Proliferation Financing

Proliferation Financing

Proliferation Financing, often overshadowed by discussions of money laundering and terrorist financing, is a significant global concern. It involves the financial support for the proliferation of weapons of mass destruction (WMD), posing a grave threat to international peace and security. To address this issue, the Financial Action Task Force (FATF) has developed comprehensive guidelines and recommendations to help countries and businesses combat proliferation financing effectively.

Proliferation Financing entails the provision of funds to entities involved in the development, acquisition, or dissemination of WMDs. This includes nuclear, chemical, and biological weapons. These activities not only endanger global security but also violate United Nations Security Council Resolutions (UNSCRs).

The FATF, renowned for its role in countering money laundering and terrorist financing, extended its mandate in 2008 to address emerging threats like proliferation financing. The organization collaborates with UN Security Council Resolutions (UNSCRs) to develop standards and recommendations aimed at curbing proliferation financing.

The FATF Recommendations call for countries and businesses to assess the risks associated with proliferation financing, identify potential breaches of targeted financial sanctions, and take appropriate mitigating measures. This approach ensures awareness among stakeholders and prevents unwitting involvement in proliferation financing networks.

The FATF has provided non-binding guidance to assist both public and private sectors in implementing UNSCRs effectively. This guidance helps entities understand their obligations, prevent sanctions evasion, and establish robust coordination mechanisms to counter proliferation financing.

Proliferation Financing risk assessment is a critical step in identifying vulnerabilities. It requires cooperation between the public and private sectors. Financial institutions play a crucial role in reporting suspicious transactions and ensuring compliance with sanctions.

To counter proliferation financing, countries must freeze proliferation-related assets and establish effective mechanisms to do so. Additionally, jurisdictions should have the legal authority and competent authorities responsible for enforcing targeted financial sanctions promptly.

Proliferation Financing is a global concern that requires concerted efforts to mitigate its risks. The FATF’s guidelines and recommendations provide a framework for countries and businesses to address this issue effectively. By understanding the nature of proliferation financing and implementing appropriate countermeasures, we can contribute to global security and peace.

FATF Indicators of the potential breach, non-implementation or evasion of PF-TFS

Customer Profile Risk Indicators

  • During on-boarding, a customer provides vague or incomplete information about their proposed trading activities. Customer is reluctant to provide additional information about their activities when queried;
  • During subsequent stages of due diligence, a customer, particularly a trade entity, its owners or senior managers, appear in sanctioned lists or negative news, e.g. past ML schemes, fraud, other criminal activities, or ongoing or past investigations or convictions, including appearing on a list of denied persons for the purposes of export control regimes;
  • The customer is a person connected with a country of proliferation or diversion concern, e.g. through business or trade relations – this information may be obtained from the national risk assessment process or relevant national CPF authorities;
  • The customer is a person dealing with dual-use goods or goods subject to export control goods or complex equipment for which he/she lacks technical background, or which is incongruent with their stated line of activity;
  • A customer engages in complex trade deals involving numerous third-party intermediaries in lines of business that do not accord with their stated business profile established at onboarding;
  • A customer or counterparty, declared to be a commercial business, conducts transactions that suggest that they are acting as a money-remittance business or a pay-through account. These accounts involve a rapid movement of high-volume transactions and a small end-of-day balance without clear business reasons. In some cases, the activity associated with originators appear to be entities who may connected a state-sponsored proliferation programme (such as shell companies operating near countries of proliferation or diversion concern), and the beneficiaries appear to be associated with manufacturers or shippers subject to export controls;
  • A customer affiliated with a university or research institution is involved in the trading of dual-use goods or goods subject to export control.

