Proliferation financing: A beginner’s guide

Proliferation financing involves providing money or enabling financial transactions that help spread nuclear, chemical, biological or radiological weapons. Changes to the UK’s Money Laundering Regulations in September 2022 mean that businesses across different industries now have new obligations related to identifying and reducing the risks of proliferation financing. 

This article gives an overview of what you need to know about these new obligations.

What is proliferation financing?

Proliferation financing means providing money or financial services that help with the development, purchase, or spread of chemical, biological, nuclear or radiological weapons. 

It also includes facilitating trade of dual-use items - goods that have both civilian and military uses in making weapons of mass destruction. Dual-use items can appear harmless on the surface but could potentially be used or diverted for dangerous weapons production.

The UK recently conducted its first National Risk Assessment of Proliferation Financing (NRAPF), the UK’s first such assessment to fulfil the FATF recommendation that countries should identify, assess and understand their proliferation financing risks. This concluded that the UK's position as an international financial hub poses certain vulnerabilities. 

Because of this, the UK’s Money Laundering Regulations were amended to require all regulated businesses to assess their risk exposure to proliferation financing. 

What does this mean for you?

These new amendments require all regulated businesses to assess their risk exposure to proliferation financing. This can be incorporated into existing anti-money laundering risk assessments (like your firm-wide risk assessment), or done separately.

High-risk sectors for proliferation financing include sectors that deal with trade financing, commercial contracts, shipping, and trade in dual-use goods. But all firms should be vigilant in identifying potential exposure based on factors like:

• Client sectors and activities
• Client locations and geographic ties 
• Services offered
• Transaction patterns
• Delivery channels

Examples of how proliferation financing might happen

Here are two examples of how proliferation financing could occur:

Example 1: A law firm

A law firm is hired to represent a shipping company based in the UK that transports dual-use materials globally. The law firm assists the client in drafting contracts and negotiating terms with manufacturers and buyers located in high-risk countries like Iran. While reviewing documents, the law firm notices indications that the materials may be intended for prohibited nuclear or military applications, despite the stated civilian purpose. 

Example 2: An accounting firm

An accounting firm has a manufacturer client that produces aluminium tubes and high-grade carbon fibre. These materials have aerospace and nuclear applications but also civilian uses. The client asks the accounting firm to advise on setting up a new holding company structure with international subsidiaries. In reviewing the corporate records, the accountants learn the subsidiaries are based in countries with ties to nuclear proliferation. This raises suspicions that the materials may end up being sold through intermediaries for improper weapons development.

Things to keep in mind

When evaluating proliferation financing risks, watch for these potential red flags:

• Clients in chemical, restricted materials, arms, import/export sectors
• Involvement in sale or shipment of dual-use goods
• Opaque counterparties or end users for contracts  
• Links to high-risk countries like Iran, North Korea, Syria, and Russia
• Transactions involving politically exposed persons
• Lack of recipient details for payments
• Mismatches between origination and delivery locations for goods/services
• Complex ownership structures with nominee directors/shareholders
• Heavy use of cryptocurrencies  

Sectoral guidance for law firms has also provided the following as things to consider as being high proliferation risk -- we consider this to be useful to other regulated firms, too:

• Jurisdictions with known proliferation programmes e.g. Iran and North Korea
• Jurisdictions that share physical/maritime borders with jurisdictions known to have
  proliferation programmes where the border is known to be poorly guarded or otherwise the subject of frequent trade (whether legitimately or illegally).
  • For example, the border between North and South Korea should not be considered as an example of this due to the tight controls there but the border between Iran and Azerbaijan is more likely to be in this category.
• Jurisdictions known to have significant numbers of state-directed temporary workers from jurisdictions with known proliferation programmes (e.g. from North Korea).

Final word

Even if your day-to-day work does not directly involve high-risk sectors like trade finance, aviation, and shipping, or dealings with relevant manufacturers and exporters, it's important to remember that financial transactions enabling the movement of prohibited goods can be facilitated through the UK indirectly. Because of this, your firm-wide risk assessment should show that you and your staff are aware of potential proliferation financing risks that might come your way.