February 28, 2017
By: Jonathan Brewer*
Finding new, more effective ways of combating the proliferation of weapons of mass destruction (WMD) has become a major concern of the international community.
The international framework for combating proliferation is clearly set out in a number of United Nations Security Council resolutions. These include 1540 (2004) and 2325 (2016) that require UN Member States to adopt and implement legislation to combat proliferation, and specific resolutions against countries of proliferation concern,such as North Korea and Iran. Unilateral sanctions are in place to limit proliferation by Syria.
Yet, combating proliferation is most effective when governments and the private sector join forces. This is due to the fact that private sector entities may possess information that governments need to have to be able to put together the jigsaw puzzle of proliferation-related activities, and disrupt them.The financial sector has an important role to play in this joint effort, by monitoring for evidence of financing of proliferation (FoP).
An ongoing Study by King’s College London is intended to help both governments and the private sector better understand current FoP typologies and possible suspicious indicators.
Complex Networks and Front Companies
Detecting FoP often proves difficult for the private sector,as certain transactions can appear to be legitimate commercial activities even though they relate to goods and materials subject to export or other controls.
Furthermore, the sources of funds may be countries under sanctions, and companies and people involved in FoP can sometimes work through complex networks of procurement agents and front companies in multiple jurisdictions to hide their involvement.
Four Ways To Detect Financing of Proliferation
In principle, bankshave the ability to detect FoP in four ways:
- By screening and monitoring financial transactions to detect individuals or entities listed under UNSC or unilateral sanctions regimes for involvement in proliferation;
- By screening documentary information forproliferation-sensitive goods and materials. This is difficult in practice because banks usually do not have sufficient expertise to determine whether goods might be listed, and documents in their possession may not have sufficient detail;
- On the basis of intelligence or other information received from governments, for example, governments might pass on information that a particular financial transaction or financial network is associated with proliferation even though none of the entities or individuals involved is listed as such); and
- By monitoring financial transactions to detect patterns or characteristics that match typologies known to be associated with FoP.
No Box for “Financing of Proliferation” on SAR
For the majority of banks, financial crime compliance largely means satisfying regulatory requirements by focusing on the detection of money laundering and terrorist financing, as few regulators require suspicious activity reports relating specifically to FoP.
For example, the Suspicious Activity Report Form required by U.S. authorities under the Bank Secrecy Act, and used across multiple industries to report suspicious activity,has 80 options to choose from when characterizing the suspicious activity, but “Financing of Proliferation” is not one of them.
The more general category “Terrorist Financing” is included as one of the options on the SAR.
Typologies Poorly Understood
Typologies of FoP are also poorly understood and few banks currently monitor for them. Many could do more.
The most recent comprehensive review of FoP typologies, called the Typologies Report on Proliferation Financing, was published in 2008 by the Financial Action Task Force (FATF), an intergovernmental body established by the G-7 to protect the integrity of the global financial system.
The King’s College London Study is collating more recent data held by governments and banks, particularly in relation to UN sanctions on Iran and on North Korea, but looking at other proliferation programs as well.The Study’s Interim Report, published on February 5, 2017, analyzes 18 case studies in order to provide examples of the role that banks can play in combating proliferation.
Case Studies: Dual Use Goods To Iran and Circumventing Sanctions
The Interim Report provides a number of case examples, such as thoseinvestigated by authorities followingsuspicious activity reports submitted by banks.
In one particular case,the Swedish authorities investigated a company involved in exports of dual-use goods to Iran, in violation of export controls. The investigations were triggered by two suspicious transaction reports submitted by banks. The reports noted payments to the company from Iran, the first in late 2010, and the second in 2011.
The Interim Report also describes cases ofattempts to circumvent financial sanctions, whichwere primarilydetected by banks through monitoring for suspicious indicators related to money laundering.
In one such case, a trading company in the Middle East opened a number of bank accounts. Monitoring by the bank (in accordance with the bank’s due diligence practices relating to companies in the country concerned) established that the company’s financial activity was not consistent with a normal trading company. The bank investigated and concluded that the accounts were being used to transfer funds from Iran into the international financial system
The King’s College London Study will continue to collect and analyze data onFoP from governments and the private sector, and will publish a final report in summer 2017.
Do you have comments or feedback on the King’s College London Study’s interim report?Do you have any examples of possible financing of proliferation that might be shared with the Study (with sensitive details removed)?Comments or feedback are welcome and will be used to ensure that the Study’s final report is of as much practical value as possible for government and private sector practitioners.To provide comment or feedback, or for further information please contact Dr. Brewer at the information above.