Account and Transaction Activity Risk Indicators

  • The originator or beneficiary of a transaction is a person or an entity ordinarily resident of or domiciled in a country of proliferation or diversion concern (i.e. DPRK and Iran);
  • Account holders conduct transactions that involve items controlled under dual-use or export control regimes, or the account holders have previously violated requirements under dual-use or export control regimes;
  • Accounts or transactions involve possible companies with opaque ownership structures, front companies, or shell companies, e.g. companies do not have a high level of capitalisation or displays other shell company indicators. Countries or the private sector may identify more indicators during the risk assessment process, such as long periods of account dormancy followed by a surge of activity;
  • Demonstrating links between representatives of companies exchanging goods, i.e. same owners or management, same physical address, IP address or telephone number, or their activities may be co-ordinated;
  • Account holder conducts financial transaction in a circuitous manner;
  • Account activity or transactions where the originator or beneficiary of associated financial institutions is domiciled in a country with weak implementation of relevant UNSCR obligations and FATF Standards or a weak export control regime (also relevant to correspondent banking services);
  • Customer of a manufacturing or trading firm wants to use cash in transactions for industrial items or for trade transactions more generally. For financial institutions, the transactions are visible through sudden influxes of cash deposits to the entity’s accounts, followed by cash withdrawals;
  • Transactions are made on the basis of “ledger” arrangements that obviate the need for frequent international financial transactions. Ledger arrangements are conducted by linked companies who maintain a record of transactions made on each other’s behalf. Occasionally, these companies will make transfers to balance these accounts;
  • Customer uses a personal account to purchase industrial items that are under export control, or otherwise not associated with corporate activities or congruent lines of business.

Maritime Sector Risk Indicators

  • DPRK PF-TFS, i.e. UNSCR 2270 (2016) OP 23, has designated the DPRK firm Ocean Maritime Management and vessels in Annex III of the same UNSCR as economic resources controlled or operated by OMM and therefore subject to the asset freeze imposed in OP 8(d) of UNSCR 1718 (2006). UNSCR 2270 (2016) OP 12 also affirms that “economic resources” as referred to in OP 8(d) of UNSCR 2270 (2016), includes assets of every kind, which may potentially may be used to obtain funds, goods, or services, such as vessels (including maritime vessels).
  • A trade entity is registered at an address that is likely to be a mass registration address, e.g. high-density residential buildings, post-box addresses, commercial buildings or industrial complexes, especially when there is no reference to a specific unit;
  • The person or entity preparing a shipment lists a freight forwarding firm as the product’s final destination;
  • The destination of a shipment is different from the importer’s location;
  • Inconsistencies are identified across contracts, invoices, or other trade documents, e.g. contradictions between the name of the exporting entity and the name of the recipient of the payment; differing prices on invoices and underlying contracts; or discrepancies between the quantity, quality, volume, or value of the actual commodities and their descriptions;
  • Shipment of goods have a low declared value vis-à-vis the shipping cost;
  • Shipment of goods incompatible with the technical level of the country to which it is being shipped, e.g. semiconductor manufacturing equipment being shipped to a country that has no electronics industry;
  • Shipment of goods is made in a circuitous fashion (if information is available), including multiple destinations with no apparent business or commercial purpose, indications of frequent flags hopping, or using a small or old fleet;
  • Shipment of goods is inconsistent with normal geographic trade patterns, e.g. the destination country does not normally export or import the goods listed in trade transaction documents;
  • Shipment of goods is routed through a country with weak implementation of relevant UNSCR obligations and FATF Standards, export control laws or weak enforcement of export control laws;
  • Payment for imported commodities is made by an entity other than the consignee of the commodities with no clear economic reasons, e.g. by a shell or front company not involved in the trade transaction.

Trade Finance Risk Indicators

  • DPRK PF-TFS, i.e. UNSCR 2087 (2013) OP 5(a), UNSCR 2094 (2013) OP 8, UNSCR 2270 (2016) OP 10, UNSCR 2321 (2016) OP3, UNSCR 2371 (2017) OP 18, UNSCR 2375 (2017) OP 3, specifies that individuals and entities listed in Annex I and II of the resolutions are subject to the asset freeze imposed in OP 8(d) of UNSCR 1718 (2006). These designated entities include trading companies.
  • Prior to account approval, customer requests letter of credit for trade transaction for shipment of dual-use goods or goods subject to export control;
  • Lack of full information or inconsistences are identified in trade documents and financial flows, such as names, companies, addresses, final destination, etc.;
  • Transactions include wire instructions or payment details from or due to parties not identified on the original letter of credit or other documentation.

EU WMD Strategy

The EU Strategy Against the Proliferation of Weapons of Mass Destruction, adopted in 2003, outlines a comprehensive approach to combat the spread of WMDs. It emphasizes the importance of multilateralism, prevention, international cooperation, and the use of all available EU instruments and policies. The strategy aims to address the threat of WMD proliferation through a broad spectrum of actions, including the strengthening of multilateral treaties, enhancing export control policies, and promoting a stable international environment. It also highlights the need for close cooperation with key partners, including the United States, and the integration of non-proliferation concerns into the EU’s broader diplomatic and economic activities.

