FATF Status

Nepal is no longer on the FATF List of Countries that have been identified as having strategic AML deficiencies

Latest FATF Statement  -  27 June 2014

The FATF welcomes Nepal’s significant progress in improving its AML/CFT regime and notes that Nepal has established the legal and regulatory framework to meet its commitments in its action plan regarding the strategic deficiencies that the FATF had identified in February 2010. Nepal is therefore no longer subject to FATF’s monitoring process under its on-going global AML/CFT compliance process. Nepal will work with APG as it continues to address the full range of AML/CFT issues identified in its mutual evaluation report.

Compliance with FATF Recommendations

The latest follow-up Mutual Evaluation Report relating to the implementation of anti-money laundering and counter-terrorist financing standards in Nepal was undertaken in 2023. According to the Evaluation, Nepal was deemed Compliant for 5 and Largely Compliant for 16 of the FATF 40 Recommendations. It was deemed Highly Effective for 0 and Substantially Effective for 0 with regard to the 11 areas of Effectiveness of its AML/CFT Regime.

2013 Asia Pacific Group on Money Laundering Yearly Typologies Report:

Trends:

The following are the identified, or suspected, trends and types of Money Laundering in Nepal:

False identification
Misuse of ATM card for the purpose of receiving Indian currency
False source of income
Under or over invoicing
Real estate including a lesser amount mentioned in the land deed than the market price
Tax/revenue evasion
Trade based ML
Extortion
Illegal telephone service Voice over Internet Protocol (VoIP)
Fund siphoning
Currency exchange and smuggling
Use of hundi
Structuring, use of complex structure of companies
Use of family members/relatives or friends, corruption

Emerging trends

Currency exchange from Nepal to India without licence
TBML
Banking frauds
Corruption
Extortion
Real estate
Tax evasion

Declining trends

Revenue
Extortion
Indian currency exchange.

US Department of State Money Laundering assessment (INCSR)

Nepal was deemed a ‘Monitored’ Jurisdiction by the US Department of State 2016 International Narcotics Control Strategy Report (INCSR). Key Findings from the report are as follows: -

Nepal is not a regional financial center. Government corruption, a large and open border with weak border enforcement, limited financial sector regulations, and a large informal economy continue to make the country vulnerable to money laundering and terrorist financing. Nepal is not a significant producer of narcotic drugs; however, hashish, heroin, and domestically produced cannabis and opium are trafficked to and through Nepal. Relatively porous borders also are used to facilitate the trafficking of persons. Other major sources of illegally earned income include tax evasion, corruption, counterfeit currency, smuggling, and invoice manipulation.

While government and banking industry officials report that most remittances flow through formal banking channels, a portion is believed to flow through informal channels. Additionally, the government has limited ability to determine whether the source of money ostensibly sent as remittances from abroad is licit or illicit. Officials have identified the use of under- and over- invoicing as a major money laundering challenge. Other problems are bulk counterfeit currency and gold smuggling into India. An open border with India and inadequate security screening make it difficult to detect currency and gold flowing in and out of the country.

Rating                                                                           (100-Good / 0-Bad)

Transparency International Corruption Index                           35

World Governance Indicator – Control of Corruption             34

Pervasive corruption is a major challenge for foreign companies in Nepal. Kickbacks and facilitation payments are widespread in public procurement and when registering a business. In Nepal, corruption reduces competitiveness and significantly increases the costs of starting a business. Further, the courts are plagued by corruption. The Prevention of Corruption Act is the country's principal anti-corruption law; it criminalizes corruption, bribery, money laundering, abuse of office and facilitation payments in the public and private sectors. However, implementation and enforcement is inadequate, leaving the levels of corruption in the country unchallenged. For further information - GAN Integrity Business Anti-Corruption Portal

