The Financial Action Task Force ("FATF"), the international standard-setting body for national anti-financial crimes regimes, recently issued new obligations for governments and, by extension, financial institutions ("FI"), around the world, aimed at preventing the financing of the proliferation of weapons of mass destruction.1
In this regard, both governments and FIs will now have requirements to identify, assess and understand the specific risk of financing the proliferation of such weapons ("Proliferation Financing Risk"), and not only the risks of money laundering ("ML") and the financing of terrorism ("TF").
Amendments to the FATF Standards
The FATF held its latest Plenary meeting on October 21-23, 2020. One of the most relevant resolutions was to amend the International Standards on Combating Money Laundering and the Financing of Terrorism & Proliferation (the "FATF Recommendations"), so that countries and FIs address the Proliferation Financing Risk in a proper fashion.
Before these amendments, countries and FIs were expected to comply with international sanctions related to counterproliferation, but had no specific obligations to manage Proliferation Finance Risk, if such a risk was not already managed through existing anti-money laundering ("AML") or countering the financing of terrorism regimes. Consequently, many countries have not adequately managed their Proliferation Finance Risk, which ultimately undermines the overall effectiveness of the FATF Recommendations.
What is the Proliferation Financing Risk?
According to FATF, Proliferation Financing Risk is the potential breach of targeted financial sanctions adopted by resolution of the United Nations Security Council, in order to tackle the proliferation of weapons of mass destruction and its financing. These sanctions include, for example, freezing without delay the assets of countries and persons determined to be involved in proliferation financing activities.
Some countries address Proliferation Finance Risk through their AML laws. For example, in the United States, violations of the International Emergency Economic Powers Act, which is the primary implementing authority for US counterproliferation sanctions, is a predicate offense to the federal crime of ML. Relatedly, US FIs are obligated to report to federal authorities any attempt to violate or evade these or other sanctions as suspicious activity. Consequently, Proliferation Finance Risk is already specifically addressed in the AML programs of many US FIs.
However, most countries have not adopted this approach and they have not specifically addressed Proliferation Finance Risk under their national laws. Following the FATF amendments, FIs in these jurisdictions should begin to take appropriate steps to identify and manage their Proliferation Finance Risk.
New obligations for FIs regarding the Proliferation Financing Risk
a) Assess the Proliferation Financing Risk, commensurate to the size and nature of the business.
Proper management of the Proliferation Financing Risk is not limited, for example, to sanctions lists screening, since it requires a certain level of understanding by FIs. This can be achieved with measures like:
- Understanding the differences of these three risks and, where they intersect, to assess them accordingly.
If an FI analyzes and measures its Proliferation Financing Risk in the same way as, for example, its risk of TF, this is likely to indicate a lack of understanding, and therefore, a compliance gap that could lead to integrity breaches, sanctions and even significant reputational risk.
b) Document the Proliferation Financing Risk assessment, separately from the ML and TF risks, taking into account the applicable national risk assessments.
Proper management and mitigation of the Proliferation Financing Risk can keep countries and global FIs from being subject to de-risking measures by their international counterparties.
c) Update the Proliferation Finance Risk assessment regularly.
d) Provide risk assessment information to authorities and self-regulatory bodies.
e) Establish policies and procedures to manage and mitigate the specific Proliferation Financing Risk.
Implementation of the amended FATF Recommendations
FATF Recommendations are not directly enforceable against FIs, since every member country incorporates them into its applicable financial regulatory and supervisory framework.
Thus, FIs must be attentive about forthcoming legal changes in every jurisdiction where they operate, in order to implement the Proliferation Financing Risk assessment as required by relevant authorities.
Proper understanding, assessment, management and mitigation of the Proliferation Financing Risk, as mandated by the latest amendments to the FATF Recommendations, is a subtle task that calls for clear differentiation from the risk analysis applicable to ML and TF, especially in the case of countries and FIs that have not yet implemented specific controls of this risk.
Unfortunately, traditional measures like sanctions lists screening are likely to fall short for understanding the real Proliferation Financing Risk and, consequently, for adopting adequate mitigation measures.
Failure to appropriately manage Proliferation Finance Risk may negatively affect an FI's access correspondent relationships in major money centers and could lead to significant enforcement actions and penalties as the FATF standards are incorporated into national regimes.
1 According to resolution A/RES/32/84-B of the United Nations General Assembly, weapons of mass destruction include: atomic explosive weapons; radioactive material weapons; lethal chemical and biological weapons, and any other weapon with similar or comparable features.