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Pakistan’s Relationship with FATF and its Impact on the Country’s Economy and Foreign Policy

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Numerous international organizations have been established since the end of World War II to foster global peace, with the Financial Action Task Force (FATF) being one such entity created in July 1989 by the G-7 dedicated to examining and regulating the perils associated with money laundering and terrorist financing. In the aftermath of the events unfolding in the post-9/11 landscape, the global community has heightened its scrutiny of the pivotal role played by financial resources in facilitating terrorist operations worldwide.

The overarching objective of averting future terrorist attacks is fundamentally contingent on strategies focused on obstructing the financial channels utilized by terrorist organizations at their foundational levels. Various state entities, alongside international actors, possess the capability to effectively counteract terrorist networks by meticulously tracing and disrupting the ‘sources of their funding.’

Since 2001, the FATF has served as the principal institution for the world community’s anti-money laundering regime, also known as AML regime, legislation, and certain enforcement mechanisms in the wake of the fight against terrorist financing (Gul et al., 2021). The Security Council, as articulated in Resolution 1617 issued in late July 2005, has affirmed that the FATF efforts in coordination and capacity-building serve as an exemplary model for disrupting the financial networks of terrorist organizations.


Pakistan is not a member of the FATF, but it is a member of the Asia Pacific Group (APG), the largest FATF-Style Regional Body (FATF, n.d.). In a developing nation such as Pakistan, characterized by a deficiency in transparent mechanisms for financial transactions and a lack of robust legal frameworks, the conditions become conducive for individuals to engage in illicit activities like money laundering.

In Pakistan, a considerable number of instances have arisen involving the perpetration of money laundering, with the subsequent utilization of these illicit funds by terrorist organizations. Money laundering, essentially a white-collar crime, poses a complex challenge for comprehensive comprehension.

Its extensive adverse ramifications extend to the economic fabric of any nation. As formally defined by FATF, money laundering represents the process through which criminals fund their activities, aiming to obfuscate the origins of their illegitimate financial resources. The most prominent methods for laundering money in Pakistan include hundi, physical bulk cash smuggling, manipulation in the structure of cash deposits in the domain of real estate, and exchange of money through illegal opium trade, to name a few.

Pakistan was placed on the FATF “Grey List” in June 2018 due to concerns about its strategic deficiencies in anti-money laundering (AML) and combating the financing of terrorism (CFT) measures. The decision was made during the FATF plenary meeting held in Paris. The FATF identified several areas where Pakistan needed immediate and sustained action to address these deficiencies.

Some of the critical concerns included Strategic deficiencies in Anti-Money Laundering (AML) and Combating Financing of Terrorism (CFT) regulations. Concerns included weak financial system regulation, ineffective oversight of cash couriers and hawala systems, and inadequate legal framework for freezing terrorist assets. Being placed on the grey list had significant implications for Pakistan, including increased scrutiny of its financial transactions, potential challenges in accessing international financial markets, and the need to implement comprehensive reforms to address the identified deficiencies.

Research Question:

  1. The central research issue of this study explores the complex connection between Pakistan and the FATF, exploring the various ways this participation has affected the country’s foreign policy dynamics and economic environment. A crucial question arises as Pakistan navigates the difficulties presented by the FATF.
  2. How does Pakistan’s association with FATF influence its economic stability and shape its approach to international relations in the long run, and what is the way forward for Pakistan?
  3. The first dimension delves into the consequences of FATF evaluations. It explores how being on the FATF watch list or subject to its sanctions influences investor confidence, access to international financial markets, and the country’s overall economic development trajectory.
  4. The second dimension focuses on the realm of foreign policy. It scrutinizes how Pakistan’s stance on FATF shapes its diplomatic and international relationships—exploring the diplomatic pressure exerted due to FATF classifications and the influence of these considerations on forging alliances.

Pakistan’s Economy and FATF Listing

Economic Consequences:

Despite the assertions made by Miftah Ismail, the advisor on finance to the prime minister at the time, that the “country’s economy would not be affected due to FATF’s grey list,” The KSE-100 Index of the Pakistan Stock Exchange dropped 411 points and ended at 42,942 points even before to the FATF’s ultimate decision (Mukhtar, 2018). Due to concerns about overcoming the more rigorous financial monitoring linked with the Grey List, Foreign Direct Investment (FDI) decreased. Concerns about noncompliance forced renegotiations of the International Monetary Fund (IMF) lending program.

Impact on Investment Climate:

The “Grey Listing” heightened Pakistan’s risk profile, and some financial institutions were wary of transacting with Pakistani banks and counterparties. Moreover, the impacts prompted a decrease in foreign transactions, a reduction in foreign currency inflows, and an expansion of the current account deficit. Compounding these concerns are instances such as the imposition of a $225 million fine on Pakistan’s primary lender, Habib Bank, leading to the effective closure of its U.S. operations by the New York regulator.

