Out Of The Shadows, But Watching The FATF Horizon - Pakistan, FATF, And The Ever-Present Risk Of The Grey List

Introduction

The Financial Action Task Force (FATF) is the world’s premier intergovernmental body dedicated to combating money laundering, terrorist financing, and the proliferation financing of weapons of mass destruction. Established in 1989 by the G-7 nations at a summit in Paris, it has grown into a 39-member body — comprising 37 countries and two regional organisations, the European Commission and the Gulf Cooperation Council — whose recommendations carry the weight of international financial law in practice, if not in form.

Among FATF’s most consequential tools are its two public lists: the grey list, formally described as “jurisdictions under increased monitoring,” and the blacklist, reserved for high-risk jurisdictions subject to a call for action. Placement on either list carries severe economic and reputational consequences, restricting access to international credit, deterring foreign investment, and subjecting a country’s financial institutions to heightened scrutiny worldwide.

For Pakistan, FATF monitoring has been a recurring feature of its economic and diplomatic landscape for much of the past two decades. Having been grey-listed three separate times between 2008 and 2022, the country’s hard-won exit from the grey list in October 2022 was a milestone achievement — the result of a sweeping, whole-of-government effort to overhaul its anti-money laundering (AML) and counter-terrorist financing (CFT) regime. Yet, as recent geopolitical developments demonstrate, Pakistan’s FATF position remains a live and sensitive issue, with new pressures emerging that could once again bring the grey list into focus.

Pakistan’s History with the FATF Grey List

Pakistan’s entanglement with FATF monitoring is not a single episode but a recurring pattern spanning fourteen years. Understanding this history is essential to appreciating both the significance of Pakistan’s 2022 exit and the fragility of its current standing.

The First Listing (2008–2009)

Pakistan was first placed on the FATF grey list on 28 February 2008, following concerns about deficiencies in its AML/CFT framework. The initial listing lasted 848 days, with FATF’s posture at that stage relatively measured — asking Islamabad to address loopholes in its financial oversight regime. Pakistan was removed from the list in 2009 after demonstrating initial compliance.

The Second Listing (2012–2015)

Pakistan returned to the grey list on 16 February 2012, remaining for 1,106 days. By this stage, FATF’s language had hardened considerably. The watchdog demanded the freezing of terrorist assets and alignment with United Nations Security Council Resolution 1267, which targets al-Qaeda, the Taliban, and associated individuals and entities. Pakistan was removed again in February 2015, though with instructions to continue working closely with the Asia Pacific Group on Money Laundering (APG).

The Third and Most Consequential Listing (2018–2022)

The third grey-listing, commencing 28 June 2018 and lasting 1,576 days, was by far the most rigorous and economically damaging. Following a mutual evaluation by the APG — the largest FATF-style regional body, with 41 member jurisdictions — Pakistan was assessed against all 40 FATF Recommendations and found severely deficient. As of 2020, Pakistan was rated ‘compliant’ in only one recommendation and ‘largely compliant’ in nine, while receiving ratings of ‘partially compliant’ in twenty-six and ‘non-compliant’ in four.

FATF issued Pakistan a demanding 27-point action plan — later supplemented by a further 7-point plan agreed with the APG in 2021 — bringing the total to 34 distinct action items. The plan covered a sweeping range of requirements: identifying and analysing terrorist financing risks, demonstrating effective prosecution of UN-designated terror groups and their senior leadership, freezing and confiscating assets linked to terrorism, and strengthening cross-border cooperation on financial intelligence.

"Three listings in fourteen years reveal a pattern of compliance under pressure — and the urgent need for Pakistan to demonstrate that its reformed AML/CFT regime is durable, not merely reactive."

Pakistan’s Path Out of the Grey List: Reforms and Achievements

The response to the 2018 grey-listing was, by any measure, the most comprehensive effort Pakistan had ever mounted on financial regulation. It was described by the government as a whole-of-nation endeavour, engaging seven federal ministries and approximately 50 departments and agencies at both federal and provincial levels.

Institutional Architecture

The cornerstone of Pakistan’s compliance effort was the establishment of the National FATF Secretariat, a dedicated body charged with coordinating action across the entire government. Complementing this was a new National Executive Committee of AML/CFT Regulators and Law Enforcement Agencies (LEAs), created to ensure continuity of the process and effective monitoring of the action plan. An AML Core Engagement Team was also constituted to interface directly with FATF and the APG. At the operational level, a Supervisory Coordination Committee — composed of AML/CFT regulators — provided day-to-day oversight.

