Nepal has been placed on the Financial Action Task Force (FATF) grey list for a second time. The decision came during the FATF plenary meeting held in Paris on February 17-21.

Earlier, Nepal was on the FATF grey list from 2008-2014. It has to cleanse its financial sector within two years or the country will fall into the black list where it will face more international transaction hurdles and sanctions.

In an update following its latest plenary, the FATF, a global anti-money laundering watchdog, said on Friday : “The FATF removed the Philippines from its increased monitoring following a successful on-site visit.

“The FATF added Laos and Nepal to the list of jurisdictions subject to increased monitoring.”

It added that Russia’s membership of the FATF remained suspended, according to Reuters, a global newswire.

The grey list, officially termed “jurisdictions under increased monitoring,” includes countries with strategic deficiencies in their anti-money laundering (AML) and counter-terrorist financing (CFT) regimes, but which are actively working with the FATF to address these issues.

“We will emerge from the grey list before the given time,” Finance Minister Bishnu Paudel said in a brief comment given after Nepal’s inclusion in the list on Friday evening.

Any county that is placed on the list is given two years to come out from the list by improvement in legislation, their implementation, and taking action against illegal money and money laundering, among other measures.

“We arrived at this situation after failing to undertake certain tasks in a designated time,” said the finance minister. “The Paris meeting has approved Nepal’s action plan to come out of the list. We will work as per the plan and come out of the list,” said the finance minister.

Nepal’s placement on the grey list stems from its failure to fully implement necessary legal, policy, and structural reforms to combat money laundering and terrorist financing, despite some legislative progress.

The Asia/Pacific Group on Money Laundering (APG), which conducted Nepal’s mutual evaluation, highlighted weaknesses in enforcement, investigation, and prosecution of financial crimes, as well as inadequate regulation of high-risk sectors like cooperatives and real estate.

Nepal was given until October 2024 to meet FATF standards following an extension in July 2023. But the international body found the country had not sufficiently addressed these deficiencies by the deadline.

Several senior officials from government departments of Nepal were in Paris to attend the meeting that concluded on Friday.

Former vice-chair of the National Planning Commission, Govind Raj Pokharel, said the listing has come at a time all major government agencies like the Office of the Prime Minister, the Ministry of Finance, the central bank, the National Planning Commission, the Investment Board, the security board, as well as other key financial regulatory bodies are headed by people close to the ruling parties. “So how come the country fell into the grey list?” he questioned.

Nepali officials and stakeholders had anticipated the decision of the FATF, and they now fear economic repercussions such as reduced foreign investment, higher transaction costs, and challenges in securing international financial aid.

Nepal is now expected to develop and implement an action plan within a specified timeframe—typically reviewed every three months—to exit the grey list, potentially within a year if the progress is swift.

Having been on the grey list until 2014, Nepal came out of it after amending the Anti-Money Laundering Act and improving its framework. However, the current listing reflects a lapse in effective implementation even with laws in place.

Recently, Nepal Rastra Bank Governor Maha Prasad Adhikari had publicly talked about the risk of Nepal falling in the FATF grey list if there were no intervening measures.

A recent meeting of the APG in the Philippines had assessed and evaluated the progress made by Nepal but it was not satisfied and recommended Nepal’s placement in the grey list. Mostly, Nepal was not making adequate progress on taking action against money laundering, was failing to investigate financial crimes and to execute the laws required to improve the country’s overall financial activities. The FATF has set several parameters, standards and indicators to measure the effective implementation of various technical and financial achievements. It updates the lists based on the evaluation of those achievements and milestones.