Cooperatives have been brought under the Money Laundering Prevention Act a decade after the law was passed. The Department of Cooperatives has enforced the Directive on Money Laundering Prevention for Cooperatives, opening the cooperative sector to government scrutiny.

There are 34,512 cooperatives operating in the country including 14,000 savings and credit cooperatives. In 2016, they held deposits totalling Rs302.2 billion and issued loans worth Rs274.2 billion, according to government statistics. More than 600 cooperatives are estimated to have an annual turnover of Rs50 million and above. 

According to the department, it has formed a separate cell to enforce the law in an effective manner. Narayan Prasad Aryal, deputy registrar at the department, said the cell had started writing to cooperatives with a large turnover to follow the new directives. 

“We are also planning to supervise primary cooperatives to obtain better results,” said Aryal. “The new regulation has mainly focused on preventing suspicious transactions and strengthening the reporting system to maintain transparency in the cooperative business.” 

The new directive has stipulated stern action against cooperatives that fail to comply with the law. Cooperatives that do not maintain adequate information about their members and conduct transactions by creating fake accounts will face fines ranging from Rs1 million to Rs50 million.

The directive has made it mandatory for all cooperatives to update the details of their members by mid-April next year. If members belong to the ‘high risk’ category, their details should be updated within nine months from the date of the enforcement of the directive, according to the department. 

The department has defined ‘high risk’ clients as those who have bought shares or deposited money in excess of Rs3 million. “The transactions of these clients must be assessed every year,” states the directive. 

The directive has also ordered cooperatives to enforce the ‘know your member’ policy, which is similar to the ‘know your customer’ policy in effect in the banking sectors. 

As per this policy, cooperatives must develop mechanisms for risk management, closely monitor their business activities, identify suspicious transactions, carry out transactions by remaining within the threshold and keep a close eye on annual transactions beyond Rs3 million. If they fail to carry out these activities, they will be fined up to Rs3 million, the directive said.

The department has fixed ‘threshold transaction’ at Rs1 million for cooperatives. The limit is applicable while buying shares, collecting deposits, issuing loans and receiving payment from remittance companies and fund transfer service providers. 

Such transactions have to be reported to the Financial Information Unit (FIU) of Nepal Rastra Bank within 15 days. Likewise, cooperatives need to submit a report of suspicious transactions within three days to the FIU. 

The department has also made it mandatory for cooperatives to appoint a separate compliance officer to enforce the provisions of the new directive. Cooperatives need to provide details of the compliance officer to both the department and the central bank’s FIU. 

To maintain good governance, cooperatives need to develop an internal working guideline and report to the regulator every four months. Likewise, cooperatives with assets of Rs50 million or more have to enroll themselves in the government-approved Integrated Management Information System within one to three years depending on their access to the internet.  

“If the provisions are effectively implemented, it will help control wrong practices in the cooperative business to a large extent,” Aryal said. 

Over the last decade, many cooperatives sank into crisis due to haphazard lending and bad corporate governance as a result of lax provisions in the old Cooperative Act and failure to implement provisions in the Money Laundering Act. 

Hordes of depositors lost their savings when problems emerged in big cooperatives like Guna, Oriental, Corona, Exim, Ugrachandi and many others.