De-Risking and the Debanking of Pakistan

On 31st October 2024, the American blog Money Laundering Watch, founded by the Philadelphia anti-money laundering lawyer Peter D. Hardy, carried a podcast post titled “State Fair Access and Debanking Laws Bring Country’s Political and Cultural Divisions to the Fore”, on the new “Fair Access” statutes by which American states, Florida in the lead, forbid a bank from refusing or dropping a customer on account of his business sector or his political or religious beliefs; and on 29th July 2024 the same blog had recorded that three Members of Congress and the United States Treasury consider the Florida law to be in conflict with federal anti-money laundering requirements, since the federal examiner expects a bank to manage risk by exiting the risky customer whereas the state statute commands the bank to keep him.

The federal position carries its own contradiction, and the blog had named it two years earlier. On 11th July 2022, in a post titled “FinCEN and Federal Functional Regulators Issue Coded Warnings Against De-Risking”, the same author recorded that FinCEN and the federal banking regulators had cautioned American banks against “De-Risking”, the wholesale exit from entire categories of customers, because a customer expelled from the regulated system does not stop transacting; he transacts where no examiner can see him.

Pakistan does not need that warning explained to it. For the better part of a decade, Pakistan was the customer.

The country as the exited customer

When the Financial Action Task Force placed Pakistan on its “Grey List” in June 2018, where we remained until 21st October 2022, the instrument that punished us was not any sanction in the FATF’s own hands, for the FATF levies no fines and freezes no accounts; the instrument was “De-Risking”. Moody’s, as Dawn reported on 28th February 2020, called Pakistan’s continued presence on the “Grey List” credit negative for its banks precisely because it raised questions over their access to foreign-currency clearing and their correspondent relationships abroad, the plumbing through which every letter of credit and every export payment must pass. The Basel Institute on Governance, in its country briefing of 15th December 2022, recorded that the listing impeded Pakistan’s access to the International Monetary Fund, the World Bank, the Asian Development Bank and the European Union, and that the IMF made exit from the “Grey List” a condition tied to its six billion US Dollar programme; and on 21st October 2022, the very day of delisting, Fitch cut Pakistan’s rating to CCC+, so the reward for four years of legislative labour was collected at the door by the crisis those years had deepened.

A foreign bank asked to clear dollars for a Pakistani bank in those years faced the same calculation an American bank faces over a small money services business: the income is modest and the diligence expensive, and the examiner’s file reads better without the relationship. The answer, in case after case, was exit.

Debanking, the domestic edition

Very unfortunately, the lesson our state functionaries drew from being de-risked was not that indiscriminate exclusion is dangerous; it was to reproduce the exclusion internally, one customer category at a time.

The “Exchange Companies” are the clearest example. An “Exchange Company” is a creature of Section 3AA of the Foreign Exchange Regulation Act, 1947 (Act VII of 1947), authorised by the State Bank of Pakistan to deal in “foreign currency notes, coins, postal notes, money orders, bank drafts, travelers cheques and transfers”, under a framework set out in F.E. Circular No. 09 of 30th July 2002, which fixed a minimum paid-up capital of two hundred million Rupees that stood unchanged for twenty-one years. On 6th September 2023 the State Bank announced structural reforms of the sector: the category B companies and the franchises were to be consolidated into a single category with a well-defined mandate, the minimum capital was raised to five hundred million Rupees, and the leading banks were directed to establish wholly-owned “Exchange Companies” of their own to serve the foreign exchange needs of the public at large; by a further amendment of December 2024 the capital floor was doubled to one billion Rupees. Whatever the supervisory merits, the design is plain: larger, bank-shaped institutions, and fewer of them; the exit of the small is the object, not the by-product.

Of Pakistan’s 2.32 million freelancers, only 38,000 hold a bank account in Pakistan.

That figure was placed before the Prime Minister’s committee on IT export remittances, as Business Recorder reported on 13th December 2024, and those 38,000 account-holders contribute fifteen per cent of the country’s IT exports; the remaining 2.28 million keep their earnings abroad, in foreign wallets and informal channels, for the reasons best known to the compliance departments that have made the opening of an ordinary account an ordeal of documentation.

The charities can produce no such tidy figure, because nobody in Pakistan has published a register of the not-for-profit organisations refused or stripped of accounts during the “Grey List” years; what is on the record is the FATF’s own admission. At its plenary of 25th to 27th October 2023 the FATF revised Recommendation 8 and its Interpretive Note because countries had misapplied the standard and imposed disproportionate measures on the whole not-for-profit sector, when only the narrow sub-set actually exposed to terrorist financing abuse was ever meant to be policed; and a country under the FATF’s microscope applies such a standard with the zeal of the examined, hence the blanket treatment of the sector by our banks needs serious reconsideration now that the standard-setter itself has recanted.

Where the money goes when the bank says no

Since a payment refused by the regulated channel does not cease to move but moves instead through “Hawala and Hundi”, therefore every account closed and every licence surrendered is a subsidy to the informal market which the Anti-Money Laundering Act, 2010 (Act VII of 2010) was enacted to squeeze. The Financial Monitoring Unit’s own tables prove it. In the fourth quarter of 2022, “Hawala and Hundi” accounted for eighty of the quarter’s financial intelligence disseminations, second only to tax crimes at ninety-nine (FMU, Quarterly Report, October to December 2022); in the same quarter the “Exchange Companies” filed 824 Suspicious Transaction Reports against the banks’ 4,901. Suspicious Transaction Reports across the system rose from 8,708 in 2018 to 33,743 in 2021 before settling at 24,107 in 2022, a curve bent upward by the “Grey List”; yet the predicate this machinery keeps finding is the very channel that exclusion feeds.

The stakes are not small. The State Bank of Pakistan’s data released on 9th July 2025 records workers’ remittances of 38.3 billion US Dollars in the financial year 2024-25, a rise of 26.6 per cent over the year before, and the financial year 2025-26 closed at a record 41.6 billion US Dollars; every percentage point of that flow pushed back into “Hawala and Hundi” by a closed account or a shuttered “Exchange Company” is measured in hundreds of millions of dollars moving beyond the sight of the state.

What is to be done

The courts have already said their part on the misuse of coercion. In Shahid Chaudhry v The State (Criminal Petition No.174 of 2026, decided on 27th February 2026), the Honourable Supreme Court of Pakistan held that criminal law is not a tool for the recovery of money; the same discipline belongs on the regulatory side, where debanking by category has become punishment by paperwork of customers never found to have done anything.

In the light of the above, it is urgently required that the State Bank of Pakistan direct that no bank refuse or close an account by reason of the customer’s category alone, whether “Exchange Company”, freelancer or charity, and that every closure record its individualised reason, since a risk-based regime that operates by category is not risk-based at all; it is highly recommended that the treatment of not-for-profit organisations be brought into line with revised Recommendation 8 of October 2023, keeping in view that only the sub-set genuinely exposed to abuse requires enhanced measures; and the conversion of freelance earnings into the banking system should be published quarterly as a supervisory metric, so that the 38,000 accounts of December 2024 become a number the state is ashamed of rather than one it reports in passing.

America, which wrote the rulebook under which we were de-risked, is now legislating “Fair Access” statutes to shield its own customers from exclusion over their business sector or their political or religious beliefs. Pakistan need not copy those statutes; but the premise beneath them, that wholesale exclusion is a supervisory failure and not a supervisory achievement, is one this country has paid for many times over, first in its correspondent accounts and now in the accounts of its money changers, its freelancers and its charities, and the FMU’s tables show exactly where the excluded money went.