VASP Correspondent Relationships: AML Rules for Pakistani Firms

For virtual asset service providers (VASPs) in Pakistan, establishing relationships with other financial institutions and virtual asset firms is often essential for operational efficiency and service delivery. These connections enable a range of services, from facilitating fiat on- and off-ramps to enabling cross-border transfers and liquidity provision.

However, these correspondent relationships are not just business opportunities; they introduce significant anti-money laundering and counter-terrorist financing (AML/CFT) risks. Regulators worldwide, including Pakistan’s proposed Pakistan Virtual Assets Regulatory Authority (PVARA), are increasingly scrutinising these arrangements due to their potential for illicit finance.

Understanding and managing these risks is crucial for any VASP operating or planning to operate in Pakistan. Non-compliance can lead to severe penalties, reputational damage, and even the loss of your operating licence. This article explains the proposed regulatory expectations for VASP correspondent relationships.

What are VASP Correspondent Relationships?

A VASP correspondent relationship involves one VASP providing services to another VASP, allowing the latter to access services it cannot provide directly. This often includes payment processing, virtual asset transfers, and other financial services. These arrangements are critical for the interconnectedness of the virtual asset ecosystem.

In essence, a correspondent relationship allows a “respondent” VASP to offer services to its own customers that it might not be equipped to handle directly, by leveraging the capabilities of a “correspondent” VASP. For example, a smaller VASP might use a larger, established VASP to process high-volume transactions or to access a wider range of virtual assets. These relationships are foundational for liquidity, market access, and the efficient movement of virtual assets and related fiat currencies across the global financial system. PVARA’s proposed framework aims to bring clarity to how these inter-VASP dealings must be conducted, particularly regarding AML/CFT compliance. Firms seeking to engage in such activities will need to ensure they meet the criteria for VASP licensing in Pakistan.

Why are Correspondent Relationships a Regulatory Focus?

Regulators, guided by the Financial Action Task Force (FATF), view correspondent relationships as high-risk areas for money laundering and terrorist financing. The complexity and cross-border nature of these arrangements can create opportunities for criminals to obscure the origin or destination of funds.

The FATF, an intergovernmental body that sets international standards to prevent illicit financial activities, specifically addresses correspondent banking and similar relationships in its recommendations. FATF Recommendation 15, which specifically addresses virtual assets, mandates that countries apply AML/CFT requirements to VASPs, including those involved in correspondent relationships. You can learn more about what FATF Recommendation 15 means for Pakistan’s rules. The State Bank of Pakistan (SBP) and the Securities and Exchange Commission of Pakistan (SECP) also contribute to the broader financial crime prevention landscape, influencing PVARA’s approach. The concern stems from the potential for “nested” relationships, where a respondent VASP might serve numerous other VASPs, creating opaque layers that hinder transparency and traceability. This makes it challenging for the correspondent VASP to understand the true ultimate beneficial owners of funds flowing through the relationship, significantly increasing the risk of money laundering or terrorist financing.

What Due Diligence is Required for Correspondent Relationships?

PVARA’s proposed framework requires VASPs to conduct thorough due diligence on their correspondent VASP partners, similar to traditional financial institutions. This involves assessing the respondent VASP’s AML/CFT controls, regulatory status, and overall risk profile before establishing a relationship.

This due diligence process is more extensive than standard customer due diligence (CDD) and is often referred to as Enhanced Due Diligence (EDD). It aims to ensure that the correspondent VASP is not facilitating illicit activities. Key elements of this due diligence, as generally expected by regulators globally and proposed by PVARA, include:

