Nepal Remains on FATF Grey List: Urgent Reforms Needed to Combat Money Laundering and Terrorism Financing

The Financial Action Task Force (FATF), the global watchdog for financial crime, has confirmed that Nepal will remain on its 'grey list.' This designation signifies that Nepal's anti-money laundering (AML) and counter-terrorism financing (CFT) frameworks still possess strategic deficiencies, requiring significant and demonstrable improvements. The decision, following the FATF's June 2026 Plenary in Paris, underscores the persistent challenges Nepal faces in aligning its financial oversight with international standards.

Nepal was initially placed on the grey list in February 2025, after the FATF identified critical shortcomings in the nation's ability to prevent illicit financial flows. While the grey list does not trigger immediate economic sanctions, it significantly increases scrutiny on cross-border financial transactions involving Nepal, potentially escalating compliance costs for banks and businesses, and impacting investor confidence and international financial partnerships. The FATF has, however, cautioned against measures that could disrupt legitimate financial flows, including vital humanitarian assistance and remittances, which are crucial for Nepal's economy.

In its latest review, the FATF outlined six specific areas where Nepal must demonstrate tangible progress to move towards exiting the grey list. These critical areas demand a concerted effort from Nepali authorities:

1. **Enhanced Understanding of Risks:** Nepal must improve its comprehension of key money laundering and terrorism financing risks prevalent within its financial system and economy.

2. **Strengthened Sectoral Oversight:** Regulatory oversight needs to be significantly bolstered for high-risk sectors, including commercial banks, higher-risk cooperatives, casinos, dealers in precious metals and stones, and the real estate sector. This oversight must be proportionate to each sector's identified risk level.

3. **Action Against Informal Transfers:** The country must identify and take decisive action against illegal informal money transfer operators, commonly known as 'hundi' providers, without impeding access to legitimate financial services.

4. **Capacity Building for Investigations:** There is an urgent need to build the capacity of relevant agencies and improve coordination among them to effectively carry out money laundering investigations.

5. **Measurable Increase in Enforcement:** Nepal must demonstrate a measurable increase in money laundering investigations and subsequent prosecutions, indicating a more robust enforcement regime.

6. **Asset Recovery Capabilities:** The nation must prove its ability to trace, freeze, seize, and confiscate proceeds of crime effectively, in line with the specific risks presented by each case.

According to an assessment by the Asia Pacific Group (APG) on Money Laundering, Nepal's regional peer body, meaningful progress had been achieved on only nine of the 15 items in Nepal's FATF action plan as of January 2026, with the remaining six showing only partial implementation. While Nepali officials have claimed further improvements since January, the FATF's decision to retain Nepal on the grey list indicates that these efforts have not yet met the required threshold for removal.

Being on the grey list poses significant challenges for Nepal's financial sector and broader economy. It can deter foreign direct investment, complicate international trade, and increase the cost of borrowing from international markets. For Nepalese banks, it means heightened due diligence requirements from correspondent banks, potentially leading to de-risking actions where international banks reduce or terminate relationships with Nepalese counterparts. This could particularly impact the flow of remittances, a cornerstone of Nepal's economy, despite FATF's caution against disrupting legitimate transfers.

Since February 2025, Nepal has reportedly taken steps to address weaknesses in its framework for imposing targeted financial sanctions related to terrorism financing and proliferation financing. However, the FATF's latest pronouncement makes it clear that sustained and comprehensive implementation of the entire action plan is paramount. Nepal's financial integrity and its standing in the global financial system hinge on its ability to swiftly and effectively address these remaining gaps, ensuring a robust defense against money laundering and terrorism financing.