Anti-Money Laundering Preventive Measures: A Case Study in Line of Defence Adopted by Pakistani Banks

Abstract

Money laundering remains a critical issue for global financial systems, particularly in Pakistan, where despite the implementation of Anti-Money Laundering (AML) frameworks aligned with the Financial Action Task Force (FATF) and the State Bank of Pakistan (SBP), illicit financial flows persist. This study investigates the effectiveness of AML preventive measures in Pakistani banks, focusing on the "Three Lines of Defence" model, which integrates regulatory compliance, institutional behavior, and enforcement capacity. It explores how illegal activities, financial transactions, regulatory measures, and cross-border transactions impact money laundering outcomes, with a focus on the moderating roles of AML laws and enforcement capacity and the mediating role of financial institutions' compliance behavior. A survey of compliance officers, risk managers, and regulatory professionals in major Pakistani banks was conducted, and data were analyzed using SPSS and PROCESS macro. The findings reveal that regulatory measures and financial institutions' compliance behavior are the most significant predictors of effective AML outcomes, while illegal activities and cross-border transactions increase risks. Furthermore, robust AML laws and enforcement capacity strengthen the effectiveness of regulatory measures, with compliance behavior mediating the relationship between regulatory measures and money laundering outcomes. This study underscores the importance of integrating behavioral and regulatory approaches to strengthen AML strategies in Pakistan’s banking sector.