Basics of Proliferation Financing

Proliferation financing in simple words refers to the provision of funds or financial services that are used to support the manufacture, acquisition, possession, development, export, transfer, or use of weapons of mass destruction (WMDs) and their means of delivery, including nuclear, chemical, or biological weapons, in violation of national laws or international obligations.

The objective of proliferation financing is to circumvent international sanctions, export controls, and other regulatory measures put in place to prevent the spread of WMD. It involves illicit financial networks, front companies, and deceptive practices to hide the true nature of the transactions and evade detection.

Proliferation financing can take various forms, including:

• Procurement: Financial activities related to the acquisition or attempted acquisition of WMD-related goods and technologies, such as materials for nuclear enrichment, missile components, or chemical precursors.
• Logistics and transportation: Financing the movement of WMD-related items, including arranging shipping, insurance, and related financial services to facilitate their transport.
• Money laundering: Concealing the origins of funds used for proliferation purposes through complex transactions and illicit networks to make the money appear legitimate.
• Trade-based activities: Manipulating trade transactions, misrepresenting goods, or using fraudulent documentation to disguise the movement of WMD-related items or illicit funds.
• Front companies and intermediaries: Establishing legitimate-looking businesses or individuals to act as intermediaries or cover for the proliferation activities, providing a fa?ade of legitimate trade or investment.

To counter proliferation financing, countries and international organizations have implemented various measures, including sanctions, export controls, and enhanced financial regulations to detect and disrupt these illicit activities.

FATF Recommendation 7 requires countries to implement targeted financial sanctions (TFS) to comply with the United Nations Security Council Resolutions (UNSCRs) relating to the prevention, suppression, and disruption of proliferation of weapons of mass destructions (WMD) and its financing and recognizing the significant threat posed by the proliferation of WMDs to international peace and security.

The Interpretive Note to Recommendation 7 sets out specific requirements concerning the implementation of targeted financial sanctions, including in relation to: designations; freezing and prohibiting dealing in funds or other assets of designated persons and entities; delisting, unfreezing and providing access to frozen funds or other assets; and the UN designation criteria.

• Paragraph 5 of the Interpretive Note to Recommendation 7 addresses the obligation of countries to implement targeted financial sanctions without delay against designated persons and entities.
• Paragraph 6(d) of the Interpretive Note to Recommendation 7 states that countries should require financial institutions and designated non-financial businesses and professions to report to competent authorities any assets frozen or actions taken in compliance with the prohibition requirements of the relevant.

To address this issue, FATF has established recommendations requiring countries and the private sector to identify and assess the risks associated with potential breaches, non-implementation, or evasion of targeted financial sanctions related to proliferation financing. They are also expected to take appropriate mitigating measures proportional to the identified risks.

The objective is to ensure that private sector entities and their supervisors are aware of the risks involved in their businesses and professions and prevent inadvertent support for proliferation financing networks or schemes.

This revised guidance consolidates and updates the previous three FATF guidance papers:

• ???The Implementation of Financial Provisions of UNSCRs to Counter the Proliferation of WMD (June 2007)
• The Implementation of Activity-Based Financial Prohibitions of UNSCR 1737 (October 2007)
• The Implementation of Financial Provisions of UNSCR 1803 (October 2008)

Some points taken from the guidelines are as follows:

• Countries should encourage financial institutions to apply a risk-based approach to identify high-risk customers and transactions.
• Countries should encourage their financial institutions to collect additional information on high-risk customers and transactions in order to identify, and avoid engaging in, prohibited activities, and to enable follow-up actions.
• Financial institutions should conduct on-going monitoring of high-risk customer account activity.
• Financial institutions may also consider additional steps, such as terminating the relationship with the relevant customer or account, suspending the relevant transaction, pending further investigation.
• Countries should continue to study measures to facilitate the effective implementation of the activity-based financial prohibitions, with a view to facilitating a harmonised and workable approach for financial institutions to prevent engaging in financial activities prohibited under activity-based financial prohibitions.
• Information provided by financial institutions relating to potential activity-based financial prohibitions should be shared internally with relevant counter-proliferation authorities, as appropriate and subject to countries’ existing legal frameworks.
• Countries should also share such information with counterparts from relevant countries, as appropriate.
• Countries should encourage financial institutions to consider transactional and customer information collected through their existing AML/CFT obligations and customer due diligence programs to identify transactions, accounts (including correspondent accounts), or relationships (such as joint ventures or jointly owned banking operations or facilities) with Iranian and DPRK banks.
• Countries should also encourage financial institutions to take adequate steps to satisfy themselves that their correspondent relationships with other banks are not used to bypass or evade the risk mitigation practices described in this guidance.
• Consider whether the designation of the bank will cause fit-and-proper concerns relating to the bank’s directors or senior management and consider whether the designation of the bank will cause other regulatory concerns.
• Determine whether the designated bank has a presence in their country.
• No payments should be made by a designated bank except were authorized by competent authorities which are actually implementing the financial sanctions.
• Competent authorities should put in place robust safeguards to ensure that only permitted payments are made.
• Competent authorities should consider how to deal with payments due under prior contracts.

In considering this guidance, countries should ensure that financial institutions comply with existing legal requirements that implement the FATF Recommendations, in particular: Recommendation 10 concerning customer due diligence; Recommendation 13 concerning correspondent banking; Recommendation 16 concerning wire transfers; Recommendation 18 concerning internal controls; and Recommendation 7 concerning targeted financial sanctions pursuant to UNSCRs 1718(2006), 1737(2006), 1747(2007), 1803(2008), 1874(2009), 1929(2010), 2087(2013) and 2094(2013).

Source:?FATF Guidance: The Implementation of Financial Provisions of United Nations Security Council Resolutions to Counter the Proliferation of Weapons of Mass Destruction

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