Nepal risks being ‘greylisted’ for abetting money laundering

While countries on the greylist are not subject to sanctions, it is a signal to the international banking system that there could be enhanced transactional risks from doing business with the country.

Prithvi Man Shrestha

Prithvi Man Shrestha

The Kathmandu Post


January 3, 2023

KATHMANDU – With Nepal struggling to address a number of deficiencies to comply with the standards on anti-money laundering and terrorist financing, stakeholders are worried whether this would lead to the greylisting of the country by the Financial Action Task Force (FATF), a global anti-money laundering watchdog.

A delegation of the Asia Pacific Group on Money Laundering (APG), an FATF-style regional anti-money laundering body, recently concluded a field visit to Nepal as a part of Nepal’s mutual evaluation, a peer review process to examine whether Nepal complied with a number of standards set by the FATF.

Officials said that the APG would only include the progress made till December 16 in its mutual evaluation report, which puts Nepal in a vulnerable position again, and liable to being greylisted if not blacklisted.

The terms ‘Blacklist’ and ‘Greylist’ do not exist in the official FATF lexicon, but are colloquial phrases used to describe two lists of countries maintained by the body.

‘Blacklist’ is a term used for the FATF’s list of “High-Risk Jurisdictions subject to a Call for Action.” Currently, North Korea, Iran, and Myanmar are on the blacklist.

The ‘greylist’ is used to denote a group of countries/jurisdictions with “strategic deficiencies” in their regime to counter money laundering and terror financing. Once listed as ‘jurisdiction under increased monitoring’ by the FATF, they must develop an action plan within a specific period.

A country on the greylist is not subject to sanctions. However, the greylist signals to the international banking system that there could be enhanced transactional risks from doing business with the said country.

Nepal was on the greylist of the FATF from 2008-2014. After a series of progress made on the anti-money laundering regime that includes amendment to the Anti-Money Laundering Act 2008, and the enactment of other laws, the FATF finally removed Nepal from the list in 2014.

“There is a real risk of being put on the greylist because we have deficiencies in both legislations and enforcement of the laws related to money laundering and terrorist financing,” said a senior official of Nepal Rastra Bank on the condition of anonymity.

Nepal has identified 15 laws that need to be amended to make them compatible with the FATF anti-money laundering standards. “We initiated the process of amending them but before the amendments could happen the tenure of the erstwhile House of Representatives expired,” said Dhan Raj Gyawali, secretary at the Prime Minister’s Office.

The government sought to amend those laws through Some Nepal Acts Amendment processes. A majority of the 19 laws in the group are meant to address deficiencies in compliance with the FATF’s anti-money laundering and terrorist financing standards.

Some of the major laws that need amendment are Assets Laundering Prevention Act-2008, Land Revenue Act-1978, Tourism Act-1978, Securities Act-2007, Human Trafficking and Transportation (Control) Act-2008, Confiscation of Criminal Proceeds Act-2014, Mutual Legal Assistance Act-2014, Organized Crimes Prevention Act-2014, Criminal (Code) Act-2017 and Cooperative Act-2017.

The proposed amendments made these laws more strict against money laundering and terrorist financing. But the bill remained stuck in the House of Representatives. The government sent an ordinance incorporating such amendments to President Bidya Devi Bhandari for authentication in early November. But the President sat on the ordinance, which later lapsed with the election of a new House of Representatives.

“Had the ordinance been authenticated by December 16 before the APG team completed their field visit, Nepal would probably not have been greylisted,” said the NRB official. “The APG team will only include progress made till that date in its report, which may be damaging.”

In February, the APG is expected to produce its preliminary report on which Nepal will give its opinion. A face-to-face interaction is expected in April before the APG prepares its final report, according to Gyawali.

The report will then go to the APG plenary, which will determine whether Nepal will be under the International Cooperation Review Group (ICRG) monitoring of the FATF. “There is still hope for us, if we can show political commitment for reforms at the APG plenary which is a political body, even if we have many deficiencies at technical levels such as legislation and enforcement of laws,” said Gyawali.

Let alone blacklisting, even the greylisting could be damaging for Nepal’s struggling economy that is heavily reliant on foreign aid, remittances and imports. A country on the greylist could potentially face problems such as lack of trade opportunities, a downgrade of ratings, and a subsequent shrinking of the economy.

The consequences of greylist, according to the International Monetary Fund, is a possible future blacklisting and loss of correspondent banking with many of the world’s major banks. Correspondent banking refers to agreements between banks to provide payment services for each other.

An IMF publication ‘Nepal: Into and Out of Grey’ talked about the consequences of losing correspondent banking. “Without correspondent banking, the trade will eventually go underground, migrating to the grey market, where the government can’t measure or regulate it,” it says. “If Nepal gets cut off from correspondent banking, Nepali migrant workers can’t send money home.”

