Law

Under the Banks and Financial Institutions Act, 2073 (BAFIA) and NRB directives, Nepal Rastra Bank may refuse prior approval for incorporating a bank or financial institution, or for opening a branch office of a foreign bank or financial institution, in the following circumstances:

1. Inadequate capital: the minimum paid-up capital prescribed by NRB is not met, or the source of capital is not lawful and reliable.
2. Unfit promoters, shareholders or directors: they lack the prescribed qualifications, or have been involved in financial irregularities, blacklisting or criminal offences.
3. Weak promoter institution: a promoter that is itself a bank or financial institution fails to meet capital adequacy and prudential norms.
4. Unrealistic business plan: the feasibility study or financial projections are unrealistic, or the institution is unlikely to operate soundly.
5. Inadequate infrastructure and management: no suitable organisational structure, qualified management, internal control system or office premises.
6. Non-conformity with law: the application, memorandum and articles of association or other documents do not comply with the Act, Rules or NRB directives.
7. Risk to the financial system: approval would harm the stability and credibility of the financial system, healthy competition or depositors' interests.
8. Incomplete or false information: the prescribed documents are not submitted, or false or misleading information is given.
9. Failure to meet conditions on time: the applicant does not fulfil the conditions set by NRB within the given period.
10. Foreign branch concerns: for a foreign institution's branch, the home-country regulator does not give consent or adequate supervision, or the parent is financially weak.

Duties of an Importer Making Payment in Foreign Exchange for Imports

Under the Foreign Exchange (Regulation) Act, 2019 (1962) and the directives of Nepal Rastra Bank, an importer who makes payment in foreign exchange for imports must fulfil the following duties:

1. Obtain an import licence / prior approval: The importer must obtain the necessary import licence or approval from the concerned authority (Ministry of Industry, Commerce and Supplies / Department of Commerce) before arranging foreign exchange payment.

2. Open an L/C or arrange remittance through an authorised bank: Payment in foreign exchange must be made only through a bank authorised to deal in foreign exchange (Class "A" commercial bank), either by opening a Letter of Credit or by other approved modes of remittance. Payment through illegal channels (Hundi) is strictly prohibited.

3. Submit genuine documents: The importer must submit the proforma invoice, purchase order, L/C application, commercial invoice, bill of lading/airway bill, packing list, certificate of origin and other supporting documents as required by the bank and NRB.

4. Furnish declaration of foreign exchange: A declaration of the source and use of foreign exchange must be filed, and the purpose of payment must be stated truthfully.

5. Complete import within the stipulated period: The goods must be imported within the period specified in the L/C or as prescribed by NRB, and the importer must ensure that the value, quantity and quality of goods match the documents.

6. Submit evidence of import (customs documents): After the goods arrive, the importer must submit the customs declaration/pass (Pragyapan Patra) and other proof of actual import to the bank within the prescribed time.

7. Surrender/return unused foreign exchange: Any foreign exchange remaining unutilised must be surrendered to the authorised bank or returned within the prescribed period.

8. Comply with NRB directives: The importer must maintain proper accounts, allow inspection and audit by NRB, and comply with all circulars and directives relating to foreign exchange transactions.

9. Pay duties, taxes and charges: The importer must pay all applicable customs duty, VAT and other charges to the Government of Nepal.

10. Avoid misdeclaration and misuse: False declaration, over-invoicing, under-invoicing or diversion of imported goods is punishable under the Act.

In short, the importer must ensure that every foreign exchange payment is genuine, made through the banking channel, supported by authentic documents, and followed by actual importation of the goods with full compliance with NRB rules.

The Bank and Financial Institution Merger and Acquisition Bylaws, 2073, issued by Nepal Rastra Bank under the Banks and Financial Institutions Act, 2073, aim to:

1. Strengthen the financial system by consolidating small, weak and scattered institutions into strong, stable and trustworthy ones.
2. Raise the capital base and financial capacity of banks and financial institutions.
3. Make regulation and supervision effective by reducing the number of institutions NRB must oversee.
4. Widen access to services through stronger institutions with a larger network.
5. Protect stakeholders: safeguard the interests of depositors, shareholders, employees and other stakeholders.
6. Provide a clear legal and procedural framework for merger and acquisition, including valuation, share-exchange ratio, employee adjustment and NRB approval.
7. Promote healthy competition, efficiency and productivity in the banking sector.
8. Support financial stability and overall economic development.

Money Laundering

Money laundering is the process of concealing the true source, ownership or destination of money obtained from illegal activities (such as corruption, tax evasion, drug trafficking, human trafficking, smuggling, fraud and organised crime) so that the "dirty" money appears to be legally earned. It generally passes through three stages:

1. Placement – illegal cash is introduced into the financial system (e.g. deposited in banks, buying assets).
2. Layering – a series of transactions (transfers, conversions, shell companies) is made to hide the trail.
3. Integration – the laundered money is returned to the economy as apparently legitimate income or investment.

In Nepal, money laundering is controlled mainly by the Prevention of Money Laundering and Promotion of Good Governance Act, 2064, the Financial Information Unit (FIU-Nepal), the Department of Money Laundering Investigation and the National Coordination Committee under the National Planning Commission.

Reasons behind Nepal falling in the FATF Grey List

Nepal was placed in the FATF "Grey List" (jurisdictions under increased monitoring) in February 2020, mainly due to:

1. Weak enforcement of existing laws – laws existed but investigation, prosecution and conviction of money laundering cases were very few.
2. Inadequate supervision of high-risk sectors – real estate, cooperatives, casinos, gold and jewellery dealers, and money remitters were poorly monitored.
3. Failure to meet FATF action plan deadlines – Nepal could not fully implement the 15-point action plan within the given time.
4. Weak customer due diligence (CDD) – banks and financial institutions did not properly identify beneficial owners and report suspicious transactions.
5. Poor inter-agency coordination – FIU-Nepal, police, customs, revenue offices and the judiciary worked in isolation.
6. Low conviction rate – cases filed were delayed in courts, giving the impression of impunity.
7. Large informal economy and cash-based transactions – made tracing of illegal money difficult.
8. Political instability and transitional justice issues – diverted attention from financial governance.

Ways to exit from the FATF Grey List

1. Full implementation of the FATF action plan – complete all pending items within the agreed timeline.
2. Strengthen legal and institutional framework – amend laws to meet FATF standards on beneficial ownership, targeted financial sanctions and non-profit organisations.
3. Effective supervision of high-risk sectors – bring real estate, cooperatives, casinos, gold traders and remittance companies under strict reporting.
4. Increase investigations, prosecutions and convictions – ensure that money laundering cases end in punishment, not just filing.
5. Strengthen FIU-Nepal – give it adequate manpower, technology and autonomy to collect and analyse suspicious transaction reports (STRs).
6. Improve inter-agency coordination – regular joint meetings and information sharing among FIU, police, customs, IRD, courts and regulators.
7. Enhance customer due diligence and record keeping – enforce know-your-customer (KYC) and beneficial ownership rules in all financial institutions.
8. Promote digital payments and reduce cash transactions – expand electronic banking to reduce the cash-based informal economy.
9. Capacity building and training – train investigators, prosecutors and judges on financial crime.
10. International cooperation – exchange information with foreign FIUs and comply with UN Security Council resolutions.
11. Regular national risk assessment – identify and address emerging money laundering and terrorist financing risks.
12. Political commitment and good governance – ensure sustained political will and accountability at the highest level.

With these measures, Nepal completed most of its action plan and was removed from the FATF Grey List in February 2023, though continued vigilance is needed to avoid re-listing.