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.
Dual use items are items, including software and technology, which can be used for both civil and military purposes.
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.
Democratic People´s Republic of Korea (DPRK)
In 1977, the country had concluded an INFCIRC/66 type Safeguards Agreement
(INFCIRC/252) for two nuclear research facilities (the IRT research reactor and
a critical assembly).
On 12 December 1985 the Democratic People´s
Republic of Korea (DPRK) became a party to the Treaty on the Non-Proliferation
of Nuclear Weapons (NPT). On 10 April 1992 the NPT Safeguards Agreement entered
into force (INFCIRC/403). On 12 December 1985 the
Democratic People´s Republic of Korea (DPRK) became a party to the Treaty on
the Non-Proliferation of Nuclear Weapons (NPT). On 10 April 1992 the NPT
Safeguards Agreement entered into force (INFCIRC/403).
In 2003, North Korea again announced its withdrawal from the
Nuclear Non-Proliferation Treaty. In 2005,
it admitted to having nuclear weapons but vowed to close the nuclear program.
On October 9, 2006, North Korea announced it had successfully conducted its
first nuclear test.
Subsequently
the Security Council adopted two Chapter VII resolutions condemning the tests
and imposing sanctions.
Both
the DPRK’s withdrawal from the NPT and its nuclear-weapon tests constitute
significant challenges to the NPT regime.
On February 21, 2025, a group of hackers from
North Korea pulled off the largest cryptocurrency heist in history after
stealing $1.5 billion in Ethereum tokens from the Dubai-based cryptocurrency
exchange ByBit. The hackers exploited a free storage software product
that ByBit used to move Ethereum to another location, most likely coupled with
phishing attacks to access control and download malware. It is estimated that at least $160 million of the funds stolen from ByBit were laundered within
the first 48 hours of the attack.
The theft has been attributed to Lazarus
Group, an infamous North Korean criminal hacking group that was also
responsible for the 2014 attack on Sony Pictures that released emails and personal
employee information and destroyed 70 percent of Sony’s laptops and computers. The North
Korean government routinely uses Lazarus Group, most likely under its Reconnaissance General Bureau, to commit
large-scale ransomware attacks to generate funds for the country’s nuclear and
ballistic missile program. North Korean hackers have become prolific in stealing cryptocurrency; in 2024 more than a dozen
crypto companies were infiltrated by North Korean hackers who posed as
legitimate information technology (IT) workers to gain access to internal
information and systems. It is estimated that Lazarus Group has stolen at
least $3.4 billion in cryptocurrencies since its emergence in 2007,
creating a significant source of revenue for the North Korean government.
A common technique includes hackers
posing as recruiters on LinkedIn and targeting security
researchers, creating rapport with them before luring them into phishing
attacks. This level of sophistication has evolved from traditional email
phishing attacks since increased cybersecurity measures and awareness have made these
cyberattacks harder to successfully pull off. North Korea has increased its
campaigns against the crypto industry after heavy sanctions continue to cripple
their already isolated economy. Crypto theft provides an opportunity for
funding that has a low barrier of entry with extremely high-profit opportunity.
It’s also harder for law enforcement to track, charge, and arrest perpetrators
of these hacks than traditional modes of espionage and human intelligence.
Happy Reading
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1. Combating Proliferation Financing
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