What is Proliferation Financing and what does it mean to you?
Proliferation Financing (PF) refers to the provision of funds or financial services that are used to acquire or develop nuclear, chemical, or biological weapons as well as their delivery systems, which includes missiles and related materials.
This financing enables entities, typically state actors or non-state actors like terrorist groups, to support and expand their capabilities to produce and distribute weapons of mass destruction (WMD).
Key Components:
Funding Sources: PF can involve state sponsorship, criminal networks, front companies or deceptive financial practices to disguise the true nature of transactions.
Methods: Techniques include trade-based money laundering, misuse of free trade zones, falsified documentation and use of shell companies.
Regulation and Sanctions: International bodies like the Financial Action Task Force (FATF) and the United Nations Security Council (UNSC) believe the risk of aggressive actors acquiring CBRN weapons has risen, demanding disruption of their financial support. They have therefore established regulations and sanctions to counter PF.
The UK has specific vulnerabilities, identified by the National Risk Assessment of PF (NRAPF) due to the country’s openness for investments, strong financial sector and ease of forming companies.
Regulation Changes: The Money Laundering and Terrorist Financing (Amendment) (No. 2) Regulations 2022, effective from 1st September 2022, aimed to enhance the UK’s ability to combat money laundering, terrorist financing, and destabilising actors.
The aim of these changes was to safeguard against the misuse of financial services by aggressive actors seeking materials for weapons of mass destruction.
Firms must now assess their exposure to PF, report ‘material discrepancies’ to Companies House and adhere to updated AML policies. They should also consider client types, geographic ties, services, transactions and delivery channels when evaluating PF risk.
Red Flags to Consider: Factors like involvement in sensitive sectors, unclear end-users, transactions lacking information and dealings in crypto assets can indicate PF risk. There are also risks associated with Trust and Company Service Providers (TCSPs) as well as the creation of seemingly legitimate companies by nefarious actors.
Implications for Accountant/Bookkeepers
- Increased responsibilities in assessing PF risks, updating AML policies and maintaining vigilance in client dealings.
- Caution and scepticism is advisable, especially with new company formations, nominee shareholders and sudden changes in ownership.
