By Chandan Gupta Rauniyar and Sean Parker, July 28, 2025
As Canada faces scrutiny from an international body that combats money laundering, there may be lessons it can learn from an unlikely source: Nepal.
The small South Asian country has its share of experience being examined by the Financial Action Task Force (FATF) – a body created by the G7 in 1989 which serves as a global watchdog for money laundering and terrorist financing.
Canada – a G7 member and one of the world’s most economically stable countries – is now facing serious scrutiny from the FATF. Presently, the task force is undertaking a Mutual Evaluation (ME) of Canada – a peer review process in which FATF members assess another member country to determine if it has an effective framework to prevent abuse of its financial system.
The evaluation’s timing couldn’t be worse. One of Canada’s largest financial institutions, Toronto-Dominion Bank (TD), has been rocked by scandal. The bank recently pleaded guilty to laundering fentanyl proceeds through its US banking divisions. US regulators also cited widespread failures in TD’s compliance framework, raising serious concerns about the bank’s internal controls and oversight.
These developments raise difficult questions about Canada’s own financial crime oversight. In particular, FINTRAC, the federal anti-money laundering regulator, has come under fire for its perceived failure to enforce effective compliance among Canadian reporting entities, especially in light of the TD revelations.
How these failures will impact Canada’s FATF evaluation remains to be seen. The report is expected next year.
In the meantime, Nepal may offer lessons. It’s been placed not once, but twice, on the FATF’s list of “Jurisdictions under Increased Monitoring” – also known as the grey list. The FATF describes counties on this list as ones that are “actively working” with it to address “strategic deficiencies in their regimes to counter money laundering, terrorist financing, and proliferation financing.” Criteria to be placed on the list includes that the country has made a commitment to resolve issues on a set timeframe, subject to increased monitoring.
Nepal has navigated these pressures before, and implemented the reforms required to return to FATF compliance. If anything, Nepal knows what it takes to get off the grey list.
Nepal grey-listed again: What went wrong
Nepal is sandwiched between India and China – a crossroads between two vastly different cultures and economic giants. It was recently returned to the FATF grey list, after it first received this undesirable classification in 2008.
Nepal underwent its FATF assessment in December 2023, with the final report issued in January 2024, and a follow-up report issued June 2024. Following the February 2025 FATF meeting, Nepal was officially placed on the grey list. While a subsequent follow-up showed technical improvements on nine FATF recommendations, Nepal remained fully compliant with only five of the 40 recommendations. The more decisive factor, however, was its performance on Effectiveness/Immediate Outcomes (IOs): Nepal was deemed ineffective in 11 of the IOs, the core reason for its grey-listing.
Economic and reputational impacts of grey-listing
Being placed on the grey list can have significant economic and reputational consequences. As of the time of writing, 25 countries are currently grey-listed.
A white paper written by White & Case found the following issues arise after a grey-listing determination:
- Reduction in the ratio of foreign direct investment to GDP, on average two per cent;
- Other countries are less receptive to receiving payments from grey-listed countries, leading to about a 10-per-cent reduction;
- A large decrease in cross-border liabilities, approximately 16 per cent;
- Decline in capital inflows, on average 7.6 per cent;
- Decline in foreign direct investment inflows of three per cent, portfolio inflows decline by about 2.9 per cent, and investment inflows decline by 3.6 per cent.
The impact of being grey-listed may vary from country to country, influenced by factors such as trade dependence, foreign investment and aid levels, the strength of banking channels, and existing legal frameworks. Generally, grey-listing triggers financial ripple effects across the public and private sectors.
Nepal’s experience offers a clear example of the impact such scrutiny can have on a country’s financial system and regulatory framework. In Nepal’s case, the consequences included disruptions to foreign aid and support, reputational harm, and increased scrutiny of its financial system.
Grey-listed countries often face stricter conditions from institutions like the World Bank and IMF, higher borrowing costs, and reduced bilateral assistance, all of which hinder economic development and funding for essential public programs. For example, in Nepal, banks face increased compliance costs, stricter regulatory oversight, and difficulties maintaining correspondent banking relationships, which in turn restrict access to global markets. These pressures spill into the private sector, where businesses encounter barriers to cross-border transactions, reduced access to credit, and hesitancy from international investors who may perceive the country as high-risk. These issues cause negative outcomes for people and businesses in Nepal.
While Nepal has faced grey-listing before, it is now facing political and social headwinds making it more difficult to make changes. Many of its lawmakers hold stakes in high-risk sectors, with ownership in cooperatives and real estate, resulting in perceived conflicts of interest when it comes to changing or positively impacting the financial crime compliance landscape. FATF’s evolving standards mean that expectations, and the challenges of compliance continue to grow as financial crime evolves.
The reputational damage caused by grey-listing can be long-lasting. The bigger question is can Nepal make the necessary changes to shift the political mindset to put financial crime front and centre, in order to remove itself from the grey list by 2027.
The lag between reform and results
Despite recent reforms, Nepal was still grey-listed, highlighting a key challenge: regulatory changes take time to yield tangible results. This delay in impact could offer a cautionary warning for Canada, which has recently advanced several initiatives, including the creation of a beneficial ownership registry first announced in 2023, the new government’s proposed Stronger Borders Act introduced this spring, and stronger financial crime measures.