These punitive actions were a consequence of compliance shortcomings concerning money laundering (ML) and terrorist financing (T.F.), intensifying the challenges faced by Pakistan in the international financial arena (Michelle, 2017). Trade flows were hampered when certain foreign banks lost interest in doing business with Pakistani organizations because they were worried about adhering to FATF requirements.

Trade and Remittance Challenges:

Due to compliance concerns, banks grew increasingly wary of doing business with Pakistan, which resulted in higher fees and longer wait times for international trade financing. According to the World Bank, FATF scrutiny increased transaction costs for Pakistani companies by three to five percent (Rana, 2021).

Because of the perceived risks and complexity of complying with trade laws, some multinational corporations, especially smaller ones, have chosen to work with suppliers outside of Pakistan. This affected agricultural, leather, and textile exports.

Restrictions on Letters of Credit (L.C.s), essential financial documents for import transactions, have made foreign banks reluctant to grant or approve L.C.s for businesses in Pakistan. This made obtaining equipment and raw supplies more difficult, which hurt industrial productivity.

Government Measures in Response

Changes in Financial Regulations:

Pakistan updated its AML/CFT framework significantly, propelled by the Grey List push. The passing of the National Accountability signaled a change towards a strong legal framework (Second Amendment) Act, 2019, and the creation of dedicated Financial Monitoring Units.

Implementation of Anti-Money Laundering Measures:

Pakistan implemented the National Action Plan (NAP), a comprehensive counterterrorism action plan, with incredible speed due to the Grey List, which led to institutional and legal reforms.

Also Read: Pakistan China Vocational and Technical Institute faculty to receive 6-month training in China

Foreign Policy Implications for Pakistan

The Strain on International Relations:

Before the FATF’s decision, Pakistan made diplomatic efforts to keep itself off the list. However, at the last minute, the key allies withdrew their support. According to Dr. Vaqar Ahmed, China has cautioned Pakistan about adhering to international standards, especially when handling financial inflows, because of its substantial banking presence in the nation (Mukhtar, 2018).

Recent historical observations indicate Pakistan’s enduring geopolitical scrutiny. Its strained ties with the U.S. have spurred Washington and London to work together to put Pakistan back on the watch list. This highlights the complex geopolitical environment in which Pakistan operates, managing ties with significant international players and adapting to the changing factors influencing its standing on the global stage.

The long-standing strategic cooperation was jeopardized as early as 2019 when a U.S. Senate measure connected funding to Pakistan with FATF advancement. The belief that Pakistan presents a security threat undermines trust in the bilateral relationship. High-level visits decreased, especially as European countries were reluctant to get involved financially.

The destabilizing impact was demonstrated in 2020 when Pakistan’s participation in the prestigious Cobra Gold multilateral military exercise hosted by the U.S. was canceled. Pakistan also faced potential hindrances in counterterrorism cooperation and information exchange. There were also challenges in acquiring military equipment and technology in defense partnerships.

Changes in Foreign Policy Strategies

Diplomatic Efforts to Address FATF Concerns:

Pakistani authorities requested technical help and sent information on progress to the FATF Secretariat and relevant member nations. They also actively engaged in dialogue. In June 2019, for example, Pakistan’s action plan was presented to the FATF plenary by Foreign Minister Shah Mahmood Qureshi.

Pakistan sought support for its changes and explained to essential allies such as the U.S., China, and the E.U., as well as regional partners like Saudi Arabia and Turkiye—frequent interactions to address issues and foster understanding.

Pakistan demonstrated its dedication to global collaboration by participating in AML/CFT-related international conferences and forums, including the G20 and Financial Action Task Force (FATF)-Asia Pacific Group (APG) meetings.

Impact on Regional Alliances and Partnerships

Acknowledging its own experience, Pakistan started helping other regional players, like Bangladesh and Sri Lanka, with FATF compliance. This proactive approach to Pakistan’s diplomacy promoted a sense of shared accountability and regional cooperation.

Opportunities for Reform and Improvement

Strengthening Financial Institutions:

Exerting control over money laundering is anticipated to yield a notable decrease in various other illicit activities, including drug trafficking and the financing of terrorism. Effectively addressing this challenge requires the establishment of robust legislation, cultivating a well-defined rule of law, seamless collaboration among anti-money laundering (AML) agencies nationally and internationally, vigilant monitoring of borders, and the rigorous accountability of political figures and societal elites. These multifaceted measures collectively contribute to the comprehensive effort aimed at combating the pervasive threat posed by money laundering.

