Proliferation Financing

 Effective anti-money laundering and combating the financing of terrorism (AML/CFT) policies and measures are key to the integrity and stability of the international financial system and member countries’ economies. Money laundering (ML) and related underlying crimes (the so-called “predicate offenses” or “predicate crimes”), as well as terrorist financing (TF) and the financing of the proliferation of weapons of mass destruction (WMD) or proliferation financing (PF) are crimes with economic effects—they can threaten the integrity and stability of a country’s financial sector and a country’s external stability more generally. They can result in destabilizing “hot money”resulting from inflows and outflows, as well as in banking crises, ineffective revenue collection, broader governance weaknesses, reputational risks for international financial centers, and loss of correspondent banking relationships (CBRs). In an increasingly interconnected world, the harm done by these crimes is global, affecting the integrity and stability of the international financial system. AML/CFT policies and measures are designed to prevent and combat these crimes and are essential to protect the integrity and stability of financial markets and the global financial system.

Financing of the Proliferation of Weapons of Mass Destructions make it imperative  on countries to implement targeted financial sanctions to comply with the United Nations Security Council (UNSC) resolutions on the proliferation of WMD and its financing. This requirement is similar in its approach to the targeted financial sanctions applicable in the context of the fight against terrorism and terrorism financing but has a narrower application: it addresses exclusively the freezing without delay of funds or other assets of persons or entities designated by the UNSC as being involved in illicit proliferation of WMD and domestic cooperation.

There is no international definition of proliferation financing. However, the FATF produced a working definition of proliferation financing based on UNSCR 1540, which reads as follows:

"Proliferation financing" refers to the act of providing funds or financial services which are used, in whole or in part, 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 both technologies and dual-use goods used for non-legitimate purposes), in contravention of national laws or, where applicable, international obligations.

Proliferation of weapons of mass destruction (WMDs), nuclear, biological, and chemical weapons, represents the most serious threat to global security and challenges the entire international community.  To circumvent international restrictions and sanctions, states and non-state actors are able to procure components and technology through proliferators, that can then be used to build a weapon. Proliferators use a number of evasive techniques and tactics to circumvent the financial sanctions restrictions applied against them, providing them access to the financial system.  Proliferation risks expand further than just those emanating from specific countries, such as North Korea (DPRK) or Iran. There are also non-state actors that can attempt to obtain proliferation-sensitive goods.

Proliferation financing risks are connected to more countries than just North Korea and Iran, and firms should factor this into their risk assessment processes. However PF risks are constantly evolving. As global concerns on the proliferation of weapons of mass destruction (WMD) evolve, it is vital to broaden the risk assessment process to ensure your firm is not caught out.

The highest risk countries for proliferation financing

 

According to the 2024 US National Proliferation Financing Risk Assessment prepared by the US Treasury, Russia and North Korea are the highest risk threat actors for proliferation financing. This is significant due to the scale of Western sanctions on Russia. The risk of doing business with Russia or sanctioned entities connected to Russia can now come with PF risks. This is particularly concerning as Russia continues to utilise complex transaction structures in Türkiye, the United Arab Emirates and China.

 

Russia and proliferation financing risks

 

Russia has the largest nuclear stockpile on earth, alongside a sizeable military force currently engaged in the invasion of Ukraine. Given the breadth of international sanctions on the country, Russia has engaged its allies and partners to replenish its conventional weapons, as well as increasing its reliance on nuclear, cyber and space capabilities, as well as threatening nuclear action in Ukraine.

 

Russia has also reduced or suspended cooperation with nuclear non-proliferation treaties. Russia as also revoked ratification of the Comprehensive Nuclear-Test Ban Treaty. Meanwhile, Russia is increasing investment in chemical weapons and has given material support to the use of chemical weapons by the Assad regime in Syria. 

Russia is prioritising the illegal procurement of goods and technologies, both in breach of international sanctions, and to support and maintain the proliferation of weapons of mass destruction (WMD). Russian PF networks leverage front and shell companies to place orders for needed components. These networks often then obfuscate the end-user and destination for the goods, routing shipments through third countries before they are ultimately delivered to customers in Russia.

Russia is also working closely with North Korea and Iran, two other states of PF concern. Russia is procuring military equipment from North Korea, in violation of UN Security Council resolutions. Russia has also been procuring Unmanned Aerial Vehicles (UAVs) from Iran to support its invasion of Ukraine.

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