Dr. Ikramul Haq & Abdul Rauf Shakoori
The rapid diffusion of artificial intelligence (AI) across financial systems has reshaped the risk environment for money laundering and terrorist financing in ways that directly engage the core objectives of the framework of Financial Action Task (FATF). The increasing use of generative AI, deepfake technologies, and automated decision-making has altered both the nature and scale of illicit financial activity, shifting risk from transaction-centric manipulation to identity-centric exploitation.
For Pakistan, which has recently transitioned out of enhanced monitoring and is focused on demonstrating the sustainability of its anti-money laundering and combating the financing of terrorism (AML/CFT) reforms, these developments raise material questions regarding the adequacy, effectiveness, and future readiness of its preventive and supervisory measures.
The FATF has consistently emphasized that jurisdictions must demonstrate an understanding of evolving risks as a foundational element of an effective AML and CFT regime. The emergence of AI-enabled identity fraud directly challenges traditional customers due diligence frameworks, particularly in non-face-to-face onboarding environments.
The use of deepfake images, synthetic documents, and real-time video impersonation has weakened the reliability of document-based verification processes. These developments increase the exposure of financial institutions and designated non-financial businesses to misuse where risk assessments have not been updated to reflect technological evolution.
The FATF analysis highlights that artificial intelligence is now being actively exploited to enhance the efficiency and adaptability of money laundering schemes. Criminal networks are deploying AI driven tools to automate transaction structuring, test institutional controls, and dynamically adjust laundering patterns in response to monitoring thresholds. This capability undermines static rule-based systems and increases the likelihood that illicit proceeds can transmit the financial system without timely detection. Therefore, from a Mutual Evaluation perspective, this raise concerns under Immediate Outcome 4 regarding the effectiveness of preventive measures implemented by financial institutions.
The integration of artificial intelligence into virtual asset ecosystems has further elevated ML and TF risks. Virtual asset service providers operate within an inherently higher risk environment due to cross border reach, transaction speed, and varying degrees of decentralization.
The FATF has observed that AI-enabled automation, when combined with decentralized finance protocols and privacy enhancing mechanisms, can significantly complicate tracing and attribution of transactions. This development is particularly relevant to Pakistan as it advances toward formal regulation and licensing of virtual asset service providers under the FATF Recommendation 15.
The terrorist financing dimension of AI misuse presents distinct challenges for risk identification and mitigation. The FATF notes that extremist networks increasingly leverage AI generated content to impersonate legitimate actors and solicit funds through digital channels. These activities exploit humanitarian narratives and crisis events, often relying on informal payment methods and virtual assets. Therefore, from an effectiveness standpoint, this places heightened importance on Immediate Outcome 9, requiring jurisdictions to demonstrate that terrorist financing risks are understood and disrupted in a timely manner.
The FATF framework requires that supervisory authorities assess not only the existence of controls but their effectiveness in practice. The reliance on legacy compliance tools that are not adjusted to detect AI driven behavior creates gaps between technical compliance and operational outcomes. Where monitoring systems fail to identify adaptive laundering techniques, the effectiveness of supervision under Immediate Outcome 3 may be compromised. This highlights the need for supervisory authorities to update expectations and guidance in line with emerging risk typologies.
The implications for Pakistan’s financial system are amplified by the rapid expansion of digital financial services. The growth of mobile wallets, branchless banking, fintech platforms, and planned virtual asset activity has advanced financial inclusion objectives. However, the FATF underscores that inclusion must be accompanied by proportionate risk mitigation measures. Where digital access expands faster than control capacity, vulnerabilities may emerge that affect national risk profiles and undermine confidence in the AML and CFT regime.
The FATF places significant weight on a jurisdiction’s ability to apply a risk-based approach in both regulation and supervision. Pakistan’s historical emphasis on rule-based compliance and documentary verification addressed earlier risk cycles but requires realignment considering AI-enabled threats. Risk assessments must move beyond static indicators and incorporate behavioral analysis, technology driven typologies, and continuous monitoring models. This transition is essential to demonstrate effectiveness under Immediate Outcome 1.
