India’s Push to Greylist Pakistan: FATF, Terror Funding, and Global Aid

In light of the recent Pahalgam terror attack and escalating tensions, India is preparing a detailed dossier to urge the Financial Action Task Force (FATF) to re-list Pakistan on its grey list. The move aims to expose Pakistan’s continued failure in curbing terror financing, despite earlier commitments. India’s push comes amid global concerns over the misuse of multilateral aid and seeks renewed international scrutiny on Islamabad’s financial practices.

What is the Financial Action Task Force (FATF) and its purpose?

The Financial Action Task Force (FATF) is an inter-governmental body established in 1989 by the G7 nations to address the threats of money laundering, and later expanded its mandate to terrorist financing and proliferation financing. It creates global standards and monitors countries for compliance. FATF categorizes countries into two main watchlists:

• Grey list: For jurisdictions under increased monitoring due to strategic deficiencies.
• Black list: For jurisdictions with serious, ongoing deficiencies, often leading to economic sanctions.

Key characteristics of FATF:

• Has 40 members and observes compliance by over 200 jurisdictions.
• Operates through plenary sessions held thrice a year — in February, June, and October.
• Maintains cooperation with FATF-Style Regional Bodies (FSRBs) like the Asia Pacific Group (APG) of which both India and Pakistan are members.

Inclusion in the grey list subjects countries to enhanced scrutiny, making it harder to access international loans and aid. The FATF framework is central to ensuring global financial integrity, helping countries counter the financial networks of organized crime and terrorism.

Why is India demanding Pakistan’s grey list status again?

India’s push to place Pakistan back on the FATF grey list is based on concrete allegations of terror financing and misuse of international funds. The central reasons include:

• Recent terror attacks, such as the Pahalgam massacre on April 22, 2025, which killed 26 civilians, allegedly linked to Pakistan-based groups.
• Violation of FATF commitments: Though Pakistan was removed from the grey list in October 2022, it remains partially compliant with Recommendation 38, which relates to Mutual Legal Assistance (MLA) on confiscating proceeds of crimes.
• Evidence of misuse of aid: India claims that IMF and World Bank loans meant for development are being diverted for arms procurement and military use.
• India has documented how arms imports in Pakistan spiked during years of multilateral disbursements, averaging 18% of national budget on defense, higher than even war-affected countries.
• Pakistan’s anti-terror laws, promised as part of FATF compliance, have reportedly not materialized.

India is preparing a detailed dossier showcasing “omissions and commissions” by Pakistan. The goal is to convince FATF member nations to support greylisting. Indian officials have also reached out to international allies and key FATF board members, emphasizing the security risks and financial loopholes posed by Pakistan’s inaction.

India is also leveraging its diplomatic presence to oppose World Bank’s $20 billion funding package to Pakistan for FY2026-2035. The concern is that unrestricted funding could further empower state-sponsored terrorism.

India insists that the move is not against development aid, but against misuse of global institutions for military and terror-related expenditures. With broad bipartisan support and diplomatic lobbying, India aims to apply strategic pressure on Pakistan to enforce global anti-terror standards.

Where is FATF’s influence seen and how does grey listing impact a country?

The influence of FATF is global, with its guidelines forming the basis for anti-money laundering (AML) and counter-terrorism financing (CFT) laws across jurisdictions. It operates through regional bodies, such as the Asia Pacific Group (APG) and Eurasian Group (EAG), to ensure comprehensive implementation. Countries on the FATF lists often experience wide-ranging economic and diplomatic consequences.

Impact of grey listing on a country:

• Restricted foreign investments: Investors hesitate due to enhanced compliance requirements and perceived financial risks.
• Increased scrutiny of transactions: All international transactions undergo stricter monitoring, leading to delays and cancellations.
• Reputational damage: Grey listing signals weak enforcement of financial laws, tarnishing a country’s global image.
• Loan conditionalities: Institutions like the IMF, World Bank, and ADB impose stringent conditions for disbursements.
• Currency pressure: Foreign exchange reserves deplete due to declining investor confidence and capital flight.
• Trade disruptions: Importers and exporters face obstacles due to due diligence checks imposed by foreign banks and partners.

In Pakistan’s case:

• Grey listing between 2018 to 2022 restricted foreign direct investment, complicated trade finance, and forced compliance with 34 FATF action points.
• Removal in 2022 restored some access, but the current Indian dossier aims to reverse this, arguing that key legal reforms remain unfulfilled.
• India’s contention is also strategic — if Pakistan is re-listed, it could curb terror funding routes and weaken financial pipelines supporting cross-border militancy.

