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Proliferation Financing

 

 

 

 

What is it, and why should AML compliance professionals be paying attention?

If you’ve looked at the Financial Action Task Force (FATF)’s recommendations recently, you’ve no doubt noticed that there are now three big topics on the covering page:

  • Money laundering,
  • Terrorist financing, and
  • Proliferation.

The last of these has received considerably less attention until recently, and in many cases, it may not be explicitly included in either jurisdiction-specific legislation or compliance programs. While some elements of proliferation are generally included (for instance, it is rare to see a compliance program that does not address sanctions-related list screening), there is often little if any consideration given to risks such as sanctions evasion or the non-implementation of sanctions.

According to the FATF, weapons of mass destruction (WMD) proliferation refers to 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 dual-use technologies and dual use goods used for non-legitimate purposes). The financing of proliferation refers to the risk of raising, moving, or making available funds, other assets or other economic resources, or financing, in whole or in part, to persons or entities for purposes of WMD proliferation, including the proliferation of their means of delivery or related materials (including both dual-use technologies and dual-use goods for non-legitimate purposes). There are targeted financial sanctions intended to prevent specific jurisdictions, organizations, and persons from participating in any proliferation-related activities.

In Canada, reporting entities have strict obligations to comply with sanctions requirements.

Similarly, terrorists and terrorist groups are often subject to financial sanctions and prohibitions. All accounts and transactions are scanned against listed persons and entities. In the case that we have property (including money and investments) in our possession that belongs to a listed person or entity, it must be frozen and reported immediately.

Recommendation 1 requires countries and private sector entities to identify, assess, and understand “proliferation financing risks”. In the context of Recommendation 1, “proliferation financing risk” refers strictly and only to the potential breach, non-implementation or evasion of the targeted financial obligations referred to in Recommendation 7. These R.7 obligations apply to two country-specific regimes for the Democratic People’s Republic of Korea (DPRK) and Iran, require countries to freeze without delay the funds or other assets of, and to ensure that no funds and other assets are made available, directly or indirectly to or for the benefit of (a) any person or entity designated by the United Nations (UN), (b) persons and entities acting on their behalf or at their direction, (c) those owned or controlled by them. The full text of Recommendations 1 and 7 is set out at Annex A.

Canadian reporting entities will be familiar with Ministerial Directives related to North Korea and Iran that impose additional requirements, as well as providing indicators of activity related to these jurisdictions. While we may not be used to thinking about these requirements as being controls related to proliferation financing risk, this is exactly what they are. We may also fail to consider how they fit into our overall compliance regimes.

Proliferation Financing Trends and Typologies

It is not enough to simply say that your business does not deal with these jurisdictions directly. In many cases, funds are not actually repatriated to these jurisdictions but are held in other countries. For instance, identified state-sponsored North Korean hacking groups have moved stolen funds and virtual currencies through the Philippines, Macau, and China. In addition, actors intending to circumvent sanctions are known to be relatively proficient in using false and manufactured identities, as well as well as organizational structures intended to obfuscate true beneficial ownership. In the FATF’s webinar on proliferation financing, the global watchdog noted that proliferation financing may be one of the most challenging threats to detect in action, due to its complex nature.

Helpful Resources

Late in 2021, the FATF conducted an excellent webinar on proliferation financing risk assessment and mitigation, which has now been posted publicly. This presentation includes an excellent high-level overview, as well as detailed discussions of the trends and typologies that are relevant today.

It can be useful to review the aspects of the FATF’s recommendations that refer to proliferation.

There is additional guidance from the FATF on proliferation financing risk assessment and mitigation. This is a detailed document focused entirely on proliferation financing, and the FATF’s expectations.

The UK has conducted a national level assessment of proliferation financing risk. This includes a number of relevant case studies and typologies. If you want the sense of it, but are short on time, our friend Dev Odedra has published a summary.

Manchester CF has launched a proliferation financing training module as part of the Financial Intelligence Specialist (FIS) designation, offered in conjunction with the University of Newhaven.

Need a Hand?

If you want to get ahead of the curve by having a conversation about proliferation financing risk and potential impacts to your compliance program, please contact us.

