The Reserve Bank of India (RBI) has directed domestic lenders to step up checks on money flowing into the country through indirect channels from Pakistan, citing a “high risk” that such funds could be used to finance arms purchases, according to a letter reviewed by Reuters.
The directive, dated August 6, comes in the wake of Indian investigations that followed a four-day military clash between India and Pakistan in May. Direct fund transfers from Pakistan to India are already heavily restricted, requiring central bank approval for every transaction. However, investigators found that some Pakistani nationals had been routing money into India via third countries, raising concerns of misuse.
A government official with knowledge of the matter said Indian authorities had uncovered cases of funds entering the country through alternate banking channels. “India’s financial system faces a high risk of being exploited for arms funding by Pakistan,” the source said, requesting anonymity due to the sensitivity of the issue.
While the RBI has long maintained guidelines to prevent money laundering and the financing of terrorism, the move to specifically single out Pakistan is seen as unusual. The letter, circulated to banks and non-bank lenders, urged closer monitoring of cross-border transactions and reminded institutions of their obligation to identify suspicious flows.
Pakistan has pushed back against the allegations. Zafar Masud, president of the Pakistan Banks Association, said in a statement that the country maintains “very strict and robust” anti-money laundering and counter-terrorism financing regulations. Pakistan’s foreign ministry did not comment on the RBI’s move.
The central bank’s warning also referenced international findings. The letter cited a June 2025 report by the Financial Action Task Force (FATF), the global watchdog on illicit finance, which accused Pakistan’s state-owned National Development Complex of evading sanctions by importing items for missile development without declaring them.
In addition to Pakistan, the RBI letter also flagged North Korea as a “high risk” jurisdiction. The note reminded lenders of repeated United Nations Security Council sanctions imposed on Pyongyang over its weapons program, urging vigilance in monitoring any transactions linked to the country.
The development underscores India’s growing financial security concerns as geopolitical tensions persist. By directing banks to scrutinize indirect inflows, the RBI aims to prevent the country’s financial system from being misused for purposes that could compromise national security.
The central bank has not publicly commented on the letter. However, banking and security analysts said the measure reflects heightened caution amid regional instability, particularly with the recent escalation of hostilities earlier this year.
For now, the onus rests on Indian lenders to ensure stronger due diligence as the government tightens safeguards against the risk of arms-related funding.
