All firms in the regulated sector must undertake a proliferation financing risk assessment, either a stand alone risk assessment, or as part of their existing money laundering and terrorist financing risk assessments.
However proliferation financing compliance must go beyond a risk assessment. The risk assessment process will result in a series of mitigation measures. This should include dedicated training modules on proliferation financing and guidance on high risk jurisdictions on PF.
Communication is also a vital risk mitigation measure to combat proliferation financing. Communication is more than training, it means regularly communicating with staff and stakeholders about the risks of PF, and what your firm is doing to combat them.
VinciWorks have created free-to-use templates to assist with your communication around proliferation financing. We have produced a template email to staff on understanding PF risks, a template email to stakeholders on what your firm is doing to mitigate PF risks, and a template one page explainer to inform staff and stakeholders about PF and why it is important.
You can copy and paste the text of these templates and customise them to suit your organisation.
Don’t forget to register for VinciWorks free webinar on managing proliferation financing risks on Wednesday 3 April at 12pm UK time. Register for free here.
Template one page explainer on proliferation financing
Mitigating the risk of Proliferation Financing
Proliferation Financing (PF), which facilitates the movement and development of illegal goods, has become an increasing cause of global concern over the last decade. Its potential consequences can be severe – from global instability to a catastrophic loss of life.
The UK’s position in the global economy and international financial system makes it a prime location to raise funds to develop chemical, biological, radiological, and nuclear programmes that threaten international peace and security.
This has led to the emergence of regulations and tools designed to disrupt the underlying financial services that enable bad actors to procure, ship and receive illicit goods.
What exactly is proliferation financing?
As defined by the Financial Action Task Force (FATF), PF is the provision of funds or financial services used for the manufacture, acquisition, possession, development, export, trans-shipment, brokering, transport, transfer, stockpiling or use of nuclear, chemical or biological weapons and their means of delivery and related materials (including dual-use technology – meaning it could be used for either civil or military purposes) and dual-use goods in connection with such weapons.
A key focus here is on the threats posed by rogue states, and the strict implementation of a sanctions regime on North Korea and Iran to prevent bringing certain restricted goods or funds to these states. Sanctions laws apply to all businesses. Any business that breaches the UK sanctions regime could be fined or subject to criminal prosecution. Breaching sanctions was recently made a strict liability offence, which means a business only has to breach the law to be liable; there is no requirement for intent.
A series of amendments to the UK Money Laundering Regulations 2017 came into force September 1, 2022. The Money Laundering and Terrorist Financing Regulations 2022 include an obligation for regulated entities to assess and mitigate the risk of PF by introducing policies, procedures, systems, and controls where risk exposure is identified.
The FATF released draft guidance detailing specific measures that financial institutions can take to mitigate the risk. These include enhanced onboarding processes, customer due diligence procedures and sanctions screening controls. The measures are largely designed to help identify sanctions evasion and uncover the beneficial owners of corporate entities (including shell companies) being used to avoid detection.
Since a significant proportion of proliferation activities use trade finance as a vehicle, the focus should be on:
- Direct loans or general credit facility to facilitate export transactions
- Purchase of promissory notes or bills of exchange issued by foreign buyers to exporters
- Purchase of foreign account receivables for cash at a discount from face value
- Provision of guarantees to or by financial institutions on behalf of exporters
- Provision of insurance against certain risks in the trading process.
Proliferators mask their acquisitions as legitimate trade. They exploit global commerce by taking advantage of weak export controls or free-trade zones, where their illicit shipments are more likely to escape scrutiny.
Even if you are unlikely to be directly involved in high-risk areas and you may not be dealing with relevant manufacturers and exporters, the financial transactions required to enable the movement of the illicit goods could be facilitated as part of seemingly innocent transactions. It’s critical that all employees be aware of the risk of proliferation financing, understand its significance and know how to take the proper steps to mitigate the risk. The implications are real.
Template email to all staff on proliferation financing
Template email to all staff in their business to be sent from the compliance officer / MLRO reminding staff of PF risks and red flags to be wary of. Audience – internal
Subject: Proliferation Financing: The risks and the red flags
Body:
Hi [name],
It’s time to get vigilant.
As you are likely aware, Proliferation Financing (PF) has emerged as a matter of growing concern over the past decade. It involves the financing or provision of funds to support the proliferation of nuclear, chemical, or biological weapons. Its potential consequences can be extremely serious – from global instability to a catastrophic loss of life.
Accordingly, the regulatory requirements of the UK Money Laundering Regulations have been expanded to include mitigating the risks of PF. This involves implementing policies, procedures and controls where risk exposure is identified.
What’s complicated for us at [your organisation] is that the financial transactions required to move the illicit goods often come in the guise of seemingly innocent transactions.
In addition to the comprehensive compliance training on PF we will provide, you should be aware of some PF red flags:
1. Customers or transactions with some indication of evasion or concealment. These could be overly complex financing structures, the use of shell companies or anonymous bank accounts.
2. Customers or transactions with unusual or hard-to-explain characteristics, such as large or unusual payment patterns or transactions that don’t appear to have commercial purpose.
3. Transactions involving countries or sectors that have a history of non-compliance with international export controls or are known to be involved in the proliferation of nuclear, chemical, or biological weapons.
If you come across any of these red flags or if you have any other concerns about a customer or transaction, please do not hesitate to contact our MLRO [contact details]. Our country’s position in the global economy and international financial system makes it a prime location to raise funds for proliferation. But by working together, we can ensure that your organisation can reduce the risks of proliferation financing.
Best,
MLRO
Template email to stakeholders on proliferation financing
Subject: How [your organisation] is mitigating the risk of proliferation financing
Body:
We at [your organisation] are aware that proliferation financing (PF) has become an increasingly serious global concern – and a particularly complicated issue for those of us in the financial services sector in the UK, a centre of the international financial system.
We want you to know that we are deeply committed to compliance, and to identifying and mitigating PF risks within [your organisation].
Following are the efforts we have taken to achieve compliance:
1. We have implemented a comprehensive training program for all members of our staff which focuses on the legal and regulatory requirements for preventing PF, as well as best practices for identifying and reporting potential risks.
2. We have conducted an intensive risk assessment process so we can more effectively identify, assess and mitigate potential PF risks.
3. We conduct ongoing monitoring and reviews of our customer base and transactions on a regular basis to identify unusual or unexplained characteristics or activities.
4. We have implemented enhanced due diligence measures for high-risk customers and transactions.
5. Our MLRO, [your MLRO contact details], is in constant contact with the staff and is always available for questions and concerns. This is a key element of our PF mitigation program due to the highly complex and adaptive nature of this global activity.
We believe that these efforts have helped to reduce the risk of PF within [your organisation]. We intend to continue to review and strengthen our procedures to ensure that we remain compliant and in line with best practices.
Thank you for your trust and support of [your organisation]. If you have any questions or concerns, please don’t hesitate to contact us.
Sincerely,
CEO