The Financial Action Task Force now requires countries to assess proliferation financing risk, a welcome step in global efforts to counter sanctions evasion by actors such as North Korea. However, the narrow scope of the new requirement may reduce its effectiveness.
The Financial Action Task Force (FATF) – the global standard-setter on combating financial crime – first added requirements to counter the financing of the proliferation of WMDs to the standards it asks countries to comply with in 2012. The focus was set strictly on the implementation by countries of targeted financial sanctions (TFS) asset freezes and other measures against a set list of individuals and entities. However, unlike measures designed to combat money laundering and terrorist financing, the FATF did not require countries to assess their exposure to proliferation financing (PF) risk. But this exception has now gone. At its recently concluded October plenary, the FATF adopted language into its standards that now requires countries – as well as private sector actors – to understand and assess their PF risk, and tailor their counter efforts accordingly.
The decision by the FATF to mandate national assessments of PF risk is a welcome and – many would argue – long overdue development in global efforts to counter proliferation financing: after all, it is difficult to counter a risk that is not recognised or understood. However, despite the good intentions, the narrow scope of the new requirement – focusing strictly on TFS – means that the amendment may not be as effective as it could be in helping governments and the private sector understand and address their PF risk exposure.
LIMITED SCOPE, LIMITED RESULTS
As a global standard-setter on countering financial crime, the FATF is in a unique position to push for the universal adoption of PF risk assessments as a key component of countries’ financial crime regimes. The way in which the FATF defines the requirements for such an assessment however has important implications for how countries understand PF risk more broadly. The FATF’s approach to assessing PF risk is – like its general treatment of PF – strictly limited to compliance with UN Security Council (UNSC) TFS on a set list of individuals and entities linked to proliferation activities. However, since the inclusion of PF in the FATF’s standards in 2012, proliferators have adapted – hiding behind complex webs of front companies, intermediaries, misleading documents and other deceptive practices to carry out their transactions. In response, the UNSC has adopted broad activity-based PF prohibitions to target such evasion practices. PF-related UNSC prohibitions on North Korea have also expanded to include restrictions on most trade with the country, since revenue generated through such trade could be used by Pyongyang to finance its proliferation activities.
As a result, proliferation financing is now often understood to include a very broad range of prohibited financial and other activities – from transactions linked to WMD procurement, to the generation of revenue by proliferators and the financial and corporate networks sustaining this activity. While the FATF had decided to keep its risk assessment criteria focused only on TFS (and encouraging countries to understand how those sanctions might be evaded in their jurisdiction), such a narrowly scoped risk assessment will not capture or improve countries’ understanding of the full breadth of PF activities and risk.
LOWERING THE PF RISK ASSESSMENT BAR
The FATF’s narrow scoping of PF also risks discouraging countries conducting more ambitious risk assessments. Prior to the latest FATF amendment, a limited number of jurisdictions had independently chosen to assess their PF risk exposure, even in the absence of an FATF requirement to do so, including the US, Namibia, Gibraltar and Latvia. As part of its 2019–22 Economic Crime Plan, the UK government has also announced that it will be conducting a national PF risk assessment. Although each national PF risk assessment was scoped differently, some have gone further than simply an assessment of TFS evasion risk. In 2019, RUSI developed a PF risk assessment methodology, which also focused on assessing a broad range of PF risks.
Messaging around the new standards is therefore key: it is important that efforts to understand broader PF risks are not discouraged by an FATF requirement that is too narrowly scoped, and that the risk related to TFS is not conflated with a comprehensive PF risk assessment.
CONSTRAINED PRIVATE SECTOR CAPACITY
The new standards also call on governments to require their financial institutions and designated non-financial businesses and professions (DNFBPs) to identify, assess and mitigate their PF risk. The private sector is on the frontlines of efforts to counter financial crime, including PF. A survey conducted jointly by RUSI and the Association of Certified Anti-Money Laundering Specialists (ACAMS) earlier this year on private sector approaches to PF found significant gaps in private sector awareness and implementation on PF. Requiring private sector actors to understand their PF risk exposure will therefore be a valuable contribution to CPF efforts.
However, the same RUSI–ACAMS survey found that PF responses vary significantly within the private sector, with larger, international banks taking the lead. These institutions have devoted significant attention and resources to developing risk-based approaches to PF, sometimes despite a lack of government guidance or national risk assessments. However, smaller banks and non-banking institutions have generally not previously looked at PF as a distinct risk and tend to have far fewer resources available to engage in such analysis. It is important that this gap is acknowledged by governments, and that smaller institutions are provided the necessary guidance needed to conduct a PF risk assessment. Thus, a comprehensive country-level PF risk assessment could provide an invaluable tool for smaller banks to understand this risk.
COMPLEMENTARY NOT COMPETING EFFORTS
Overall, the FATF should be commended for strengthening its standards on CPF, and for raising expectations on countries and private sectors when it comes to understanding and mitigating their PF risk exposure. The amendment is an important step in the right direction even if the requirement to assess risks only focuses on the implementation of TFS, rather than the full scope of activities that make up PF.
While it may be difficult to ever expand the scope of FATF requirements when it comes to countering PF, the organisation’s future efforts on the issue should be designed and implemented in a way that does not discourage countries to focus on the full scope of PF risks and obligations, including those agreed at the UN level which go beyond the FATF’s focus. For their parts, countries conducting national PF risk assessments should continue to integrate the full range of PF risks into their evaluations and share best practices and methodologies among themselves. Outcomes of such risk assessments should be made public, wherever possible – both for the benefit of each country’s respective private sectors as well as other governments that may be working to undertake their own risk assessment. Providing support to smaller private sector actors especially will have an important impact on strengthening frontline efforts in countering PF.
By Darya Dolzikova and Emil Dall, December3, 2020, published on RUSI