Published: 04:42 PM, 12 March 2025
Nepal's FATF Grey Listing is a Government Failure with Regional Security Implications
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Nepal's recent inclusion in the Financial Action Task Force (FATF) grey list represents a significant diplomatic and economic setback that can be directly attributed to the Oli government's systemic failures in financial governance. The FATF, the global money laundering and terrorist financing watchdog, made this decision during its February 17-21 plenary meeting in Paris, citing Nepal's failure to implement necessary legal, policy, and structural reforms to combat illicit financial activities. This marks the second time Nepal has found itself on this ignominious list, having previously been grey-listed from 2008 to 2014. The repeated failure speaks volumes about the government's inability to learn from past mistakes and implement sustainable financial oversight mechanisms.
Prime Minister KP Sharma Oli's administration has demonstrated a troubling pattern of neglect regarding anti-money laundering (AML) and counter-terrorist financing (CFT) measures.
Despite having years to strengthen regulatory frameworks following its previous removal from the grey list, the government has allowed critical deficiencies to persist, effectively inviting international scrutiny once again. The political fallout has been swift and severe. Opposition Maoist Center MP Madhav Sapkota has called for Prime Minister Oli's resignation, highlighting the government's "inconsistency" and "negligence towards good governance" that has "finally reached the point of shame." This sentiment reflects growing public frustration with an administration that appears indifferent to Nepal's international standing and financial integrity.
The consequences of this grey-listing extend far beyond mere political embarrassment. Nepal now faces a precarious two-year window to address its deficiencies or risk facing more severe international transaction hurdles and potential sanctions. The repercussions will be felt across Nepal's economy, potentially hampering foreign investment, complicating international banking relationships, and increasing transaction costs for ordinary Nepalese citizens. To understand the gravity of these implications, one need only look to Pakistan's experience with FATF grey-listing between 2018 and 2023. Pakistan's prolonged presence on the grey list severely constrained its access to international financing, with estimates suggesting the country suffered economic losses exceeding $38 billion. Foreign direct investment dwindled, and Pakistan was forced to accept stringent IMF conditions to maintain economic stability amid growing international isolation.
More troublingly, Nepal's insufficient financial controls mirror the conditions that allowed terrorist networks to exploit Pakistan's financial system for years. While Pakistan is still dealing to make progress in addressing these issues, the damage to its international reputation persists. Nepal risks following a similar path if immediate corrective actions are not taken. The ramifications of Nepal's financial oversight failures extend beyond its borders, particularly impacting India's security concerns. Nepal's porous border with India, combined with weak financial controls, creates an environment ripe for exploitation by terrorist organizations seeking to finance operations in the region. Indian security agencies have long raised concerns about Nepal becoming a conduit for terrorist financing, particularly targeting India's northern states. Evidence suggests that several terrorist organizations have already leveraged Nepal's fragile financial system to launder money and finance activities across the region. The Oli government's lax approach to these threats represents not just a domestic governance failure but a potential security risk for the entire South Asian region.
Nepal's Finance Minister Bishnu Paudel has belatedly expressed commitments to implement reforms aimed at improving anti-money laundering and counter-terrorism financing efforts. These include promises to identify and take action against illegal payment service providers and hundi operators. However, such reactive measures following international censure reflect a governance approach that addresses problems only after they develop into crises. Nepali Congress lawmaker Arjun Narshingh KC has proposed more drastic measures, including demonetization of 500 and 1000 rupee notes, similar to India's 2016 initiative. While such measures may demonstrate seriousness, they would need to be part of a comprehensive strategy rather than isolated actions. KC correctly emphasizes the need for parliamentary discussion and thorough investigations into corruption cases to salvage Nepal's tarnished international image.
The correlation between Nepal's rising corruption index and its FATF grey-listing is not coincidental. Transparency International's latest assessment shows Nepal moving further up the corruption scale, indicating systemic governance failures that facilitate both corruption and money laundering. The intertwined nature of these issues demands a comprehensive governance overhaul rather than piecemeal reforms. The Oli government now faces a critical juncture. It can either acknowledge its failures and implement sweeping reforms to address these deficiencies, or it can continue its pattern of neglect and risk plunging Nepal into further international isolation and economic hardship. The latter path would not only damage Nepal's sovereignty by forcing it to accept externally imposed conditions but would also continue to pose security risks to neighborhood and the broader region.
Pakistan's journey through FATF grey listing offers a lesson for Nepal about the long-term consequences of financial governance failures. After being placed on the grey list in 2018, Pakistan endured a tough five-year period of international scrutiny that severely damaged its economic prospects and global standing. The country was forced to implement 34 action items across multiple domains, including legislative reforms, prosecutorial actions against terrorist financiers, and complete overhauls of its financial monitoring systems. This process came at tremendous cost economists estimate Pakistan lost over $38 billion in potential economic activity, faced significantly higher borrowing costs, and experienced sharp declines in foreign direct investment. Even after finally exiting the grey list in October 2023, Pakistan continues to grapple with the lingering effects of diminished international credibility, with investors and financial institutions maintaining heightened due diligence requirements for Pakistani transactions. Thus this stands as a crucial lesson for Nepal to not follow Pakistan’s path and journey with FATF.
Pen & Ink by: Md. Monir Hossain (Journalist) [The views are personal]
