Nepal: Off the FATF Grey List and Embracing Automation

The country of Nepal has historically been seen as an easy target for money launderers and financial crime, mainly due to its long, porous border with India and cash-dominant economy.

Additionally, relatively weak financial controls and a destabilised economic system – a legacy of the decade of civil unrest that began in 1996 – added to Nepal’s vulnerability.

The international financial community has long recognised Nepal’s deficiencies in anti-money laundering (AML) and counter terrorism financing (CFT) measures.

In 2005, an assessment by the Asia Pacific Group on Money Laundering (APG) found that Nepal did not fully meet any of the 49 AML standards set by the Financial Action Task Force (FATF), the inter-governmental body set up to combat money laundering worldwide. In 2008, Nepal was placed on the FATF’s “Grey List,” marking it as a territory that was deemed a “safe haven” for money launderers, and only narrowly avoided moving to the FATF’s Blacklist (of countries identified as uncooperative in the international fight against money laundering) in 2012.

A place on the FATF Grey List has serious implications for a nation, including the possibility of economic sanctions from international financial institutions, such as the World Bank and International Monetary Fund. If Nepal had moved to the Black List – the impact could have been catastrophic. The correspondent banking system would almost certainly have collapsed, and legitimate international trade would have become almost impossible for a nation that imports 80% of its goods.

Over the past decade, however, the country has made huge strides in strengthening the internationally agreed controls designed to combat money laundering worldwide. In doing so, Nepal has positioned itself to take full advantage of the globalised trade and financial market.

Back from the brink

The work carried out by the Financial Information Unit (FIU), Nepal Rastra Bank, and the Ministry of Finance to improve the country’s AML/CTF measures has pulled Nepal back from the brink and helped it take its place on the international financial stage.

A five-stage plan has significantly improved Nepal’s ability to combat money laundering and terrorism financing:

  • Develop a national AML strategy
  • Draft the necessary AML laws
  • Strengthen the FIU
  • Develop a risk-based approach to supervision
  • Encourage financial institutions to invest in Financial Crime Compliance (FCC) technology.

It has not been an easy transition. An evaluation report by the APG in 2011 found a number of continuing deficiencies in Nepal’s AML/CFT measures.

“Customer identification and verification was a weakness in Nepal’s preventative measures,” it said, adding that while the country had implemented preventative measures through its Asset (Money) Laundering Prevention Rules 2008 (ALPA) and a number of other sector-specific FIU Directives, a lack of systematic monitoring of compliance through the supervisory system meant that it was not possible to establish whether the measures were effective.

“We have been working with Nepal for more than ten years now. Nepal’s journey has been challenging, but the dedication from the financial community to implement change driven by a supportive regulator has been dramatic, and its movement off the Grey List is testament to that,” said Jonathan Rogerson, Sales Director – APAC South at Accuity.

“Is there more work to be done? Of course,” he added. “But what is really encouraging is the growing ‘culture of compliance’ from front to back and top to bottom in organisations. In many of our conversations now, there is clear focus on the three pillars of People, Process and Technology – which from our experience are integral to long-term success and the evolution of an outcome-focused, risk-based approach. We are proud to support Nepal in this ongoing journey and excited for what it can achieve in the next ten years.”

More work to be done

The APG’s next evaluation report for Nepal is due to take place in 2020/21 and so far, the signs are promising.

Nepal was removed from the Grey list in 2014, when the FATF announced that “significant progress in improving the AML/CFT regime” had been made, although the catastrophic earthquake of 2015 did slow its progress. While it is clear that huge improvements have been achieved, there is still much work to be done.

The ALPA Act and its 2014 amendments, and the Unified Directives issued by Rastra Bank, have introduced AML requirements that are in line with international standards, such as a requirement to establish the identity of customers (including politically exposed persons (PEPs) and beneficial owners of companies), transaction monitoring, risk assessment, reporting of suspicious / high-volume transactions and applying risk based approach both in AML/CFT compliance and reporting.

