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FinCEN AML/CTF Priorities Part 4: Counterproliferation

Michelle M. Lucci, CSS, CRCM

July 23, 2021

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Key Priority: Proliferation Financing

Among FinCEN's first list of key priorities for AML/CFT policy is preventing proliferation financing

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FinCEN released their first ever government wide priorities (“Priorities”) for anti-money laundering and countering terrorist financing on June 30, 2021. The regulations are forthcoming, but institutions now should begin the process of performing a threat-focused risk assessment which will guide them where to focus their efforts.

Included as a Priority is Proliferation Financing. The threat of the proliferation of weapons of mass destruction is very significant and the consequences are severe. Ultimately it poses a serious threat to global stability with the potential for catastrophic loss of life if a weapon of mass destruction was deployed.

It is a concept that we have all heard of, however, the concept remains somewhat of a mystery in the community bank world. Now that there are new requirements in this area it’s time to unravel some of the mystery. Below are terms and definitions that will be referred to in this article.

Ballistic missile – a rocket-propelled self-guided strategic-weapons system that follows a ballistic trajectory to deliver a payload from its launch site to a predetermined target.

Centrifuge – a gas device that is a tub that spins at high speed to process and increase the concentration of the active isotope of uranium. Both nuclear reactors and nuclear bombs are powered by uranium.

Weapons of mass destruction (WMD) is defined by Homeland Security as a nuclear, radiological, chemical, biological, or other device that is intended to harm a large number of people.

WMD proliferation refers to the manufacture, acquisition, possession, development, export, trans-shipment, brokering, transport, transfer, stockpiling, or use of nuclear, chemical or biological weapons in complete systems or the transfer of components and their means of delivery and related material (including both dual-use technologies and dual use good used for non-legitimate purposes).

Means of delivery are missiles, rockets, and other unmanned systems capable of delivering nuclear, chemical, or biological weapons.

Proliferation financing refers to the act of providing funds or financial services which are used in whole or in part for any of the activities mentioned above.

Foreign proliferation threats

Democratic People’s Republic of North Korea (DPRK)

Several days before President Biden’s inauguration, North Korean dictator Kim Jong-un held a parade to show off a new submarine-launched ballistic missile. Shortly before that at another parade the country’s largest-ever intercontinental ballistic missile (ICBM) was revealed. After testing three ICBMs in 2017 they claimed the capability to reach the continental United States with a nuclear warhead.

North Korea has been silently ramping up their nuclear capabilities for years despite increasingly tough comprehensive United Nations sanctions in place since 2006 that have banned most of the country’s exports and severely limited its imports. Sanctions have hampered DPRK’s efforts, but the North Korean government has adapted and uses creative methods to acquire what they need. The entities involved include state-owned entities and FI’s in North Korea, to brokers, agents, banking representatives, and even diplomats in third countries.

Agents for the DPRK are acting in somewhat of a unique role. Their efforts are not only to procure WMD related components but to engage in fundraising that can be ultimately transferred to the DPRK government. Therefore, a large amount of DPRK illicit financial activity can resemble traditional money laundering or smuggling schemes. More recently alleged cyber-crimes including ransomware, attacks on exchanges, and mining have been attributed to DPRK controlled groups. Since the DPRK is a totalitarian state where the government controls every aspect of the economy it focuses its resources almost entirely on its military and weapons programs.

Since former President Trump’s diplomatic efforts with Kim failed, the North Korean leader appears to have even bolder nuclear ambitions. He uses the parades to not only showcase the latest WMD but to also apologize to his people for the crippling international economic sanctions that have brought the economy to a halt resulting in famine and starvation for many North Koreans. The North Korean government has been also found to have used chemical weapons against its own nationals. To date Kim Jong-un has presided over four nuclear tests and 91 ballistic missile tests as well as launches of cruise missiles and the firing of rocket-propelled artillery. With diplomatic relations stalled many experts expect him to return to testing.

Kim Chol-Sam

Kim Chol-Sam and British banker Nigel Cowie created numerous shell companies (was named in the Panama Papers linked to Mossack Fonseca the Panamanian law firm) including “DCB Finance”, in the British Virgin Islands, mainland China, and Hong Kong. Since at least 2010, Daedong Credit Banks processed transactions that were worth millions in US dollars for DPRK companies involved in nuclear and missile programs. Both were added to OFAC’s SDN List on June 27, 2013.

Iran

Iran’s nuclear program begin in the 1950’s. The program was slow in development but by the 1990’s and early 2000’s the program was sophisticated and included the modification of its Shahab-3 missile to carry a nuclear warhead. In 2004 Iran admitted that it had been steadily increasing its capability to enrich uranium through purchases of centrifuge technology from a foreign intermediary.

In 2006 the United Nations Security Council passed two resolutions demanding that Iran suspend enrichment activities, banned the international transfer of nuclear and missile technologies to Iran, and froze the assets of twelve individuals and ten organization involved in the nuclear program.

