Proliferation financing might seem like an abstract concept that is completely removed from your daily life. But you might have more to do with it than you think. Even if you are working in Finance!
What are sanctions?
If you are following the news these days, you will know that sanctions are quite a hot topic.
Take the case of Iran, ever-present in the headlines, especially with a pretty aggressive US president who seems to be looking for excuses to demonstrate US military strength!
The main concern with Iran remains of course its interest in the development and use of Weapons of Mass Destruction (WMD). There are various ways the international community deal with countries that are developing or are interested in developing WMD, with the most widespread being the use of economic, or other, sanctions. The status quo with Iran is one of a return to sanctions after a brief period of more cooperative relations between Iran and the rest of the world.
And what has this got to do with ‘proliferation’?
While there have been international rules on nuclear non-proliferation for decades, this has not specifically been the case when it comes to the financing of proliferation.
As the Council of Europe outlines the timeline of action on this:
In 2004, the UN Security Council issued Resolution 1540, requiring states to put in place a number of measures in order to prevent the proliferation of nuclear, chemical or biological weapons. Subsequently, the FATF started in 2007 to consider the threats related to proliferation financing and its interconnection with terrorism and terrorism financing. (Source: COE)
The close connection with FATF’s concerns here is that proliferation is seen as a possible means for supporting the undertaking of terrorist activity. Thus, any action against proliferation financing is also essential for the prevention of any possible terrorist acts.
Proliferation financing: how does it work in practice?
The Democratic People’s Republic of Korea (DPRK, also known as North Korea) is perhaps notorious bad player when it comes to proliferation financing. ‘North Korea has perfected the art of disguise and employs various tricks to hide its identity when interacting with the global financial institutions’ (Source: Carnegie).
They rely on procurement managers who reside in third countries, or on middlemen acting on their behalf. These middlemen use multiple bank accounts under different names, paying for goods in several instalments (which creates confusion and covers any trails).
A documented case of such deception specifies a representative of the DPRK Daedong Bank opening several accounts in mainland China and Hong Kong, ‘both in his name and in the name of front companies, and used those accounts to carry out transactions worth millions of U.S. dollars’ (Source: Carnegie). The crucial piece of interest is that because of this deception, the DPRK is simply not mentioned in any of the documentation that the financial institutions receive – which makes it impossible to know who you are dealing with!
Regulating against Terrorist and Proliferation Financing
In 2017, you may have heard about the US Treasury Department designating the Chinese Bank of Dandong as an institution ‘of primary money laundering concern based on its alleged processing of North Korean transactions’ (Source: Lexology). The US Treasury’s Financial Crimes Enforcement Network (FinCEN) is especially feared in its ruthless pursuit of institutions of money laundering concern. This is because its actions have repercussions for how others around the world deal with the institution in question:
While Treasury’s action is technically a proposed rule rather than a final, binding rule, in practice it is a signal to banks around the world that they should immediately sever ties to Bank of Dandong. Banks are likely to do so rather than risk the loss of access to the U.S. financial system (Source: Reuters).
Sticking to the main principles of due diligence that guide AML checks and regulations in financial institutions’ daily regulatory life is a solid rule of thumb. When it comes to proliferation financing specifically, the key challenge is our limited capacity to identify proliferation activity through the data snapshots we get of transactions.
But this comes back to the validity of the Risk-Based Approach to Money Laundering and Terrorist Financing: in the absence of complete control and oversight, we can develop a system that minimises risks and catches out abuse of the financial system by paying attention to red flags and making sure we know our customer.