• Understanding the Respondent VASP’s Business: Gaining a comprehensive understanding of the respondent VASP’s nature of business, its client base, and the types of services it offers.
• Assessing AML/CFT Controls: Evaluating the respondent VASP’s AML/CFT programme, including its internal policies, procedures, risk assessments, and compliance personnel. This often involves reviewing their customer due diligence processes, transaction monitoring systems, and suspicious transaction reporting mechanisms. A practical guide to customer due diligence for crypto exchanges highlights similar principles.
• Regulatory Status and Licensing: Verifying that the respondent VASP is properly licensed and regulated in its jurisdiction for the services it provides. This includes confirming they are not operating in a jurisdiction known for weak AML/CFT controls or under international sanctions.
• Reputation and History: Conducting checks on the respondent VASP’s reputation, management, and any history of regulatory breaches or enforcement actions.
• Purpose of the Relationship: Clearly documenting the purpose and intended nature of the correspondent relationship.
• Information Sharing Capabilities: Ensuring the respondent VASP is able and willing to provide relevant customer and transaction information upon request, especially for purposes of the FATF Travel Rule.

This rigorous assessment is a cornerstone of a robust risk-based approach to AML for crypto businesses in Pakistan.

How Should Firms Manage Ongoing Correspondent Relationships?

Managing these relationships requires continuous oversight to ensure the correspondent VASP maintains adequate AML/CFT controls and adheres to agreed-upon standards. This includes regular risk assessments and monitoring of transactions, ensuring that the risk profile of the relationship remains acceptable.

Once a correspondent relationship is established, the due diligence process does not end. PVARA’s proposed guidelines, consistent with international best practices, will likely require ongoing monitoring to ensure that the risk profile of the respondent VASP has not changed and that their AML/CFT controls remain effective. This includes:

1. Periodic Reviews: Conducting regular, comprehensive reviews of the respondent VASP’s AML/CFT programme, typically annually or more frequently for higher-risk relationships. This is distinct from ongoing monitoring versus periodic review of customers but shares similar principles.
2. Transaction Monitoring: Implementing robust transaction monitoring systems to detect unusual patterns or high-risk transactions originating from or destined for the correspondent VASP. This requires setting appropriate rules and thresholds for alerts.
3. Risk Re-assessment: Regularly re-assessing the overall risk posed by the relationship, taking into account any changes in the respondent VASP’s operations, regulatory environment, or the nature of transactions.
4. Communication and Information Exchange: Maintaining open channels of communication to facilitate timely information exchange, especially concerning suspicious activities or regulatory inquiries.
5. Termination Clauses: Ensuring that agreements include clear clauses for immediate termination of the relationship if the respondent VASP fails to meet AML/CFT obligations or if significant risks emerge.

The designated compliance officer (MLRO) plays a critical role in overseeing these ongoing management activities and reporting any concerns.

What Record-Keeping Obligations Apply to These Relationships?

VASPs must maintain comprehensive records of all due diligence performed, risk assessments conducted, and ongoing monitoring activities related to their correspondent relationships. These records must be readily accessible for regulatory inspection and demonstrate compliance with AML/CFT requirements.

The importance of meticulous record-keeping cannot be overstated. PVARA is expected to mandate specific retention periods for various types of records, aligning with the general record-keeping obligations for VASPs in Pakistan. These records serve as crucial evidence of a VASP’s compliance efforts and are vital during regulatory audits or investigations. Required documentation will likely include:

• Copies of all due diligence documents obtained from the respondent VASP, such as their licences, corporate registration documents, and AML/CFT policy manuals.
• Records of all risk assessments conducted, including the methodology used and the rationale for the assigned risk rating.
• Documentation of ongoing monitoring activities, including alerts generated by transaction monitoring systems and the outcomes of investigations into those alerts.
• Minutes of meetings, correspondence, and other communications related to the correspondent relationship, especially those concerning compliance matters.
• Details of any suspicious activity detected and the subsequent filing of a Suspicious Transaction Report (STR) with the Financial Monitoring Unit (FMU).

These records must be organised, easily retrievable, and stored securely to protect sensitive information, in line with broader data protection obligations for virtual asset firms.

Are there Specific Considerations for Cross-Border Relationships?

Cross-border correspondent relationships introduce additional complexities, including varying regulatory standards and geopolitical risks. PVARA is expected to require enhanced due diligence for such relationships, particularly when dealing with VASPs in jurisdictions with weaker AML/CFT regimes.

