ASSESSING PAKISTAN’S AML AND CFT SYSTEM: LEGISLATIVE DESIGN, INSTITUTIONAL CAPACITY, AND RISK MITIGATION AGAINST FATF’S STANDARDS

Abstract

Money laundering (ML) and terrorist financing (TF) undermine global financial stability and security by exploiting gaps in legislative design and institutional capacity risk mitigation efforts. The Financial Action Task Force’s (FATF) guidelines have evolved to counter illicit financial networks around the globe, yet Pakistan’s large informal economy, periodic placement on the FATF grey list (2008, 2012, 2018), and fragmented regulatory frameworks have impeded effective compliance with the FATF’s norms. This study presents assessment to Pakistan’s various legislative reforms, particularly the Anti-Money Laundering Act and Anti-Terrorism Act with recent amendments, further creation of the National Anti-money Laundering (AML) and combating the financing of terrorism (CFT) Authority in 2023, which have increased technical compliance from 41% to 72% within two years. This study demonstrates each guideline to domestic regulations and analyses Mutual Evaluation Reports (MERs) to establish full or substantial compliance with the “Big Six” recommendations. Follow-up evaluations indicate improvements in customer due diligence (CDD), suspicious-transaction reporting (STR), and targeted sanctions driven by enhanced inter-agency coordination and capacity-building initiatives. An analysis of Pakistan’s FATF gray-list journey and legislative reforms revealed persistent gaps in the application of multiple overlapping statutes that continue to exist that give rise to legal uncertainty. Finally, this study provides specific actionable recommendations for legal, institutional, and operational reforms designed to close the gaps identified in Pakistan’s AML and CFT framework.