Payment service providers (PSPs) will now be required to freeze the assets and other financial resources of individuals and entities designated as terrorists by the United Nations Security Council (UNSC) or Nepal’s Ministry of Home Affairs. The measure is part of Nepal’s effort to get off the Financial Action Task Force (FATF) grey list.

On Monday, Nepal Rastra Bank introduced the Guidelines on Targeted Financial Sanctions for Payment Service Providers. Under the new rules, freezing measures and prohibitions on making funds available apply to anyone listed in the domestic terrorist list published by the home ministry or in the UNSC’s Consolidated Sanctions List.

The sanctions also extend to entities directly or indirectly owned or controlled by listed individuals or groups, or acting on their behalf.

Targeted financial sanctions require freezing funds or other assets of designated persons or entities, combined with a ban on providing them with economic resources or related services, directly or indirectly.

The UN may impose such measures internationally or regionally, and individual states are obligated to implement them.

Central bank officials said the guidelines were prepared to strengthen risk management for anti-money laundering (AML) and counter-terrorist financing (CTF).

“Until now, PSPs verified customers based on Know Your Customer (KYC) details,” said Kiran Pandit, spokesperson for the central bank. “Now, they must also check whether a customer is on the sanction lists of the UNSC or the home ministry before allowing any transaction. If they find a listed person or entity conducting a transaction, the financial asset—such as an e-wallet—must be frozen immediately.”

Pandit added that the guidelines will support Nepal’s bid to exit the FATF grey list. The aim of targeted financial sanctions, he said, is to deny designated persons the means to violate international peace and security, support terrorism, or finance the proliferation of weapons of mass destruction.

To ensure timely enforcement, PSPs must subscribe to the UN sanctions list for automated notifications on listings and delistings, or register with the targeted financial sanctions portal operated by the home ministry. They may also monitor the ministry’s website regularly.

Nepal currently has 22 licensed PSPs.

Binay Khadka, CEO of IME Khalti, said his company already conducts due diligence and checks sanction lists, freezing e-wallets when notified by police. “If there are additional provisions in the guideline, our compliance team will work to implement them accordingly,” he said.

Cases of money laundering have been rising in Nepal.

According to the Cyber-Enabled Frauds under Strategic Analysis Report 2024, published by the Financial Intelligence Unit of Nepal Rastra Bank last November, around 15 percent of suspicious transaction and activity reports received between January 1 and May 31 last year were linked to fraud, often used for money laundering or terrorist financing.

The analysis shows that the highest number of people involved in such suspected transactions were aged between 18 and 24 years and had listed “student” as their profession. In most cases, the suspicious transaction occurred within three months of opening the account.

Cyber-enabled frauds mainly included scams related to gifts and parcels, cheating through social media, fake online trading platforms, one-time password (OTP) fraud, lottery scams, and similar schemes. Of the 501 fraud-related suspicious transaction reports filed during the period, 319 were linked to cyber-enabled fraud.

Many digital transactions through ConnectIPS, various e-wallet accounts, and Fonepay transfers were traced to accounts belonging to illiterate individuals who appeared to lack the skills to use such payment systems. Upon investigation, these accounts were found to be operated by fraudsters as “money mule” accounts.

The Financial Intelligence Unit-Nepal also recorded scams involving money-doubling promises, cryptocurrency investments, network marketing, online room rental services, and fraudulent payments for English language tests such as the Pearson Test of English (PTE) and the International English Language Testing System (IELTS).

Fraud involving gifts or parcels was the most reported type of cyber-enabled crime. Social media impersonation and scams offering free iPhones and other Apple products jointly ranked as the second most common typology. Most impersonation cases occurred on WhatsApp and Facebook.

The FATF placed Nepal on its grey list during a meeting held from February 17–21 in Paris, citing failures to meet several obligations. Nepal previously spent six years (2008–2014) on the list. The country now has two years to reform its financial sector or risk being placed on the FATF blacklist, which would bring severe restrictions on international transactions and increased sanctions.

The decision followed the Asia/Pacific Group on Money Laundering’s (APG) mutual evaluation, which found that while Nepal had made some legislative progress, it still lacked effective enforcement, investigation, and prosecution of financial crimes. The APG also pointed to weak regulation of high-risk sectors such as cooperatives and real estate.