Although Nepal has committed to a robust FATF action plan, including increased legislative amendments, the introduction of the Asset (Money) Laundering Prevention Rules, and a multi-year National Strategy and Action Plan, credibility hinges on implementation. The pressure is not only to reform, but to demonstrate measurable progress and implementation, quickly.
Canada may find itself in a similar position. As FATF evaluators look for outcomes, not just intent, the lesson learned from Nepal is clear: structural change must be matched by visible, effective enforcement to avoid reputational and financial fallout.
What Nepal’s grey-listing means for Canada
Canada faces its own year-end FATF examination amid growing scrutiny over its management and oversight of financial crime.
While Canada’s political and economic system is considerably more stable and established – as a founding G7 member and a 150-year-old democracy with relatively low levels of political scandal – this stability does not guarantee immunity from FATF concerns. Nepal’s experience, while occurring in a vastly different political and economic context, offers important lessons.
Nepal has struggled with political instability – including its 2001 royal massacre and its recent democratic transition – alongside perceived political corruption of the government. Despite this, even countries with fragile institutions must meet global standards to maintain access to international financial networks.
For Canada, the challenge lies less in political upheaval and more in addressing systemic weaknesses in regulatory oversight, inter-agency coordination, and enforcement of anti-money laundering (AML) and counter-terrorist financing (CTF) measures.
Like Nepal, which sits next door to China, Canada is also situated next to one of the world’s largest economies: the United States. It’s Canada’s largest trading partner with over $1.3 trillion in annual two-way trade. This proximity creates unique financial crime risks and cross-border enforcement challenges. For example, the United States government recently accused Canada of being a transit point for fentanyl trafficking into the US, highlighting the severity of the opioid crisis on both sides of the border. In response, the Canadian government created a task force to address border security and stem the flow of fentanyl, including a working group to identify fentanyl-related financial activity.
However, the scandal involving TD Bank exposes ongoing vulnerabilities. TD’s US banking division pleaded guilty to laundering fentanyl-related drug money and paid a fine of over $3 billion USD to the US Department of Justice for inadequate compliance controls. Though the misconduct occurred in the US division, the scandal inflicted significant reputational and financial damage on the Canadian bank.
TD Bank has begun to remedy the situation by replacing its CEO and hiring consultants and new staff to rebuild its financial crime risk management program. However, the controversy casts a shadow over Canada’s financial intelligence unit, FINTRAC. TD Bank faced stiff fines and penalties from the US Department of Justice and US financial regulator FINCEN. However, FINTRAC’s comparatively modest fine of just over $9.1 million drew criticism. While differences in legislative frameworks partly explain this gap, the incident highlights the need for stronger enforcement measures in Canada.
Recognizing this, the Canadian government introduced Bill C-2, its proposed Stronger Borders Act, aiming to increase penalties and accountability for reporting entities. These legislative reforms are designed to close regulatory gaps and align Canada more closely with FATF expectations.
The TD scandal and related enforcement shortcomings demonstrate that even well-established financial systems are vulnerable without robust, coordinated oversight. This makes for an instructive counterpoint to Nepal’s grey-listing experience. It shows that political stability and economic strength do not exempt a country from international scrutiny. The playing field is level in that regard. Rather, effective implementation, timely reforms, and a genuine commitment to enforcement are critical to maintaining trust and avoiding reputational and economic fallout.
Canada’s upcoming FATF evaluation is not just a bureaucratic exercise. It’s a pivotal moment, and a test of its financial crime defences. Failure could jeopardize Canada’s standing in the global financial system, restrict access to correspondent banking relationships, and damage investor confidence. To avoid this, Canada must move beyond legislative promises to demonstrable outcomes, proving it can effectively combat money laundering, terrorist financing, and the complex cross-border threats it faces.
Lessons from Nepal and implications for Canada
While FATF has already made its decision regarding Nepal, Canada’s upcoming ME remains highly anticipated.
It’s unlikely that Canada will be grey-listed – such a designation would cause severe economic and reputational damage for a major global economy. However, preliminary discussions are almost certainly underway to address concerns before the report is written. Canada may receive a critical or unfavourable report, serving as a warning from FAFT to strengthen its systems and close compliance gaps.
Nepal’s experience – both its grey-listing and determined efforts to reform – offers a valuable case study for countries like Canada. It stands as a cautionary compliance tale, demonstrating the serious consequences of failing to meet FATF’s evolving standards.
Countries must be prepared with robust legal frameworks, effective enforcement, and transparent oversight to avoid the reputational and financial fallout when the FATF comes knocking.
Chandan Gupta Rauniyar is a seasoned banking professional with more than 17 years experience in the Nepalese banking sector. He presently serves as deputy manager at Siddhartha Bank Limited, and heads its AML/CFT Department. He also plays a key leadership role as coordinator of the AML/CFT Committee at the Nepal Bankers’ Association.
Sean Parker is a compliance leader with AML Consultancy Inc, with well over a decade of experience in financial crime compliance, and a contributor for the Macdonald-Laurier Institute.