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November 25, 2018 By: Sanctions Alert

The proliferation of weapons of mass destruction (WMDs) is a critical threat facing the international community. As such, finding new and more effective ways of combating the proliferation of WMDs has become a major concern of the international community.

Despite the global concerns, only a handful of private sector institutions and governments, such as the U.S., Australia, and a few European countries, are taking meaningful steps to counter the ongoing threat. More specifically, many governments and financial institutions do not understand how the proliferation of WMD is financed, how to detect it, and consequently, how to put measures in place to prevent it.

Joseph Bognanno, VP of Strategy at Accuity, says that sanctions service providers like his do “provide customers with tools to screen for Dual Use Goods, which is particularly useful in trade finance to ensure that sanctioned materials, countries and cargo vessels are compliant.”

The adoption of both public policies as well as focused internal compliance programs used to detect and disrupt the financing of proliferation is one of the important tools that can be used to counter the spread of WMDs. Effective partnerships between governments and financial institutions is essential to identifying and countering the threat, but the first step is to conduct a proliferation financing risk assessment.

A New Report on Countering the Financing of WMD Proliferation

In a new report, “The Financing of WMD Proliferation: Conducting Risk Assessments,” Dr. Jonathan Brewer, Adjunct Senior Fellow at the Center for New American Security, Washington DC, outlines why conducting risk assessments is fundamentally important to strategies followed by authorities and financial institutions to detect financing of WMD proliferation. The report describes how authorities and financial institutions should do this, indicators to take into account and procedures to follow, and how financial institutions should monitor customers’ profiles and behavior.

Mr Bognanno agrees that, “many of the same scenarios used to detect behaviors and/or transactions, that pose risk for money laundering, trafficking in persons, sanctions detection evasion, and a number of other financial crime related and targeted behavior, can be repurposed in some cases to address proliferation financing. He adds that, “this is especially true when KYC/KYCC practices and customer, country and country risk assessment models are leveraged to enhance the PF monitoring efforts.”

In the report, Dr. Brewer mirrors Mr Bognanno’s view that proliferation financing risk assessments do not require authorities or financial institutions to put in place new business procedures. Rather, existing procedures used for assessing risks of money laundering or terrorist financing can be adapted to also detect WMD proliferation.

Incorporating a Risk-Based Approach to Detecting WMD

The report lists basic principles, starting with a risk assessment, for detecting proliferation risk and highlights the threats posed by certain banking activities and business types. It then goes on to describe the best way of charting and recording such risks and threats, in particular regular monitoring by financial institutions of their customers.

By incorporating proliferation risk assessment into your existing program, Dr. Brewer points out that, “financial institutions can demonstrate to regulators, shareholders, customers, and other stakeholders that they are in compliance with or exceeding regulatory expectations.”

Using A Points-Based System

The report also demonstrates how the risk of financing of WMD proliferation could be measured using a points-based system based fundamentally on customer monitoring. Such a points-based system, which is illustrated using a case study in Annex 2 of the report, takes into account potentially WMD-relevant factors specific to the country in which the customer is located as well as the type of customer and its pattern of business activity.

For example, a customer might be assessed for risk against a number of criteria such as its business, and its location. A trading company dealing with dual-use goods might be considered “high-risk” and thus allocated a higher score of 3 than a trading company customer dealing in non-industrial goods, which might be assigned a score of 1. Similarly, a trading company customer based in a trans-shipment hub (with a history of shipping proliferation-sensitive items) might be assigned a higher risk score than a trading company customer based elsewhere.

In order to detect high-risk activity, a financial institution might decide to monitor high-risk customers several times per year. Such a system is similar to standard Money-Laundering and Terrorist Financing risk assessments carried out by financial institutions, based on factors such as customers, products, services and geographical locations.

Financial institutions can use the points-based system as a guide for measuring specific levels of proliferation finance risk and, in turn, can use those levels to monitor new and on-going customers and their businesses.

*Dr. Jonathan Brewer, Adjunct Senior Fellow at the Center for New American Security, Washington DC. Contact +1 917 900 7636 (cell), +44 7815 848 418 (mob), and Jonathan.Brewer@kcl.ac.uk.

Dr. Brewer is a recognized expert on global proliferation threats, financial sanctions and proliferation financing, was the financial expert on the UN Panel on Iran, created by UN Resolution 1929 in 2010. Previously, he served with the UK Diplomatic Service, where he was Head of Counter-Proliferation 2005-2010. Dr Brewer’s current areas of research include proliferation financing, financial sanctions, and related typologies. He contributed extensive material on UN financial sanctions to reports of the UN Panel on Iran published by the Security Council. His publications include papers relating to financing of proliferation, sanctions on Iran, and the role of the private sector in supporting implementation of sanctions.