Terrorism Financing in Pakistan: Legal, Institutional, and Operational Challenges in a Risk-Based AML/CFT Framework

Abstract

Financial borders play an instrumental role, analogous to the role of physical borders, to maintain the security of the state in the modern global environment. For instance, Pakistan accomplished an important milestone in October 2022 by being taken off the list of countries under FATF’s heightened monitoring program – a significant achievement that marks another important step in Pakistan's struggle with financial crime. However, this accomplishment only reflects the start of a more complicated journey considering that financial crime continues evolving continuously. This research work ‘Terrorism Financing in Pakistan: Legal, Institutional, and Operational Challenges in a Risk-Based AML/CFT Framework’ scrutinizes the problems associated with the implementation of regulatory measures to address financial crime. Despite having an extensive set of legislative mechanisms, such as the ‘Anti-Terrorism Act, 1997,’ and ‘Anti-Money Laundering Act, 2010’, Pakistan faces significant practical challenges to successfully combating terrorism financing. Notably, certain friction points that hamper the tracing and prosecution of illegal networks are identified in the course of research. According to the results of this work, there are three critical risks threatening the financial well-being of the country. Firstly, this is the underground economy, manifested through the use of untraceable sources, including, but not limited to hawala and hundi systems. Secondly, the misuse of humanitarian organizations by malicious individuals constitutes another problem faced by Pakistan. Thirdly, there are financial schemes connected with smuggling operations which contribute to extremist organizations’ finances. Moreover, growing risks related to virtual assets are mentioned since they allow carrying out cross-border anonymous payments. Overall, Pakistan should consider moving from merely fulfilling its international obligations to developing a human-oriented and local-based solution. It implies shifting focus from formal compliance with regulations to enhancing legislation for protecting the country’s economic welfare.