The Role of Financial Institutions in Preventing Money Laundering: A Study of Pakistan's AML/CFT Regime

Abstract

This study examines the pivotal role of financial institutions in preventing money laundering within Pakistan's Anti-Money Laundering and Countering the Financing of Terrorism (AML/CFT) regime. Anchored in the Anti-Money Laundering Act, 2010 (as amended), and reinforced by regulations from the State Bank of Pakistan (SBP), financial institutions primarily banks and development finance institutions serve as the first line of defense through mandatory customer due diligence (CDD), enhanced due diligence for high-risk customers, ongoing transaction monitoring, and timely reporting of suspicious transactions to the Financial Monitoring Unit (FMU). The research analyzes the evolution of Pakistan's framework, including the establishment of the National AML/CFT Authority and alignment with Financial Action Task Force (FATF) standards following Pakistan's removal from the FATF Grey List in 2022. Despite significant legislative and institutional progress, challenges persist, such as implementation gaps, resource constraints in smaller institutions, and emerging risks from digital financial services. The paper evaluates the effectiveness of risk-based approaches adopted by SBP-regulated entities and highlights the contributions of financial institutions in disrupting illicit financial flows linked to predicate offenses and terrorist financing. Findings underscore the need for sustained capacity building, technological integration, and inter-agency coordination to strengthen preventive measures. This analysis contributes to understanding how regulated financial gatekeepers can bolster national and global financial integrity in a developing economy context.