Under the FATF Lens: A High-Stakes Push for Compliance
Following the decision by the Financial Action Task Force (FATF) - the global watchdog responsible for combating money laundering, terrorist financing, and proliferation financing - to place Nepal on its Increased Monitoring List (grey list) in February 2025, the country remains under heightened international scrutiny. The designation followed the identification of strategic deficiencies and weak enforcement within Nepal’s anti-money laundering framework.
After the adoption of Nepal’s Mutual Evaluation Report (MER) at the Asia/Pacific Group on Money Laundering (APG) Annual Meeting in 2023, the country was initially placed under observation for one year. However, Nepal failed to demonstrate sufficient progress in strengthening its Anti-Money Laundering and Combating the Financing of Terrorism (AML/CFT) regime, prompting FATF to place the country on the grey list.
The deficiencies were viewed particularly seriously because Nepal took nearly a year to pass amendments to the Asset (Money) Laundering Prevention Act through Parliament. The delay raised concerns about the country’s ability to implement the legal and institutional reforms required to meet international standards.
Against this backdrop, Nepal is now implementing an action plan it committed to under the APG, a FATF-style regional body comprising 42 member jurisdictions across the Asia-Pacific region. The plan focuses on strengthening the country’s understanding of money laundering and terrorist financing risks; implementing risk-based regulation across commercial banks, high-risk cooperatives, casinos, the precious metals trade, and the real estate sector; identifying and dismantling hundi networks and illegal money or value transfer services without undermining financial inclusion; enhancing the capacity of investigative agencies and improving inter-agency coordination; increasing investigations and prosecutions; identifying, tracing, and confiscating assets derived from criminal activity; and addressing technical deficiencies in the targeted financial sanctions regime aimed at preventing terrorist financing (TF) and proliferation financing (PF).
Nepal currently shares FATF grey-list status with Algeria, Angola, Bolivia, Bulgaria, Cameroon, Côte d’Ivoire, the Democratic Republic of the Congo, Haiti, Kenya, Kuwait, Lao PDR, Lebanon, Monaco, Namibia, Papua New Guinea, South Sudan, Syria, Venezuela, Vietnam, the British Virgin Islands, and Yemen.
Private Sector Backlash and the High Stakes of the 2026 Review
As part of its commitment to the APG, Nepal has intensified investigations and prosecutions related to money laundering. However, critics argue that many of the cases filed by the government lack sufficient evidence and fail to achieve their intended objectives.
Birendra Raj Pandey, President of the Confederation of Nepalese Industries (CNI), has stressed that investigative agencies must first establish whether an accused individual has actually committed a criminal offence before pursuing punitive measures.
The private sector has also strongly advocated for the use of economic penalties and regulatory sanctions in cases involving businesses, unless a distinct criminal offence has been committed. “The surge in arrests of businesspersons who have not committed any serious offence is a fundamentally flawed practice, especially given their willingness to cooperate with investigations,” said Pandey.
Concerns have also emerged within political circles. Amresh Kumar Singh, a parliamentarian from the ruling Rastriya Swatantra Party, criticized what he described as the government’s increasingly coercive approach toward businesses.
“Arrests and detentions of businesspersons are increasing without mature evidence, and this approach of running the government like a police state is defaming the private sector,” Singh said. “If this predatory state behaviour continues, it will have severe consequences for investment, employment, and production in the country.”
Legal and policy experts have similarly argued that authorities must strike a balance between enforcement and economic confidence. While effective AML/CFT enforcement is essential, they caution that clear distinctions must be drawn between serious criminal conduct and minor compliance infractions.
Citing Benjamin Franklin’s famous observation: “Let a hundred guilty be acquitted but let not one innocent person suffer”, senior advocate Bhimarjun Acharya urged the government to uphold the fundamental rights guaranteed by the Constitution. According to Acharya, selective or biased enforcement ultimately undermines the rule of law.
Meanwhile, remarks by Finance Minister Swarnim Wagle have sparked controversy after he suggested that the government is compelled to pursue more suspects in order to fulfil its commitments to the APG. Critics argue that such statements create the impression that enforcement targets are being driven by international obligations rather than evidence-based investigations.
The minister’s comments have been interpreted by some observers as an attempt to justify punitive actions after the fact, while persuading the private sector not to resist increased scrutiny. Senior legal scholar Bipin Adhikari has gone further, arguing that money laundering provisions are increasingly being weaponised in Nepal to damage political careers and undermine businesses—a practice he views as fundamentally inconsistent with the objectives of anti-money laundering legislation.
The stakes are particularly high because Nepal’s next APG review is scheduled for September 2026. The assessment will determine whether the country can exit the grey list or faces the risk of further escalation based on its progress in addressing structural deficiencies and demonstrating effective enforcement.
The consequences of blacklisting would be severe. Potential outcomes include international financial isolation, increased compliance burdens for businesses and financial institutions, disruptions to trade and remittance flows, a decline in foreign direct investment, and long-term reputational damage. For an economy seeking greater investment and integration with global markets, such an outcome would be extremely costly.
Yet despite these risks, concerns persist that Nepal’s push to demonstrate enforcement results is encouraging rushed investigations and prosecutions.
Evolution of Nepal’s Regulatory Framework and the Shift to Risk-Based Supervision
Nepal joined the international effort to combat money laundering, terrorist financing, and proliferation financing through the enactment of the Asset (Money) Laundering Prevention Act (ALPA) in 2008 and the establishment of the Financial Intelligence Unit (FIU-Nepal) during the same period.
Beginning in 2021, Nepal Rastra Bank introduced Know Your Customer (KYC) requirements and the goAML reporting system to facilitate the reporting of suspicious transactions, suspicious activities, and transaction volumes within banks and financial institutions (BFIs).
Under Directive No. 19, BFIs are required to maintain KYC and customer due diligence (CDD) records across multiple categories, including natural persons, legal entities, politically exposed persons (PEPs), and beneficial owners.
Over the years, Nepal has introduced dozens of laws, regulations, and supervisory mechanisms designed to align the country with FATF’s 40 Recommendations.
The regulatory framework established by Nepal Rastra Bank can broadly be divided into two categories: rules-based regulation and risk-based (prudential) regulation. Nepal formally adopted risk-based supervision in 2014. The framework rests on two pillars: the Basel Committee on Banking Supervision’s Core Principles for Effective Banking Supervision and the FATF AML/CFT Supervisory Framework.
Drawing from both frameworks, Nepal Rastra Bank has issued unified directives and guidelines on risk-based AML/CFT supervision that incorporate key elements of Basel standards and FATF requirements. Together, these approaches form the foundation of Nepal’s prudential regulatory system.
Nepal’s prudential regulatory journey began with the adoption of Basel I in 1989, followed by Basel II in 2009/10 and Basel III in the early 2020s. Nepal Rastra Bank formally introduced macroprudential measures on December 17, 2009.
Although prudential regulations have existed since 1989, Nepal’s formal adoption of risk-based supervision in 2014 was largely driven by lessons learned during its first FATF grey-listing period between 2008 and 2014. One of the key conditions for Nepal’s removal from the grey list was the introduction of stronger risk-based regulatory and supervisory mechanisms to reinforce AML/CFT compliance.
