Nepal is emerging as a new hub for money laundering in South Asia, attracting the attention of international investigative agencies. The Financial Action Task Force (FATF) has placed Nepal on its grey list, highlighting the country's vulnerable financial system susceptible to illicit activities.
Kathmandu: Nepal is becoming a new hub for money laundering in South Asia, placing it under the scrutiny of international investigative agencies. The Financial Action Task Force (FATF) has included Nepal in its grey list, indicating weaknesses in the country's financial system that make it vulnerable to suspicious activities. The open border with India, informal financial transactions, corruption, and weak monitoring systems are contributing to Nepal becoming a center for illegal money transfers.
Nepal's Financial Policies Fueling Illicit Funds
Several flaws in Nepal's current financial policies are being exploited by illegal investors. Current laws do not require scrutiny of the source of income if someone invests in infrastructure projects or businesses. This provision has facilitated corruption and the growth of black money.
Furthermore, Nepal's economy relies heavily on informal financial transactions such as hundi, dhukuti, and informal loans. Nepali migrant workers, particularly those in South Korea, send significant amounts of money to Nepal through the hundi system, which operates outside the formal banking system. While Nepal was previously placed on the FATF grey list in 2008 and implemented some financial reforms in 2024, these reforms proved insufficient.
Grey Listing to Inflict Significant Losses on Nepal
Inclusion on the FATF grey list will directly impact Nepal's economy. Foreign investor confidence will weaken, the reputation of banks and financial institutions will suffer, and Nepal's exports may be affected. Securing assistance from international financial institutions may also become difficult. The United States has suspended approximately $39 million in aid to Nepal, including $20 million for federal structure development and $1.9 million for a biodiversity conservation project. This decision follows revelations of misuse of foreign aid and financial irregularities in Nepal.
Rising Cyber and Financial Crimes in Nepal
Reports from the FATF and the Asia Pacific Group (APG) indicate a rapid increase in financial crimes in Nepal. Incidents involving extortion, fraud, corruption, and organized crime raise serious questions about the effectiveness of Nepal's law enforcement agencies. In October last year, three individuals, including two police officers, extorted 5 million rupees from a cryptocurrency trader. Cybercrime is also on the rise in Nepal due to weak digital security infrastructure and ineffective enforcement of cyber laws.
To escape the FATF grey list, the Nepalese government must take decisive action. This includes enhancing financial transparency, strengthening the digital banking system, and implementing stricter monitoring at the open border with India.
