suspected illicit financial activities.

The ongoing investigations are expected to contribute significantly to the country’s efforts to be removed from the FATF grey list, as several of the individuals arrested are among those specifically identified by the FATF evaluators for investigation, thereby demonstrating tangible progress in enforcement and effectiveness. Government of Nepal has prioritized delisting the country from the grey list, emphasizing that the major task involves the investigation and prosecution of money‑laundering activities.

 

Commitment Then Made

High-level political commitments consisting of seven exhaustive points were given by Government of Nepal to work with the FATF and APG to strengthen the effectiveness of Nepal’s AML/CFT regime and is expected to be removed from grey list even earlier than the designated time. The Commitment and progress made thereon is as under:

1. improving understanding of key ML/TF risks;
2. improving risk-based supervision of commercial banks, higher risk cooperatives, casinos, DPMS and real estate sector;
3. demonstrating identification and sanctioning of materially significant illegal Money or Value Transfer Services (MVTS)/hundi providers, without hindering financial inclusion;
4. increasing capacity and coordination of competent authorities to conduct ML investigations;
5. demonstrating an increase in ML investigations and prosecutions;
6. demonstrating measures to identify, trace, restrain, seize and, where applicable, confiscate proceeds and instrumentalities of crime in line with the risk profile;
7. addressing technical compliance deficiencies in targeted financial sanctions regime for TF and PF.

This is evidenced by a rise in money‑laundering investigations and prosecutions, including cases involving high‑net‑worth individuals with disproportionate income and assets, as anticipated by the evaluators. Nepal has also begun demonstrating effectiveness in tracing, restraining, and seizing proceeds of crime, while addressing technical gaps in targeted financial sanctions for terrorist and proliferation financing through the issuance of sanctions‑related directives.

 

Conclusion:

Nepal’s placement on the FATF grey list in February 2025 reflects not a lack of laws or institutional structures, but a persistent gap between formal compliance and real‑world effectiveness.

 

Nepal requested re-ratings for eight Recommendations and showed incremental progress in addressing deficiencies identified in the 2023 MER and 2024 FUR; however, the improvements remain insufficient for re-rating, and no upgrades were granted for R.6, R.7, R.24, R.25, R.26, R.28, R.34, and R.40 as of 1 June 2025. (Nepal FUR June 2025)

 

The APG’s Mutual Evaluation (2023) and Follow‑Up Reports (2024 and 2025) clearly show that while Nepal has largely aligned its legal and regulatory framework with FATF standards, it has struggled to translate these frameworks into consistent supervision, meaningful investigations, successful prosecutions, and proportionate confiscation of criminal proceeds-especially in high‑risk sectors such as cooperatives, DNFBPs, informal remittance systems, and non‑profit organizations.

 

Encouragingly, the macroeconomic fallout feared at the time of grey listing has remained limited, with strong remittance growth and continued concessional support from international partners. However, FATF delisting will depend primarily on demonstrated results rather than intentions.

 

The recent Economic Position Paper also shows that despite the legal and policy arrangement of the government, meaningful implementation and non-achievement of targeted result regarding suggestions of the FATF, the international community is yet to be confident in government action. This may create a barrier in attracting foreign investment and in doing international banking, which remains a challenge for the government to come out of grey list.

 

So, sustained political commitment, credible enforcement actions, strengthened inter‑agency coordination, and measurable outcomes in ML/TF cases over the remaining action‑plan period will determine whether Nepal can come out of grey list of FATF and restore full confidence in its financial integrity regime. The paradigm shifts in the political system, together with stronger political commitment and credible enforcement actions, has generated a positive signal on this front.

 

References:

• https://www.fatf-gafi.org/en/publications/Mutualevaluations/Fatf-methodology.html
• https://www.apgml.org/documents?keys=nepal
• https://newbusinessage.com/article/fatf-adds-nepal-to-grey-list-again
• https://kathmandupost.com/national/2025/02/22/it-s-official-nepal-falls-back-into-fatf-grey-list
• https://niice.org.np/archives/11259
• https://ekantipur.com/business/2025/10/27/en/nepals-efforts-to-get-out-of-the-grey-list-were-not-enough-fatf-02-28.html
• https://www.onlinekhabar.com/2025/02/1629127/nepal-falls-on-money-laundering-gray-list-for-the-second-time
• https://bizmandu.com/content/20260402160447.html
• https://www.nepalclicks.com/details/130460
• https://myrepublica.nagariknetwork.com/news/govt-approves-185-million-loan-from-world-bank-and-asian-development-bank-46-90.html