VZCZCXYZ0007
PP RUEHWEB

DE RUEHKT #2998/01 3111128
ZNR UUUUU ZZH
P 071128Z NOV 06
FM AMEMBASSY KATHMANDU
TO RUEHC/SECSTATE WASHDC PRIORITY 3809
INFO RUEHNE/AMEMBASSY NEW DELHI 0460
RUEHKA/AMEMBASSY DHAKA 0367
RUEHIL/AMEMBASSY ISLAMABAD 3204
RUEHLM/AMEMBASSY COLOMBO 5208
RUEHBJ/AMEMBASSY BEIJING 4952
RUEHLO/AMEMBASSY LONDON 4588
RUEATRS/DEPT OF TREASURY WASHINGTON DC

UNCLAS KATHMANDU 002998 
 
SIPDIS 
 
SENSITIVE 
SIPDIS 
 
E.O. 12958: N/A 
TAGS: EFIN KCRM KTFN NP
SUBJECT: 2006-2007 INCSR REPORT, FINANCIAL CRIMES AND 
MONEY LAUNDERING 
 
REF(S): A)STATE 157084 
 
        B)KATHMANDU 1042 
 
¶1. (SBU) This is Post?s 2006-2007 International 
Narcotics Control Strategy Report II, Financial Crimes 
and Money Laundering, per ref A. 
 
Begin Text: 
 
Nepal is not a regional financial center.  There are 
no indications that Nepal is used as an international 
money laundering center.  The Government of Nepal 
(GON) has not yet criminalized money laundering, and 
legislation on money laundering, mutual legal 
assistance and witness protection, developed as part 
of the GON?s Master Plan for Drug Abuse Control, 
remained stalled in 2006.  The Parliament was 
reinstated in April and is entitled to pass new laws 
(ref B). Draft anti-money laundering legislation has 
been prepared but has not yet been tabled in the 
reinstated Parliament.  The Foreign Exchange Act of 
1962 and the Bank and Financial Institutions Act of 
2006, together, authorize prosecutions for illegal 
transfer of money.  There were no prosecutions or 
arrests for illegally transferring money so far in 
¶2006. 
 
Banks are required to record the identity of customers 
engaging in significant transactions.  In particular, 
the Nepal?s central bank, Nepal Rastra Bank (NRB), 
must approve all transactions that involve payments in 
foreign currency.  Any Nepali citizen who wishes to 
open a foreign currency account must obtain a license 
to do so from the NRB, and Nepali citizens wishing to 
conduct foreign exchange transactions of any kind must 
obtain approval from the NRB by clearly outlining the 
purpose for the transaction.  The NRB normally 
approves small transactions (in USD thousands) for 
travel, education and medical treatment.  Travelers 
can take out USD 2000 a year from any commercial bank 
by showing travel documents such as a passport, visa, 
and air ticket, without NRB approval.  Individuals 
with an NRB approval letter can conduct a foreign 
exchange transaction at any bank.  In addition to NRB 
approval, students must obtain a recommendation letter 
from the Ministry of Education; the transactions 
approved can only be for the amount listed on the 
total expenses line of the student?s visa paperwork. 
The NRB approves foreign exchanges for medical 
treatment based on the recommendation of the Nepal 
Medical Council, and there is no limit on the amount. 
Business travelers are entitled to foreign exchange 
approval from the NRB to cover their food, lodging, 
and transportation expenses.  For business 
transactions, however, individuals must open a letter 
of credit from a commercial bank documenting all the 
transaction details.  The commercial bank then 
forwards the letter of credit to the NRB for approval. 
There is no maximum or minimum limit on the amount for 
transactions in legal products and services. 
 
Nepal has enacted bank secrecy laws that prevent the 
disclosure of client and ownership information to 
individuals and law enforcement authorities; however, 
the present law does not prevent the disclosure of 
client and ownership information to the NRB, courts, 
auditors or the Commission for Investigation of Abuse 
of Authority (CIAA).  Banks have provided records 
regarding bank accounts of individuals and 
institutions to assist in GON investigations into 
corruption by senior officials.  There are currently 
no free trade zones in Nepal.  However, different 
industry sector associations have been urging the GON 
to set up an export processing zone near the Inland 
Container Depot (ICD) in Birgunj, which borders India. 
 