Nepal’s annual Gross Domestic Product (GDP) is approximately USD36.3 billion, and trade totaling USD15.9 billion. Despite considerable potential – particularly in the energy, tourism, information and communication technology (ICT), infrastructure and agriculture sectors – political instability, widespread corruption, cumbersome bureaucracy, and inconsistent implementation of laws and regulations have deterred potential investment. While the Government of Nepal (GoN) publicly states its keenness to attract foreign investment, this has yet to translate into meaningful practice. The COVID pandemic coupled with a fresh bout of political instability slowed reform efforts that might have made Nepal a more attractive investment destination. Despite these challenges, foreign direct investment (FDI) into the country has been increasing in recent years. Historically, few American companies have invested in Nepal; and yet the U.S. still features among the top 10 foreign investors in Nepal, constituting about 2.9% of the total FDI stock.

In 2017, the Millennium Challenge Corporation (MCC) signed a USD500 million Compact with the GoN that will focus on electricity transmission and road maintenance.  The agreement includes an additional contribution of USD130 million from the GoN. Following years of delay, Nepal’s parliament ratified the Compact on February 27, 2022, and attention has now turned to implementation, expected to begin in August 2023. Despite the delay, MCC ratification showed that the GoN is committed to honoring its international commitments.

Nepal’s location between India and China presents opportunities for foreign investors. Nepal also possesses natural resources that have significant commercial potential.

Hydropower – Nepal has an estimated 40,000 megawatts (MW) of commercially-viable hydropower electricity generation potential, which could become a major source of income through electricity exports.

Other sectors offering potential investment opportunities include agriculture, tourism, the ICT sector, and infrastructure. The tourism sector is recovering from the downturn due to the pandemic.

Nepal offers opportunities for investors willing to accept the inherent risks and unpredictability of doing business in the country and who possess the resilience to invest with a long-term mindset.  While Nepal has established some investment-friendly laws and regulations in recent years, significant barriers to investment remain, including the following reported by the business community:

Corruption, laws limiting the operations of foreign banks, lingering challenges in the repatriation of profits, controlled currency exchange facilities, prohibition of FDI in certain sectors as well as a minimum foreign investment threshold of NPR 20 million (USD154,000), and the government’s monopoly over certain sectors of the economy (such as electricity transmission and petroleum distribution), undermine foreign investment in Nepal. Political uncertainty is a continuing challenge for foreign (as well as domestic) investors. Nepal’s ruling parties have spent much of their energy over the last years on internal political power struggles instead of governance. While fresh elections in November 2022, and a new government has raised hopes for political stability, this is not guaranteed. Political instability often engenders policy stagnation and uncertainty.

A lack of understanding of international business standards and practices among the political and bureaucratic class, and a legal and regulatory regime that is not quite aligned with international practices also impede, hinder, and frustrate foreign investors. Elements of Nepal’s tax regime, in particular, may be inconsistent with international practices, and could trip-up foreign investors as has happened in two cases in recent years.

Millions of Nepalis seek employment overseas, creating a talent drain, especially among educated youth.

Immigration laws and visa policies for foreign workers are cumbersome.  Inefficient government bureaucratic processes, a high rate of turnover among civil servants, and corruption exacerbate the difficulties for foreigners seeking to work in Nepal.

Nepal’s geography also presents challenges.  The country’s mountainous terrain, land-locked geography, and poor transportation infrastructure increases costs for raw materials and exports of finished goods.

Trade unions—each typically affiliated with parties or even factions within a political party—and unpredictable general strikes can create business risk, although this problem, once common, has diminished in recent years.

The potential use of intimidation, extortion, and violence – including the use of improvised explosive devices – by insurgent groups targeting domestic political leaders, GoN entities, and businesses remains a source of potential instability, although this threat too has diminished in recent years (the country’s most prominent insurgent group—led by Netra Bikram Chand, also known as Biplav—agreed in March 2021, to enter peaceful politics, for example.)

Country Links

Financial Information Unit (FIU-Nepal)

Central Bank of Nepal (Nepal Rastra Bank)

Securities Board Nepal