The responsibility of financial institutions under the FATF standards extends to maintaining systems that are commensurate with their risk exposure. Banks, payment service providers, and virtual asset service providers are expected to deploy monitoring frameworks capable of identifying anomalous behavior rather than relying solely on predefined thresholds. This includes ongoing customer due diligence, enhanced scrutiny of high-risk digital channels, and timely reporting of suspicious transactions. Failure to adopt these measures may weaken overall system effectiveness.
The governance of artificial intelligence within compliance functions has emerged as a critical supervisory consideration. The FATF recognizes that opaque or poorly governed AI systems may introduce new risks, including bias, unexplained decision-making, and accountability gaps. Financial institutions must therefore demonstrate clear ownership of AI driven processes, maintain documentation of model logic where feasible, and ensure that high impact decisions remain subject to human oversight.
The cross-border nature of AI-enabled financial crime reinforces the importance of international cooperation. The FATF framework stresses that jurisdictions must be able to exchange information efficiently and support foreign counterparts. Given the global reach of virtual assets and digital finance, Pakistan’s continued engagement in international cooperation mechanisms will be central to sustaining positive Mutual Evaluation outcomes under Immediate Outcome 2.
The policy challenge for regulators is to strike an appropriate balance between innovation, inclusion, and financial integrity. Overly restrictive measures may inhibit technological development, while insufficient controls expose the system to abuse. The FATF advocates proportionate, technology neutral regulation grounded in demonstrated risk. This approach allows jurisdictions to respond dynamically without undermining legitimate economic activity.
The policy recommendations for Pakistan’s virtual asset service providers should reflect FATF expectations on preventive controls and risk governance. VASPs should be required to implement enhanced customer due diligence for remote onboarding, continuous transaction monitoring capable of detecting AI driven typologies, and governance structures that ensure accountability for compliance technologies. Licensing frameworks should explicitly address AI related risks and supervisory reporting obligations.
The financial institutions should be encouraged to strengthen institutional capacity through investment in advanced analytics, staff training, and internal coordination. Supervisory authorities should update guidance notes to reflect AI-enabled threats, clarify expectations on model governance, and support innovation through controlled testing environments. These measures would strengthen effectiveness across multiple Immediate Outcomes.
The broader recommendation for the government is to embed artificial intelligence risk considerations within the national AML and CFT strategy. This includes coordination between financial regulators, law enforcement agencies, and cybersecurity authorities, as well as investment in public sector analytical capabilities. Such an approach would demonstrate that Pakistan’s AML and CFT framework remains responsive to emerging threats.
The FATF Mutual Evaluation process ultimately assesses not whether risks exist but whether they are understood, mitigated, and addressed in practice. The rise of artificial intelligence and deepfake technologies represents a structural shift in financial crime rather than a temporary challenge. Pakistan’s ability to adapt its regulatory, supervisory, and institutional frameworks accordingly will be fundamental to sustaining financial integrity, international confidence, and long-term economic growth.
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Dr. Ikramul Haq, Advocate Supreme Court, specializes in constitutional, corporate, environment, media, ML/CFT related laws, IT, intellectual property, arbitration and international tax laws. He holds LLD in tax laws with specialization in transfer pricing. He was full-time journalist from 1979 to 1984 with Viewpoint and Dawn. He served Civil Services of Pakistan from 1984 to 1996.
He established Huzaima & Ikram in 1996 and is presently its chief partner. He studied journalism, English literature and law. He is Chief Editor of Taxation. He is country editor and correspondent of International Bureau of Fiscal Documentation (IBFD) and member of International Fiscal Association (IFA).
He is Visiting Faculty at Lahore University of Management Sciences (LUMS) and member Advisory Board and Visiting Senior Fellow of Pakistan Institute of Development Economics (PIDE).
