AML-Terror Financing Risks: Nepal Re-enters FATF Grey List

FATF sets the gold standard in the global fight against transnational crimes

The Financial Action Task Force leads global action to tackle money laundering, terrorist and proliferation financing. FATF continuously monitors how criminals and terrorists raise, use and move funds and publishes global standards aimed at preventing organized crime, corruption and terrorism. FATF and its global partners evaluate the implementation of the FATF Recommendations across the more than 200 countries and jurisdictions that have committed to follow FATF standards. Countries that repeatedly fail to implement FATF Recommendations are named as an increased monitoring or a high-risk jurisdiction, designations that significantly diminish a country’s global economic standing and their ability to obtain credit and attract foreign investment.

FATF placed Nepal under increased monitoring in February 2025 highlighting regulatory weaknesses in enforcement, investigation and prosecution of financial crimes and inadequate regulation of high-risk sectors like cooperatives and real estate. Nepal has demonstrated compliance with only 21 out of 40 of FATF's key recommendations, which exposes a substantial gap.¹ Nepal has committed to work with FATF and the Asia Pacific Group over the next two years to strengthen the scope and enforcement of Nepal’s Money Laundering Prevention Act. These actions must prioritize seven key parameters outlined by FATF to strengthen the effectiveness of Nepal’s anti-money laundering (AML) and counter financing of terrorism (CFT) efforts:

• Improving understanding of key money laundering (ML) /terrorist financing (TF) risks
• Improving risk-based supervision of commercial banks, higher risk cooperatives, casinos, DPMS and real estate sector
• Demonstrating identification and sanctioning of materially significant illegal MVTS/hundi providers, without hindering financial inclusion
• Increasing capacity and coordination of competent authorities to conduct ML investigations
• Demonstrating an increase in ML investigations and prosecutions
• Demonstrating measures to identify, trace, restrain, seize and, where applicable, confiscate proceeds and instrumentalities of crime in line with the risk profile
• Addressing technical compliance deficiencies in its targeted financial sanctions regime for Terrorist Financing and Proliferation Financing.

Nepal faces a long challenge to rectify the vulnerabilities and inadequate regulatory oversight that resulted in FATF’s increased monitoring designation. Improving transparency across the Nepalese financial system is critical to resolving Nepal’s Grey List status, securing Nepal’s financial foundation and restoring the country’s reputation on the global economic playing field.

Current regulatory weaknesses compound pressures on Nepal’s financial institutions

Nepal’s standing with FATF underscores how the country’s current regulatory weaknesses and lax enforcement standards unintentionally create a haven for networked money laundering and terrorism financing to proliferate. This type of risk climate exposes Nepal’s financial institutions to heightened AML/CFT risks and the Grey List designation further compounds these issues. The immediate impacts of FATF’s actions for Nepal’s financial institutions include:

• Added processes to increase due diligence and scrutiny for transactions involving Nepal-based entities
• Expanded documentation requirements for transactions tied to correspondent banking and import and export trades
• Intensified oversight from global regulatory organizations and correspondent banks
• Increased complexity in risk assessing entities or individuals impacted by economic ramifications resulting from the Grey List fallout

Nepal’s efforts to exit the Grey List need to result in more standardized regulatory expectations, more extensive screening and reporting requirements, including new requirements encompassing designated non-financial businesses and professions (DNFBPs), and stricter enforcement of AML/CFT laws. Nepal’s Department of Money Laundering Investigation also needs more authority and autonomy to effectively enforce the new regulatory framework. These advances will also accelerate digital banking and digital transactions becoming the norm in Nepal. All of this positive momentum is necessary to strengthen the country’s economic integrity and health, yet it may also place immediate operations and cost pressures on financial institutions that are currently managing AML/CFT compliance efforts with a limited or bare minimum program.

Responding to uncertain times by taking a risk-based approach

Renewed regulatory efforts, expanded enforcement focus and an evolution toward a more digital economy are essential steps for overcoming the litany of deficiencies that landed Nepal on the Grey List. However, these changes and a more carefully governed regulatory framework do not have to derail your business operations. Raising compliance levels to match global standards actually adds a competitive advantage by removing barriers to global commerce. Implementing a risk-based approach can provide a real-time view into potential risk roadblocks upfront, before they impact your business:

• Know Your Customer (KYC) due diligence
• Sanctions and enforcements watchlist
• AML/CTF
• Anti-bribery and corruption
• Trade finance risks

Building your compliance program on the foundation of technology solutions that automate screening and onboarding workflows helps avoid cumbersome decisioning delays and customer experience disruptions. Ensuring your compliance program is informed by real-time access to actionable risk intelligence also keeps your business prepared to respond and easily adapt to local challenges, new regulatory developments and changing global requirements. A risk-based approach and integrated decisioning tools reinforce your compliance program so your business can stay agile and risk ready without sacrificing on growth goals and customer experience priorities.

Navigating a stronger stance against AML and CFT risks as Nepal starts forward

Nepal’s path ahead is marked with short term obstacles that hopefully lead to longer term opportunities for the country’s financial health, global standing and ultimately, for your business. The first step in restoring financial integrity is Nepal implementing the regulatory changes, more stringent requirements and robust oversight mechanisms that closely align with the FATF Recommendations. A more secured financial ecosystem and digitally connected economy can strengthen risk transparency and support greater financial inclusion.

Being proactively prepared to align with Nepal’s new AML and CFT regulatory framework translates into competitive advantage for your business. A risk-based approach to AML/CFT compliance strengthens your compliance program and screening workflows while adding the flexibility to adapt as the new regulations take shape in Nepal and digital transactions become the day-to day norm. Understanding a real-time view of potential money laundering, terrorist financing and proliferation financing risks helps inform the relationship decisions that protect your institution and improve performance outcomes.

LexisNexis® Risk Solutions offers a full range of data-driven risk management solutions that can be customized to fit your budget and risk appetite. Our experts can help design a risk-based approach that supports an effective and comprehensive compliance program. We offer industry-tested experience working with financial institutions in regions that have exited the Grey List such as UAE, the Philippines and Pakistan. Our solutions efficiently automate screening and due diligence workflows so you can confidently operate in Nepal’s dynamic risk climate and stay ready to capture new opportunities as the country moves forward.