What has changed in the FATF approach to proliferation financing?

This note was basically a means and excuse for me to see what changes FATF had approved in respect of CPF at the recent Plenary…

WHAT HAS CHANGED IN THE FATF APPROACH TO PROLIFERATION FINANCING?

4 November 2020

On 23 October 2020, FATF issued a news release explaining the outcomes of the Plenary held 21-23 October[1].  It also issued a fuller Public Statement on Counter Proliferation Financing[2].

The Public Statement advised that FATF had adopted amendments to its Recommendations 1 and 2, and their respective Interpretative Notes.  These require member states and the private sector to –

  1. identify, and assess the risks of potential breaches, non-implementation or evasion of the targeted financial sanctions related to proliferation financing, as contained in FATF Recommendation 7[3];
  2. to take action to mitigate these risks; and
  3. to enhance domestic co-ordination.

The changes made are intended to strengthen the global response to WMD proliferation financing, as identified by UN Security Council Resolutions (UN SCR)[4], in response to a call to do so from the G20 in June 2019.

“Proliferation financing” has been defined by FATF in 2010 as being the act of providing funds or financial services that 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 (including both technologies and dual-use goods used for non-legitimate purposes), in contravention of national laws or, where applicable, international obligations[5].

The changes were described by FATF thus

  1. The revision of Recommendation 1 and Interpretive Note to Recommendation 1 require countries, financial institutions and DNFBPs to identify and assess the risks of potential breaches, non-implementation or evasion of the targeted financial sanctions related to proliferation financing, as contained in FATF Recommendation 7, and to take action to mitigate these risks; and
  2. The revision of Recommendation 2 and a new Interpretive Note to Recommendation 2 insert a reference to counter proliferation financing in the context of national co-operation and co-ordination; and the Interpretive Note sets out that there should be an inter-agency framework to promote domestic co-operation, co-ordination and information exchange.

The new obligations imposed by the changes made are intended to ensure that financial institutions and DNFBP should identify and assess the risks of potential breach, non-implementation or evasion of targeted financial sanctions when dealing with their customers, and take appropriate mitigating measures commensurate with the level of risks identified. 

The idea appears to be that the requirement would then mean that the financial institutions and DNFBP  are aware of the risks involved in their businesses and professions, and do not unwittingly support or become part of the proliferation financing networks or schemes (which would be in contravention of the existing relevant obligations).  This will also then ensure appropriate allocation of resources by countries and the private sector entities to their CPF efforts, commensurate with the level of risks faced.

It is said that FATF will develop Guidance to assist countries and the private sector in assessing and mitigating the proliferation financing risk; and will also begin the process of revising its own Methodology for assessing these new obligations.

As part of a phased introduction, FATF says that it will begin assessing jurisdictions for implementation of these requirements at the start of the next round of mutual evaluations, to allow time for the jurisdictions to put the necessary domestic measures in place.

FATF Recommendation 7 is concerned with targeted financial sanctions related to proliferation –

Countries should implement targeted financial sanctions to comply with UN SCR relating to the prevention, suppression and disruption of proliferation of WMD and its financing.

These UN SCR 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, any person or entity designated by, or under the authority of, the UN Security Council under Chapter VII of the Charter of the UN.

There is also an Interpretative Note to Recommendation 7.  Amongst other things, this noted –

  1. Recommendation 7 only applied to sanctions imposed pursuant to UN SCR that relate to the prevention and disruption of the financing of proliferation of WMD (and hence would seem to only directly apply, at the time of writing, North Korea[6]);
  2. The focus of Recommendation 7 is on preventive measures that are necessary and unique in the context of stopping the flow of funds or other assets to proliferators or proliferation; and the use of funds or other assets by proliferators or proliferation, as required by the UN Security Council;
  3. An obligation exists for countries to implement targeted financial sanctions without delay against persons and entities designated under relevant UN sanctions;
  4. Countries should require all natural and legal persons within the country to freeze, without delay and without prior notice, the funds or other assets of designated persons and entities;
  5. The obligations to freeze assets extends to –
    • all funds or other assets that are owned or controlled by the designated person or entity, and not just those that can be tied to a particular act, plot or threat of proliferation;
    • those funds or other assets that are wholly or jointly owned or controlled, directly or indirectly, by designated persons or entities; and
    • the funds or other assets derived or generated from funds or other assets owned or controlled directly or indirectly by designated persons or entities, as well as funds or other assets of persons and entities acting on behalf of, or at the direction of designated persons or entities
  6. Have mechanisms for communicating designations to financial institutions and DNFBP immediately;
  7. The need to provide clear guidance, particularly to financial institutions and other persons or entities, including DNFBP, that may be holding targeted funds or other assets, on their obligations in taking action under freezing mechanisms;
  8. A requirement for financial institutions and DNFBP to report to competent authorities any assets frozen or actions taken in compliance with the requirements of the relevant UN SCR, including attempted transactions, and ensure that such information is effectively utilised by competent authorities;
  9. Protect the rights of bona fide third parties acting in good faith when implementing the obligations under Recommendation 7; and
  10. There will be a publicly known procedures to unfreeze the funds or other assets of such persons or entities in a timely manner, upon verification that the person or entity involved is not a designated person or entity (i.e. a false positive).

