Proliferation financing: a definition, and case studies and examples.

Proliferation financing is defined by the Financial Action Task Force (FATF) as

• 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.
• This includes technologies and dual-use goods used for non-legitimate purposes, contravening.
• National laws or,
• Where applicable, international obligations.

The FATF Recommendations require countries and the private sector to

• Identify and assess the risks of potential breaches, non-implementation or evasion of the targeted financial sanctions related to proliferation financing and take appropriate mitigating measures commensurate with the identified risks.

This ensures that private sector entities and their supervisors know the risks involved in their businesses and professions and refrain from unwittingly supporting or participating in proliferation financing networks or schemes in contravention of the relevant obligations.

X4 CASE STUDIES

A - Proliferation financing case: Illicit New York-Russia procurement scheme

1. In 2023, a New York resident and two Canadian nationals were charged with sanctions evasion and breaches of the export control regime.
2. The defendants used several corporate entities registered to an address in Brooklyn to unlawfully source and purchase millions of dollars worth of dual-use goods. These electronics were sent to sanctioned entities in Russia.
3. The individuals purchased the electronics directly from US manufacturers and had the goods shipped to an address in Brooklyn. Then, the goods were shipped to intermediary corporations in Türkiye, Hong Kong, India, China, and the UAE and trans-shipped to Russia. 

B - Proliferation financing case: Military-grade dual-use technology

1. Two US nationals and five Russian nationals, including Russian FSB agents, were charged with conspiracy as part of a global proliferation financing and money laundering scheme on behalf of Russia. The defendants conspired to obtain military-grade and dual-use technology directly from US corporations.
2. This included ammunition, regulated electronics, quantum computing, and other electronics that can be used to develop nuclear and hypersonic weapons systems. The sanctioned Russian entity based in Moscow received the exports from the US-based defendants, who used shell companies and associated bank accounts to reroute shipping and obscure their financial transactions.
3. Shipping documents and invoices were fabricated, and items were repackaged and relabelled. They were sent around the world before arriving in Estonia and other neighbouring countries.
4. The goods were then smuggled across the border, and the money was sent to different bank accounts worldwide.

C- Proliferation financing case: Iranian UAV procurement

1. In December 2023, an Iranian national and a previously sanctioned Chinese national were charged with procuring US-manufactured dual-use electronics for the development of uncrewed aerial vehicles (UAVs) used by the Islamic Revolutionary Guards Corp (IRGC).
2. OFAC sanctioned the Iranian national and other entities in Iran, Malaysia, Hong Kong, and Indonesia for their involvement.
3. The defendants used front companies to purchase illegally and ship electronics from the US to Iran for use in the UAVs.
4. Foreign companies were used to obfuscate the destination for the goods. This caused an unwitting French company to purchase several electronic items from the US.
5. The sanctioned Chinese national caused the French company to send the goods to Hong Kong, where they were diverted to Iran. 

D - Proliferation financing case: Australian logistics company

1. In 2022, OFAC settled a case with Toll Holdings, an Australian freight and logistics company. Toll had processed thousands of transactions between North Korea, Iran, and Syria using the US financial system. This was for the benefit of sanctified individuals and entities and was due to the company's complete failure of compliance controls.
2. Toll didn’t have control policies that matched its operations' complexity.
3. Toll had over 600 payments, invoicing, and data systems spread across its business units, a few of which talked to each other. The breaches only came to light when an internal whistleblower raised concerns about the company’s compliance with US sanctions.
4. The company tried to mitigate its risk by ceasing all business with US-sanctioned countries in 2016. Still, the company didn’t fully implement policies and procedures to stop payments from sanctioned entities.
5. It didn’t test its procedures either, so customers in US-sanctioned countries could still use the company’s services. It took another year for controls to finally prevent shipments to sanctioned countries. 

SOURCE

• https://www.fatf-gafi.org/content/dam/fatf-gafi/reports/Status-report-proliferation-financing.pdf
• https://www.fatf-gafi.org/en/topics/proliferation-financing.html
• https://vinciworks.com/blog/proliferation-financing-in-practice-pf-case-studies-and-examples/
• https://guernseyfiu.gov.gg/article/175969/What-is-Proliferation-Financing
• https://www.gfiu.gov.gi/what-is-proliferation-financing
• https://www.gfsc.gg/commission/financial-crime/proliferation-financing