Indian lenders told to step up checks on funds flowing indirectly from Pakistan

The Reserve Bank of India (RBI) has asked the country’s lenders to increase scrutiny over funds flowing indirectly from Pakistan, according to a letter seen by Reuters that cited a “high risk” of such money being used to buy arms.

Direct flows of funds from Pakistan to India are largely prohibited, with every transaction requiring the central bank’s approval.

The directive, dated August 6, follows investigations by Indian agencies after the two neighbouring countries engaged in a fierce military conflict in May, triggered by India blaming Pakistan, without evidence, for the April 22 Pehalgam attack in occupied Kashmir.

The RBI named Pakistan a “high risk” jurisdiction from an arms financing perspective and cited Indian investigations into arms financing, but did not go into detail about their findings.

According to a government source with direct knowledge of the matter, Indian investigative authorities found that some Pakistani nationals had sent funds to India via other countries.

India’s banking channels are at a “high risk of being used for arms funding by Pakistan”, alleged the source, who was not authorised to speak to the media and declined to be identified.

The central bank has general guidelines in place for banks to prevent money laundering and the financing of arms and terrorism, but a directive drawing attention to Pakistan is rare.

The Reserve Bank of India did not respond to a Reuters’ request for comment.

Zafar Masud, president of the Pakistan Banks Association, said in a statement that Pakistan’s “anti-money laundering laws and combating the financing of terrorism is very strict and robust.”

The RBI letter to banks and non-bank lenders also separately cited instances where Pakistan has been accused of violating global sanctions and rules.

It noted that a June 2025 report by the global anti-money laundering watchdog Financial Action Task Force had accused a Pakistan state-owned entity, the National Development Complex, of “evading sanctions by importing items for missile development without declaring them.”

Pakistan’s foreign ministry did not respond to a Reuters request for comment.

The letter also listed North Korea as a “high risk” jurisdiction, citing sanctions imposed by the United Nations Security Council on the country in the past.