With the skimpy performance of the governments and the state machinery over the last decades, Nepal's odds of exiting the grey list after the stipulated two years remain doubtful
In 2016, Dacher Keltner, a Mexico-born American psychologist propounded the concept of power paradox that appraises how an individual becomes corrupt after gaining power. Dacher's study based on psychological studies and real-world examples reveals that power is often gained through empathy, generosity and fairness. However, after attaining power, the individuals become corrupt and tend to be more self-centered, impulsive and less empathetic.
The power paradox perfectly matches with the behaviour of our current cohort of political leaders and high-ranking executives. The drastic change in the lifestyles of the mainstream political leaders before and after they gained political power justifies this statement. The leaders who once lived modestly have accumulated abundant wealth and adopted lavish lifestyles, a clear outcome of the state-sponsored corruption.
The state-sponsored corruption has severely crippled the already fragile economic environment of the country. This is the obvious reason behind Nepal's Financial Action Task Force (FATF) grey listing. This is not the first time that Nepal has been relegated to this disreputable list. Previously, Nepal was on the FATF grey list from 2008 to 2014. The current FATF grey list marks a crucial period for Nepal, as the country must strengthen and cleanse its financial sector within two years to avoid being further downgraded to blacklist. Currently, North Korea, Iran and Myanmar are in the ignominious FATF black list.
FATF dates back to 1989 when the G7 nations established this forum to develop and implement measures to combat money laundering. Later, in 1997, FATF's inter-governmental body, the Asia-Pacific Group on Money Laundering (APG), was formed with an objective to enhance the enforcement of international standards against money laundering, terrorist financing and the proliferation of weapons of mass destruction in the Asia-Pacific region. APG currently has 42 member countries, including Nepal.
APG regularly conducts a mutual financial evaluation of its member countries. During such evaluation, the APG identified significant weakness in enforcement, investigation and prosecution of financial crimes in Nepal, especially inadequate regulation in high-risk sectors such as cooperatives and real estate. Nepal had received a mandate to cleanse its financial standing in accordance to FATF compliance standards until October 2024. However, Nepal failed to do so. As a result, Nepal was grey listed, making it the only country in South Asia to face this disreputable designation.
The APG has granted Nepal an additional two years to make necessary reforms to emerge out of the grey list. Failing to comply with this directive will dump Nepal down to the FATF black list, a devastating blow to the country's budding economy. Even under the grey list, Nepal is going to face serious financial repercussions, including reduced foreign investment, higher transaction costs in international banking, capital outflows, stricter banking regulations and trade restrictions.
With the skimpy performance of the governments and the state machinery over the last decades, Nepal's odds of exiting the grey list after the stipulated two years remain doubtful. This is strengthened by the fact that Nepal has been consistently ranked very low on the Corruption Perceptions Index, with state-sponsored corruption being the primary driver of ongoing financial instability. For decades, entrenched corruption within government institutions, fueled by political patronage and weak enforcement, has severely undermined governance, economic progress and public trust. The lack of accountability has allowed illicit financial activities to thrive, further jeopardising Nepal's international credibility and economic future.
Aping the corrupt political leadership, the bureaucracy has also failed to function effectively that has rendered the country's governance nearly defunct. The Office of the Attorney General has been selectively granting immunity to politically connected and/or financially sound individuals, shielding them from criminal and civil prosecution even before their cases reach the court's jurisdiction. Likewise, the legislative body, including the House of Representatives and the Upper House, is preoccupied with petty disputes and personal vendettas rather than making necessary laws. The executive branch is equally idle. These factors create the perfect ingredients for bad governance, ultimately fostering widespread financial and judicial corruption, further weakening the nation's institutions and public trust.
The Minister for Communications and Information Technology and government spokesperson, Prithvi Subba Gurung, had recently blamed the previous government's financial irregularities as the primary reason behind Nepal's FATF grey listing, clearly overlooking the fact that his own party was a coalition partner in that very government. Such cheap blame games are not going to help Nepal emerge out of the FATF grey list. Instead, the government should swiftly address the ongoing financial deficiencies, strengthen regulatory frameworks and enhance enforcement against money laundering and financial crimes. This is possible only by a strong commitment to good governance, industrial development, financial reforms, infrastructure improvement and human capital investment.
Nepal must emerge out of the grey list within two years to avoid being blacklisted. The FATF black listing will bring severe long-term consequences for Nepal's economy, international financial standing and global reputation. Time is running out. The government must take urgent and decisive action to improve and cleanse the country's financial status as if there were no tomorrow.
Dr Joshi is a senior scientist and independent opinion maker based in Germany
pushpa.joshi@gmail.com