Recommendation 7 and its Interpretative Note contain some provisions that apply to or affect only countries, e.g. considering having a mechanism to propose persons or entities that could be considered for listing under relevant UN sanctions.

Recommendation 1 requires jurisdictions to assess AML/CFT risks and adopt a risk-based approach, so as to be able to apply resources to the higher risk elements.  It also required jurisdictions to demand that financial institutions and DNFBP similarly identify, assess and take effective action in respect of AML/CFT risks.

The amendment to Recommendation 1 extends the risk assessment and risk-based approach to proliferation financing risks[7]; and also the requirement that financial institutions and DNFBP identify, assess and take effective action in respect of proliferation financing risks.

The Interpretative Note to Recommendation 1 is amended to provide a explanation of the “proliferation financing risk” – being and only that relating to the potential breach, non-implementation or evasion of the targeted financial sanctions obligations referred to in Recommendation 7.

The Interpretative Note also required countries to take appropriate steps to mitigate proliferation financing risks, develop and understanding of those risks and ensure that financial institutions and DNFBP take appropriate action (particularly where a higher risk is identified).

FATF Recommendation 2 is concerned with national cooperation and coordination and, as amended, required –

  1. National AML/CFT/CPF policies, informed by the risks identified, and which should be regularly reviewed;
  2. Effective mechanisms  to enable national authorities and agencies, including the FIU, law enforcement and policy-makers to cooperate and exchange information for the development and implementation of policies and activities to combat money laundering, terrorist financing and the financing of proliferation of WMD.

Therefore, the changes contained in the amendments adopted by the FATF Plenary appear limited to ensuring that member states, and their financial institutions and DNFBP, include CPF in their risk assessment and mitigation processes, and for a risk-based approach to be adopted, as for AML/CFT risks.  This, I would argue, is nothing more than should be expected.

I would also argue that the proliferation financing risk is wider than merely focusing on UN SCR on North Korea, taking into account other states and non-state actors – and as covered by UN SCR 1540, although the primary focus of that UN SCR was the implementation of a suitable and effective export control system.

UN SCR 1540 places obligations on all member states to both have and to enforce appropriate and effective measures against the proliferation of nuclear, chemical and biological weapons, and their delivery systems., and all member states should adopt and enforce appropriate effective laws and domestic controls to prevent any non-State actor being involved in the manufacture, acquisition, possession, development, transportation, transfer or use of CBRN weapons and their means of delivery, in particular for terrorist purposes, as well as in attempts to engage in any of the foregoing activities, participate in them as an accomplice, assist or finance them; as well as preventing illicit trafficking.

In Notice 1008 MAN, I said that “proliferation financing” can be –

  1. Terrorism financing – where it provides financial support to terrorist organisations that would want to acquire and/or use an WMD; or
  2. Financing from a state, or a state-controlled or state-sponsored entity with the aim of providing a state with a WMD, or to enhance, improve or replace an existing one.

I would argue that having a more holistic approach to risk assessment, considering potential risks on a broad basis – proliferation, terrorism, export control – makes more sense than continuing to treat each as if in a separate silo.  This is especially the case as consignments and funding are likely to be disguised, with origin, destination and purpose similarly obscured.  This was certainly the position that I adopted and which I would recommend.

Ray Todd

Panama

4 November 2020


[1]  http://www.fatf-gafi.org/publications/fatfgeneral/documents/outcomes-fatf-plenary-october-2020.html

[2]  http://www.fatf-gafi.org/publications/financingofproliferation/documents/statement-proliferation-financing-2020.html

[3]  http://www.fatf-gafi.org/media/fatf/documents/recommendations/pdfs/FATF%20Recommendations%202012.pdf

[4]  Note the narrow definition, contrasted to that in Notice 1008 MAN: https://www.gov.im/media/1352777/notice-1008-man-proliferation-and-proliferation-financing-risks-15-jul-20.pdf

[5]  FATF, Combating Proliferation Financing: A Status Report on Policy Development and Consultation, 2010

[6]  As those relevant UN sanctions on Iran were lifted, pursuant to the JCPOA, w.e.f. 16 January 2016.

[7]  See the consultation on the proposed amendments: http://www.fatf-gafi.org/publications/financingofproliferation/documents/consultation-recommendation-1.html

Author: raytodd2017

Chartered Legal Executive and former senior manager with Isle of Man Customs and Excise, where I was (amongst other things) Sanctions Officer (for UN/EU sanctions), Export Licensing Officer and Manager of the Legal-Library & Collectorate Support Section

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