Despite constant push from the Asia/Pacific Group (APG) on Money Laundering to make policy and structural changes, Nepal continues to fall short on delivery and will thus remain on the FATF’s grey list.

Even as the APG, the regional arm of the Financial Action Task Force (FATF), had been repeatedly warning the country, the task force on Friday came up with the latest review report and recommendation, retaining Nepal under the “jurisdictions under increased monitoring” or externally referred to as the “grey list”.

Since February 2025, when Nepal made a high-level political commitment to working with the FATF and APG to strengthen the effectiveness of its Anti-Money Laundering/Countering the Financing of Terrorism (CFT) regime, Nepal has taken steps to improve its standing by addressing the remaining technical compliance deficiencies in its targeted financial sanctions regime for ‘terrorist financing’ and ‘proliferation financing’ (TF and PF).

In May third week, a two-member delegation from the APG had visited Kathmandu and met Finance Minister Swarnim Wagle, senior ministry officials, Nepal Rastra Bank governor Bishwo Nath Poudel, senior central bank officials, the police chief and other stakeholders, and clearly reminded them of areas where the country has failed to make adequate improvements after being placed on the grey list. The delegation warned that failure to address those shortcomings could put Nepal at risk of being blacklisted.

The two-member delegation, led by APG Deputy Executive Secretary David Shannon, had reviewed progress in areas where Nepali authorities have been working and pointed out shortcomings in implementation.

The APG delegation had concluded that Nepal had made limited progress on several commitments outlined in the action plan for exiting the grey list and suggested improvements.

“Nepal should continue to work on implementing its FATF action plan to address its strategic deficiencies, including improving its understanding of key money laundering and terrorist financing; improving risk-based supervision of commercial banks, higher-risk cooperatives, casinos, Designated Non-Financial Businesses and Professions [DPMS] and the real estate sector,” the FATF said in statement on Friday.

During the meetings with minister and senior government and security officials, the APG delegation was dissatisfied with progress in regulation, investigation and prosecution related to the banking and financial sector, cooperatives regulation, banking offences, real estate transactions, precious metals trading, corruption, tax evasion, human trafficking, environmental and wildlife crimes, and money laundering through shell companies.

In May, the APG team also held meetings with the senior officials from Nepal Rastra Bank, the Commission for Investigation of Abuse of Authority, members of the parliamentary Finance Committee, the law minister, the foreign minister and other stakeholders.

In the meeting, the APG said meaningful progress had been made on only nine of the 15 items outlined in Nepal’s FATF action plan, while the remaining six had seen only partial implementation. The assessment was based on a January 2026 review. However, Nepali officials claimed that further improvements had been made on those six partially implemented items since January.

On Friday, the FATF advised Nepal to demonstrate the identification and sanctioning of materially significant illegal Money or Value Transfer Services MVTS/hundi providers, without hindering financial inclusion and increasing capacity and co-ordination of competent authorities to conduct money laundering investigations.

During the Nepal visit, the APG also raised concerns over recent amendments to Nepal’s anti-money laundering laws introduced through an ordinance. The government amended the Anti-Money Laundering Prevention Act to allow the Department of Money Laundering Investigation to probe financial crimes categorised as predicate offences under FATF standards.

In the Kathmandu visit, the APG Deputy Executive Secretary Shannon questioned whether the amendment had been introduced after sufficient consultation with investigating agencies, regulators and prosecutors, and whether the long-term implications had been properly assessed.

Earlier officials had told the Post that the APG delegation questioned the intent behind the ordinance and raised concerns over what it described as weak enforcement efforts.

According to one joint secretary present at the meetings, the delegation criticised authorities for neglecting certain offences during investigations, failing to show urgency in meeting FATF targets, ignoring confiscation and management of criminal assets, weakening investigations through institutional interference, failing to strengthen investigative agencies and neglecting regulation and monitoring in identified high-risk sectors.

On Friday, the FATF advised the Nepal government to demonstrate an increase in money laundering investigation prosecutions as well as measures to identify, trace, restrain, seize, and, where applicable, confiscate proceeds and instrumentalities of crime in line with the risk profile.

Nepal was placed on the FATF’s grey list on February 21, 2025. FATF then provided the country with a detailed action plan, giving Nepal two years to implement the reforms required to exit the list. The two years have been divided into five four-month phases because FATF holds review meetings every four months.

According to the annual report of Nepal Rastra Bank’s Financial Intelligence Unit for the fiscal year 2024-25, reports related to suspicious financial activities increased by more than 30 percent after Nepal was grey-listed.

The report said authorities received 9,565 suspicious transaction reports and suspicious activity reports during the fiscal year, an increase of 30.34 percent compared to the previous year. Nepal had received 7,338 such reports in 2023-24 and 5,335 in 2022-23.

Commercial banks accounted for 7,303 reports, or 76 percent of the total. Development banks submitted 708 reports, finance companies 355, securities brokers 491, payment service operators and related entities 252, insurance companies 244, remittance companies 100, cooperatives 36, casinos two, and microfinance institutions and government agencies one each. Parliament had amended the anti-money laundering law in April 2024 to allow agencies investigating predicate offences to also investigate related money laundering crimes.

Under the revised law, 13 offices related to the Commission for Investigation of Abuse of Authority, the Nepal Police, the Revenue Investigation Department, forest authorities and national parks authorities, among others, were authorised to investigate money laundering cases linked to their jurisdiction.

After the law came into effect, the Department of Money Laundering Investigation was no longer allowed to independently register complaints and investigate such cases unless they related to older cases predating the amendment.

However, on May 1 this year, the government again amended the law through an ordinance, allowing the department to investigate money laundering cases linked to smuggling, customs and tax evasion, securities and commodities market manipulation, insider trading, currency offences, banking and financial crimes, foreign exchange violations and insurance-related offences. Officials said the APG questioned the rationale behind the latest amendment.

Officials also warned that development partners, including the World Bank, the International Monetary Fund and the Asian Development Bank, could reduce financial assistance or impose stricter conditions on lending. Bankers say international transactions are already becoming slower and more expensive due to additional documentation and compliance procedures. Analysts say the grey listing has also increased Nepal’s country risk profile, potentially discouraging foreign direct investment.

Experts say the grey listing will not immediately trigger an economic crisis, but could gradually raise costs in banking, trade and investment while weakening Nepal’s access to international financial systems.