In a recent development, Nepal has been reinstated on the Financial Action Task Force's (FATF) grey list, signaling concerns over the nation's anti-money laundering (AML) and counter-terrorist financing (CFT) frameworks. This move has significant implications for Nepal's economy and its global financial standing. Understanding the FATF and Its Mandate Established in 1989, the FATF is an intergovernmental organization aimed at combating money laundering, terrorist financing, and other related threats to the integrity of the international financial system.

It sets standards and promotes effective implementation of legal, regulatory, and operational measures for combating these illicit activities. Countries that fail to meet these standards may be placed on the FATF's grey list, indicating strategic deficiencies in their AML/CFT regimes.

Nepal's Inclusion in the Grey List

On February 21, 2025, during its plenary meeting in Paris, the FATF added Nepal to its grey list. This decision stems from concerns about Nepal's financial system, including inefficient regulatory enforcement, insufficient supervision over high-risk sectors like real estate and cooperatives, and inadequate implementation of AML and CFT regulations. Notably, Nepal was previously on the grey list from 2008 to 2014, after which it was removed following amendments to its Anti-Money Laundering Act and improvements in its framework.

Economic Implications of Grey Listing

The economic ramifications of being on the FATF grey list are substantial. A 2021 study by the International Monetary Fund (IMF) revealed that grey-listed countries experience an average decline of 7.6% of GDP in capital inflows. For instance, Pakistan has suffered massive losses to its GDP, amounting to $38 billion, due to its prolonged presence on the grey list since 2008. Countries on the grey list often face reduced foreign investment, higher transaction costs, and challenges in securing international financial aid.

FATF Compliance Ratings

The FATF assesses countries based on two primary ratings:

1. Technical Compliance Rating: This evaluates the formulation of laws and the establishment of institutions, encompassing 40 indicators. Countries are rated as Highly Compliant, Compliant, Partially Compliant, or Non-Compliant.
2. Effectiveness Rating: This assesses the implementation of laws and the effectiveness of measures in practice, with ratings of High, Substantial, Moderate, or Low effectiveness.

As of its 2022 Mutual Evaluation, Nepal was rated Largely Compliant for 29 of the FATF's 40 Recommendations and Compliant for 8 Recommendations. However, the recent grey listing indicates lapses in effective implementation despite these technical compliance ratings. Reasons for Nepal's Grey Listing

The FATF identified several key deficiencies in Nepal's AML/CFT framework, including:

• Inefficient Regulatory Enforcement: Despite having laws in place, there has been a lack of effective enforcement, leading to vulnerabilities in the financial system.
• Insufficient Supervision: High-risk sectors such as real estate and cooperatives have not been adequately supervised, increasing the risk of money laundering and terrorist financing.
• Inadequate Implementation: There has been a gap between the laws enacted and their practical implementation, resulting in continued financial crimes. Impact on Nepal and the Way Forward

The grey listing poses several challenges for Nepal:

• Economic Slowdown: The country may experience reduced foreign investment and aid, leading to an economic downturn.
• Increased Transaction Costs: International financial transactions could become more expensive and cumbersome, affecting businesses and consumers alike.
• Reputational Damage: Being on the grey list tarnishes Nepal's international image, making it less attractive to investors and tourists.

To address these challenges, Nepal must:

• Strengthen Regulatory Enforcement: Ensure that existing laws are effectively enforced, with stringent penalties for non-compliance.
• Enhance Supervision: Improve oversight of high-risk sectors to prevent misuse for illicit activities.
• Capacity Building: Invest in training and resources for agencies responsible for AML/CFT to ensure effective implementation.

Nepal’s inclusion in the FATF grey list is a stark reminder that regulatory frameworks are only as strong as their enforcement. While the country has made notable progress in technical compliance, gaps in implementation have exposed vulnerabilities that could cost Nepal dearly in foreign investment, economic growth, and global credibility. However, this setback also presents an opportunity by swiftly addressing FATF concerns through stronger enforcement, better supervision, and institutional reforms, Nepal can not only exit the grey list but also fortify its financial system for long-term resilience. The path forward is challenging, but with decisive action, Nepal can turn this crisis into a stepping stone toward a more transparent and robust financial future.