When did India intensify its efforts and what triggered it?

India’s renewed campaign to re-list Pakistan began after the Pahalgam terror attack on April 22, 2025, where 26 civilians including 25 tourists were killed. This massacre, linked to Pakistan-backed outfits, was viewed as a turning point in India’s strategic calculus.

Key triggers behind India’s intensified move:

• Immediate aftermath of the attack: Within weeks, India declared it would escalate diplomatic efforts.
• Diplomatic engagements: India engaged in high-level dialogue with FATF members, including European nations and Gulf countries, to build consensus.
• Opposition to IMF and World Bank loans: India strongly objected to:
  • The $1 billion IMF bailout in early May 2025.
  • The $20 billion World Bank aid proposed for 2026–2035.
• Operation Sindoor and global outreach: As part of post-attack counter-terrorism doctrine, India launched a multi-nation diplomatic campaign showcasing evidence of terror funding links.

Events following April 22 marked a coordinated policy shift:

• Indian ministers engaged the IMF chief and finance ministers of key board countries to oppose fund disbursements.
• AIMIM MP Asaduddin Owaisi’s speech in Bahrain equated Pakistani terrorists with ISIS, rallying Arab states’ support.
• India’s External Affairs Minister accused the West of supporting military regimes in Pakistan, highlighting decades of global hypocrisy.
• Prime Minister Modi’s address linked terrorism with economic costs, warning that Pakistan will pay for every attack.

This strategic timing, coupled with a comprehensive evidence dossier, sets the stage for India’s decisive push during the June 2025 FATF plenary.

Who are the key players and stakeholders involved in this issue?

The issue of Pakistan’s potential re-inclusion in the FATF grey list involves a wide array of international, regional, and national stakeholders, each with specific interests and roles.

Key stakeholders include:

• Government of India: Leading the campaign, India has compiled a detailed dossier highlighting Pakistan’s failure to act against terror financing. It is lobbying globally, engaging FATF member countries, IMF, and the World Bank, and presenting data linking aid misuse to increased arms procurement.
• FATF (Financial Action Task Force): The plenary body with 40 members (including India) and over 200 jurisdictions following its framework. It is the decision-maker on whether Pakistan should be grey-listed again. FATF’s decision will be based on its own assessment and member consensus.
• Pakistan Government and Military: Accused of supporting terror groups and misusing development aid for military expenses, Pakistan is defending itself with claims of compliance and urging lenders to ignore political pressure. It is not a member of FATF, but of APG, where it is evaluated.
• International Monetary Fund (IMF): Approved over $2.1 billion under an extended facility for Pakistan. Despite India’s objections, IMF has continued support, though it imposed 11 new conditions to increase financial accountability.
• World Bank: Proposed a $20 billion assistance package for Pakistan from 2026–2035 under a Country Partnership Framework. India is opposing this, citing security threats and lack of terror finance accountability.
• Indian Political Leadership:
  • Prime Minister Narendra Modi has warned of severe repercussions for cross-border attacks, stating Pakistan will “pay heavily”.
  • Finance Minister Nirmala Sitharaman personally objected to IMF aid timing and requested deferment.
  • External Affairs Minister S. Jaishankar criticized Western support to military regimes in Pakistan, calling out global double standards.
  • Opposition leaders like Asaduddin Owaisi have echoed the government’s stance abroad, showing national unity on the issue.
• International partners: India is lobbying countries in Europe, the Gulf, and Asia-Pacific, seeking their backing at the FATF plenary and opposing financial aid that allegedly fuels terrorism.

Together, these actors are shaping a high-stakes geopolitical and financial battle, with India aiming to use global governance institutions to pressure Pakistan into compliance.

How does the process for grey listing a country work?

Placing a country on the FATF grey list involves a multi-step procedure governed by consensus and evidence. The process is structured to ensure due diligence, peer reviews, and transparent justification.

Step-by-step grey listing process:

• Identification of deficiencies: A country is flagged when it shows strategic weaknesses in anti-money laundering (AML), countering financing of terrorism (CFT), or proliferation financing.
• Mutual Evaluation Report (MER): Regional bodies like the Asia Pacific Group (APG) assess countries based on FATF’s 40 recommendations. Pakistan was found partially compliant with Recommendation 38, concerning mutual legal assistance in freezing criminal proceeds.
• Plenary meetings: Held three times annually (February, June, October), these meetings decide on listing, based on evaluations, updates, and evidence submissions. India will use the upcoming June 2025 meeting to push its case.
• Consensus-based decision: Listing requires the consensus of FATF members. India must gather sufficient international support to get Pakistan re-listed. This is why it is pursuing a broad diplomatic offensive.
• Action plan assignment: If listed, the country must commit to specific reforms within a timeline. Between 2018–2022, Pakistan fulfilled 34 points in two FATF action plans to be removed from the list.
• Monitoring and follow-up: Once grey listed, the country undergoes regular reporting, on-site visits, and peer evaluations. Failure to meet deadlines could lead to black listing.

