Nepal races against time to fix money laundering deficiencies ahead of FATF review

Nepal is currently on the Financial Action Task Force (FATF) ‘grey list’ – officially, the ‘jurisdictions under increased monitoring’ – and has a deadline to implement its action plan by January 2027.
As Nepal is under continuous observation of the international evaluators, officials are scrambling to demonstrate that the country has made real progress in its fight against flow of dirty money.
Financial Action Task Force (FATF), the global watchdog that monitors illicit financial flows, has kept Nepal under ‘increased monitoring’ – a status popularly known as the grey list – after identifying serious gaps in the country’s enforcement and supervision systems.
However, authorities claim that Nepal is actively working with the FATF and the Asia Pacific Group (APG) to address its Anti-Money Laundering / Combating the Financing of Terrorism (AML/CFT) shortcomings. Prime Minister Sushila Karki, on Sunday, took stock of the situation with Finance Minister Rameshore Prasad Khanal, Nepal Rastra Bank Governor Bishwonath Poudel, and Department of Money-Laundering Investigation (DMLI).
Nepal is trying to address the issues raised by FATF and potentially exit the grey list is January 2027, albeit in a lousy pace because the global body to watch flow of dirty money’s decision this year, came with a clear message: Nepal’s laws look better on paper than they work in practice.
The message was: Nepal government does not walk the talk despite passing several regulations and setting up mechanisms to counter money laundering and the financing of terrorism but tangible results – like investigations, prosecutions, and confiscations – remain scarce, not due to successive governments’ inability but due to affiliation of governments with the infamous gangs and ‘middlemen’ like Therman Gun Gang.
The DMLI on Sunday reported the Prime Minister Karki that the department has frozen 1,600 ropanis of land within the Kathmandu Valley alone, in suspicious of Money Laundering.
However, the successive government’s lack of urgency in coming out of the grey list and its failure to meet the requirements by the deadline may result in Nepal being moved to the ‘black list’ – High-Risk Jurisdictions subject to a Call for Action – that will lead to severe economic sanctions and international financial isolation.
Though the erstwhile government led by Prime Minister KP Sharma Oli and his finance minister Bishnu Poudel, both, have claimed to bring Nepal out of the grey list, they have – in reality – been protecting the infamous Therman Gun Gang, which is allegedly involved in most of the money-laundering cases like illegal and suspicious transactions, by stationing their henchmen in the regulators.
The then KP Sharma Oli government has even withdrawn their cases from the Department of Money-Laundering Investigation (DMLI) and even Central Bank due to their affiliation with infamous gangs has also worsened the situation.
“We are responsible for investigation only,” said Director General of the DMLI Gajendra Thakur. But the department has always been under pressure not to investigate on suspicious transactions and therefore the department saw new head almost frequently.
Similarly, the investigation that the then Oli government withdrew against the infamous Thermal Gun Gang including Deepak Bhatta, the department seems at loss, whom to investigate and whom not. “The situation will put Nepal further in red-zone, as the FATF is closely monitoring the country,” according to those, who are privy to the investigation.
However, NRB and Finance Ministry are preparing the agendas to put forward the FATF during the review. Finance Minister Khanal and NRB Governor Poudel, on Sundy, appraised the Prime Minister.
The illicit flow of money is not only rampant among the ‘middlemen’ but also among the political leaders affiliated to the cooperatives sector.
Most of the cooperatives are run by the political leaders and their families, who are, despite cheating people’s money, getting protection from their respective parties, and law enforcement bodies are mere spectators.
FATF, on the contrary, has more focus on politically exposed persons (PEPs) because they are much powerful to cover the illicit money, earned with the help of their political clout.
According to officials familiar with Nepal’s preparation to face the FATF, the FATF wants proof that Nepal’s Financial Information Unit (FIU), law enforcement agencies, and regulators are not only coordinating among themselves but also not producing any measurable outcomes meaning taking action against the flow of dirty money. And it’s not a surprise as the regulatory capture by the infamous gang has made these law enforcement agencies and regulators impotent. “However, this time, FATF is neither interested in new laws or plans nor in paper works, it wants the tangible result,” according to the official, who is involved in the national response team. “FATF wants to see cases, numbers, and results."
In its last assessment, FATF pointed to persistent weaknesses: limited understanding of the country’s biggest money-laundering and terrorist-financing threats; weak supervision of high-risk sectors like cooperatives, casinos, and real-estate businesses; and a lack of visible action against illegal money transfer networks, popularly known as hundi.
The global watchdog also noted a shortage of prosecutions and asset recovery cases, raising concerns about Nepal’s ability to enforce its own laws.
Thus, Nepal will have to convince FATF and its regional counterpart, the Asia-Pacific Group on Money Laundering (APG), of which Nepal is a member, that Nepal has turned its commitment into action.
The face-to-face review will decide whether Nepal’s recent reforms and actions are credible enough to move it closer to removal from the grey list or continued deficiencies will prolong its stay.
Analysts warn that remaining on the list could damage Nepal’s reputation, discourage foreign investment, and make cross-border transactions more difficult. “Grey listing doesn’t shut Nepal out of the global system, but it raises the cost of doing business,” said a senior banker. “Every transaction gets extra scrutiny,” he said, adding that it affects business confidence.
Nepal is trying to get out of the grey list. Officials say the government has already begun working on a short-term action plan. It has prepared key priorities including publishing an updated National Risk Assessment (NRA) that identifies major threats, conducting risk-based inspections of banks and non-bank sectors, and launching visible enforcement against illegal hundi operations, and middlemen like Thermal Gun Gang.
The FIU under NRB is also expected to present detailed records of suspicious transaction reports (STR) enforcement actions, and ongoing investigations. In recent years, the STR has also been increasing, also due to regular and mandatory reporting system of the financial sector.
“But we need to prove effectiveness, not just intent,” according to a source, who is following the FATF process. “If we can show credible numbers, we have a good chance to convince FATF."
Experts also recommend that Nepal demonstrate at least one significant asset seizure or confiscation case before the review. “A clear example of money-laundering proceeds being traced and frozen”, they say, “would help signal that enforcement is moving from policy to practice."
They have also called for a high-level political statement reaffirming Nepal’s commitment to anti-money-laundering reforms before the FATF meeting. Coordination among the FIU, central bank, police, and prosecutors has been described as ‘critical,’ with several agencies already instructed to document all enforcement actions taken since the last evaluation.
However, insiders admit that bureaucratic inertia and overlapping mandates remain challenges. “Different agencies have done different works though in isolation, but what FATF wants is a coherent picture, a single narrative showing how Nepal’s system functions together."
Nepal’s response team has reportedly prepared a concise evidence dossier summarizing actions taken since the last review. If Nepal can demonstrate real progress – more inspections, visible enforcement, and actual asset recoveries – it could begin the process of exiting the grey list starting the next year.
But if Nepal fails to convince the evaluators, Nepal risks a prolonged stay under global watch list. For a country struggling to attract investment and rebuild economic confidence – also after the Gen Z movement on September 8 and 9 – that would be a setback it can hardly afford. After all the Gen Z movement had also called on ‘Corruption free Nepal’, transparency and accountability.

(Originally published at NepalKhabar: https://en.nepalkhabar.com/news/detail/16621/)