When a Pakistani VASP engages in correspondent relationships with a VASP located in another country, the regulatory landscape becomes more intricate. The proposed PVARA framework will likely align with FATF guidelines, which emphasise heightened scrutiny for cross-border arrangements. This is especially true for relationships involving jurisdictions identified as high-risk by the FATF or those with known strategic AML/CFT deficiencies.

Specific considerations include:

• Jurisdictional Risk Assessment: Evaluating the AML/CFT regime of the respondent VASP’s home jurisdiction. This involves consulting the FATF’s public statements and lists of high-risk and monitored jurisdictions. Pakistan’s own National Risk Assessment provides context for domestic risks, but international assessments are key for cross-border activities.
• Information Exchange Limitations: Understanding any legal or practical impediments to obtaining necessary customer information from the respondent VASP’s jurisdiction, which can impact a Pakistani VASP’s ability to meet its own AML/CFT obligations.
• Sanctions Compliance: Ensuring strict adherence to international and national sanctions regimes, verifying that neither the respondent VASP nor its underlying customers are subject to sanctions.
• Regulatory Divergence: Navigating differences in regulatory requirements between Pakistan and the respondent VASP’s jurisdiction, ensuring compliance with the stricter of the two where applicable.

For Pakistani VASPs, the due diligence for cross-border relationships must be robust enough to mitigate these elevated risks effectively. For more information on PVARA’s role and upcoming regulations, firms can visit the official PVARA website at https://pvara.org.

What are the Potential Consequences of Non-Compliance?

Failing to comply with the proposed regulations for VASP correspondent relationships can result in significant penalties, including fines, licence suspension, or revocation. Non-compliance also carries severe reputational damage, potentially hindering future business partnerships and customer trust.

The regulatory landscape for virtual assets in Pakistan is evolving, but the commitment to AML/CFT compliance is firm. PVARA, once fully operational, will possess a range of enforcement powers designed to ensure adherence to its rules. These powers are expected to be substantial, reflecting the high-risk nature of virtual asset activities.

Potential consequences for non-compliance with correspondent relationship requirements may include:

• Monetary Penalties: Significant fines levied against the VASP and potentially against individual directors or compliance officers. The scale of these fines can be substantial, as seen in crypto compliance penalties across jurisdictions.
• Licence Suspension or Revocation: PVARA has the authority to suspend or even revoke a VASP’s operating licence, effectively forcing the business to cease operations. This is a critical risk for any firm, as it means the end of their legal ability to conduct virtual asset services in Pakistan.
• Reputational Damage: Public enforcement actions can severely damage a VASP’s reputation, eroding customer trust and making it difficult to attract new clients or establish further correspondent relationships. Negative publicity can have long-lasting effects.
• Criminal Charges: In severe cases involving deliberate money laundering or terrorist financing facilitation, individuals associated with the VASP could face criminal prosecution.
• Increased Scrutiny: Even without formal penalties, non-compliance can lead to increased regulatory scrutiny, more frequent audits, and additional reporting requirements, diverting significant resources from core business activities.

These consequences underscore the critical importance of establishing and maintaining a robust compliance framework for all VASP operations, especially those involving correspondent relationships.

About this analysis

This article was researched using publicly available information from the Financial Action Task Force (FATF), the State Bank of Pakistan (SBP), the Securities and Exchange Commission of Pakistan (SECP), and anticipated regulatory positions of the proposed Pakistan Virtual Assets Regulatory Authority (PVARA). The content reflects our understanding of the evolving virtual asset regulatory landscape in Pakistan as of 6 September 2026.

While we strive for accuracy, specific regulatory requirements, thresholds, and deadlines are subject to change as PVARA’s framework is finalised and implemented. Operators should always verify the latest official guidance directly from PVARA or other relevant authorities. This analysis is provided for informational purposes only and does not constitute legal or professional advice. Firms should seek independent legal counsel for specific compliance questions.