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Failing on money laundering

A high-level delegation consisting of about two dozen government officials and headed by Nepal Rastra Bank Governor Maha Prasad Adhikari has returned from Canada after attending the Asia Pacific Group (APG) on Money Laundering Annual Meeting held in Vancouver from July 9-14. The APG on Money Laundering is a Financial Action Task Force (FATF)-style regional body. The 39-member FATF leads global action to tackle money laundering, terrorist and proliferation financing and sets international standards for national authorities to effectively follow illicit funds linked to drug trafficking, the illicit arms trade, corruption and cyber fraud. Nine regional bodies, including the APG, form a global network of institutions working in their geographical jurisdictions on anti-money laundering and counter-terrorist financing (AML/CFT). The Nepali delegation seems to have returned with a sense of respite after communicating Nepal’s efforts on AML/CFT.

For the last 15 years, Nepal has faced the constant risk of slipping into the FTAF’s “grey” or “black” list for failing to fulfill compliance in a number of commitments encompassing legislative, institutional and regulatory/supervisory imperatives. The FATF-defined “black list” and “grey list” indicate “high risk” and “increased monitoring” categories of the countries and jurisdictions with regard to AML/CFT. Currently, there are three and 26 countries in the black and gray list categories, respectively. The blacklisted countries are North Korea, Iran and Myanmar.

The actual outcome of the Vancouver meeting whether Nepal escaped the gray list trap or not will only be known in September before the October plenary. But the head of the Nepali delegation, Governor Adhikari, sounded very upbeat upon his return, “For sure we are escaping the September trap. Even if an unfavorable report reaches the FATF before the October plenary, they will provide us a reasonable ‘observation period’ before being relegated to the ‘grey list.'” But that too will only be a temporary breathing space and the risk remains for Nepal as it has failed to take bold steps to enact a number of pending laws, enforce those in place and enhance the supervisory regime in the financial sector.

A retrospective view

Last April, after a face-to-face meeting with Nepali authorities in Kathmandu, the APG had pointed out several deficiencies in Nepal’s compliance with AML/CFT commitments and standards. After an on-site inspection of Nepal’s progress on AML/CFT in December 2022, the APG had submitted a report on “full mutual evaluation” to the Office of the Prime Minister and Council of Ministers (OPMCM) at the end of February. The Department of Money Laundering Investigation is, incidentally, directly under the OPMCM.

The April meeting discussed the third draft of the report. It was then planned that the final report on Nepal would be discussed and adopted at the just concluded Vancouver meeting. The APG plans to publish a full report, perhaps, soon. It is important to note here that a 273-page third draft report was prepared by the APG in July 2011 with a six-point “Recommended Action Plan to Improve Nepal’s AML/CFT System” that incorporated: (i) General, (ii) Legal System and Related Institutional Measures, (iii) Preventive Measures for Financial Institutions, (iv) Preventive Measures—Non-Financial Businesses and Professions, (v) Legal Persons and Arrangements and Non-Profit Organizations, and (vi) National and International Co -operation. The international standards against money laundering and terrorist financing are contained in the 40+9 Recommendations of the FATF.

Nepal was on the FATF’s “grey list” in 2008 owing to a complete lack of AML/CTF related laws and institutional frameworks. The international community was also apprehensive about the circulation of large sums of money looted by the Maoists from banks and individuals during the decade-long insurgency. Nepal narrowly escaped the “black list” in 2012. After the introduction of several laws and the establishment of a Financial Intelligence Unit (FIU) at Nepal Rastra Bank, Nepal was removed from the “grey list” in 2014.

Lack of political will

A clear example of lack of political will to improve the compliance position of Nepal is exhibited in the federal Parliament’s inability to pass the Bill to Amend Some Nepal Acts that sought to amend at least 15 related laws. They included the Assets Laundering Prevention Act 2008, Human Trafficking and Transportation (Control) Act 2008, Confiscation of Criminal Proceeds Act 2014, Land Revenue Act 1978, Organized Crimes Prevention Act 2014, Criminal Code 2017, Extradition Act 1988 and the Cooperative Act 2017, among others. Immediately after the OPMCM received the report, the government had mooted the Bill to Amend Some Nepal Acts to have it ratified through the fast track. But for lack of adequate political backing, and national political consensus, the bill still has not made any headway. Had these laws been updated, Nepal’s case to establish her unwavering commitment to AML/CTF would have been much stronger at all international forums.

Although the gray listing may not have direct draconian consequences as reported by some sections of the media, it signals increased transactional risks in international finance, and key development partners and lenders may factor in the risk associated with the gray list while making decisions to invest in Nepal. It would essentially be tantamount to a comprehensive trust deficit of the state in financial integrity and also mirror the kind of (rogue) regime that governs the country. In addition to the laws that are mired in a protracted legislative process, three major areas that are proving to be too daunting to improve are extradition of suspected criminals, feared parking of illegal income in Nepal’s highly speculative real estate sector, and mobilization of money extracted out of corruption in the public sector. On the institutional side, the FIU is seen as an ineffective entity under the central bank. Duplication of functions and fragmentation of authority among government agencies is a widely perceived phenomenon.

Right from the beginning of Nepal’s efforts to comply with international AML/CTF norms and standards, it has been seen as the sole responsibility of the central bank alone rather than embracing it as a national responsibility led by the government of the day. If the political leadership and the federal Parliament remain impervious as before to such an imminent risk, the last-minute efforts made at the bureaucratic level may buy some time, but the risks will only get compounded over time. The cost borne by the country is bound to be larger than can be calculated in numbers as monetary loss.

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