A report made public by the Centre for Investigative Journalism Nepal in collaboration with the International Consortium of Investigative Journalists has revealed gaping holes in our financial regulation. The scandal surrounding the alleged money laundering through tax havens is now escalating into one of the biggest examples of tax fraud in the country. As the report discloses, 55 Nepalis broke the country’s law by investing in different offshore companies. 

According to the expose, as of 2017, the cumulative deposit by Nepalis in Swiss banks exceeded a whopping Rs50 billion. In terms of receiving Foreign Direct Investment (FDI), surprisingly, the British Virgin Islands—a British Overseas Territory in the Caribbean, ranks 3rd only after India and China. The report further mentions how out of the total Rs137.67 billion received in FDI in the last two decades, British Virgin Islands’ share accounted for 45 percent. 

Money laundering represents the act of masking the original source of funds and ushering money into the market secretly. Nepali law prohibits citizens from depositing money in foreign banks unless the funds are earned abroad. Yet, the practice of stashing money in foreign banks prevails. Often times, companies cleverly route their profits through subsidiaries set in destinations called ‘tax havens’. Wealth earned through illicit means is taken abroad where subsidiaries are set up and the same money is returned to the country in the form of FDI to avoid taxes. 

The report highlights the government’s sheer negligence and lack of follow through with regard to the issue. When the Panama Papers first revealed Nepal’s links to various offshore accounts in 2016, little was done by the Nepal government to investigate account holders. In April 2016, an official at the Financial Intelligence Unit (FIU) at Nepal Rastra Bank told the Post that if the government wanted, it could obtain information about Nepalis siphoning off money to the British Virgin Islands as per our Mutual Legal Assistance Act. The Money Laundering Prevention Act was also introduced only in 2008. Clearly, despite being aware of the existence of these illegal accounts, the government has not demonstrated any political will to seek remedy to the issue. 

Investment from illegal sources no doubt weakens the country. In fact in 2014, Nepal’s record of money laundering almost led to its blacklisting by the Financial Action Task Force (FATF), an inter-governmental body established to combat money laundering. If the ongoing practice remains unaddressed, there is a greater likelihood for Nepal to feature on the list during FATF’s next assessment in 2020-2021. 

No doubt, curbing the menace of money laundering requires a broader international effort. But on our part, the government can start by demonstrating strong political will in cracking down illegal transactions made through Hundi and Hawala. Our economy is hugely cash-based, too. A shift from conducting business transactions from cash-based to banking-based processes will allow for more transparency in  transactions. But these moves must be backed by clear and robust data protection laws. 

What’s more, while institutions like the Financial Intelligence Unit at the Nepal Rastra Bank and the Department of Money Laundering Investigation under the PMO have been established, they have yet failed to reached any logical end. This provides ample ground to question the establishment of these institutions. If the government is serious about fighting against unaccounted wealth, it should work effectively to ensure that these institutions are carrying out its duties of following up on the various reports that implicate individuals of money laundering.