Enhancing Diplomatic Engagement:

As Pakistan exhibited observable advancements, pockets of hope appeared. In 2021, the U.S. returned to providing military support, indicating a measured easing of its position. Pakistan’s dedication to international involvement was further demonstrated in 2022 when it successfully hosted the Organisation of Islamic Countries (OIC) summit.


Policy Recommendations:

The government should promptly establish a working group, facilitated by either the Federal Board of Revenue (FBR) or the Ministry of Finance, to initiate the documentation of Pakistan’s economy. This is imperative, particularly in a cash-oriented economy, where defaulters can be easily identified, apprehended, and subjected to legal consequences. To combat money laundering (ML) and terrorist financing (T.F.) effectively, the Government of Pakistan (GoP) should actively engage the expertise of private sector money exchangers. These stakeholders possess valuable insights into the illicit channels through which unauthorized transactions are conducted.

Furthermore, Pakistan should intensify its diplomatic efforts as a strategic measure, taking proactive steps to engage with the Financial Action Task Force (FATF) and observer organizations and countries. This engagement is vital to showcase the nation’s commitment to addressing financial integrity concerns and fostering collaborative initiatives in mitigating the risks associated with ML and T.F. (Gul et al., 2021).

Post FATF- Grey List Era:

While Pakistan’s removal from the FATF Grey List in October 2022 marked a significant victory, its impact on its business landscape, foreign investment, and institutional reforms remains in flux.

The new compliance measures have undoubtedly changed the business landscape, especially for financial institutions. AML/CFT regulations are stricter, requiring enhanced due diligence, know-your-customer (KYC) procedures, and transaction monitoring. While this promotes transparency and combats financial crime, it can add complexity and costs for businesses, tiny ones.

While access has improved slightly since the removal of the Grey List, challenges remain. Banks are still cautious about extending credit to smaller businesses due to stricter compliance requirements and perceived risks. This is a pressing concern for micro, small, and medium enterprises (MSMEs) essential for job creation and economic growth. (Sherani, 2022).

Investor confidence has shown signs of improvement since the removal of the Grey List. The IMF-backed program and improved economic stability enhance the investment climate. However, lingering concerns about political instability and potential backsliding on reforms might still deter some investors.

Like some European nations, trade with cautious countries during the Grey List period is gradually normalizing. The removal of trade restrictions and improved financial transparency are facilitating smoother transactions. However, complete normalization might take time, and more profound trade diversification beyond traditional partners remains crucial.

The established FMU, National Counterterrorism Authority (NACTA), and legal frameworks are positive steps towards robust AML/CFT infrastructure. However, sustainability requires continued commitment. Institutional capacity building, training, and ensuring adequate resources are crucial to prevent backsliding.

Backsliding on reforms remains a potential risk. Political or economic pressures could lead to weakened enforcement or compromised systems. Continued international monitoring, civil society involvement, and transparency are essential to maintain the integrity of the reforms and the gains achieved.

The post-FATF Grey List era presents both opportunities and challenges for Pakistan. Navigating this new terrain requires careful balancing of enhanced compliance, ensuring business sustainability, attracting foreign investment, and maintaining the momentum of institutional reforms. Pakistan must remain vigilant, transparent, and committed to international standards to secure a stable and prosperous future.


Gul, S., Asghar, M. F., & Ali, S. (2021). FATF and Terror Financing: The Perspective of Pakistan. Global Economics Review, VI(II), 1–10. https://doi.org/10.31703/ger.2021(vi-ii).01

Financial Action Task Force (FATF). (n.d.). Frequently asked questions (FAQs). https://fatf.gov.pk/Home/FAQs

Mukhtar, A. (2018). Money Laundering, Terror Financing, and FATF: Implications for Money Laundering, Terror Financing, and FATF: Implications for Pakistan. http://www.ipripak.org/wp-content/uploads/2018/10/Article-2-2-Oct-2018-ED-SSA.pdf

Michelle Price. (2017). Pakistan’s Habib Bank to pay $225-million New York fine for compliance failures. reuters.com. https://www.reuters.com/article/us-pakistan-bank-new-york/pakistans-habib-bank-to-pay-225-million-new-york-fine-for-compliance-failures-idUSKCN1BI291?edition-redirect=uk

Sherani, D. com | T. (2022, October 21). FATF removes Pakistan from grey list after 4 years. DAWN.COM. https://www.dawn.com/news/1716183

Rana, S. (2021, February 25). FATF grey-listing caused “$38b losses.” The Express Tribune. https://tribune.com.pk/story/2286167/fatf-grey-listing-caused-38b-losses

Siddique, S. (2023, July 20). Investor confidence wanes in Pakistan’s economy. The Express Tribune. https://tribune.com.pk/story/2427022/investor-confidence-wanes-in-pakistans-economy



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