Nepal On FATF Radar: All You Need To Know

Nepal might be placed under the grey list of the Financial Action Task Force (FATF), given the deficiencies around legislation relates to money laundering and terror financing. If the irregularities continue, the country might even be placed on the blacklist, which will have a cascading impact on Nepal’s economy.

What happened?

Asia Pacific Group on money laundering which is a FATF-style anti-money laundering body visited Nepal for a fortnight to assess the country's terror financing and money laundering situation. They found over 15 irregularities in the anti-terror funding and money laundering laws.

Nepal already holds the dubious distinction of holding a place in the grey list from 2008 to 2014. Following this development, they amended Anti Money Laundering Act 2008 among others due to which they were removed from the list in 2014. However, given its record and the present situation, it might earn a place again on the grey list and may even get blacklisted. Some of the 15 identified laws posing these irregularities include the Assets Laundering Prevention Act, of 2008, the Land Revenue Act 1978, and the Cooperative Act of 2017, among many others. Many of these laws are due to be passed with amendments. However, the ever-changing political situation in Nepal has made things difficult. The government has sent the amendments to President Bidya Devi Bhandari but they are yet to be ratified by him. If this situation continues, Nepal might have to re-join the grey list.

What is the impact on Nepal's economy? 

To analyse this, we first need to understand the present state of Nepal's economy. Nepal is a developing country with a largely agricultural economy. The country has made progress in recent years in reducing poverty and increasing economic growth, but it still faces significant challenges, including a high trade deficit, a large informal sector, and a reliance on foreign aid. The Nepali rupee start to plunge against the dollar in June 2022. It reached an all-time high of Rs132.88 as of December 24 2022. It is an import-based economy, and the appreciation Dollar means a higher cost of imports, further fuelling inflation in the landlocked country. Further, the country is recovering from Covid induced lockdown.

The grey listing could thus be challenging for Nepal's already struggling economy which depends on trade and investment. This will further deter foreign funding, and further downgrade ratings of the already struggling economy. We can take a cue from Pakistan about what happens when a country in blacklisted. As per Tabadlab Pvt Ltd, the country has lost USF 38 bn in GDP after getting grey-listed. This is due to declining in FDI, consumption, and expenditure, between 2008 and 2019.

What is FATF?

The Financial Action Task Force or FATF is an intergovernmental organization that develops and promotes policies to combat money laundering and terrorist financing. The organization was founded in 1989 by the G7 countries and has since grown to include 39 member countries and two regional organizations. The FATF sets standards and provides guidance to countries on how to implement measures to protect against money laundering and terrorist financing, and it monitors countries' progress in implementing these measures. The organisation also works to identify countries that are not meeting their commitments to combat money laundering and terrorist financing and can take a range of actions, including issuing public statements or recommending that other countries take steps to protect against the risks posed by these countries.

What is grey list?

The "grey list' is a term used by the Financial Action Task Force (FATF) to refer to countries that are not fully compliant with the organisation's standards for combating money laundering and terrorist financing, but are committed to taking action to address the deficiencies in their systems. The grey list is a step between the FATF's 'white list' and the "black list' of countries that are not compliant and not making significant efforts to address their deficiencies.

Being placed on the grey list can have significant consequences for a country, as it may lead to increased scrutiny and the possibility of financial penalties or other measures being imposed. It can also damage a country's reputation and make it more difficult for it to attract foreign investment. Countries on the grey list are expected to take steps to address the deficiencies identified by the FATF and to demonstrate progress in doing so in order to avoid being placed on the blacklist.

What is the blacklist?

The 'black list' is used by the Financial Action Task Force (FATF) to refer to countries that are not compliant with the organisation's standards for combating money laundering and terrorist financing and are not making significant efforts to address the deficiencies in their systems. The blacklist is the lowest ranking in the FATF's rating system, and being placed on the blacklist can have significant consequences for a country.

The FATF may recommend that other countries take measures to protect themselves against the risks posed by a country on the blacklist, such as by increasing scrutiny of financial transactions involving the blacklisted country or by imposing financial penalties or other measures. Being on the blacklist can also damage a country's reputation and make it more difficult for it to attract foreign investment. Countries on the blacklist are expected to take steps to address the deficiencies identified by the FATF and to demonstrate progress in doing so in order to be removed from the list.

How will it impact India?

India and Nepal have a long history of trade and economic relations, with India being Nepal's largest trading partner. Nepal exports a variety of goods to India, including textiles, carpets, and agricultural products, while India exports manufactured goods and petroleum products to Nepal. There are several trade agreements in place between the two countries, including the Indo-Nepal Treaty of Trade and the South Asian Free Trade Area (SAFTA) agreement, which aims to promote economic cooperation and trade liberalization among the countries of South Asia. In addition to trade, there are also close cultural and historical ties between India and Nepal. However, trade between the two countries has not always been smooth, and there have been instances of trade disputes and disruptions due to various factors, including political tensions and infrastructure constraints. Given that imports are at a premium in Nepal, it might be a good opportunity for India to expand its export profile to Nepal. At the same time, it can limit the FDI investment of India in Nepal given the trade restrictions that come with FATF listing. If the political volatility in Nepal is sorted out, it will further streamline the trade between the nations.