He has coauthored with Huzaima Bukhari many books that include, Tax Reforms in Pakistan: Historic & Critical Review, Towards Broad, Flat, Low-rate, and Predictable Taxes (third edition, 2024), Pakistan: Enigma of Taxation, Towards Flat, Low-rate, Broad and Predictable Taxes (revised/enlarged edition of December 2020), Law & Practice of Income Tax, Law , Practice of Sales Tax, Law and Practice of Corporate Law, Law & Practice of Federal Excise, Law & Practice of Sales Tax on Services, Federal Tax Laws of Pakistan, Provincial Tax Laws, Practical Handbook of Income Tax, Tax Laws of Pakistan, Principles of Income Tax with Glossary and Master Tax Guide, Income Tax Digest 1886-2011 (with judicial analysis).
He is author of Commentary on Avoidance of Double Taxation Agreements, Pakistan: From Hash to Heroin, its sequel Pakistan: Drug-trap to Debt-trap and Practical Handbook of Income Tax. Two books of poetry are Phull Kikkaran De (Punjabi 2023) and Nai Ufaq (Urdu 1979 with Siraj Munir and Shahid Jamal).
He regularly writes columns/article/papers for many Pakistani newspapers and international journals and has contributed over 3000 articles on a variety of issues of public interest, printed in various journals, magazines and newspapers at home and abroad.
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Abdul Rauf Shakoori, Advocate High Court, is a subject-matter expert on AML-CFT, Compliance, Cyber Crime and Risk Management. He has been providing AML-CFT advisory and training services to financial institutions (banks, DNFBPs, Investment companies, Money Service Businesses, insurance companies and securities), government institutions including law enforcement agencies located in North America (USA & CANADA), Middle East and Pakistan. His areas of expertise include legal, strategic planning, cross-border transactions including but not limited to joint ventures (JVs), mergers & acquisitions (M&A), takeovers, privatizations, overseas expansions, USA Patriot Act, Banking Secrecy Act, Office of Foreign Assets Control (OFAC).
Over his career he has demonstrated excellent leadership, communication, analytical, and problem-solving skills and have also developed and delivered training courses in the areas of AML/CFT, Compliance, Fraud & Financial Crime Risk Management, Bank Secrecy, Cyber Crimes & Internet Threats against Banks, E–Channels Fraud Prevention, Security and Investigation of Financial Crimes. The courses have been delivered as practical workshops with case study driven scenarios and exams to ensure knowledge transfer.
His notable publications are: Rauf’s Compilation of Corporate Laws of Pakistan, Rauf’s Company Law and Practice of Pakistan and Rauf’s Research on Labour Laws and Income Tax and others.
His articles include: Revenue collection: Contemporary targets vs. orthodox approach, It is time to say goodbye to our past, US double standards, Was Due Process Flouted While Convicting Nawaz Sharif?, FATF and unjustly grey listed Pakistan, Corruption is no excuse for Incompetence, Next step for Pakistan, Pakistan’s compliance with FATF mandates, a work in progress, Pakistan’s strategy to address FATF Mandates was Inadequate, Pakistan’s Evolving FATF Compliance, Transparency Curtails Corruption, Pakistan’s Long Road towards FATF Compliance, Pakistan’s Archaic Approach to Addressing FATF Mandates, FATF: Challenges for June deadline, Pakistan: Combating the illicit flow of money, Regulating Crypto: An uphill task for Pakistan. Pakistan’s economy – Chicanery of numbers. Pakistan: Reclaiming its space on FATF whitelist. Sacred Games: Kulbhushan Jadhav Case. National FATF secretariat and Financial Monitoring Unit. The FATF challenge. Pakistan: Crucial FATF hearing. Pakistan: Dissecting FATF Failure, Environmental crimes: An emerging challenge, Countering corrupt practices .
The recent publication, coauthored by these writes with Huzaima Bukhari is:
Pakistan Tackling FATF: Challenges & Solutions, available at:
https://aacp.com.pk/book-detail/pakistan-tackling-fatf-challenges-and-solutions-35
https://www.amazon.com/dp/B08RXH8W46