The hundi (an informal money transfer system) is crippling Nepal's economic framework by bypassing formal banking channels and facilitating the illegal flow of funds into the country
Despite laws and mechanisms in place, Nepal has been placed on the grey list of the Financial Action Task Force (FATF) for the second time since 2008, primarily due to a lack of effective implementation. This development did not happen overnight; there were clear warning signs, yet Nepal failed to take the necessary steps to avert it. The greylisting is not merely a reputational setback but a pressing reminder of the urgent need for systemic reforms to address the vulnerabilities in Nepal's financial system.
In 2025, FATF added Nepal to its grey list due to significant concerns about its inability to effectively combat money laundering and terrorist financing. Key issues include lax enforcement of anti-money laundering (AML) and counter-terrorist financing (CTF) laws, inadequate oversight of high-risk sectors such as real estate and cooperatives, and insufficient monitoring of financial transactions. Nepal has only been able to comply with 21 out of 40 FATF's key recommendations, highlighting a substantial gap.
The greylisting doesn't come with sanctions but a warning for Nepal to implement reforms within a time frame. However, the implications of greylisting are significant as it undermines Nepal's international credibility, increases the cost of doing business and creates hurdles for foreign investment and trade. A 2021 study by the International Monetary Fund (IMF) revealed that grey-listed countries experience an average decline of 7.6 per cent of GDP in capital inflows.
Nepal Rastra Bank spokesperson Ramu Poudel has highlighted practical challenges, such as increased documentation requirements for imports and exports, difficulties in opening bank accounts abroad, and reduced confidence among international investors. Experts like Nar Bahadur Thapa have warned that Nepal's greylisting could further strain its economy, particularly when major donor countries face economic contractions.
If Nepal fails to address the deficiencies identified by FATF, it risks being blacklisted. This would have catastrophic economic consequences, including a potential balance of payments crisis, loss of external reserves and the need for an IMF bailout.
Beyond the economic ramifications, greylisting tarnishes Nepal's international image. Its weak regulatory framework raises concerns about its potential misuse of terror financing and money laundering, undermining Nepal's efforts to position itself as a stable and attractive destination for tourism and investment.
To address these challenges, Nepal must take immediate and decisive action. Nepal needs to focus on seven key tasks to address financial system weaknesses. These include improving anti-money laundering and counter-terrorism financing measures, strengthening oversight of high-risk sectors like banks, cooperatives, casinos and real estate, and cracking down on illegal money transfer systems like hundi. The aim is to ensure effective monitoring and regulation while maintaining legitimate financial access.
These measures are essential, as the hundi (an informal money transfer system) is crippling Nepal's economic framework by bypassing formal banking channels and facilitating the illegal flow of funds into the country. Recent news stories in Nepal have highlighted alarming financial crimes such as tax under-invoicing, tax evasion, fraudulent billing and customs irregularities, with hundi suspected to play a central role in this web of financial misconduct. Moreover, investments without strict scrutiny of their sources pose a significant risk.
Since the origins and destinations of these funds are not rigorously monitored, there is a real possibility that such money could be used to finance terrorist activities within Nepal or abroad.
Corruption is a more significant threat than most external challenges. Weak AML mechanisms enable corrupt individuals to launder their illicit gains and evade prosecution.
Additionally, capital flight is an important issue, as funds are being funneled to tax havens like the Bahamas, where individuals can avoid taxes and legitimise their ill-gotten wealth.
Compounding these concerns is the lack of transparency in cross-border real estate ownership. Despite Nepal and India sharing an open border, it is an open secret in Kathmandu that many elites hold properties in India and Dubai, often through opaque financial transactions. Rather than criminalising such investments, Nepal and India should work towards legalising and regulating cross-border property purchases.
The greylisting is a wake-up call for Nepal's political leadership. It underscores the need for unity and commitment to implement reforms. The government must prioritise this issue, engage with international partners and demonstrate tangible progress before the subsequent FATF evaluation. Failure to do so could result in blacklisting, with dire consequences for Nepal's economy and global standing.
International financial institutions (IFIs) such as the World Bank Group (WBG), International Finance Corporation (IFC), International Monetary Fund (IMF) and Asian Development Bank (ADB) have been actively involved in Nepal for decades. However, their effectiveness in addressing deeper systemic issues like the informal financial system, including the use of "hundi", is questionable.
Nepal's greylisting by FATF is a serious but solvable challenge. It highlights the urgent need for systemic reforms to strengthen the country's financial regulatory framework, combat corruption and restore international confidence. While the road ahead is daunting, it is also an opportunity for Nepal to demonstrate its commitment to good governance and financial integrity. The time for action is now-before the grey list becomes a black mark on Nepal's future.
Rana is the Program Director at The Himalayan Dialogues, and his expertise lies in crisis and knowledge management
