Despite serious concerns expressed by the United States over Nepal’s vulnerability on money laundering and terrorism financing issues, a senior Nepal Rastra Bank (NRB) official termed the US observation an “overstatement”.

The US Department of State in its recently published annual report titled “Country Reports on Terrorism 2015” has expressed concern that terrorists might use informal money transfer systems such as hundi and hawala, rampant in Nepal for money laundering and terrorism financing.

The NRB official said the magnitude of risk is not like as mentioned in the report since it has not given any concrete evidence nor has it cited such instances.

According to NRB official, although a few issues mentioned in the report are close to reality, the report overstates the risk. The central bank is yet to come up with an official statement about the report.

“NRB Governor Chiranjibi Nepal is currently out of the country. Once he is back, we will hold talks with Financial Information Unit (FIU) and Department of Money Laundering Investigations (DMLI) and come out with the official statement,” said the NRB source.

The report has attributed government corruption, an open border with weak enforcement, limited financial sector regulations and a large informal economy as factors making Nepal vulnerable to money laundering and terrorism financing.

“While the government of Nepal made progress in 2015 in constructing an anti-money laundering/countering the financing of terrorism (AML/CFT) regime, additional work is required to develop expertise in financial crimes investigations, case management, interagency and departmental coordination, and border control,” states the report.

According to the report, FIU and DMLI in Nepal lacked access to relevant data that would detect nefarious activity in informal money transfer systems such as hundi and hawala, which are illegal in Nepal.

The annual report also said that a significant portion of the remittance flows through informal channels such as hundi and hawala.

“Additionally, the government has limited ability to determine whether the source of money ostensibly sent as remittances from abroad is licit or illicit,” the report pointed out.

The report has also pointed out legal loopholes in FIU directives saying that they do not cover non-profit organisation, unless there is specific information that they are involved in money laundering and terrorism financing.

The report also mentioned that Nepal’s open border with India and weak security controls at Kathmandu’s Tribhuvan International Airport (TIA) continued to underpin concerns that international terrorist groups could use Nepal as a transit and possible staging point.

“TIA lacks state of the art baggage screening technology and relies on physical pat-downs alone for passengers,” stated the report. “There were weak controls for restricting access of airport employees throughout the facility, and initial and recurrent background checks on employees were not sufficiently rigorous.”

According to the report, Nepal also lacks a law specifically criminalising terrorism or material support to terrorist networks and in response to an act of terrorism, Nepali courts would prosecute the perpetrators on the basis of laws pertaining to murder or arson, for example.

“Most Nepali officials view Nepal as being at no or low risk for an international terrorist incident on its soil,” the report pointed out.  “Accordingly, there is little impetus to introduce new laws.”