Proliferation Financing risks: What businesses need to know
Proliferation Financing (PF) forms part of the compliance landscape, like anti-money laundering and counter-terrorism financing (AML/CTF). However, it’s only recently that regulators have started to introduce tighter measures to help businesses identify PF risks.
The UK is currently leading the way. And with an increased focus worldwide on enhancing risk regulatory measures, it’s likely that other countries will follow suit. While many companies are only just beginning to understand the risks of proliferation financing, there are steps organisations can take to reduce and assess their exposure.
In this article, Arctic Intelligence explores what the Financial Action Task Force (FATF) is doing to counteract PF risk, and highlights the key areas businesses can focus on to identify and address potential proliferation financing risks.
What is Proliferation Financing?
While there is currently no international definition of PF, it can be described as providing products and financial services for the transfer and export of nuclear, chemical or biological weapons; including their means of delivery and any related materials.
It can also include providing other financial or legal support or arrangements that engage in proliferation, along with the financing of trade in proliferation sensitive goods.
Steps FATF has taken
In September 2022, the amended standards drafted by the Financial Action Task Force (FATF) to identify, assess and mitigate PF risks were formally introduced.
Financial institutions and some designated non-financial businesses must now undertake a PF risk assessment and produce a copy of the assessment on request.
How Proliferation Financing differs from AML/CTF
Until recently, PF hasn’t been considered a foundational aspect of enterprise wide risk assessment (EWRA) like AML and CTF. However, in the UK’s first national risk assessment on PF, it’s been elevated as a key component of building a robust compliance program.
But because PF is less understood than money laundering and counter-terrorism, it’s also more difficult for businesses to detect.
So what is PF Risk? According to FATF, it involves threat, vulnerability, and consequence and a business’s obligations to identify, assess, and understand the risks of a potential breach, non-implementation or evasion of the targeted financial sanctions obligations.
It involves inherent risks (the natural level of risk before introducing any control measures to mitigate or reduce the likelihood of risks) and residual risk (the level of risk remaining after the risk mitigation process).
Why sanctions screening alone is inadequate
Sanctions screening plays a critical role in identifying PF risk. It involves checking businesses and individuals to help protect against illicit activity and is a way businesses can ensure they remain compliant while protecting the integrity of the global financial system.
But while sanctions screening plays an important role in identifying PF risk, it can’t be used stand-alone. Proliferators employ a range of evasive tactics. For example, using actors who won’t appear on any sanctions list that seem legitimate at first glance.
To address PF risk, businesses need to know their customers well.
Using Know Your Customer (KYC) guidelines and protocols helps. As does interrogating any transactions that seem unusual or out of character. While minor inconsistencies may not seem like much, scrutinising all risks for suspicious transactions, products or customers can help identify PF activity.
Potential Red Flags
There are some common factors to look out for when identifying PF activity, including:
Transaction deals involving dual-use goods or other controlled commodities
Dual-use items are any goods, software or technology used for civilian and military purposes.
These items represent a greater PF risk because proliferation networks are more likely to procure individual goods and component parts. For those in the supply chain, or even people processing payments, these transactions may appear harmless but can be a red flag for PF activity.
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