What is proliferation financing?
Proliferation financing is of significant concern to every business in the regulated sector. A series of amendments to the UK Money Laundering Regulations 2017 came into force 1 September 2022. The Money Laundering and Terrorist Financing (Amendment) (No. 2) Regulations 2022 include an obligation for regulated entities to identify, assess and mitigate the risk of proliferation financing (PF). We have further detailed guidance on these amendments here.
What do regulated entities have to do on proliferation financing?
Regulated entities have the flexibility to create a new risk assessment on PF, or to incorporate proliferation financing into their existing money laundering and terrorist financing risk assessments. The Legal Sector Affinity Group (LSAG) has also updated its guidance on the anti-money laundering (AML) regulations to incorporate PF. Guidance on the new requirement to carry out proliferation financing risk assessments, either as part of the firm’s existing practice-wide risk assessment or as a standalone document.
VinciWorks has created a number of tools to assist with proliferation financing compliance. This includes dedicated training modules on proliferation financing. VinciWorks have also produced guidance on high risk jurisdictions on PF, incorporating the latest 2024 US National Proliferation Financing Risk Assessment prepared by the US Treasury.
Proliferation financing case: Illicit New York-Russia procurement scheme
In 2023, a resident of New York and two Canadian nationals were charged with sanctions evasion and breaches of the export control regime. The defendants used a number of corporate entities registered to an address in Brooklyn to unlawfully source and purchase millions of dollars worth of dual-use goods. These electronics were sent to sanctioned entities in Russia. The individuals purchased the electronics directly from US manufacturers and had the goods shipped to an address in Brooklyn. Then the goods were shipped to intermediary corporations in Türkiye, Hong Kong, India, China, and the UAE, which were then trans-shipped to Russia.
Proliferation financing case: Military-grade dual-use technology
Two US nationals and five Russian nationals, including Russian FSB agents, were charged with conspiracy as part of a global proliferation financing and money laundering scheme on behalf of Russia. The defendants conspired to obtain military-grade and dual-use technology directly from US corporations. This included ammunition, regulated electronics, quantum computing, and other electronics which can be used in the development of nuclear and hypersonic weapons systems. The sanctioned Russian entity based in Moscow received the exports from the US-based defendants who used shell companies and associated bank accounts to reroute shipping and obscure their financial transactions. Shipping documents and invoices were fabricated, and items were repackaged and relabeled, being sent around the world before arriving in Estonia and other neighbouring countries. The goods were then smuggled across the border, and the money sent to different bank accounts around the world.
Proliferation financing case: Iranian UAV procurement
In December 2023, an Iranian national and a previously sanctioned Chinese national were charged with procuring US-manufactured dual-use electronics for the development of unmanned aerial vehicles (UAVs) used by the Islamic Revolutionary Guards Corp (IRGC). OFAC sanctioned the Iranian national and other entities in Iran, Malaysia, Hong Kong and Indonesia for their involvement. The defendants used front companies to illegally purchase and ship electronics from the US to Iran for use in the UAVs. Foreign companies were used to obfuscate the final destination for the goods. This caused an unwitting French company to purchase from the US several electronic items. The sanctioned Chinese national then caused the French company to send the goods to Hong Kong, where they were diverted to Iran.
Proliferation financing case: Australian logistics company
In 2022, OFAC settled a case with an Australian freight and logistics company called Toll Holdings. Toll had processed thousands of transactions between North Korea, Iran and Syria, and had used the US financial system to do so. This was for the benefit of sanctified individuals and entities, and it was due to a complete failure of compliance controls from the company. Toll didn’t have in place policies of controls which matched the complexity of its operations. Toll had over 600 payment, invoicing and data systems spread across its business units, few of which talked to each other. The breaches only came to light when an internal whistleblower raised concerns about the company’s compliance with US sanctions. The company actually tried to mitigate its risk by ceasing all business with US sanctioned countries in 2016, but the company didn’t fully implement policies and procedures to stop payments from sanctioned entities. It didn’t test its procedures either, so customers based in US sanctioned countries could still use the company’s services, and it took another year for controls to finally prevent shipments to sanctioned countries.
What companies should do now to prevent proliferation financing
Firms should build their own internal intelligence on proliferation financing. If you come across something that could be a risk or is questionable, add it to your internal watch list. Don’t just rely on simple screening either, look at any potential adverse media, consider indirect relationships as well if the risk is high enough. Thoroughly investigate any potential sanctions matches you might have before you carry out the transaction.
In addition, training should encompass not just proliferation financing, but sanctions compliance as well. All staff, and particularly those at the front line undertaking due diligence or working with clients and third parties need to understand high risk issues like dual use goods. These are software and tech which can be used for both civil and military purposes, or the items are placed under sanction and there can be a breach if they fall into the hands of the wrong people like Russia.