The NRB has the authority to freeze accounts and seize 
assets related to criminal investigations.  However, 
the GON?s ability to identify and trace assets is 
hindered by the lack of a computerized information 
sharing system.  For example, many bank branch offices 
do not have computers.  The Nepal Police also have the 
authority to seize any goods or property related to 
criminal investigations.  The Department of Revenue 
 
Investigation (DRI), under the Ministry of Finance, 
functions as Nepal?s financial intelligence unit 
(FIU).  DRI is responsible for the control and 
investigation of any kind of revenue loss to the GON. 
It has the authority to make raids, seize assets, and 
arrest and prosecute individuals or institutions for 
causing any kind of revenue loss to the government, 
such as cash smuggling, underpaying customs duty, or 
tax evasion.  The DRI can also investigate and 
prosecute foreign exchange violations.  Nepal Police, 
Immigration, and Customs forward all cash smuggling 
cases to the DRI for prosecution.  The DRI makes the 
case and takes it to the district court.  However, the 
DRI is not adequately staffed.  Increased cooperation 
among the NRB, Nepal Police, and the DRI would enhance 
Nepal?s money laundering and terrorist financing 
investigative and enforcement capabilities. 
 
The estimated 1.2 million Nepalese who work overseas 
send back at least $1 billion (about 13 percent of 
GDP) a year and are the largest users of informal 
means of transferring money to Nepal.  Expatriates 
frequently send money back using the hundi system of 
informal money transfers (called hawala in other 
countries) or physically carry money back with them 
undeclared to Nepal.  A large number of Nepalese who 
work in India are able to bring Indian rupees back 
over the border because the Indian and Nepalese 
governments do not aggressively look for cash on 
people or in vehicles as they cross. Indian currency 
is widely accepted in Nepal.  Nepalese workers in the 
Gulf and Southeast Asia also send a significant amount 
of money back through informal channels even though 
financial regulations are more stringent.  In Nepal, 
the hundi system is linked to issues of capital 
flight, tax avoidance, and corruption.  The NRB has 
instituted an International Monetary Exchanges 
licensing policy within the past year, which requires 
financial organizations wanting to distribute foreign 
remittances to obtain an operating license. 
Additionally, many of Nepal?s commercial banks have 
opened offices in countries with large numbers of 
Nepali expatriate workers to facilitate remittances 
through the banking system.  According to NRB 
officials, the combination of these factors has 
resulted in a decrease in the use of the hundi system 
in Nepal. 
 
The Bank and Financial Institutions Act 2006 and Nepal 
Rastra Bank Act 2002, working in tandem, criminalize 
terrorist financing.  In addition, using the 
regulatory power vested in it under various acts and 
regulations, the NRB directs all the banks and 
financial institutions of Nepal to comply with anti- 
terrorist financing requests made by USG.  The Bank 
and Financial Institutions Act 2006 regulates the 
actions of financial institutions in Nepal and 
provides the NRB with the authority to seize any 
assets or freeze accounts deemed to have been used in 
terrorist activities.  No assets belonging to 
individuals or entities on the UNSCR 1267 Sanctions 
Committee?s consolidated list have been identified in 
Nepal.  Additionally, Nepal?s State Offense Act of 
1989 authorizes security forces to arrest and 
prosecute any Nepalese or foreign citizen involved in 
any criminal activities against the State or 
associated with foreign terrorist activity.  The GON 
made no arrests for terrorist financing in 2006. 
 
The GON is a party to the 1988 UN Drug Convention, the 
1961 UN Single Convention on Narcotic Drugs, as 
amended by the 1972 Protocol, and the 1990 South Asian 
Association for Regional Cooperation (SAARC) 
Convention on Narcotics, Drugs, and Psychotropic 
Substances.  It has signed, but not yet ratified, the 
UN Convention against Transnational Organized Crime 
and the UN Convention Against Corruption.   Nepal is 
not a signatory to the UN International Convention 
Against Illicit Traffic in Narcotic Drugs and 
Psychotropic Substances. 
 
End Text. 
 
MORIARTY