Legislative Overhaul

A large number of new laws and regulations were enacted, and significant amendments were made to existing legislation. The most significant of these was the amendment of the Anti-Money Laundering Act 2010 (AML Act), which serves as the primary legislative instrument for Pakistan’s AML/CFT regime. Additional legislative steps included:

• Amendments to the Schedule of Offences under the AML Act, broadening the predicate offences that trigger money laundering liability.
• Enactment of new regulations governing the designated non-financial businesses and professions (DNFBPs), including lawyers, accountants, and real estate agents — sectors identified by FATF as high-risk conduits for illicit finance.
• Strengthening of laws relating to the freezing, seizing, and confiscation of assets linked to terrorism and money laundering.
• Alignment of national legislation with United Nations Security Council resolutions on targeted financial sanctions.
• The prosecution of senior figures linked to designated terrorist organisations, including a high-profile terrorism financing conviction in June 2022 days before the Berlin plenary — a development specifically noted by FATF observers as decisive in demonstrating institutional will.

Regulatory and Enforcement Improvements

Beyond legislation, Pakistan undertook significant improvements in the actual effectiveness of its AML/CFT regime. The Institute of Chartered Accountants of Pakistan (ICAP) was designated as an AML/CFT regulator, taking on a formal supervisory role over the accounting profession for the first time. Financial intelligence units were strengthened, and law enforcement agencies received training and resources to pursue complex financial investigations.

As a result of these intensive reforms, Pakistan’s compliance rating improved dramatically in its 2022 follow-up assessment: the country moved to ‘compliant’ or ‘largely compliant’ for 38 of the 40 FATF Recommendations, compared to only 10 at the start of the process.

Formal Removal from the Grey List

In June 2022, FATF’s Berlin plenary determined that Pakistan had substantially completed all items on both action plans, and an on-site visit was scheduled to verify implementation. Following a successful visit, the FATF Plenary meeting in Paris on 20–21 October 2022 — with Pakistan’s delegation led by Minister of State for Foreign Affairs Hina Rabbani Khar — decided by consensus that Pakistan had completed all substantial, technical, and procedural requirements. Pakistan was removed from the grey list with immediate effect. FATF President Dr Marcus Pleyer acknowledged the reforms, stating that they were “good for the stability and security” of Pakistan. The Ministry of Foreign Affairs of Pakistan described the achievement as a whole-of-nation endeavour.

Pakistan’s Current FATF Status

As of June 2026, Pakistan is not on the FATF grey list. It was removed in October 2022 and has remained off the list through every subsequent plenary session, including those in February 2025, June 2025, October 2025, and February 2026. Pakistan continues to engage with FATF through the normal follow-up process, working with the APG to further improve its AML/CFT system, as directed upon its removal.

The FATF itself, following Pakistan’s removal, acknowledged that Pakistan would continue to work on its AML/CFT system but classified it among jurisdictions that had made sufficient progress to no longer require increased monitoring. FATF President Elisa de Anda Madrazo subsequently noted, in the context of Pakistan, that countries exiting the grey list are “not bulletproof” against money laundering or terrorist financing, and that all jurisdictions — listed or not — must continue their work to prevent and deter financial crimes.

Pakistan’s economic standing has benefited measurably from its FATF compliance status. The country has secured a USD 7 billion extended fund facility from the International Monetary Fund (approved in September 2024), and the World Bank has committed a substantial assistance package for 2026–2035. Both institutions apply heightened scrutiny to grey-listed countries; Pakistan’s clean FATF status has undoubtedly facilitated these arrangements, even as critics argue that not enough structural reform has occurred to guarantee durable compliance.

"The FATF’s June 2025 plenary was a critical test of Pakistan’s standing. Despite concerted diplomatic pressure from India in the aftermath of the Pahalgam attack, FATF declined to re-list Pakistan — a decision supported by China, Turkey, and Japan."

Dangers and Risks: Could Pakistan Return to the Grey List?

Despite its current clean status, Pakistan faces real and evolving risks that could result in renewed grey-listing. These risks span the geopolitical, structural, and compliance dimensions, and none of them can be dismissed as merely theoretical.

1. The India-Pakistan Geopolitical Dimension

The most immediate and visible risk has emerged from the dramatic deterioration of India-Pakistan relations following the Pahalgam terror attack of 22 April 2025, in which 26 civilians, mostly tourists, were killed in Indian-administered Kashmir. India attributed the attack to Pakistan-backed militants — specifically the Resistance Front, identified as an offshoot of the Pakistan-based Lashkar-e-Taiba. While Pakistan denied involvement and called for an independent investigation, the incident triggered a four-day military confrontation between the two nuclear-armed neighbours before a ceasefire brokered by Washington came into effect on 10 May 2025.

In the aftermath, India launched a comprehensive diplomatic campaign to have Pakistan re-listed on the FATF grey list. Indian officials prepared a detailed dossier — compiled by the Ministry of External Affairs, the National Security Council Secretariat, and the Enforcement Directorate — alleging that Pakistan had not sustained its post-2022 reform commitments and continued to permit financial flows to UN-designated terrorist groups. India lobbied key FATF members across Europe, the Gulf, and North America, and presented its case at the June 2025 FATF plenary in Paris.

