Historical Weaknesses & FATF Grey‑listing
In June 2018, Pakistan was added to the FATF “Grey List” due to profound structural deficiencies in its Anti‑Money Laundering and Counter‑Terrorism Financing (AML/CFT) regime. Its 2019 Mutual Evaluation by the Asia Pacific Group (APG) found major gaps: absence of a coherent risk‑based framework; lack of AML oversight for non‑bank financial entities and DNFBPs; weak mechanisms for asset seizure in ML cases; and inadequate regulation of trusts, NPOs, legal persons, and cross‑border cash movements. Pakistan had only one of the FATF’s 40 recommendations rated fully compliant, while the majority were rated partially or non‑compliant; its effectiveness across 11 “Immediate Outcomes” was low or moderate for nearly all dimensions.
The Reforms: 34‑Point Action Plans & Institutional Strengthening
To exit the grey list, Pakistan agreed with FATF/APG two sequential action plans: a 27‑point plan in 2018, and a further seven items added in 2021, making 34 total milestones. These included:
- Amending AML/CFT law to bring unregulated DNFBPs and exchange companies under legal watchdog,
- Strengthening the Financial Monitoring Unit (FMU), led by the State Bank, as an empowered Financial Intelligence Unit (FIU),
- Implementing goAML technology for automated detection,
- Enhancing national cooperation across more than 50 public agencies,
- Improving prosecution and asset freezing capabilities,
- Strengthening beneficial ownership transparency,
- Tightening supervision of NPOs and corporate transparency.
These reforms led to re‑rating of 38 out of 40 FATF Recommendations as “compliant” or “largely compliant” by late 2022..
Removal from FATF Grey List and Ongoing Effectiveness Challenges
In October 2022, FATF officially removed Pakistan from the grey list, with its president citing verified high‑level commitment to maintain reforms and documented improvements in supervision, prosecutions, and asset confiscation systems. Despite progress on technical compliance, Pakistan’s APG‑assessed “effectiveness” has lagged. As of early 2023‑24, Pakistan scored “moderate effectiveness” in only one of 11 immediate outcomes, and “low effectiveness” in the remaining ten, indicating persistent gaps in practical implementation of AML/CFT goals.
Issues remain in translating legal reform into enforcement: low prosecution numbers for money laundering, minimal asset confiscation relative to risk exposure, continued challenges regulating legal persons, NPOs, and cross‑border cash flows, and inconsistent understanding of ML/TF risks across federal versus provincial investigators.
Recent Developments: Virtual Assets & CFT Risks
In July 2025 Pakistan formally established the Pakistan Virtual Assets Regulatory Authority (PVARA) to license and supervise crypto and digital asset services under the new Virtual Assets Ordinance, 2025. This aims to bring crypto providers into AML/CFT‑regulatory frameworks and align with FATF’s Recommendation 15 on new technologies.
Reportedly, FATF’s June 2025 plenary flagged Pakistan’s involvement in a 2020 dual‑use proliferation shipment, mis‑declared missile‑related equipment en route to Karachi, and linked terror‑financing ties in an April 2025 attack in Pahalgam to Pakistani financial networks, raising alarm over ongoing financial controls and proliferation financing risk. These incidents suggest that even as regulations strengthen, enforcement lapses and geopolitical tensions continue to pose risks undermining credibility.
Persisting Gaps in Implementation
Despite commendable strides in aligning Pakistan’s legal framework with FATF requirements, significant challenges remain in translating compliance into meaningful enforcement. While the country has successfully enacted key amendments, expanded institutional oversight, and extended regulatory coverage across critical sectors, actual implementation on the ground tells a more complex story.
Prosecution and conviction rates for money laundering remain disproportionately low, and asset confiscations have yet to reflect the true scale of illicit financial activity. Enforcement effectiveness is further undermined by entrenched corruption, political interference, and uneven capacity across provinces.
Though risk-based supervision has improved for major financial institutions, especially banks and licensed exchange companies, smaller actors such as NPOs, money changers, trusts, and informal hawala/hundi networks continue to operate with limited oversight. The adoption of the goAML platform by the Financial Monitoring Unit (FMU) has enhanced data collection and suspicious transaction reporting, but cross-border currency controls and enforcement of beneficial ownership transparency remain underdeveloped.
Furthermore, recent findings by FATF concerning mis-declared dual-use goods highlight the vulnerabilities in Pakistan’s proliferation financing safeguards. These lapses suggest that illicit networks can still exploit weaknesses within state systems, especially in the absence of proactive interdiction. Both FATF and regional actors, including India, have voiced ongoing concerns regarding Pakistan’s compliance with proliferation-related recommendations, keeping geopolitical scrutiny firmly in place.
In sum, while Pakistan’s AML regime is now structurally sound on paper, its ability to detect, deter, and disrupt illicit financial flows still lags in practice, pointing to the need for more robust enforcement, institutional independence, and targeted capacity-building at both federal and provincial levels.
Pakistan vs. International Standards & Regional Response
Internationally, Pakistan now ticks most FATF boxes on paper. Yet political friction undermines mutual trust. India has publicly called for Pakistan’s reinstatement on the grey list, alleging ongoing non‑compliance and misuse of international funds. Scholarly critics also warn that the FATF process may be politicized, and Pakistan’s progress is subject to external geopolitical targeting. emerald.com
Recommendations & Next Steps
To fully close remaining loopholes and consolidate its anti-money laundering (AML) gains, Pakistan must shift from structural reform to robust, sustained enforcement.
This includes enhancing operational effectiveness by accelerating investigations, prosecutions, and asset confiscation in money laundering and terrorism financing cases. Regulatory coverage should be expanded to include higher-risk sectors such as NPOs, money changers, informal exchangers, legal entities, and unregulated financial channels.
Strengthening transparency around beneficial ownership is critical to preventing the misuse of trusts, shell companies, and waqfs for illicit activity. Cross-border monitoring must also improve through tighter coordination between customs, border agencies, and financial intelligence units. With the establishment of the Pakistan Virtual Assets Regulatory Authority (PVARA), aligning cryptocurrency oversight with FATF’s evolving standards is essential to curbing misuse in the digital finance space.
Finally, Pakistan must ensure that its AML regime is administered by credible, independent regulators, free from political influence, to reinforce both domestic accountability and international trust.
Conclusion
Pakistan’s updated AML laws and institutional overhaul have effectively responded to FATF’s recommendations, it has closed many structural loopholes and earned removal from the grey list. Nevertheless, implementation effectiveness remains a critical weakness. Without deeper enforcement, thorough supervision across all financial channels, and sustained political independence in regulatory decisions, illicit financial flows may persist despite legal compliance. The task ahead is not merely ticking boxes, but embedding AML/CFT norms into everyday financial practice. Progress so far is notable. Pakistan has the architecture. Translating it into action will determine whether reform merely meets international standards or transforms the integrity of its financial system.
