The Financial Action Task Force (FATF) is an inter-governmental body established in 1989 to combat money laundering (ML), terrorist financing (TF), and proliferation financing (PF). It sets  global standards and monitors countries’ implementation to safeguard the international financial system.

FATF maintains two primary lists: the Grey List, which includes jurisdictions with strategic Anti-Money Laundering and Countering the Financing of Terrorism (AML/CFT) deficiencies that are actively working to address them under enhanced monitoring; and the Black List, which identifies high-risk jurisdictions with serious, unresolved deficiencies that pose significant threats to the global financial system.

FATF Plenary Meeting held in Paris from February 17–21, 2025, officially placed Nepal on the Grey List due to strategic deficiencies in its AML/CFT regime. This marks Nepal’s second listing, following a prior grey list status from 2010 to 2014.

A country is placed on the Grey List based on the findings of mutual evaluations, which assess both technical compliance with FATF’s 40 Recommendations and the effectiveness of its AML/CFT measures across 11 Immediate Outcomes.

Nepal’s mutual evaluation revealed significant weaknesses in effectiveness. Out of the 11 Immediate Outcomes (IOs) assessed, Nepal received low ratings in 7 areas and moderate ratings in 4, with no rating of substantial or high effectiveness.

Alongside effectiveness, the technical compliance was also assessed against the FATF’s 40 Recommendations. Nepal received 5 compliant, 16 largely compliant, 16 partially compliant, and 3 non-compliant ratings.

According to Asia/Pacific Group on Money Laundering (APG) Mutual Evaluation Procedures, 2019, the expedited enhanced follow-up category applies if a country has (i) 10 or more partially/non-compliant ratings among 13 key recommendations, or (ii) low or moderate effectiveness in 9 or more of the 11 immediate outcomes.

Nepal was placed under expedited enhanced follow-up, the highest level of FATF/APG monitoring, due to serious effectiveness gaps. Nepal met the second threshold, with low or moderate ratings across all 11 immediate outcomes.

To exit the Gray List, Nepal must implement the FATF-approved seven-point action plan, which focuses on addressing gaps in understanding ML/TF risks, improving supervision, enhancing investigation and prosecution capacity, strengthening asset recovery, and ensuring compliance with financial sanctions.

Nepal has committed to completing this action plan within a two-year timeframe, aiming for substantial progress by January 2027. Failure to meet these goals could have serious repercussions, including the risk of falling into the FATF Black List.

Unlike Nepal’s previous grey list exit in 2014, which focused on legal reforms, the current exit requires effective implementation of AML/CFT measures. This approach emphasizes long-term compliance over short-term fixes.