Nepal has once again been placed on the Financial Action Task Force (FATF) grey list, a development that could trigger significant financial and economic implications for both Nepal and its close trading partner, India.
What Happened and Why ?
The move, announced during FATF’s plenary in February 2025, came after Nepal failed to implement key reforms to strengthen its anti-money laundering (AML) and counter-terrorism financing (CFT) mechanisms. While the greylisting is not a formal sanction, it signals a high-risk environment for international financial flows and investments involving Nepal.
The FATF’s assessment revealed that Nepal had completed less than half of the recommended actions required to establish a robust AML/CFT regime. While legislative amendments had been introduced, their enforcement remained patchy. Weak oversight in sectors like real estate, cooperatives, casinos, and informal money transfer systems left gaps that could be exploited for money laundering and illicit cross-border flows. This vulnerability was exacerbated by Nepal’s open border with India and a large informal economy.
The greylisting immediately impacts investor perception. Global investors and financial institutions view greylisted countries as higher risk, prompting many to reassess or withdraw their financial exposure. For Nepal, this could mean a slowdown in foreign direct investment and heightened scrutiny on its banking sector.
International financial transactions, including remittances and trade-related payments, are now subject to additional due diligence by global correspondent banks. These frictions are likely to drive up transaction costs and delay trade flows.
FATF Slams Pakistan Over Hidden Missile Shipments – Will India Push for Greylisting?
The financial sector in Nepal faces increased pressure to meet international compliance standards. Nepali banks will likely find it harder to maintain relationships with international partners, especially in U.S. dollars or euros. The deterioration in correspondent banking ties could restrict the country’s ability to import goods, issue letters of credit, or access external development financing. In a country heavily dependent on remittances from abroad, even small disruptions in remittance flows could dampen household consumption and domestic demand.
Implications for India
The implications for India, as Nepal’s largest trading partner and neighbor, are equally important. India and Nepal share an open border, and cross-border trade exceeds several billion dollars annually. Indian exporters may now encounter delays in receiving payments due to enhanced compliance procedures faced by Nepali importers. The banking systems in both countries will need to coordinate more intensively to ensure trade settlements proceed smoothly under the new risk framework.
Indian banks with exposure to Nepal will also be reviewing their risk mitigation strategies. Institutions with operational ties—such as those managing trade finance, correspondent accounts, or bilateral development projects—must now incorporate stricter transaction monitoring and risk assessments for dealings with Nepalese entities. This creates an additional administrative and compliance burden, potentially slowing down financial collaboration between the two countries.
Another pressing concern is the possible increase in informal transactions. Historically, both countries have dealt with unregulated networks like hundi and hawala to move money across borders. As the formal banking sector tightens controls, there’s a risk that more transactions shift underground. This shift would not only make AML oversight more difficult but could also provide a channel for black money and tax evasion, impacting India’s financial surveillance mechanisms.
Philippines Nears Grey List Exit Following Strong FATF Review
Greylisting Impact on Trade
From a trade standpoint, sectors such as agriculture, pharmaceuticals, and consumer goods may be particularly affected, as they rely on a seamless payment infrastructure between Indian exporters and Nepali buyers. Any breakdown or delay in that system can lead to supply chain disruptions and loss of market competitiveness. Small and medium enterprises on both sides of the border, which lack the compliance infrastructure of larger firms, are likely to be disproportionately affected.
There’s also a development finance dimension to consider. India is a significant investor in Nepal’s infrastructure and hydropower sectors. With Nepal now under heightened financial scrutiny, Indian firms and development agencies will need to perform deeper due diligence before disbursing funds or partnering with local contractors. Projects may face delays due to additional vetting requirements or concerns about fund misuse.
Impact on Remittances
Nepal’s reliance on remittances also has implications for India. Thousands of Nepali citizens live and work in India, sending money home regularly. Under greylist conditions, remittance channels through banks and money transfer operators are likely to be monitored more closely. This might lead to delays or higher transfer fees, potentially encouraging a shift toward unregulated cash-based systems that increase the risk of smuggling or counterfeit currency circulation.
💥 Deal of the decade? Trump slaps 19% tariff on Philippines—U.S. exports get free pass
In the long run, Nepal may seek increased support from India in navigating the greylisting challenges. India’s own financial systems are closely monitored and rated highly by FATF. Technical assistance from Indian regulators, banks, and compliance bodies could help Nepal improve its monitoring frameworks and exit the grey list faster. Joint efforts in training, data sharing, and enforcement could foster greater financial resilience in the region.
However, until Nepal achieves measurable progress in its FATF action plan, India must manage the spillover effects carefully. The greylisting is a wake-up call to both governments that financial integrity is not just a domestic issue but a cross-border one with real economic costs. A cautious, yet cooperative approach will be critical in navigating the months ahead.