Nepal’ FIU and Department of cooperative (the regulator of saving and credit cooperatives) has also taken steps to extend the AML/CFT requirements to Nepal’s approximately 14,000 savings and credit cooperatives, which account for around 10% of the country’s transactions.

Dr Chiranjibi Nepal, Governor of Rastra Bank, said at an AML conference earlier this year that the country has “a lot to do for the APG’s upcoming evaluation in 2020, where greater focus will be on the effectiveness of our implementation.” He added that banks and financial institutions “play an important role in deterring, as well as detecting money laundering and activities related to terrorism financing. Compliance with AML/CFT law and regulations require high commitments with non-compliance being seriously dealt with.”

Dr Chiranjibi also said that financial institutions “must adopt a strategic approach and comply with KYC regulations in a risk-based approach, with real-time transaction monitoring and transaction analysis.”

Automation is key

Financial institutions and non-financial businesses around the world are making use of increasingly sophisticated automated screening software in order to effectively and efficiently meet their AML/CFT obligations.

Up-take of these systems in Nepal, though, has lagged. According to a 2017 survey by Accuity, 76% of Nepalese institutions taking part said their biggest challenge was insufficient screening, because of a lack of automation. While the vast majority of institutions in Nepal are carrying out screening in some form – 82% said they cover PEP data and 75% cover sanctions lists, for example – until very recently much of that screening has been carried out manually or by using basic internal systems.

It is clear that Nepal’s institutions have unique challenges that must be overcome, such as lack of digitised data, or having any data on some customers. In fact, 34% of those taking part in the Accuity survey said poor quality data was a barrier to effective screening.

Institutions, however, are making concerted efforts to rectify data deficiencies, which must be applauded.

Reaching new heights

Nepal will continue its ascent towards international best practices, including the intelligent use of verified databases and tools.

Regulators and international AML bodies will continue to encourage improvements, especially as international banks ramp up pressures on correspondent networks to improve and automate screening processes.

Digitised data and automated screening has become the accepted best practice in the international fight against money laundering and financial crime. It is these tools that will help organizations in Nepal complete rapid and effective screening against comprehensive and up-to-date databases, without delaying the customer journey, and help maintain its credibility in the financial ecosystem.

More work to be done

“We have delivered on the compliance recommendations since 2011, which resulted in Nepal exiting from the Grey List. At this stage we now have a legal and institutional landscape set up, regulators and law enforcement in place, and everything is working well together for outcome-based compliance. We now have a new AML/CFT five-year strategy (2019-24) in place, multinational technical assistance, strengthened institutions, penalties for non-compliance, and we have seen that banks are sending reports of excellent quality to the FIU.”

“Compliance of the DNFBPs sector has been prioritized and stringent regulation and compliance are also in the process of full enforcement. In this way, Nepal is moving in the right direction towards meeting the revised FATF 40 standards and is now preparing for the third round of mutual evaluation.”

Ramu Paudel
Head – Financial Intelligence Unit, Nepal

Automation is key

“Nepal is a great example to the developing world in that respect. Many institutions are setting up automated systems for KYC, sanctions screening and reporting, and the FIU and law enforcement agencies are doing the same.”

Ramu Paudel
Head – Financial Intelligence Unit, Nepal

“Himalayan Bank has always strived to be fully compliant when it comes to AML/KYC. It is this thinking that led the bank to be associated with Accuity in 2015, when it implemented the Accuity financial crime screening solution along with its comprehensive data on PEPs, sanction lists, negative news as well as enforcement data. Using the Firco screening solution generated a lot of trust in our correspondents as well as the regulator, and helped the bank significantly automate and improve the screening processes. Being trusted by many banks throughout Nepal, but also across the globe, is testimony to Accuity and its market-leading solutions in the area of financial crime screening.”

Mr. Ashoke SJB Rana
Chief Executive Officer of Himalayan Bank