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Recently, some members of the House of Representatives of Nepal proposed to ‘turn black money into white’ by paying taxes. This proposal could make it difficult to come out of the Financial Action Task Force (FATF) Grey List. Nepal has also been placed in the list of high-risk third-country jurisdictions of the European Union for money laundering and terrorist financing with eight other countries, which is similar to global watchdog FATF; which has enlisted Nepal to its Grey List. Nepal’s inclusion on the Grey List is the result from its failure to fully implement necessary legal, policy, and structural reforms to combat money laundering and terrorist financing, despite some legislative progress.
On 21st February 2025, the FATF concluded its February Plenary. During this Plenary, the Philippines was removed, and Laos and Nepal were added to its Grey List. FATF is a global leader in efforts against financial crimes such as Money Laundering (ML), Terrorism Financing (TF), and Proliferation Financing (PF). It conducts extensive research on these financial crimes and sets international standards on Anti-Money Laundering (AML), Combatting the Financing of Terrorism (CFT), and Counter Proliferation Financing (CPF). Its primary mandate is to lead and encourage international efforts for the mitigation of ML/TF and PF.
FATF releases a list of “Jurisdictions under Increased Monitoring” colloquially known as the FATF Grey List. This is a list of countries with strategic deficiencies in their AML/CFT/CPF regimes who are actively working with the FATF to address these deficiencies. It maintains a “blacklist” of “High Risk” jurisdictions and a “greylist” of “Jurisdictions Under Increased Monitoring”, and issues updates as countries on High-risk and non-cooperative jurisdictions list have made significant improvements in standards and cooperation. The FATF also issues updates to identify additional jurisdictions that pose Money Laundering/Terrorist Financing risks.
In 2018, Nepal Rastra Bank (NRB), the country’s central bank, revealed a set of findings with serious implications and a number of renowned businesspersons have been involved in bringing billions of FDI from tax haven countries. But no investigation was initiated by the government, neither was any action taken to stop illegal investments. Given this, NRB’s report recommends that laws would have been strictly implemented and institutions established to effectively combat money laundering and corruption before Nepal’s evaluation by the Financial Action Task Force, however due to more deteriorating situations, FATF enlisted Nepal on Grey List.
The Commission for the Investigation of Abuse of Authority (CIAA) in Nepal has extraordinary powers to investigate and file cases related to corruption in the special court, except the policy decisions of the council of ministers, judiciary and the army. Similarly, the Department of Money Laundering Investigation (DMLI) has the authority to investigate and prevent the commission of money laundering as well as the financing and proliferation of terrorism in the country while the Department of Revenue Investigation has been entrusted to discharge the functions and responsibilities under the important Acts of Nepal.
CIAA has the authority to investigate cases against persons holding public office as well as their associates who have indulged in the abuse of authority by way of corruption. Sadly, citing the constitution and law of Nepal, which provide immunity to policy decisions of parliamentarians and lawmakers, it has been conducive to increased instances of corruption. Every decision of the cabinet has been beyond the scope of the CIAA’s investigations. This has only resulted in all kinds of proposals, big and small, being sent to the cabinet, thereby making them immune against investigation. However, all decisions made by the cabinet cannot be regarded as policy decisions which offer this kind of immunity. They must be separated from real policy decisions and be included within investigative parameters. In this regard, as a new and surprising step, the CIAA filed a case in special court against Former PM Madhav Kumar Nepal related to cabinet decision on Patanjali land scam. This was the first case to challenge the highest executive in the competent court related to policy decisions of the cabinet.
Although the Department of Money Laundering Investigation (DMLI) was established to investigate cases related to money laundering , due to weak legal compliance, poor governance and rampant impunity, it has been less effective at money laundering investigations. Similarly, the Department of Revenue Investigation has to be also more aggressive in investigation of revenue fraud and leakages.
However, the government’s plan to merge DMLI and DRI in one could be a new step to investigate more effectively on money laundering and revenue leakages cases. According to an earlier report by FATF, if Nepal’s involvement in money laundering and terrorist financing is not curbed, the country’s credibility for investment will fall by deteriorating its investment climate, limiting opportunities for the expansion of global trade, and affecting its financial stability.
Nepal’s informal or underground or shadow economy is also a cause for Nepal to be listed in FATG Grey List. Nepal has the highest percentage of underground economy in the world. Based on a 2018 study by Medina and Schneider, the average value of Nepal’s shadow economy was at 37.5 percent of the total economy whereas the world average in 2015 based on 158 countries was 27.78 percent.
The scale and volume of the informal economy are on the rise and only a few or negligible cases of revenue investigation and money laundering have been investigated by competent authorities.
The reasons for expansions of underground economy is mostly due to factors associated with the informal nature of Nepal’s economy, the predominance of cash transactions, an open border with India, an unstable political climate, and rampant instances of predicate offences such as corruption, bribery, smuggling, tax evasions, human and drug trafficking, use of counterfeit currency, and, of late, extortion, looting and black money.
The informal economy comprises all currently unregistered economic activities that nevertheless contribute to the officially calculated (or observed) Gross National Product. Additionally, it allows for much of the corruption to go beyond the radar of anti-graft bodies.
Arun Kumar, author of The Black Economy in India, argues that the shadow economy in India is worth almost half the size of India’s official economy. Given Nepal’s open border with India, this has an influence on Nepal’s shadow economy as well.
As money laundering and shadow economic activities are prevalent around the world, it is very difficult to get accurate information about the relationship between corruption and the shadow economy because all individuals engaged in these activities wish not to be identified. According to a 2010 World Bank Policy Paper, in countries where the rule of law is upheld and financed by tax revenues, shadow economies are considerably smaller. A nation’s shadow economy is comparatively larger in the absence of high quality state institutions or benefits.
The CIAA, DMLI, and DRI as well as the Police and other concerned institutions in Nepal must be vigilant and effective in their investigation of illegal financial activities. Moreover, there must be zero unwarranted government interference in these organisations. The World Bank emphasises that the fight against the shadow economy is not all about enforcing laws and punishing offenders, but also about making the formal sector more attractive and changing social norms for paying taxes. Building trust in the government is a key factor in convincing citizens that pay taxes.
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