EU Council Decisions

Proliferation Financing-related targeted financial sanctions

The term „proliferation financing-related targeted financial sanctions“ refers to specific sanctions outlined in European Union legal frameworks, aimed at preventing the spread of weapons of mass destruction.

These sanctions, derived from

  • Council Decision (CFSP) 2016/849 of 27 May 2016 concerning restrictive measures against the Democratic People’s Republic of Korea and repealing Decision 2013/183/CFSP
  • 2010/413/CFSP: Council Decision of 26 July 2010 concerning restrictive measures against Iran and repealing Common Position 2007/140/CFSP
  • Council Regulation (EU) 2017/1509 of 30 August 2017 concerning restrictive measures against the Democratic People’s Republic of Korea and repealing Regulation (EC) No 329/2007
  • Council Regulation (EU) No 267/2012 of 23 March 2012 concerning restrictive measures against Iran and repealing Regulation (EU) No 961/2010

are designed to restrict financial transactions and resources that could contribute to nuclear, chemical, or biological weapons proliferation activities.

Hague Code of Conduct

The Council Decision (CFSP) 2023/124, adopted on 17 January 2023, supports the Hague Code of Conduct and ballistic missile non-proliferation as part of the EU’s strategy against the proliferation of Weapons of Mass Destruction (WMD). This decision builds on the EU’s long-standing commitment to non-proliferation and disarmament, as evidenced by previous strategies and decisions aimed at curbing the spread of WMD and their delivery systems, particularly ballistic missiles.

The decision outlines a comprehensive approach to reinforce the Hague Code of Conduct, aiming for its universal adoption and effective implementation. The specific objectives include promoting the Code’s subscription, ensuring its full implementation by current members, and integrating the Code more effectively into the global non-proliferation regime. The action plan includes targeted outreach to non-subscribing states, regional seminars, the development of informational materials, and events to foster dialogue and build confidence among states.

The High Representative of the Union for Foreign Affairs and Security Policy is tasked with overseeing the implementation of this decision, with the Fondation pour la recherche stratégique (FRS) executing the technical aspects of the action. The decision allocates a budget of EUR 1,042,614.72 for these activities, with the European Commission supervising the financial management and ensuring transparency and visibility of the EU’s contribution.

This decision represents a significant step in the EU’s efforts to address the challenges posed by the proliferation of ballistic missiles and WMDs, emphasizing the importance of international cooperation, transparency, and confidence-building measures in maintaining global security and stability.

UN Resolution on the non-proliferation of weapons of mass destruction and their means of delivery

Council Decision (CFSP) 2023/654 plays a pivotal role in supporting the implementation of United Nations Security Council Resolution 1540 (2004), which is central to the global effort to prevent the proliferation of weapons of mass destruction (WMD) and their means of delivery. This decision is aligned with the European Union’s (EU) strategy against the proliferation of WMD, adopted on 12 December 2003, and contributes to international peace and security by fostering the effective implementation of Resolution 1540.

Key Points of UN Security Council Resolution 1540 (2004)
  • Comprehensive Approach: It was the first international instrument to address WMD proliferation in a comprehensive manner, establishing binding obligations on countries to enforce national controls and adopt legislation aimed at preventing the proliferation of nuclear, chemical, or biological weapons and their means of delivery.
  • Non-Support for Non-State Actors: It specifically mandates countries to deny support to non-state actors seeking to develop, acquire, manufacture, possess, transport, transfer, or use WMD.
EU Strategy Against WMD Proliferation
  • Multilateralism: The strategy emphasizes strengthening international non-proliferation mechanisms and improving systems to verify compliance with multilateral treaties.
  • Prevention: It focuses on promoting a stable environment internationally and regionally, integrating non-proliferation goals across all EU political, diplomatic, and economic activities.
  • International Cooperation: The EU commits to working closely with the UN, other international organizations, key partners like NATO and the United States, and assisting non-EU countries in enhancing their procedures to fulfill obligations under international conventions.
Objectives and Activities Under Council Decision (CFSP) 2023/654
  • Tailored Support: The decision aims to utilize experience from previous EU actions to support UNSCR 1540, tailor support to specific country needs, and encourage national and regional responsibility to ensure the sustainability of activities.
  • Enhanced Implementation: It seeks to enhance national and regional capabilities for implementing UNSCR 1540 through training, capacity-building, and assistance facilitation, including the development of voluntary national implementation action plans.
  • Awareness and Cooperation: The decision includes raising awareness among stakeholders, supporting practical implementation recommendations, and developing sub-regional, regional, and international cooperation.