Last week, the Financial Action Task Force (FATF) issued a reminder to Pakistan: its removal from the gray list in October 2022 does not confer immunity from the persistent threats of money laundering (ML) and terrorism financing (TF).
Speaking at a press conference in France, FATF President Elisa de Anda Madrazo emphasized that delisting is not a shield against criminal exploitation. Countries must continue implementing robust safeguards to deter illicit financial flows.
Her remarks came amid alarming reports of proscribed militant group Jaish-e-Mohammad using digital wallets to fund terror camps, an indication that financial masking tactics are evolving faster than regulatory countermeasures.
Pakistan's vulnerabilities are not episodic, they are deeply embedded within its institutional architecture. The country's AML/CTF frameworks remain deficient, a reality that led to its gray-listing from 2018 to 2022.
Despite efforts to strengthen oversight, the structural weaknesses persist, leaving Pakistan exposed to both domestic and transnational financial crimes. The State Bank of Pakistan (SBP) identifies real estate, hawala, and trade-based transactions as primary conduits for money laundering.
These sectors operate with minimal transparency and are often beyond the reach of effective regulatory scrutiny.
The hawala system, in particular, exemplifies the challenge. Informal, trust-based, and largely unregulated, hawala enables the rapid transfer of funds without a paper trail. Pakistan's inclusion in the so-called "hawala triangle," as noted in a 2002 US Treasury report, underscores its role in a global nexus of tax evasion, ML, and TF.
The system's anonymity and speed make it attractive not only to criminal networks but also to migrant workers and their families, who often distrust formal banking channels. This dual-use nature complicates regulatory efforts, especially when hawala operators arrested in Karachi and Peshawar between 2023 and 2025 continue to operate in the shadows.
Institutional fragmentation further exacerbates the problem. The National Accountability Bureau (NAB), tasked with leading anti-corruption and financial crime efforts under the National Accountability Ordinance (1999) and the Anti-Money Laundering Act (2010), has relied heavily on plea bargains and voluntary returns.
While expedient, these mechanisms have drawn judicial criticism for fostering impunity and undermining deterrence. The Supreme Court has warned that such practices rupture national security and tarnish Pakistan's global image. Moreover, NAB's selective prosecution of elite actors has raised concerns about political bias and unequal accountability. Although amendments proposed in 2024 aim to shift the burden of proof once a prima facie case is established, implementation remains uneven.
The Federal Investigation Agency (FIA) has formed specialized squads to combat ML, yet coordination gaps between NAB, FIA, and other regulatory bodies persist.
FATF evaluations have repeatedly highlighted the weak interconnections between financial regulators and law enforcement agencies, which hinder the effective implementation of AML/CTF measures. These institutional silos allow criminal networks to exploit loopholes with impunity.
Pakistan's financial ecosystem is riddled with vulnerabilities. The prevalence of benami accounts, shell companies, and asset registration under proxies, often relatives or employees, facilitates tax evasion and obfuscates ownership.
The Panama Papers exposed how influential families used offshore entities to conceal wealth and transfer funds internationally. Real estate remains a particularly opaque sector, with minimal documentation and oversight. It serves as a repository for illicit funds, enabling both ML and TF.
The nonprofit sector presents another high-risk domain. Many charitable organizations, including Falah-e-Insaniyat Foundation (FIF), Al-Rasheed Trust, and Al-Khair Trust, have been linked to banned militant groups. Despite regulatory scrutiny, the 2019 Mutual Evaluation Report noted that such entities continued to operate.
Trusts, waqfs, cooperatives, and societies are sparsely documented and largely unregulated, making them susceptible to misuse for terrorism financing. Donations intended for welfare can be diverted to fund extremist activities, especially in the absence of stringent oversight.
Pakistan's economic structure compounds these risks. With a tax-to-GDP ratio of just 10.6% in FY 2024–25, the economy remains largely undocumented. This facilitates tax evasion and creates fertile ground for ML and TF.
The Directorate of National Savings, Pakistan Post's agency functions, and various Non-Banking Financial Institutions (NBFIs) and Companies (NBFCs) operate with limited regulatory control. Insurance and exchange companies also fall within this loosely governed financial landscape. The result is a fragmented system where illicit financial flows can thrive.
Transparency International ranks Pakistan 135th out of 180 countries, reflecting a high perception of corruption. Corruption is a well-established predicate crime for money laundering, and its prevalence undermines institutional integrity.
While less directly linked to terrorism financing, corruption erodes public trust and weakens the state's capacity to enforce AML/CTF measures.
The social fabric also plays a role. Growing religious ideological spaces have implications for extremist violence and its financing.
Militant groups and individuals proscribed under United Nations Security Council Resolutions 1267 and 1373 continue to operate within Pakistan, posing significant threats.
The resurgence of terrorist activity and the risk of high-frequency attacks remain formidable challenges. Terrorist networks feed on financial resources, and the presence of underground remittance systems like hawala and hundi facilitates their operations.
The human dimension of these vulnerabilities cannot be ignored. Many overseas workers, particularly those in low-skilled labor markets across the Gulf, prefer informal channels to remit money.
Their families, often elderly or less literate, are even more distrustful of formal banking systems. This reliance on informal value transfer services (MVTS) inadvertently sustains the infrastructure that enables ML and TF.
Pakistan's grey-listing by FATF from 2018 to 2022 had tangible economic consequences. According to IMF analysts, countries under FATF observation suffer average capital inflow declines of approximately 7.6% of GDP.
The reputational damage and investor hesitancy underscore the urgency of sustained reform. Delisting should not breed complacency? rather, it must catalyze deeper institutional transformation.
Pakistan's structural vulnerabilities to money laundering and terrorism financing are multifaceted and deeply entrenched. They span institutional, economic, regulatory, and social domains.
The FATF's latest warning is not merely a procedural reminder, it is a call to action. Pakistan must move beyond cosmetic compliance and embrace systemic reform.