However, at the June 2025 plenary, FATF declined to re-list Pakistan. India’s campaign met with “strong opposition from member states,” according to diplomatic sources. China took a firm stance in Pakistan’s favour, acknowledging the country’s compliance progress. Turkey and Japan also extended their support. Pakistan’s state broadcaster described the outcome as a diplomatic victory and noted that India’s push had “completely failed.” FATF, for its part, did not issue any specific statement singling out Pakistan for concern, consistent with its practice of basing listing decisions on technical assessments rather than bilateral political disputes.

While Pakistan emerged from the June 2025 plenary unscathed, the India-Pakistan dynamic remains unresolved. India is expected to continue building its diplomatic case, and the risk of re-listing at a future plenary — particularly if fresh evidence of systemic terror financing is produced and gains traction among a broader coalition of FATF members — cannot be ruled out.

2. Structural and Compliance Risks

Even setting aside the geopolitical dimension, Pakistan faces ongoing structural vulnerabilities that the FATF itself has identified. Pakistan remains partially compliant with Recommendation 38, which governs mutual legal assistance in the freezing and confiscation of criminal proceeds. Sustained deficiencies in this area could attract renewed scrutiny in future mutual evaluation cycles.

More broadly, concerns have been raised about the depth and sustainability of Pakistan’s AML/CFT reforms. There are reports of continuing misuse of digital payment channels — including digital wallets — by proscribed organisations to fund operational activities, including instances involving Jaish-e-Mohammad. These concerns, if substantiated, strike at the heart of the commitments Pakistan made to FATF in 2018 and 2021.

The Basel Institute on Governance has noted that many jurisdictions have been grey-listed more than once — including Pakistan itself — and that FATF standards continue to evolve, requiring countries to constantly improve their regimes merely to keep pace. Pakistan’s history of complying with FATF deadlines under pressure, only to allow the underlying machinery of financial crime to persist, is precisely the pattern that observers and critics have identified as a structural risk.

3. Economic Consequences of Re-Listing

The stakes of re-listing are severe, and Pakistan’s fragile economic position makes them more so. Research by Islamabad-based think tank Tabadlab estimated that Pakistan’s three periods of grey-listing from 2008 to 2019 resulted in cumulative GDP losses of approximately USD 38 billion, driven by reductions in consumption, exports, and foreign direct investment. A fresh grey-listing would:

• Expose Pakistani banks and financial institutions to enhanced due diligence requirements from international counterparts, slowing and increasing the cost of cross-border transactions.
• Jeopardise Pakistan’s ongoing IMF Extended Fund Facility arrangement, given the IMF’s own AML/CFT conditionalities and the reputational sensitivity of its programmes.
• Deter foreign direct investment at a time when Pakistan is actively seeking to attract capital into strategic sectors, including the landmark Reko Diq mining project in Balochistan.
• Undermine the World Bank’s proposed 2026–2035 assistance framework, worth up to USD 20 billion, which is premised in part on Pakistan’s financial governance trajectory.
• Damage correspondent banking relationships, further isolating Pakistan’s financial sector from international markets.

4. The Geopolitical Wildcard: FATF as an Instrument of Pressure

A more systemic risk is that FATF may increasingly be used as an instrument of geopolitical pressure by powerful member states pursuing national objectives. FATF’s listing decisions are made by consensus, which means that sustained diplomatic pressure by influential members — particularly those within the G-7 — can shape outcomes in ways that may not always reflect purely technical assessments. India’s aggressive 2025 campaign, while ultimately unsuccessful, demonstrated the extent to which the grey-listing mechanism can be weaponised in bilateral disputes. Should the India-Pakistan relationship deteriorate further, or should India secure broader multilateral support for its position, the diplomatic insulation that China and Turkey provided at the June 2025 plenary may not hold indefinitely.

Conclusion

Pakistan’s removal from the FATF grey list in October 2022 was a genuine and hard-won achievement, the product of years of legislative reform, institutional restructuring, and high-level political commitment. The improvements to Pakistan’s AML/CFT architecture — from the amendment of the Anti-Money Laundering Act to the strengthening of regulatory oversight across DNFBPs and the prosecution of terror financing cases — represent meaningful, if incomplete, progress.

Yet the story does not end at removal from the list. As the events of 2025 have demonstrated, Pakistan’s FATF status remains a live geopolitical variable, subject to pressures that go well beyond the technical criteria that FATF formally applies. The June 2025 plenary — in which India’s campaign to re-list Pakistan was rejected — provided important relief. But the underlying structural vulnerabilities, the incomplete compliance on certain recommendations, and the persistent question marks over the depth of counter-terrorism financing measures mean that Pakistan cannot afford complacency.

For Pakistan’s government, legal community, and business sector alike, the lesson of the FATF experience is clear: compliance must be sustained, not merely demonstrated. The costs of re-listing — financial, reputational, and diplomatic — are too high, and the risks too real, for any other posture. Pakistan must continue to build on the institutional foundations it has established, entrench the culture of financial compliance within its regulatory and enforcement agencies, and engage proactively with international partners to demonstrate that its reformed AML/CFT regime is durable, not merely reactive.

The horizon remains watchful. Pakistan’s challenge is to ensure that what it has achieved remains secure.

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