Pakistan is an example of how greylisting hits an economy.

Tabadlab Private Limited, a think tank, and advisory services firm in a report in 2021 said that the greylisting of Pakistan by the FATF spanning from 2008 to 2019, may have resulted in cumulative Gross Domestic Product (GDP) losses worth $38 billion, with the response driven by a reduction in consumption expenditures, exports, and foreign direct investment.

“Importantly, our results also suggest that Pakistan’s removal from the greylist has, at times, led to the revival of the economy, as evident from an increase in the level of GDP for the years 2017 and 2018,” the report stated.

The FATF removed Pakistan from the greylist in October, but there is also a history of countries being put back on the list. In the case of Pakistan, it was first placed on the greylist in 2008 and was removed in 2009. It was again included on the list in 2012 and was taken off the list in 2015. The nation was put back in 2018 and was taken off the list only in 2022.

After being on the greylist since 2008, Nepal was close to being placed on the blacklist in 2012, according to the IMF publication. “When the FATF plenary met in 2012, only intense last-minute diplomatic efforts from international partners kept Nepal from falling onto the blacklist,” the IMF publication states. “Falling onto the blacklist will make legitimate international trade nearly impossible and seriously hurt foreign investment.”

Nepal was given a brief reprieve that allowed the government to press on with the legal reforms. Over the next few years, new laws, regulations, procedures, and a dedicated investigation unit were created, which led to the delisting of Nepal from the FATF greylist in 2014.

“There is a risk of greylisting because our existing laws and rules have not fully addressed the risk of money laundering and terrorist financing,” said the NRB official.

Former Finance Secretary Rajan Khanal said Nepal’s return to the greylist cannot be ruled out because of the failure to introduce legislations to amend the existing laws and poor reporting of suspicious and over-the-threshold transactions, particularly from non-banking sectors, including cooperatives, real estate, and others.

According to officials, the APG team in its initial findings has pointed to the lack of adequate supervision in non-financial sectors such as real estate, bullion trade, cooperatives, and the casino sector.. “They have identified the biggest risk in the casinos,” said Gyawali. “These sectors are poorly regulated and suspicious transactions there are hardly reported.”

According to Gyawali, most of the cooperatives are now under the supervision of provincial governments and there is a problem with regulation and oversight.

Reporting about suspicious transactions and transactions over the threshold from non-banking institutions has been very limited, according to the Financial Intelligence Unit (FIU)—a body created by the Nepal Rastra Bank and is responsible for collecting reports about suspicious and prescribed threshold financial transactions from several reporting entities.

According to the Strategic Analysis Report 2022 of the FIU, financial institutions are the main reporting entities while ‘designated non-financial businesses and professions’ are in a nascent stage of reporting.

The FIU’s annual report 2021-22 states, the share of suspicious transactions reporting and suspicious activities reported by commercial banks range from over two-thirds to 85 percent in the last six years.

However, the number of reports from other entities is fluctuating. Some institutions such as cooperatives and insurance companies, for example, have quite low reporting in comparison to their size in the overall financial system, the report said.

According to the annual report, commercial banks alone comprise almost 90 percent of threshold transactions reporting (TTR) of banks and financial institutions and more than 50 percent of total threshold transactions reporting received in the year.

According to the central bank directive, transactions of more than Rs1 million at one go should be reported to the FIU. Officials and experts said Nepal has weaknesses in enforcing the rules and regulations, which will also increase its risk of getting on the greylist.

“For example, the APG will also see whether the regulatory authorities such as the Nepal Rastra Bank, the Nepal Insurance Authority, the Land Revenue Offices, and the Department of Cooperatives have enforced the reporting requirements about suspicious transactions,” said Khanal.

Officials and experts at the APG would also see whether those involved in money laundering and corruption have been prosecuted. “Big offenders have hardly been prosecuted and this will reduce our score in the areas of enforcement,” the NRB official said.

For example, the Commission for Investigation of Abuse of Authority is facing accusations of failing to prosecute those involved in big scams.

On the other hand, former Finance Minister Janardan Sharma’s alleged instruction to the central bank to release “some suspicious money” belonging to one Prithvi Bahadur Shah, might also raise questions about Nepal’s commitment to anti-money laundering, officials and experts said.

The row led to a souring of relations between the former minister Sharma and NRB Governor Maha Prasad Adhikari.

“The APG might have taken note of this,” said former finance secretary Khanal. “As the money was frozen by the NRB as per a request of an US agency [Financial Crime Enforcement Network], the APG might take this issue seriously during the evaluation of Nepal.”

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