Money laundering is moving of assets derived from an illegal act -including corruption - into the legitimate economy through a series of financial transactions aimed at disguising the origins of the funds. Nepal is facing an array of money laundering threats, including those resulting from corruption, tax evasion, narcotics trafficking, smuggling, fraud and human trafficking.
Nepal’s fat informal sector and illegal cross border businesses offer enormous opportunities for money laundering as well. The Global Financial Integrity’s study shows that Nepal has lost US$ 9.1 billion from 1990 to 2008 as illicit financial flows triggered by corruption, informal trade, smuggling and counterfeiting. This is nearly eight times more than the official development assistance Nepal received during this period.
Growing vulnerability
Nepal’s vulnerability to illicit financial flows, tax evasion, corruption and money laundering has increased over the years. For the last two years, Nepal has been under huge pressure from the Financial Action Task Force (FATF), an inter-governmental body responsible for setting standards on anti-money laundering, to improve and tighten its Anti-Money Laundering (AML) regime. Endorsed by over 180 countries, the FATF recommendations are universally recognised standards for anti-money laundering and countering the financing of terrorism as well as the financing of proliferation of weapons of mass destruction. Last year, FATF had categorised Nepal among 20 countries as seriously deficient in combatting money laundering and terrorist financing, alleging that Nepal posed a risk to the international financial system.
Nepal had narrowly escaped being blacklisted during the FATF’s plenary in Paris in February because of intense last-minute efforts made across the diplomatic circles within and outside the country. But, even within the extended timeframe of four months, Nepal has not been able to endorse three crucial bills on anti-money laundering - Bill on Controlling Organised Crime, Bill on Extradition and Bill on Mutual Legal Assistance - due to strong objection from the hardliners of the UCPN-Maoist. The unexpected dissolution of the Constituent Assembly, which was also functioning as the Legislature-Parliament, has raised a fresh doubt over Nepal’s ability to meet the June deadline.
As in the past, Nepal also sought leniency from FATF’s International Cooperation Review Group (ICRG) meeting in Delhi earlier this month, citing the country’s critical political situation. But it remains to be seen what position FATF will take on Nepal in its plenary scheduled for June. What the ICRG recommends to the FATF will ultimately shape up its official position on Nepal during the meeting in Rome next month. But repeated failures to endorse the bills and yet again not fully complying with the FATF’s 40+9 recommendations has a higher possibility for this anti-money laundering body to act tougher on Nepal this time. To avoid international humiliation and minimise the adverse impact of being blacklisted, there is only one option of bringing these pending laws in the form of ordinances.
Avoid blacklisting
Being blacklisted will hit the financial sector and our already troubled economy hard. Nepali banks may lose credibility, and imports will be affected as foreign banks might refuse to accept letters of credits. Even if foreign banks hold transactions with Nepali banks, business will be costlier. Seeking foreign aid and investment would also not be easy as international donors might impose more stringent conditions for aid to a blacklisted country. The movement of Nepali nationals, especially the migrant workers, and their remittances will be under scrutiny.
Foreign banks may refuse to open up accounts of Nepali diplomatic missions abroad. Only a couple of months ago, the Chase Bank in New York had closed the bank accounts of the Nepali diplomatic mission at the request of the FATF. What could be more humiliating when foreign banks start closing accounts of Nepalese diplomatic missions abroad after it is blacklisted?
Both internally and externally, there might be more such closures, sanctions and isolation in store for Nepal. Thus, it is impor¬tant that in the aftermath of the Constituent Assembly dissolution, the three pending bills must be brought through ordinances to improve its AML regime. But our fight against money laundering also needs to exclusively focus on some institutional and legal reforms. A Money Laundering Investigation Department (MLID) and Financial Information Unit (FIU) have been already set up.
Though the MLID has been given extensive jurisdiction, with public post holders, office bearers of constitutional bodies, judiciary, army, non-government organisations and private sector falling within its ambit, its performance is lackadaisical due to lack of required investigative capability, prosecutorial strength, adequate resources and competent staff.
Data show that none of the cases filed or arrests made until now in connection with money laundering have been initiated by the MLID or FIU. The MLID is not an autonomous entity, and placing it within the Ministry of Finance questions its independence and provides the ground for political meddling. Thus, giving it the status of a statutory agency or constitutional commission by creating a pool of technical experts and judicial investigators having knowledge on electronic transfers, banking and financial system can be a great leap forward toward curbing the crimes of money laundering.
Emergence of a global AML regime in the last two decades has offered new opportunities for countries like Nepal to de¬ter and detect corruption and to recover illicit assets stashed abroad. But, in order to materialise these opportunities, Nepal needs to improve its AML system by encouraging collaboration between the MLID, FIU, Special Court and anti-graft agencies.
It also requires harmonising the domestic laws on predicate offences and improving access to information on beneficiary ownership as a part of its strengthened AML regime to curb the flow of dirty money and crimes related to it.
(The writer can be reached at pbhattarai2001@gmail.com)