Numerous additional resolutions and sanctions have been implemented that eventually sanctioned the Government of Iran, the Central Bank of Iran, and all financial institutions in the country as money laundering entities of concern. In addition, the U.S. warned financial institutions around the world that doing business with Iranian banks entailed significant risks including the risk to be cut off from the U.S. financial system, known as secondary sanctions (Executive Order 13599 on February 5, 2012).

On July 14, 2015, the P5+1 (China, France, Germany, Russia, the United Kingdom, and the United States) agreed to the Joint Comprehensive Plan of Action (JCPOA) which was also endorsed by the United Nations Security Council. The agreements contained numerous provisions that included: a reduction in operating centrifuges; the dismantling of excess centrifuges; caps on uranium enrichment limits on the uranium stockpile; plans to ship excess enriched uranium out of the country; and disabling the core of the Arak reactor. The agreement called for quarterly monitoring and reporting.

In return some sanctions were lifted against Iran by the U.S., the E. U., and the U.N. Sanctions remaining in place under the JCPOA included the ban on U.S. trade with an investment in Iran, any sanctions related to Iran as a state sponsor of terrorism, proliferation under E.O. 13382 and proliferations -related sanctions laws, and the Executive Orders related to Iran’s repression in Syria, the E.O. pertaining to human rights, and regulations barring Iran from access to the U.S. financial system.

Without citing any specific violations of the JCPOA and despite the continued public support of the treaty by France, the U.K., Germany, and even Russia, former President Trump withdrew the U.S. from the treaty and re-instated comprehensive sanctions in 2018. Since the U.S. withdrawal Iran has reduced its compliance in five phases and now has exceeded limits on uranium enrichment agreed to in the JCPOA.

Li Fangwei

One of the most notorious proliferators is Li Fangwei, known as Karl Lee and numerous other aliases, is allegedly the principal supplier of millions of dollars’ worth of embargoed dual-use items for the ballistic missile program of the Government of Iran. He controls a large network of industrial companies based in eastern China that uses front companies to conduct transactions to acquire the goods. Despite being added to OFAC’s SDN List in 2009, the use of these front companies allowed him to conceal his role so that wire transfers made from Iranian entities, cleared through U.S. financial institutions, to entities and bank accounts he controlled in China. These front companies have been held under the names of his many aliases, his presumed siblings, and even his deceased mother. It is said that if you dismantle an Iranian missile you will find at least one component inside that has passed through his hands. He was indicted in 2014 in the New York court system and there is a federal warrant outstanding for multiple counts of money laundering, bank and wire fraud, and conspiracy to violate economic sanctions. The FBI placed an unprecedented $5 million reward for him, but he still remains a fugitive.

Stay up-to-date on the latest FinCEN priorities. See Part I: Implications for Community Financial Institutions.

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Chemical Weapons

Although we’ve only reviewed proliferation with regards to nuclear missiles thus far, the definition of weapons of mass destruction also includes chemical weapons. A chemical weapon is any toxic chemical that can cause death, injury, incapacitation, and sensory irritation, and their use in armed conflict is a violation of international law. Specific types include nerve, blister, choking, blood, and riot control agents. Eight countries have declared chemical weapons stockpiles including Albania, India, Iraq, Libya, Syria, the United State, Russia, and most likely South Korea (although that isn’t verified).

The use of chemical weapons dates back at least a century but they are still in use today. As recently as February 2017, North Korean agents used VX, a nerve agent, to assassinate Kim Jong-nam, the half-brother of leader Kim Jong-un. In early 2019 Syria used chlorine gas against its own nationals. In August 2020 Russian opposition leader Alexy Navalny was poisoned with Novichok, a nerve agent.

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Export Controls

Most national governments have established extensive export controls and safeguards to prevent the acquisition of dual-use items which include the registration, licensing, and pre-approvals for their manufacture and export. In the U.S. the Export Administration Act, administered by the Bureau of Industry and Security (BIS), provides these controls. However, controls are not uniform across all jurisdictions and some jurisdictions have yet to implement controls required in international treaties.

Another difficulty is that there is a growing range of goods and technologies that have commercial applications as well as applications for WMD and WMD delivery systems (“dual-use” goods). For example, a triggered spark-gap is used in medical devices to break down kidney stones but also can be used to trigger a nuclear device.

Regulatory Guidance

In June FATF released new guidance on Proliferation Financing Risk Assessment and Mitigation. In the same month FinCEN and the U.S. federal bank regulators released their Anti-Money Laundering and Countering the Financing of Terrorism National Priorities (“Priorities”) which includes Proliferation Financing as a priority.

Some industries are more vulnerable to proliferation financing than others and they include: the financial industry, maritime sector, trust and company service providers, dealers in precious stones and metals, and virtual asset service providers.

