Since its removal from the Financial Action Task Force (FATF) grey list in 2014, Nepal has faced a decade of inadequate leadership, corruption, mishandling of funds, and questionable governance practices. Consequently, Nepal has been placed on the FATF’s grey list once more. The FATF made this decision during its plenary meeting in Paris from February 17 to 21, 2025, citing Nepal's failure to fully implement necessary legal, policy, and structural reforms to combat money laundering and terrorist financing.
The grey-listing is attributed to deficiencies in financial oversight and enforcement, as identified by the Asia/Pacific Group on Money Laundering (APG), the FATF-style regional anti-money laundering body. When grey-listed, as a 'jurisdiction under increased monitoring' by the FATF, a country is required to develop an action plan within a specific time-frame. While being on the grey-list does not subject Nepal to sanctions, it signals to the international banking system that there may be increased transactional risks associated with doing business with it. Kathmandu has been given two years to address these deficiencies and work towards removing itself from the grey list.
Being grey-listed could harm Nepal's already struggling economy, which heavily depends on foreign aid, remittances, and imports. Prime Minister K. P. Sharma Oli, now in his fourth term, is facing considerable criticism following Nepal's inclusion in the grey list, with the opposition calling for his resignation.
There have been ongoing concerns for some time now that deficiencies in both its legislation and enforcement of laws related to money laundering and terror financing, might result in Nepal’s grey-listing. Considering the significant scope of the remittance economy and the regular movement of currency between Nepal and its international diaspora, anti-money laundering legislation and enforcement have fallen far short of required efforts.
The primary predicate crimes in Nepal include drug trafficking, human trafficking, arms trafficking, cooperatives, counterfeit currency, tax evasion, and gold smuggling, among others. Significant vulnerabilities stem from the porous Indo-Nepal border, which facilitates terrorist activities and terrorist financing. The Terai is favoured by criminals for the trafficking of people, human organs, small arms, contraband goods, drugs, and counterfeit currency, and could offer a hideout for armed criminal and terrorist groups.
A deficiency of comprehensive and long-term strategic guidelines, ineffective investigative system, inadequately trained bureaucracy, and an open border with high levels of informal transactions with India, has rendered it conducive for money laundering. The country’s Financial Act includes a provision stipulating that the government will not inquire about the source of income from investors who are investing in infrastructure projects and businesses.
In addition to mafia style groups active in the country, such as Milan Gurung, who carry out extortion and racketeering in Kathmandu Valley, there troubling reports of criminal groups affiliated to political parties. The role of youth-wings of political parties, who systematically engage in extortion activities, is fundamental in the country’s organised crime landscape. Involvement of state-embedded actors in criminal markets continues to flourish due to the lack of monitoring of corruption cases and the inefficient enforcement of the relevant regulation.
Informal remittance systems like Hundi remain popular among a large number of Nepalis living in the countries like Hong Kong, South Korea, Australia and Israel. Though there is no exact data on how much money is sent through Hundi, central bank officials estimate that nearly 40 per cent of the remittance is sent using informal channels.
Nepal serves as both a transit route and a destination for gold smuggling. Gold is smuggled into the country from Dubai, Thailand, and Hong Kong via the Chinese border or Tribhuvan International Airport. In India, the gold is sold at higher prices than in Nepal, China and other neighbouring nations, hence gold smugglers always look out for Indian markets. A lack of proper equipment and expertise continues to pose a challenge in curbing such illegal activities.
Added to this is the country’s expanding counterfeit goods market that includes domestically made products as well as the import of counterfeit goods from both China. For example, Fanta is sold as ‘Fantu’ and ‘Funny ', Sprite as ‘Sport’ and 'Strike’ while Mountain Dew is sold as ‘Maintain Dew.’ These bottles have similar packaging as the original brand and are produced in Dhading. According to the Department of Industry, there are 900 pending cases against trademark fraud in Nepal. Royal Stag, Golden Oak and Blue Riband have filed complaints at the department claiming their trademarks had been stolen.
Nepal's political instability – 10 governments have ruled the country in the last 10 years – and deep-rooted corruption, have contributed to an unprecedented level of financial crime. Following numerous accounts of the misuse of foreign aid in Nepal, the Donald Trump administration has cancelled $39 million in aid set aside for Nepal, including $20 million for fiscal federalism and $19 million for biodiversity conservation. Being grey-listed formally signals to the global community that Nepal has governance and regulatory issues. This could impact Nepal’s standing in international forums and its ability to negotiate favourable trade and financial agreements. The Oli government needs to take decisive action to address these concerns.
Vaishali Basu Sharma is a security and economic affairs analyst.
The opinions expressed in this article are those of the author and do not purport to reflect the opinions or views of THE WEEK.