India is building a case by showing:

• Incomplete legislative reforms (e.g., anti-terror laws still not enacted).
• Persistent misuse of funds from the IMF and World Bank.
• Lack of enforcement of property confiscation and restraint under MLA frameworks.
• Military honors for known terrorists, showing state complicity.

India’s legal, financial, and diplomatic documentation, combined with a high-profile international campaign, is tailored to meet FATF’s evidentiary standards and trigger a consensus-based decision.

What is the broader significance of re-listing Pakistan?

Re-listing Pakistan in the FATF grey list carries deep geopolitical, economic, and counter-terrorism consequences. For India and the international community, it is not just a symbolic act but a critical tool for exerting financial pressure and disrupting the infrastructure of terrorism.

Strategic and diplomatic significance:

• Counter-terrorism impact: Greylisting would make it harder for Pakistan to fund, support, or shelter extremist networks, especially those involved in cross-border terrorism.
• Economic leverage: It restricts access to foreign loans, investments, and development finance. This would force Pakistan to undertake genuine legal and administrative reforms.
• Global accountability mechanism: Reinforces the FATF’s role as a neutral, evidence-based body that holds countries accountable irrespective of geopolitical alignments.
• Message to other nations: Demonstrates that state sponsorship of terrorism will not be tolerated and has direct financial costs.

Significance for India:

• A re-listing would help India curtail cross-border terror funding, particularly in Jammu & Kashmir.
• Strengthens India’s position in multilateral forums by highlighting its role as a responsible global actor fighting terrorism.
• Consolidates domestic political unity, showing bipartisan consensus on national security and foreign policy strategy.

Economic relevance for Pakistan:

• After its removal from the grey list in 2022, Pakistan had regained partial access to international funding.
• Re-listing would result in downgrades of sovereign ratings, increase borrowing costs, and deter foreign direct investments.
• Limits access to developmental aid which is now under global scrutiny due to claims of misuse for arms purchases.

Overall, re-listing Pakistan serves the dual purpose of weakening terror-financing channels and pressuring Islamabad to implement promised reforms. It reaffirms the principle of conditional international financing, ensuring development funds are not used to fuel violence.

What are the limitations of India’s current strategy?

While India’s dossier and diplomatic efforts are significant, there are inherent limitations and vulnerabilities that may hinder the success of its strategy to re-list Pakistan.

Dependence on global consensus:

• FATF decisions are consensus-based among 40 member nations. Without support from key members like China, Turkey, or Gulf nations, India’s push may not succeed.
• Some countries may prioritize geostrategic alliances, economic dependencies, or non-alignment, and resist India’s efforts despite the evidence.

Pakistan’s counter-narrative:

• Pakistan claims it has fulfilled FATF’s original conditions and continues to be monitored under the enhanced follow-up process.
• It presents itself as a victim of terrorism and frames India’s accusations as politically motivated.

International financial institutions’ autonomy:

• Bodies like the IMF and World Bank have institutional protocols that prevent direct influence by a single country.
• Despite India’s opposition, the IMF released the $1 billion tranche in May 2025, citing Pakistan’s compliance with targets.

Inconsistencies in enforcement:

• Even when countries are grey-listed, the impact varies. Some continue to receive bilateral and institutional support, reducing the deterrence value of FATF sanctions.
• Past FATF listings did not completely deter financial inflows or terror operations, raising questions about long-term effectiveness.

Geopolitical balancing acts:

• Western countries, particularly the US and EU, may avoid antagonizing Pakistan due to Afghanistan stability, regional security, and strategic military interests.
• Pakistan also leverages its alliances with China and Islamic nations to counter India’s lobbying.

Thus, while India’s dossier is strong, the final outcome depends on political will, diplomatic alignment, and the geopolitical climate — all of which can dilute the impact of otherwise robust evidence.

What are the major challenges India may face in this pursuit?

India’s diplomatic effort to re-list Pakistan on the FATF grey list is a well-coordinated move, but it is not without serious challenges on multiple fronts — geopolitical, institutional, and strategic.

