The Financial Action Task Force ("FATF") defines proliferation financing as "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 nuclear, chemical or biological 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."
The Bailiwick has issued Guidance on Combatting Proliferation and Proliferation Financing (“the Guidance”) outlining the legal obligations in the Bailiwick concerning proliferation and proliferation financing which provides practical guidance on good practices to identify, assess, manage and reduce the risks of proliferation and proliferation financing. The Guidance emphasises that such practices involve more than screening databases against lists of individuals and entities subject to international sanctions.
The Guidance outlines the three elements of financing a weapons of mass destruction programme as follows:
- Programme fundraising: a proliferator raises funds to finance a weapons of mass destruction programme.
- Disguising the funds: a proliferator transfers these funds into the international financial system for e.g., trade purposes.
- Procurement of materials and technology: a proliferator or its agents use those funds to pay for goods and services.
The Guidance highlights challenges involved with managing the risks of proliferation financing, a key difficulty of which is being able to distinguish proliferation and proliferation financing activities from ordinary trade and commerce, as those involved in proliferation financing can go to great efforts to seek to disguise their activities. These disguises include:
- Proliferators purchasing individual components for use in proliferation rather than fully assembled weapons of mass destruction systems.
- The use and purchase of dual use goods which have uses outside of proliferation, making it difficult to ascertain whether they will be used for proliferation e.g., chemicals such as chlorine can be used in chlorine gas (chemical weapons) but also in household cleaning products.
- Agents acting on behalf of the proliferator, either for ideological purposes, or for profit motives, or a combination of the two via intermediary vehicles such as front companies. These intermediary vehicles may be used to add complexity, opacity and/or cross border activity to a weapons of mass destruction programme so as to disguise the existence of the programme and the end use or end user of proliferation-sensitive goods and services.
The key indicators of proliferation financing are split by the Guidance into three distinct categories:
- Geographic Indicators – relating to countries or geographic areas e.g., whether a transaction involves a country of proliferation concern or a jurisdiction with weak export controls.
- Customer/Counterparty Indicators – relating to customers and counterparties involved in a transaction and/or business relationship e.g., the customer in the relationship may be engaged in activity which has vulnerability to abuse for proliferation or the customer activity not matching their business profile.
- Transaction Indicators – relating to products, services, transactions, and delivery channels e.g., delivery of products subject to proliferation-related UN or UK sanctions, or a transaction involving a potential shell company.
The Bailiwick's legal framework
The legal framework to combat proliferation in the Bailiwick broadly mirrors the equivalent legislation in the UK. The Bailiwick directly incorporates a legal provision in force in the UK by providing that it has effect in the Bailiwick, however the Bailiwick legal regime is separate from, and operates independently of, the UK regime.
The Bailiwick’s legal framework contains a number of measures to combat proliferation and proliferation financing:
- The Bailiwick implements UN and UK sanctions regimes which target (among others) countries, entities and individuals suspected of involvement in proliferation financing.
- Anti-weapons or anti-proliferation offences which make it unlawful to engage in certain activities relating to proliferation and/or proliferation financing.
- Reporting obligations which require persons to report suspicions or knowledge of proliferation, proliferation financing and related activity.
- Export controls which seek to control and prevent the acquisition and transfer of goods, services, technology, and expertise that might be used by proliferators.
In respect of the implementation of sanctions regimes, Chapter 12 of the Handbook on Countering Financial Crime and Terrorist Financing contains guidance and rules requiring firms to have in place:
- Appropriate and effective policies, procedures and controls to identify, in a timely manner, whether a prospective or existing customer, or any beneficial owner, key principal or other connected party, is the subject of a sanction issued by the UN, UK or the States of Guernsey’s Policy and Resources Committee;
- A system and/or control to detect and block transactions connected with those natural persons, legal persons and legal arrangements designated by the Bailiwick’s sanctions regime; and
- Compliance monitoring arrangements which include an assessment of the effectiveness of the firm’s sanctions controls and their compliance with the Bailiwick’s sanctions regime.
The FATF provides further guidance on assessing and mitigating the risk of proliferation financing: