Nepal has only seven months to exit out of the FATF grey list. Hence, the government has to imply necessary measures to reform Nepal's financial standing in line with the FATF call for action
Recently, the Financial Action Task Force (FATF) plenary meeting held in Paris decided to continue Nepal's grey list due to Nepal's inability to cleanse its financial standing. Before that, a high-level delegation from the Asia-Pacific Group on Money Laundering (APG), an associate member of the FATF, led by Deputy Executive Secretary David Shannon, visited Nepal in mid-May 2026 to assess Nepal's progress towards anti-money-laundering, counter-terrorist financing, and proliferation financing frameworks. It was understood that the delegation was dissatisfied with Nepal's progress in implementing these financial reforms and had therefore decided to continue the country on the grey listing.
Nepal was degraded to FATF grey list during its plenary meeting held in Paris in February 2025. During the meeting, Nepal was given a two-year timeframe to make necessary reforms in the financial sector. As a follow-up, Nepal's status was reviewed exactly one year later, earlier in February this year, at the FATF plenary meeting held in Mexico City. The review, however, resulted in Nepal remaining on the grey list.
The two-year timeframe given to Nepal in February 2025 was only a reference timeline. If Nepal had executed the necessary measures against anti-money-laundering and counter-terrorist financing by February 2025, Nepal would have exited out of the grey list during the FAFT's Mexico City plenary meeting. Unfortunately, even after one and a half years on the grey list by now, Nepal has been unable to meet the FATF line of action. Hence, the country now appears to be edging dangerously closer to the FATF's infamous blacklist.
During the FATF grey listing in February 2025, the coalition government of the Communist Party of Nepal (UML) and Nepali Congress was uncontrollably jeopardising Nepal's economy. Consequently, the government was toppled by the violent September Gen-Z rebellion. The Gen Z movement was reportedly sparked by widespread public anger over persistent state-sponsored corruption, nepotism, and the government's increasingly autocratic behaviour.
Following the Gen-Z movement, former chief justice Sushila Karki was appointed the prime minister. Despite the extra-constitutional appointment of PM Karki, the government was expected to promote good governance and meritocracy while restoring Nepal's financial credibility. However, the Karki government was also unable to improve Nepal's financial standing. Over that, the then finance minister Rameshwar Khanal himself was reported to be associated with some financial misdoings during his tenure. In addition, through the Attorney General (AG), the government initiated efforts to withdraw the impending judicial proceedings against Rastriya Swatantra Party (RSP) Chairman Rabi Lamichhane on charges of money-laundering and organised-crime. The AG herself was also accused of various ethical improprieties during her tenure. Overall, the interim government appeared to have a single overriding objective – to hold elections on March 5. Other matters of governance seemed to have been relegated to the background.
Following the federal elections held in March, the RSP, led by its senior leader Balendra Shah, formed a government with almost two-thirds majority. The government formed on the background of the violent Gen-Z movement was expected to reform Nepal's all-round standing, including the financial sector. During the pre-election campaign, RSP leaders had promised to reform Nepal and usher in good governance. However, after grabbing the statutory power, the government seems to be aping the bad example of its predecessors. The government seems to be deliberately detaining selected individuals without adequate investigation, and hence, the detainees – many of them alleged blatant corrupts – are being acquitted by the judiciary. In addition, financial offenders with connections to those in power appear to be receiving preferential treatment, while their alleged misconduct remains largely uninvestigated.
The government's most bizarre and self-defeating decision – one that could further jeopardise Nepal's efforts to exit the FATF grey list – was to acquit Lamichhane and his associates, including G. B. Rai and Chhabilal Joshi, from pending money-laundering and organised-crime charges through administrative decisions. As a large section of people were frustrated by the misdoings of the leaders of the traditional political parties over the last three decades, Lamichhane has dubiously received people's support. Despite his alleged involvement in several moral, criminal, and financial misdoings, Lamichhane miraculously established a political party that has secured almost two-thirds majority within four years of establishment.
The people might be exhilarated to see their leader being acquitted from pending criminal charges, but the international community, including the FATF, must be watching these developments closely. Until proven guilty, Lamichhane might be innocent and the charges against him might be bogus. However, the manner in which he secured his acquittal is far from ideal, as criminal charges should be resolved through due judicial process rather than administrative intervention. Hence, Lamichhane's extra-judicial acquittal from the money-laundering and organised-crime charges might work against Nepal's removal from the FATF grey list.
Nepal has only seven months to exit out of the FATF grey list. Hence, the government has to imply necessary measures to reform Nepal's financial standing in line with the FATF call for action. Instead, the government is jeopardising the overall economic status by showing leniency towards selected sub-judice high-profile money-laundering and organised-crime charges associated with high-profile individuals. In addition, members of PM Balendra Shah's inner circle have been accused of involvement in alleged illicit financial activities. If the government fails to take immediate action against such activities, Nepal's placement on the FATF blacklist could become a distinct possibility.
Dr Joshi is a senior scientist and independent opinion maker based in Germany
pushpa.joshi@gmail.com