The way North Korea and other sanctioned countries, such as Iran, fund these efforts is by proliferators exploiting a combination of vulnerabilities in the global financial system and maritime sector. These vulnerabilities make available sensitive materials, technology, services, and expertise to individuals and entities seeking to profit from the acquisition followed by resale to countries for their WMD programs. The process is detailed below:

Proliferators prefer to procure from U.S., European, and Asian manufacturers. They purchase dual-use items which have both commercial and military or proliferation applications and are primarily controlled under international export control regimes. Often they will purchase just below the controlled threshold to avoid the requirement for a permit or license for export.
The proliferators rely on support networks that use intermediaries and front companies to arrange for the trade and export of goods by witting or unwitting companies. These front companies can be established just for this purpose or have legitimate activity and comingle the funds.
The payment flows through the global banking system (primarily through correspondent banks and interbank accounts) and appears to be legitimate commercial activity because the amounts are moderate and don’t raise red flags. Sometimes offshore accounts and multiple accounts in the names of family members and shell companies will be used. Transactions are often layered.
Proliferators will lie about the end use of the item and the end-user and often pretend that the goods are for a domestic company.
Shipping methods will route the cargo through a third country with weak national anti-money laundering laws where diversion occurs. An individual there who is aware of the true destination will conceal the true end-user and take possession of the cargo. Sometimes the items are hidden in other cargo, the cargo is mislabeled, or carried on a person.

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Enhancement that banks can make to help curb proliferation finance

During the account opening process ask the potential customer if their business is involved in trading or financing of dual-use goods. If so, do they have experience in these areas?
At onboarding banks should consider screening a broader selection of lists than required including the Commerce Department’s BIS Lists (denied persons, entity, unverified, and consolidated screening lists).
For transactions, screening the broader lists mentioned above as well as foreign lists designed to prevent export control violations would be helpful. The European Union’s Dual-Use List is publicly available, regularly updated, and contains four multilateral export control regimes (The Australia Group, the Wassenaar Arrangement, the Nuclear Suppliers Group, and the Missile Technology Control Regime.)
Screen daily for duplicate addresses. DPRK front companies often share managers, owners, phone numbers, and often use the same addresses as the DPRK embassies and representation offices. Many of Li Fangwei’s front companies have used the same address or a close variant thereof.
Flagging customers who want to use cash for industrial items or trade transactions.
Flagging customers who use personal accounts to buy controlled industrial items.
Regular use of negative media searches.
Distance is not a factor. Many DPRK front companies are based in China, but the country is large so narrowing the focus is helpful. The 2018 US National PF Risk Assessment identifies the cities of Dalian, Dandong, Jinzhou, and Shenyang in China’s northeast Liaoning Province as well as Hong Kong to be the riskiest. Banks can program their systems to flag transactions to these areas. Other areas of the world that have been known to facilitate proliferation financing are Pakistan, Syria, and the United Arab Emirates.

Financial institutions can make a significant difference to stopping or curtailing this activity and that includes cutting access to procurement and fundraising; helping to uncover proliferation networks; and providing evidence to OFAC and law enforcement. We should all do our part.

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About the Author

Michelle M. Lucci, CSS, CRCM

Regulatory Compliance Director

Michelle Lucci, Abrigo’s Regulatory Compliance Director, has over 30 years of banking experience and is a Certified Sanctions Specialist (CSS), a Certified Regulatory Reporting Manager (CRCM) and a Certified Anti–money Laundering Specialist (CAMS). Prior to joining Abrigo, she served as a Commissioned FDIC Bank Examiner for both Risk Management and Consumer Compliance in the New York and Atlanta FDIC regions, acted as Examiner-In-Charge

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FinCEN AML/CTF Priorities Part 4: Counterproliferation

Key Priority: Proliferation Financing

Would you like others articles like this in your inbox?

Takeaway 1

Takeaway 2

Takeaway 3

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Stay up-to-date on the latest FinCEN priorities. See Part I: Implications for Community Financial Institutions.

Know the signs of proliferation financing

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Michelle M. Lucci, CSS, CRCM

Regulatory Compliance Director

About Abrigo

Looking for Valuant? You are in the right place!

Looking for DiCOM? You are in the right place!

FinCEN AML/CTF Priorities Part 4: Counterproliferation

Key Priority: Proliferation Financing

Would you like others articles like this in your inbox?

Takeaway 1

Takeaway 2

Takeaway 3

Nuclear proliferation threats across the globe

Stay up-to-date on the latest FinCEN priorities. See Part I: Implications for Community Financial Institutions.

Know the signs of proliferation financing

Gain confidence in your BSA program.

Steps to take to prevent proliferation

How to prevent wire fraud: Strategies for avoiding losses

Bank wire fraud – How social engineering and technology perpetrate fraud losses

Reg CC: Funds availability requirements and fraud

Michelle M. Lucci, CSS, CRCM

Regulatory Compliance Director

About Abrigo

Get Staffing Relief for your BSA Program.