ECSH33206 - Proliferation Financing

What is Proliferation Financing (PF)?

Proliferation Financing measures exist to prevent the build-up of weapons of mass destruction by certain regimes, identified in the context of UK obligations under United Nations (UN) treaties. Currently, PF sanctions regimes relate only to DPRK (North Korea) and Iran. 

Proliferation Financing is defined in Regulation 16A(9) of the Money Laundering, Terrorist Financing and Transfer of Funds (Information on the Payer) Regulations 2017 (MLR 2017) as “the act of providing funds or financial services for use, in whole or in part, in the manufacture, acquisition, development, export, trans-shipment, brokering, transport, transfer, stockpiling of, or otherwise in connection with the possession or use of, chemical, biological, radiological or nuclear (CBRN) weapons. This includes the provision of funds or financial services in connection with the means of delivery of such weapons and other CBRN-related goods and technology, in contravention of a relevant financial sanction’s obligation”. 

HMRC responsibilities

Unlike Money Laundering/Terrorist Financing risks, the MLR 2017 do not require HMRC to risk assess its supervised population for Proliferation Financing.

However, we are required to ensure the compliance of our businesses with Regulation 18A MLR 2017 (PF risk assessments by relevant persons) and Regulation 19A MLR 2017 (policies controls and procedures in relation to PF).

What must businesses do?

Regulation 18A MLR 2017 sets out a clear list of actions a relevant person must take.

All businesses are required to conduct appropriate risk assessments in relation to the risks of proliferation financing to which the business is subject. This requires the business to take into account various risk factors including factors relating to its customers, the countries or geographic areas in which it operates, the products or services and delivery channels it offers, and of its transactions.  We advise all supervised businesses that they should be checking whether businesses or individuals they deal with are subject to UK or United Nations sanctions as part of this process.

Since 1 September 2022, supervised businesses have had the added responsibility of documenting their proliferation financing, risk assessments and policies, controls and procedures.  The risk assessment must take into account the Government’s National risk assessment of proliferation financing (PF NRA).

To help them keep up-to-date on PF and other sanctions, we recommend that all supervised businesses sign up to the Office of Financial Sanctions Implementation (OFSI) email newsletter.  

The nature of the activity that our supervised population carries out means that most businesses will never come anywhere near PF, however that does not meant they cannot carry out a PF risk assessment  and this must  be documented setting out how and when PF risks were considered including use of PF NRA; and pointing to any wider policy, controls and procedures (PCP)/customer due diligence (CDD) checks that could alert the business to PF issues, e.g. risks round high risk third countries or overseas politically exposed persons (PEPs). 

What action should compliance officers take?

Compliance officers should check that businesses are complying with their obligations under Regulations 18(A) and 19(A) MLR 2017. This includes checking businesses are taking appropriate steps to identify and assess their risk of exposure to proliferation financing through adequate risk assessments and managing and mitigating those risks effectively through policies controls and procedures.  Any failure to do so should be treated in the same way as any other compliance failure, that is the failure to comply with Regulation 18A MLR 2017 and/or Regulation 19A MLR 2017 is a breach of a relevant requirement, which  means that proportionate, dissuasive and effective enforcement action should be taken.

However, many businesses that we supervise will have a very low exposure to PF risk and this should be considered when deciding what action to take.  

Where a business has struggled to identify any risks, the officer needs to explain the necessity of:

  • at least reviewing the PF NRA  and documenting when they did this
  • their conclusions pointing to generic risks and responses that should assist in the event of a PF risk arising
  • that these risks didn’t require addition of any ongoing specific PF checks
  • identifying any generic PCPs that could capture a PF issue e.g. PEP screening and enhanced due diligence for high risk third countries.