Navigating FATF Scrutiny: Nepal’s Lessons from Regional Experiences

How Have Other Countries in the Region Dealt with FATF Grey-Listing?

Several South Asian nations, including Pakistan, Sri Lanka, and Bangladesh, have previously faced FATF grey-listing due to inadequacies in their financial systems, particularly in money laundering (ML) and terrorism financing (TF) regulations.

• Pakistan (2018–2022): Pakistan was added to the grey list in 2018 and had to meet a 27-point action plan to strengthen financial oversight. The country tightened banking regulations, enhanced inter-agency coordination, revised AML/CFT laws, and cracked down on financial crimes. By demonstrating sustained commitment and implementing reforms, Pakistan successfully exited the grey list in 2022.
• Sri Lanka (2017–2019): Sri Lanka was placed on the grey list in 2017 but swiftly complied with FATF recommendations, leading to its removal by 2019. The government focused on introducing risk-based supervision, enforcing stricter due diligence measures for financial institutions, and improving transparency in ownership structures.
• Bangladesh (Previously Listed, Now Compliant): Bangladesh also faced scrutiny due to weaknesses in its AML/CFT framework but took proactive measures to align with global standards. Efforts included enhancing financial intelligence, reinforcing Know Your Customer (KYC) protocols, and tightening regulations on remittances and international transactions.

The experiences of these nations highlight that political determination, institutional reforms, and regulatory transparency are fundamental to regaining compliance and exiting the grey list.

What Can Nepal Learn from Countries That Successfully Exited the Grey List?

Nepal can adopt several key strategies from nations that have navigated FATF scrutiny effectively:

Political Will and Institutional Coordination

• Countries that successfully left the grey list demonstrated strong governmental backing and collaboration among agencies.
• Nepal must ensure seamless coordination between policymakers, regulatory bodies, financial institutions, and law enforcement agencies to execute AML/CFT measures efficiently.

Robust Anti-Money Laundering (AML) and Counter-Terrorist Financing (CFT) Frameworks

• Strengthening financial crime regulations and ensuring compliance with global banking standards is essential.
• Nepal should adopt risk-based supervision to identify and monitor high-risk transactions and prevent financial fraud.

Greater Transparency in the Financial Sector

• Nepal should work on enhancing financial reporting, ensuring clear ownership records, and boosting accountability in banking transactions.
• Implementing real-time transaction monitoring will be crucial in preventing illicit financial activities.

Capacity Building and Awareness for Financial Institutions

• Countries that exited the grey list invested in training programmes to improve compliance across their financial sectors.
• Nepal’s banks and financial organisations should receive comprehensive training on FATF requirements, risk assessment, and due diligence protocols.

Engagement with International Regulatory Bodies

• Nations that actively worked with international financial institutions like the IMF, World Bank, and FATF-affiliated groups had smoother transitions out of the grey list.
• Nepal should seek technical expertise and policy advice from these global bodies to fast-track its reforms.

By prioritising financial integrity, strengthening regulatory enforcement, and showing tangible progress, Nepal can accelerate its removal from the grey list and rebuild investor confidence.

How Will Nepal’s Relationship with Global Financial Institutions Be Affected?

Being on the FATF grey list has far-reaching economic consequences, potentially straining Nepal’s interactions with major global financial institutions such as the IMF, World Bank, and foreign banking networks.

Difficulties in Securing Loans and Financial Aid

• Institutions like the IMF and World Bank may impose tighter lending conditions due to increased financial risks.
• Nepal might struggle to obtain favourable loan terms and development funds, slowing economic progress.

Declining Foreign Investment

• Many investors steer clear of grey-listed nations due to concerns about financial security and possible restrictions.
• Nepal could experience a drop in Foreign Direct Investment (FDI), affecting key sectors like infrastructure, banking, and trade.

Greater Scrutiny on International Transactions

• Nepalese financial institutions may face heightened due diligence when conducting cross-border transactions, leading to delays and increased compliance costs.
• International banks may impose stricter checks on remittances, which are a crucial source of foreign exchange for Nepal.

Higher Banking Costs for Businesses and Individuals

• Countries on the grey list often see increased transaction costs, making international trade and remittances more expensive and time-consuming.
• Nepalese businesses might face higher banking fees and longer processing times for international payments.

Reputational Damage and Reduced Economic Trust

• Remaining on the grey list damages Nepal’s credibility in the global financial system.
• If compliance issues persist, Nepal risks being viewed as a high-risk jurisdiction, leading to further financial isolation.

Conversely, if Nepal takes decisive action and exits the grey list, it will restore investor confidence, improve its creditworthiness, and attract more foreign investment. Strengthening financial governance, enforcing compliance, and increasing transparency will be critical in reshaping Nepal’s international economic standing.