How to combat proliferation financing used to buy weapons of mass destruction

Financing the proliferation of weapons of mass destruction (WMD) poses a serious threat to global peace and security. It is imperative that entities and people sanctioned by the UN Security Council (UNSC) are denied access to the financial system to acquire or sponsor the acquisition of dangerous weapons and technology. 

Proliferation financing (PF) includes raising, moving or making available funds to people or entities for the proliferation of WMD, its means of delivery and related materials, which include controlled goods and activities. 

International expectation

The Financial Action Task Force (FATF) defines the risk of PF as “the potential breach, non-implementation or evasion of the targeted financial sanctions”. PF risk is limited to where funding is made available to or for the benefit of a person or entity whose name appears on a targeted financial sanctions (TFS) list due to the proliferation of WMD. 

SA’s legislative framework

The Financial Intelligence Centre (FIC) Act No.38 of 2001 (FIC Act) places certain TFS obligations on accountable institutions. In terms of section 26B, read together with section 49A, no-one may provide financial or other services to people on a TFS list.

An accountable institution must scrutinise its client information to determine whether the client, beneficial owner, or person acting on behalf of the client or party to a transaction is a designated person or entity on the TFS list. Client information must be scrutinised regardless of the risk assigned to the business relationship or single transaction. 

An accountable institution must not establish a new business relationship or conduct a single transaction with designated people or entities. This may include not releasing any property to the designated person or entity, and people acting on their behalf. This is referred to as a freeze.

Reporting obligations related to TFS

Where the accountable institution has an existing business relationship with a designated person or entity, the accountable institution must freeze all their property and submit a report to the FIC under section 28A of the act. 

Financing the proliferation of weapons of mass destruction (WMD) poses a serious threat to global peace and security. It is imperative that entities and people sanctioned by the UN Security Council (UNSC) are denied access to the financial system to acquire or sponsor the acquisition of dangerous weapons and technology. 

Proliferation financing (PF) includes raising, moving or making available funds to people or entities for the proliferation of WMD, its means of delivery and related materials, which include controlled goods and activities. 

International expectation

The Financial Action Task Force (FATF) defines the risk of PF as “the potential breach, non-implementation or evasion of the targeted financial sanctions”. PF risk is limited to where funding is made available to or for the benefit of a person or entity whose name appears on a targeted financial sanctions (TFS) list due to the proliferation of WMD. 

SA’s legislative framework

The Financial Intelligence Centre (FIC) Act No.38 of 2001 (FIC Act) places certain TFS obligations on accountable institutions. In terms of section 26B, read together with section 49A, no-one may provide financial or other services to people on a TFS list.

An accountable institution must scrutinise its client information to determine whether the client, beneficial owner, or person acting on behalf of the client or party to a transaction is a designated person or entity on the TFS list. Client information must be scrutinised regardless of the risk assigned to the business relationship or single transaction. 

An accountable institution must not establish a new business relationship or conduct a single transaction with designated people or entities. This may include not releasing any property to the designated person or entity, and people acting on their behalf. This is referred to as a freeze.

Reporting obligations related to TFS

Where the accountable institution has an existing business relationship with a designated person or entity, the accountable institution must freeze all their property and submit a report to the FIC under section 28A of the act. 

An accountable institution does not have to obtain consent from the FIC or through a court order to freeze the designated person or entity’s property in terms of section 26B. An accountable institution must have processes in place to ensure freezing occurs immediately where it is in possession or control of such property. Accountable institutions can access the TFS list on the FIC’s website.  

The FIC strongly urges businesses that have approval to deal in controlled goods or services to understand the various PF typologies and to implement enhanced controls to monitor transactions to identify suspicious and unusual transactions that relate to PF. 

Suspicious and unusual activity must be reported to the FIC in terms of section 29 of the FIC Act in the form of a suspicious and unusual transaction report (STR). PF has no red-flag indicators, apart from involving designated people or entities and high-risk geographic areas. PF can be detected through the identification of suspicious and unusual transactions and activities. 

Understanding TFS risk

In addition to the TFS obligations to scrutinise, freeze and report suspicious transactions and activities when dealing with designated people or entities, the FIC recommends an accountable institution should adopt a risk-based approach to ensure sufficient resources are focused on heightened risks of PF. 

A key risk indicator relating to PF is the evasion of TFS lists using legal persons. Designated people or entities employ different methods in their attempts to avoid detection or distance themselves from certain transactions, and often attempt to hide behind legal persons, trusts and partnerships.

Another key area of PF risk relates to the industry in which a client operates and the associated nature of the client’s goods and activities offerings — often referred to as dual-use goods. 

Implementing measures to deal with potential PF may seem intimidating to accountable institutions. However, the same TFS list is used for terrorist financing and PF. The FIC recommends institutions apply a risk-based approach for PF, as all businesses must do their part to ensure they don’t unwittingly assist in the proliferation of WMDs. 

All guidance and public compliance communications (PCCs) are available on the FIC website. For further information on the following topics please refer to:

• Targeted financial sanctions: PCC 44;
• Proliferation financing: PCC 54;
• Terrorist property reports: Guidance Note (GN) 6A; 
• Suspicious and unusual transaction reports and red flag indicators: GN4B; and
• Introduction to risk and red flag indicators: GN7. 

Click here for more compliance information and guidance. The FIC’s compliance contact centre can be reached on (+27)-12 -641-6000 or log an online compliance query. 

This article was paid for by the Financial Intelligence Centre.