Geopolitical resistance from key FATF members:

• China, a close ally of Pakistan, has historically blocked moves against Islamabad in international forums. Its influence in FATF can undermine India’s push.
• Turkey and Malaysia have also shown diplomatic solidarity with Pakistan in the past, potentially weakening India’s support base within FATF.
• Some Middle Eastern countries, with strategic and economic ties to Pakistan, may be reluctant to antagonize it publicly, despite India’s outreach.

Institutional and procedural constraints:

• FATF’s decision-making is based on consensus. Even if most countries support India’s stance, a few dissenting voices can delay or derail the re-listing process.
• Pakistan is under enhanced follow-up, not off FATF’s radar entirely. Some member states might argue that existing mechanisms are sufficient, resisting escalation to grey list status.

Diplomatic fatigue and global priorities:

• The global financial community is dealing with multiple crises — economic recovery, inflation, climate finance — which may dilute attention to terror financing issues.
• Countries facing their own internal financial and governance challenges may lack political bandwidth to engage with India’s evidence in depth.

Pakistan’s efforts to show compliance:

• Islamabad may accelerate cosmetic reforms, publish anti-terrorism updates, or engage diplomatically with neutral countries to counter India’s move.
• By highlighting its military losses to terrorism and claiming progress in AML-CFT, Pakistan tries to paint India’s allegations as politically motivated.

India’s credibility with multilateral lenders:

• India’s opposition to IMF and World Bank disbursements to Pakistan may be perceived by some as an attempt to weaponize financial platforms for geopolitical goals.
• While India clarifies it is not against development finance, sensitive timing and language in statements could be used by detractors to challenge its motives.

Despite these challenges, India’s strategy remains robust due to credible evidence, domestic political unity, and widespread support from terrorism-affected nations. Yet, these hurdles mean that outcomes are not guaranteed, and sustained diplomatic engagement is essential.

What could be the possible way forward for India?

India must adopt a multi-dimensional and sustained approach to maximize the chances of success in its FATF campaign while reinforcing its position as a credible voice against terror financing.

Strengthen international coalition-building:

• Continue engaging like-minded FATF member nations such as the US, France, UK, Germany, and Australia to build momentum for re-listing Pakistan.
• Expand diplomacy to non-aligned and neutral countries in Africa, Southeast Asia, and Latin America by sharing detailed and actionable intelligence.

Leverage multilateral forums:

• Present its dossier and supporting data in UN platforms, G20 discussions, and regional summits to keep pressure on Pakistan.
• Push for greater transparency and reform in the IMF and World Bank lending processes to prevent misuse of funds.

Enhance intelligence diplomacy:

• Share concrete, verifiable evidence of terror financing, including financial trails, MLA violations, and procurement patterns with international agencies.
• Coordinate with countries that have suffered from Pakistan-linked terror to create a united victims’ coalition.

Maintain political unity and domestic credibility:

• Continue bipartisan engagement where leaders from opposition parties also voice concerns internationally, as seen with Owaisi’s Bahrain speech.
• Reaffirm that India’s objection is not to development funding, but to the timing and misuse of such funds amid active terror operations.

Advocate legal accountability frameworks:

• Promote adoption of binding international mechanisms where countries like Pakistan are penalized if they fail to enact promised anti-terrorism legislation.
• Suggest FATF policy reforms to ensure that grey listing is accompanied by real consequences and automatic triggers when nations violate key commitments.

Use media and global civil society:

• Employ global media channels to publicize the human cost of terrorism supported through opaque finances.
• Partner with think tanks, research bodies, and NGOs to produce in-depth reports and awareness campaigns on Pakistan’s track record.

By using a long-term, evidence-driven and collaborative approach, India can not only push for Pakistan’s grey listing but also build a global financial and security consensus around the need for stricter anti-terror financing enforcement.

Conclusion

India’s push to re-list Pakistan on the FATF grey list is a complex but crucial initiative aimed at cutting off the financial lifelines of terrorism. Triggered by recent deadly attacks and supported by evidence of systematic misuse of development funds, this effort represents a broader strategy to ensure regional stability, financial integrity, and international accountability. Despite facing diplomatic resistance and procedural limitations, India is strategically engaging global allies, leveraging legal frameworks, and maintaining national unity. Moving forward, success will depend on persistent diplomacy, clear evidence, and a multilateral approach that prioritizes global security over political expedience.

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Practice Question: Discuss the significance of international financial institutions in shaping global counter-terrorism financing norms. (250 words)