FATF Retains Nepal on Grey List, Urgent Reforms Mandated for Financial Stability
The Financial Action Task Force (FATF), the global intergovernmental organization responsible for setting international standards to prevent money laundering and terrorist financing, has once again decided to keep Nepal on its 'grey list' of jurisdictions under increased monitoring. This crucial decision, made during the FATF Plenary meeting held in Paris from June 17-19, 2026, acknowledges Nepal's efforts in some areas but critically highlights that significant strategic weaknesses in its anti-money laundering and counter-terrorist financing (AML/CFT) framework remain unresolved.
Nepal was initially placed on the grey list on February 21, 2025. Since then, the Nepalese government, the Nepal Rastra Bank (NRB), and other relevant regulatory bodies have been actively engaged in implementing the comprehensive action plan prescribed by FATF. The recent Paris meeting served as a review of these ongoing efforts. FATF's updated report noted some positive steps, stating, "Since Nepal made a high-level political commitment in February 2025 to work with FATF and APG to strengthen the effectiveness of its AML/CFT regime, Nepal has taken some positive steps to improve its framework by addressing technical deficiencies in its targeted financial sanctions system for terrorist financing and proliferation financing."
However, these commendable efforts have not yet been deemed sufficient for Nepal to exit the increased monitoring list, which currently includes 22 countries globally. The primary reason for Nepal's continued inclusion is the incomplete implementation of the comprehensive action plan provided by FATF. An on-site review conducted in January 2026 by the Asia Pacific Group on Money Laundering (APG), FATF's regional body, assessed Nepal's progress. The assessment revealed that while meaningful improvements were observed in 9 out of 15 action points, the remaining 6 points were only partially implemented, indicating a critical gap in execution.
Key areas of concern highlighted by FATF include the severe crisis and opaque transactions within savings and credit cooperatives, inadequate regulation of the casino sector, insufficient monitoring of real estate and precious metals transactions, and the persistent challenge of effectively controlling illegal 'Hundi' (informal money transfer) operations prevalent in the country. These systemic vulnerabilities pose significant risks to Nepal's financial integrity and its ability to combat illicit financial flows, potentially impacting its standing in the global financial community.
Recognizing the gravity of the situation, Nepal's Parliament has been actively engaged in legislative reforms. On June 19, the National Assembly approved the 'Money Laundering (Third Amendment) Ordinance, 2083,' a crucial step towards enhancing the country's legal framework. Finance Minister Dr. Swarnim Wagle emphasized during parliamentary discussions that this measure was imperative to steer the nation towards financial transparency and safeguard Nepal's international reputation, warning that failure to enact timely legal reforms could have led to Nepal being blacklisted. While policy reforms are being expedited, the gap between policy formulation and effective implementation remains a significant challenge that Nepal must overcome.
To facilitate its eventual exit from the grey list, FATF has outlined six specific strategic areas where Nepal must demonstrate immediate and tangible improvements:
1. **Enhanced Risk Understanding:** Strengthen the identification and comprehension of key and emerging money laundering and terrorist financing risks.
2. **Risk-Based Supervision:** Implement effective risk-based supervision for commercial banks, high-risk cooperatives, casinos, precious metals and stones dealers, and the real estate sector.
3. **Control of Illegal Hundi Transactions:** Identify and take stringent action against large-scale illegal Hundi and informal money transfer service (MVTS) networks, ensuring this does not impede legitimate financial access.
4. **Institutional Capacity and Coordination:** Enhance the capacity of relevant bodies responsible for money laundering investigations and improve inter-agency coordination and information sharing.
5. **Increased Investigations and Prosecutions:** Demonstrate a qualitative and measurable improvement in the rate of effective investigations and prosecutions of money laundering cases.
6. **Tracing and Confiscation of Criminal Assets:** Show practical results in tracing, identifying, freezing, confiscating, and, where appropriate, bringing under state ownership assets generated from or used in criminal activities, based on risk profiles.
The implications of remaining on the grey list are substantial for Nepal's economy and financial markets. It can negatively impact the country's financial credibility, potentially increasing the cost of international banking transactions and creating hurdles in attracting foreign direct investment (FDI) and mobilizing foreign aid. This status signals to the global financial community that Nepal's financial system carries a higher risk of illicit financial activities, which can deter legitimate international business and investment, thereby affecting economic growth and development.
While the path forward is challenging, the recent legislative actions and the government's expressed commitment offer a glimmer of hope. The promptness shown by regulatory bodies and the parliamentary approval of critical ordinances suggest a renewed determination to address these deficiencies. This proactive stance is vital for Nepal to demonstrate sufficient progress in upcoming review meetings and ultimately secure its removal from the FATF grey list, thereby bolstering its standing and trust in the global financial system.