Counter-proliferation financing: what is it and what are your legal obligations?

This is not typically something the average UK accountant puts any thought into on a daily basis. But your new legal obligations mean that needs to change.

In October 2022, the Money Laundering, Terrorist Financing and Transfer of Funds (Information on the Payer) Regulations was updated to include proliferation financing. For you, this means that counter-proliferation financing (CPF) needs be on an equal footing to the anti-money laundering (AML) and counter-terrorist financing (CTF) work you’re already doing.

You and your employees must be trained on proliferation financing. You must consider the risks in your firm-wide and client risk assessments. And you must use those risks identified to shape your firms’ policies and procedures. This will enable your firm to assess and identify the business’ risk of exposure to, or involvement with, PF.

 What is proliferation financing (PF)?

The Financial Action Task Force defines proliferation financing 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 chemical, biological, radiological or nuclear (CBRN) 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.”

This is an intentionally broad definition. PF applies to financing every part of the supply chain.

The size and characteristics of the UK economy mean that it’s highly likely that proliferating actors target the UK to gain financing for CBRN proliferation, despite the robust controls in place. So all professionals need to play their part in preventing this.

What’s the risk to the Accountancy sector?

Lack of awareness

The biggest risk to your firm is a lack of awareness of what proliferation financing is and how people in the supply chain operate, which is true across the entire UK economy. With this comes a low understanding of how certain industrial products could be manipulated for hostile use or for use in a chemical, biological, radiological or nuclear programme. This can make you vulnerable to unknowingly becoming part of the PF chain.

Trust and company service providers (TCSPs)

If you deal with trust and company formation, your risk is increased. Corporate registration in the UK is a relatively simple way to give legitimacy to a proliferation-linked company. This can be a green flag for them to do business in high-risk countries. Unfortunately, UK Crown Dependencies and Overseas Territories continue to feature prominently in UK illicit finance investigations and reporting.

Criminals can create front companies to carry out procurement business. If the use of one entity for illicit activity has been uncovered during a business transaction, it can be quickly withdrawn and replaced by a new entity to carry out the same activities for future transactions.

UK Companies House has been linked to a number of PF cases and may be exploited similarly in the future.

For example, in December 2020, the US Treasury sanctioned a number of UK-based entities that had been used to own vessels trading North Korean coal, in violation of United Nations Security Council (UNSC) resolutions. In some of the cases, shell companies had been set up and used in the UK by one of China’s largest North Korean cross-border traders. He had acted on behalf of sanctioned North Korean proliferators and helped them procure items for their weapons programme, while laundering tens of millions of dollars on their behalf.

Inadequate CPF checks

HM Treasury identified economic challenges as a vulnerability in their National Risk Assessment of Proliferation Financing. There’s potential for professionals to take on business they wouldn’t normally, or to carry out less stringent checks, so that their business can remain financially viable. This can mean that red flags are ignored when onboarding and risk assessing clients.

How to protect yourself and your business

CDD

As with all AML activity, the greatest protection is having the correct policies, procedures and training in place. This enables all of your business’ employees to detect, prevent and report any knowledge (or suspicion) of money laundering, or other related criminal activity.

Detection starts with a comprehensive risk assessment during the onboarding process - and regularly for the duration of the business’ relationship with the client. Client due diligence (CDD), including identifying the ultimate beneficial owner of a business, is also vital to determining the client’s level of risk. You legally need to include a sanctions check in this process too.

Recent reforms of Companies House give it increased powers to query and challenge information submitted to it. Thoroughly checking for discrepancies on the companies register has become increasingly important.

Sanctions checks

A key focus for CPF is the implementation of UK and UN sanctions regimes on the Democratic People’s Republic of Korea, Iran and also chemical weapons activity. The sanctions measures apply to anyone in the UK’s jurisdiction, action taken by a UK national outside of the UK, and to companies incorporated in the UK.

As a TCSP, a client asking for an aged company with established banking and credit histories, also needs to be investigated throughly. Creating the impression of a reputable company, or using a nominee shareholder or directors, increases the anonymity of the beneficial owners of a company.

High-risk transactions

All employees should know how to spot a high-risk transaction. Some questions to consider are:

Has the client concerned made many small transactions to avoid drawing attention to a single large one?

Does a transaction form part of a chain involving multiple, and apparently unconnected, businesses that may or may not also be your client’s?

Are funds being sent to or received from a high-risk jurisdiction?

The use of cryptocurrencies and other new technologies to evade international sanctions regimes is an increasing global trend. Particularly where this activity involves individuals connected to North Korea and Iran. Any cryptocurrency or new technology transaction needs to be checked incredibly carefully, especially as the regulation of these areas is still evolving.

Suspicious activity reporting (SAR)

The last - and most vital - way to protect your firm is to report any suspicious activity.

All accountancy firms must appoint a member of senior management to hold the role of the Money Laundering Reporting Officer (MLRO). This is who employees should make an internal suspicious activity report to.

It’s the responsibility of the MLRO to consider the circumstances surrounding any internal reports and decide whether to make a SAR to the National Crime Agency (NCA). If you’re a sole practitioner, you’re your own MLRO and can make a report to the NCA directly.

Please remember that you have a legal obligation to make a SAR if you suspect money laundering is, or may be, taking place. Not doing so is a criminal offence which could ultimately lead to imprisonment.

An informative SAR can provide vital intelligence for law enforcement and might be able to help prevent a wide range of organised crime and terrorist activities. Investigations often include multiple SARs from different sources. So although you may feel your report will not add much information, it could prove to be the missing piece to a much larger scenario.