Nepal Corruption Report

Last updated: July 2020

Snapshot

Pervasive corruption is a major challenge for foreign companies in Nepal. Kickbacks and facilitation payments are widespread in public procurement and when registering a business. In Nepal, corruption reduces competitiveness and significantly increases the costs of starting a business. Further, the courts are plagued by corruption. The Prevention of Corruption Act is the country’s principal anti-corruption law; it criminalizes corruption, bribery, money laundering, abuse of office and facilitation payments in the public and private sectors. However, implementation and enforcement is inadequate, leaving the levels of corruption in the country unchallenged.

Risk key
Low
MODERATELY LOW
MODERATE
MODERATELY HIGH
HIGH

Judicial System

Nepal’s court system is subject to pervasive corruption and executive influence, causing overall inefficiency in the sector. Judges frequently accept bribes from individuals and companies for favorable rulings (GCR 2015-2016). Accordingly, more than three-quarters of citizens believe the judiciary is corrupt (GCB 2013). Foreign investors report that executive interference in the judiciary does not affect business; however, the politicization of the institution is increasingly problematic (ICS 2016). In addition, the resolution of commercial disputes is a cumbersome process and typically drags on for years (ICS 2016). Overall, companies do not hold much faith in the ability of the courts to challenge government regulations or to settle disputes (GCR 2015-2016). Nonetheless, recent efforts suggest a willingness to improve the situation: In 2015, the Supreme Court impeached several poltical leaders on corruption charges (BTI 2016).

Nepal is a member of the International Centre for Settlement of Investment Disputes (ICSID) and has acceded to the New York Convention 1958 on the Recognition and Enforcement of Foreign Arbitral Awards.

Police

Corruption risks in the Nepali police are high. Corruption is rife among low-level officers, who are often underpaid (HRR 2015). Another notable issue is impunity: Many engage in corruption and abuse of office with no consequences (HRR 2015). A sweeping majority of citizens perceive the police as corrupt (GCB 2013). Police cannot be relied upon to protect companies from crime, and the high-levels of crime and violence increase the costs of doing business (GCR 2015-2016).

Public Services

Nepal’s public utility services are strongly affected by corruption, making it a very high-risk sector. Companies expect to pay facilitation payments and bribes in order to activate an electrical connection or when applying for other utilities (GCR 2015-2016; ES 2013). Similarly, gifts and informal payments are also often necessary when dealing with the authorities to obtain a construction permit (ES 2013). Companies complain of burdensome government regulations and and of bureaucracy that is subject to frequent changes (ICS 2016). When trying to get an investment licence, companies should expect delays and a general lack of transparency during the process (ICS 2016). Business start-up costs in Nepal are higher than in neighboring South Asian countries (DB 2016).

Tax Administration

Nepali tax officials are prone to corruption, and some seek positions in the sector specifically for personal enrichment (CatC 2012). Businesses report that bribes and irregular payments are often exchanged when meeting with tax officials (GCR 2015-2016). Paying taxes in Nepal is time-consuming, taking 334 hours per year and requiring 34 procedures (DB 2016). Finally, there are reports of large companies engaging in tax avoidance schemes (CatC 2012).

Customs Administration

Bribery and irregular payments are very often exchanged when interacting with customs officials; almost half of all companies expect to give gifts or make facilitation payments to obtain an import licence (GETR 2014; ES 2013). Corruption is slightly more common when importing than when exporting, while burdensome import and export procedures and high tariffs and transportation costs are continuing problems in the sector (GETR 2014). The time and cost to import and export are, on average, lower than in neighboring countries but higher than in OECD countries (DB 2016). More generally, customs procedures lack transparency, creating opportunities for officials to demand bribes.

Public Procurement

Corruption is pervasive in Nepal’s public procurement sector: More than two-thirds of companies expect to give officials gifts or other irregular payments to secure public contracts (ES 2013; GCR 2015-2016). Systems of patronage are entrenched, and there are frequent reports of the embezzlement of public money (BTI 2016). Accordingly, companies report that funds are often diverted to individuals and companies due to corruption and find that favoritism towards well-connected companies influences procurement officials’ decisions (GCR 2015-2016). Interactions between companies and public officials can be avoided through the e-procurement web portal of Nepal, where tender notices are published and bids can be submitted. Nonetheless, the sector lacks transparency and regulation (ICS 2016). The Public Procurement Act requires open and competitive bidding for public contracts; however, fair bidding processes are impeded by cartels of contractors that pay kickbacks to government officials to receive lucrative contracts (CatC 2012).

In one corruption case from 2014, Smith & Wesson paid USD 2 million to resolve an SEC probe into corrupt payments made by the company in several countries, including Nepal. Reportedly, Smith & Wesson bribed Nepalese government officials, among others, to win public contracts (Wall Street Journal, July 2014). Companies are recommended to use a specialized public procurement due diligence tool to mitigate the risks associated with public procurement in Nepal.

Natural Resources

Nepal’s forestry industry is weakened by illegal logging and widespread corruption (NFSS, Nov. 2013).

In 2016, the Norwegian company Statkraft informed the Investment Board of Nepal (IBN) that it was withdrawing from the Tamakoshi hydropower project because of the absence of necessary policies and regulatory framework and numerous bureaucratic hurdles (ICS 2015).

Legislation

Nepal has a comprehensive legal anti-corruption framework in place, but enforcement of all corruption-related regulations is very weak (HRR 2015). The Prevention of Corruption Act criminalizes attempted corruption, active and passive bribery, money laundering, extortion, facilitation payments, abuse of office and embezzlement. Together with the Commission for the Investigation of Abuse of Authority Act, the Prevention of Corruption Act requires government officials, ministers and members of the parliament and civil servants to declare their and their family’s income and assets; however, there are no sanctions for failing to submit declarations. Money laundering is criminalized under the Asset (Money) Laundering Prevention Act. The Competition Promotion and Market Protection Act aims to combat private sector fraud, to ensure fair market competition and to prevent the abuse of functions in public procurement. Whistleblower protection and transparency in the public sector is addressed in the Right to Information Act, which gives citizens the right to access information from government bodies. Bribery of foreign officials is not addressed in Nepal’s legislation.

Nepal has ratified the United Nations Convention against Corruption (UNCAC).

Civil Society

Nepali law provides for freedoms of speech and press, and the government respects these rights (HRR 2015). Nonetheless, defamation and libel are criminalized under Nepali laws, and self-censorship is widespread among journalists (FotP 2015). There are some reports of journalists facing harassment and threats in relation to their work (FotP 2015). For instance, journalist Ramesh Rawal was forced to flee the area he had been working because of continued threats from officials for his reporting on government corruption (FotP 2015). Public access to government information is guaranteed, but applicants must submit reasons for their requests (BTI 2016; FotP 2015). Authorities do not block or censor internet content (HRR 2015). The overall media environment in Nepal is considered “partly free” (FotP 2015).

Nepal hosts a large variety of national and international civil society organizations (CSOs) (BTI 2016). However, most CSOs operate on the local level and face the challenge of communicating their agenda to national organizations and political actors; thus, the form of CSO participation has been limited to so-called “street politics” due to a lack of political cooperation (BTI 2016).