National Risk Assessment of Proliferation Financing 2021
06 October 2021
On 23 September 2021, HM Treasury published the 2021 UK National Risk Assessment (NRA) for proliferation financing (PF). This is the UK’s first NRA focused on PF and it fulfils a commitment the UK government made as part of the 2019 Economic Crime Plan. The NRA’s scope considers the risks associated with activities that directly or indirectly finance an actor’s procurement of chemical, biological, radiological or nuclear (CBRN) technology. To be included these activities need to have a UK nexus or threaten either the UK’s financial system or national security.
- The UK’s significant position in the global arms trade, and as a producer of dual use items (like those that can be used in the nuclear industry or as chemical weapon precursors), increase the risks of direct PF. This concerns a procurement network seeking to export dual use items to a high-risk jurisdiction.
- The UK faces risks from networks of front companies set up to mask the objectives of proliferation actors. The ease with which it is possible to incorporate a company in the UK means that UK companies may be used as a gateway for access to UK financial services. Use of trust and company service providers (TCSPs) may also help to create the impression of a reputable company and facilitate increased anonymity.
- The Democratic People’s Republic of Korea (DPRK) and Iran remain the principal state actors behind the PF networks identified by the NRA.
- A consequence of the UK’s role as a global financial centre is that this presents some vulnerabilities to PF. The NRA identified these as:
- Payments associated to PF may interact with the UK financial system or overseas branches/subsidiaries of UK headquartered financial institutions.
- UK headquartered financial institutions that operate globally can be exposed to PF activities. The risk is heightened if there is existing trade between countries and state actors with proliferation ambitions or there are known active PF networks.
- Local branches and subsidiaries of UK headquartered banks may facilitate access to financial services for proliferation actors either directly or through links to local national banks with inadequate systems or controls.
- Even if the proliferation sensitive product is not being acquired or shipped through the UK there remains a risk. For example, trade may be facilitated by, or cleared through, the UK financial system. Additional services such as maritime related insurance may also be purchased within the UK.
What does this mean for you?
Your own firm’s risk management framework should be considered in the context of the findings within the PF NRA. Assessing and managing PF adds a layer of complexity to how you manage your risks. This is exacerbated by the role played by sophisticated state sponsored PF networks. There are some measures you should consider that will make this task less challenging:
- The risk of exposure to PF being factored into your business wide risk assessment (BWRA). Customers, countries or geographic areas of operation, products/services, transactions and delivery channels (referred to under Regulation 18(2)) are all relevant to evaluation of the risks posed by PF. Beyond the NRA, the Financial Action Task Force (FATF), UN and Office of Financial Sanctions Implementation (OFSI) provide further information.
- The potential PF risks identified by the BWRA should be reflected in the design and use of your customer risk assessments.
- How PF risks may affect your procedures and operations, including the ongoing monitoring of customers under Regulation 28(11). Various PF risks could be added or incorporated into existing controls. You will also need to consider whether trigger factors for performing enhanced due diligence (EDD) are sufficiently comprehensive. This exercise could be made easier by examining your response to the January 2020 amendments to Regulation 33 of the MLR (concerning high risk factors). Three of these – transactions between parties based in high risk third countries, transactions related to arms and items of rare scientific value could cover many aspects of the risks presented by PF.
- PF should be treated as an independent risk. But there are themes within PF that are consistent with other ML/TF risks. Therefore, existing systems and controls are likely to need refinement rather than re-design. For example, framing PF within your trade finance and/or correspondent banking controls (if applicable) may be a practical solution. Many of the risks like the misdeclaration of goods, convoluted shipping routes, third party payments and networks of front companies are features of trade-based money laundering (TBML) and PF.
- Whether your sanctions screening tools are up to date, effective and employed regularly in all relevant situations. One case study in the NRA highlighted how two entities had not been sanctioned at the commencement of an insurance policy. However, both the vessel and corporate owner were subsequently designated under UN and then UK sanctions. It is always worth remembering that PF and the evasion of different sanctions regimes are closely interlinked.
- Reviewing the seven case studies within the NRA. This will help you to understand the practical realities of PF and identify ways to mitigate potential exposure to these risks.
How can we help?
BDO’s Economic Crime Advisory team works in close partnership with clients, obtaining a deep understanding of their business and the specific environment they operate in. We act as a strategic partner, providing clear advice which is both balanced and constructive. We have experience in reviewing and helping firms to enhance their risk management frameworks, including business wide risk assessments, customer risk assessments, and risk appetite statements. Therefore, please do not hesitate to contact our Economic Crime Advisory team if you have any questions.