Sanctions This Week: February 29-March 6, 2016

OSFI

On March 2nd, 2016, the Office of the Superintendent of Financial Institutions (OSFI) released the United Nations Security Council’s (UNSC) Al-Qaida and Taliban Regulations (UNAQTR) update to the consolidated list, underscoring recent information updates on 11 individuals and one entity.

The 11 individuals are subject to the assets freeze, travel ban and arms embargo set out in paragraph 2 of Security Council resolution 2253 (2015) adopted under Chapter VII of the Charter of the United Nations.  The individuals all have different nationalities, locations and expertise, but they have been tied to Al-Qaida.  The entity included is a Moroccan-led terrorist organization formed in August 2013, and were last known to be operating in the Syrian Arab Republic.

See the update on the United Nations (UN) website.

Go to the OSFI lists page.

OFAC

The U.S. Department of Treasury’s Branch, The Office of Foreign Asset Control (OFAC), released one update last week, related to North Korea and Non-Proliferation Designation Lists updates.  A total of 11 individuals and five entities were added to both lists.  OFAC also released two updates where information related to two entities was changed.

OFAC administers and enforces economic and trade sanctions based on U.S. foreign policy and national security goals.  The sanctions target countries, regimes, terrorists, international narcotics traffickers, the proliferation of weapons of mass destruction, and other threats to the national security, foreign policy or economy of the U.S.  The North Korean five entities added are all state-owned entities, who all have North Korean national defense objectives.  The 11 individuals are all high ranking persons within the five organizations.

See the update on OFAC’s website.

See OFAC’s recent actions page.

Need A Hand?

We would love to hear from you.  If there are subjects in this post that you would like to know more about, or if you need assistance with your compliance program, please contact us.

Sanctions This Week: February 22-28, 2016

OSFI

On February 23rd, 2016, the Office of the Superintendent of Financial Institutions (OSFI) released the United Nations Security Council (UNSC) ISIL (Da’esh) and Al-Qaida Sanctions Committee’s update, underscoring recent information updates on five individuals.

The five individuals are subject to the assets freeze, travel ban and arms embargo set out in paragraph 2 of Security Council resolution 2253 (2015) adopted under Chapter VII of the Charter of the United Nations.  All of the updates relate to their most recent known location, 4 of which being, prison.  The final was a ‘last known address’ update for a Tunisian individual, though he was reported as ‘in detention’ in Tunsia, as at December 2009.

See the update on the United Nations (UN) website.

Go to the OSFI lists page.

OFAC

The U.S. Department of Treasury’s Branch, The Office of Foreign Asset Control (OFAC), released two updates last week, but both related to settlement of alleged enforcement actions, or civil penalties related to alleged violations of the Cuban Assets Control Regulations (CACR).  The enforcement actions were on two entities, CGG Services S.A., formerly known as CGGVeritas S.A. (CGG France) and Halliburton Atlantic Limited (HAL) on behalf of itself and its affiliate, Halliburton Overseas Limited (HOL).

See OFAC’s recent actions page.

CGG France has agreed to pay $614,250 USD for numerous alleged violations of Cuban Sanctions, when they exported spare parts and other equipment from the United States to M/V Amadeus while the vessel operated in Cuba’s territorial waters.

See the update on OFAC’s website.

The enforcement actions against HAL were for alleged violations of Cuban Sanctions, by dealing in property in which Cuba, or a Cuban national, had an interest when they exported goods and services in support of oil and gas exploration and drilling activities within the Cabinda Onshore South Block oil concession in Angola. HAL knew, or should have known, they were dealing in property in which Cuba had an interest. HAL issued 19 invoices to the Consortium operator Cupet, a company with headquarters in Angola, related to these goods and services, and HAL primarily performed the services which were invoiced. OFAC determined that the alleged violations were voluntarily self-disclosed and constituted a non-egregious case. The total transaction value of the alleged violations was $1,189,752 USD. The statutory maximum civil monetary penalty for the alleged violations was $1,235,000 USD and the base penalty amount for the alleged violations was $423,202 USD.  HAL has agreed to pay $304,706 USD.

See the update on OFAC’s website.

Need A Hand?

We would love to hear from you.  If there are subjects in this post that you would like to know more about, or if you need assistance with your compliance program, please contact us.

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