The FATF’s Combating of Financing of Proliferation Standards: Private Sector Implementation Challenges

The financial integrity standards of the Financial Action Task Force (FATF) create a framework that enlists financial institutions and designated businesses and professions. The effectiveness of the standards is highly dependent on the effectiveness of the measures employed by these regulated institutions. This chapter considers the challenges faced by regulated institutions to comply with the 2020 amendments to the FATF’s standards aimed at combating the financing of the proliferation of weapons of mass destruction. The FATF first adopted proliferation financing (PF) measures in 2012. These support the targeted financial sanctions (TFS) measures of the United Nations Security Council (UNSC), i.e. the UNSC’s sanctions against named individuals and entities linked to proliferation programs of Iran and the Democratic People’s Republic of Korea. The discussion reflects initial perspectives gained in interviews with 46 experts globally. The challenges identified in this study can be clustered in four broad groups: navigating different definitions of PF; assessing and mitigating PF risk with limited information about PF threats and with a limited geopolitical and geo-economic capacity to identify and mitigate threats; monitoring trade-related transactions effectively to prevent PF-TFS while having limited or no information about the goods involved; and efficiently and effectively combating PF-TFS without being allowed to simplify compliance measures where risks are lower. An overarching challenge is, however, a surprising lack of considered policy about the purpose and strategic objectives of the new measures to be implemented. Given the identified challenges the chapter proposes the following as elements of a national PF-TFS strategy: adopting a meaningful definition of PF that fits with the country’s general proliferation policy; implementing a phased approach that first focuses on a select group of higher risk institutions with capacity; embracing a collaborative approach bringing that select group together with the range of government authorities that address aspects of PF-TFS to explore best practice approaches to supporting effective and efficient compliance; making appropriate use of the FATF’s low risk exemption to exclude low risk institutions from PF-TFS risk management obligations; facilitating PF-TFS compliance by supporting sectoral risk assessments and the development of appropriate compliance technologies; tailoring compliance expectations given the limited information that institutions may have; and monitoring implementation for intended and unintended consequences and reporting on impact and progress. Though ambitious, FATF standards are minimum standards. Countries and regulated institutions may therefore elect to go beyond the standards and adopt policies, regulations and compliance practices that serve broader non-proliferation and disarmament objectives. Given the current increase in WMD risks globally that approach deserves serious consideration. Increased compliance with global non-proliferation obligations is required and the FATF’s financial surveillance framework can provided a helpful additional layer of controls.