Regulatory Challenges in Pakistan’s Financial Sector: AML-CTF Compliance Amid Geopolitical and Institutional Complexities

Abstract

The paper critically evaluates Pakistan’s intricate engagement with Anti-Money Laundering and Counter-Terrorism Financing (AML-CTF) frameworks, positioning the country as both a target and an alleged facilitator of illicit financial flows. Rooted in ideological paradigms and geopolitical concerns, Pakistan’s discriminatory enforcement of AML-CTF regulations has largely been shaped by global scrutiny, particularly from the Financial Action Task Force (FATF). The role of financial institutions—particularly banks—is crucial in this dynamic, functioning simultaneously as enablers and gatekeepers in the effort to counter illegal financial activities. Despite being mandated to implement Know Your Customer (KYC) and Customer Due Diligence (CDD) procedures under the supervision of the State Bank of Pakistan and the Financial Monitoring Unit (FMU), banks remain susceptible to exploitation due to regulatory inadequacies, weak enforcement, and political interference. Drawing on recent empirical evidence, the paper highlights the ineffectiveness of prosecutorial outcomes arising from Suspicious Transaction Reports (STRs) and the continued reliance on informal financial frameworks such as Hawala and Hundi. Moreover, the rise of digital platforms and cryptocurrencies further complicates detection and investigative mechanisms, while international oversight remains influenced by selective implementation and geopolitical bias. Despite technological advancements and global collaboration models like public-private partnerships, institutional corruption and the politicization of regulatory frameworks continue to hinder meaningful progress.