April 01, 2020

Emerging Threats in Combating Proliferation Finance

New Technology and Economic Challenges

By ​Neil Bhatiya

Executive Summary

For decades, the United States, its allies, and partners have been policing the international financial system in an effort to deny the world’s most dangerous weapons to the world’s most dangerous actors. North Korea, Iran, Syria, and terrorist organizations such as the Islamic State group (ISIS) have, at various points, sought weapons of mass destruction (WMD) capabilities or their delivery systems. These actors have done so by moving illicit funds through the international financial system, exploiting an increasingly globalized world. Traditionally, efforts to combat this have focused on improving oversight of the global financial services industry and supply chains. Sanctions, export controls, and vigilance measures (customer checks and transaction monitoring) are essential to this effort.

Proliferation networks have frequently adapted in response, changing their methodologies to avoid detection. Increasingly, these networks are also embracing technological change. If the United States wishes to continue the policy leadership role it has adopted over the previous several years, it will need to understand how these networks are working to stymie the international community’s efforts to discover and disrupt their activities.

Policymakers must prepare to more comprehensively tackle two emerging threats, which this paper will outline in turn. The first threat stems from proliferators’ adoption of new financial technology, particularly their exploitation of platforms and payment systems designed to keep users and transactions anonymous or pseudonymous. North Korea, for example, has raised millions of dollars through the hacking of virtual currency exchanges. The second threat stems from new technology in the advanced manufacturing, chemical, and biological space, which can make advanced dual-use goods more accessible to more users; these technologies may also entail significant national security risks, especially in the hands of nation-state actors.

This paper recommends that the United States and its partners pursue policy adaptations across several lines. The United States should continue to raise awareness of specific proliferation finance issues by highlighting them in successive National Illicit Finance Strategies, including expanding their focus on illicit finance typologies arising from virtual currency use. The administration can best complement these efforts by drastically expanding its coordination with major economies on cybersecurity efforts to defend against advanced North Korean hacking capabilities.

The United States must also prioritize continuing partnerships between national governments around the world and companies so that the private sector is able to ensure the legitimate use of their technology. These partnerships have historically facilitated information-sharing; both sides must continue to emphasize this impulse to keep up with the new frontiers of financial and technological innovation that are lowering barriers to facilitating financial transfers or researching and developing new chemical or biological agents. Congress can help by implementing legislative changes that continue to enhance oversight of export regulations so the private sector handles potentially dual-use technologies appropriately.

Increasingly, weapons of mass destruction proliferation networks are embracing technological change.

The international community, led by the United States, needs to demonstrate a renewed sense of urgency in response to an evolving threat environment. This effort involves the long and hard work of building new rules, forging new international partnerships, and understanding dizzying technological change. The consequences of failure in this endeavor would be quite stark: the unchecked proliferation of weapons of mass destruction and their delivery systems.

Introduction

Despite the efforts of the international community, a variety of illicit actors continue to exploit the international financial system to provide resources, material, and know-how for clandestine weapons of mass destruction (WMD) programs. These networks, which specialize in what experts refer to as proliferation finance, continue to pioneer methods to move through the global financial system in a way that is difficult for even the most sophisticated and well-resourced international banks to detect. Likewise, many nation-states struggle to police their own financial and commercial sectors, due to a lack of resources or political will. In recent months, U.S. authorities have targeted with legal action Chinese banks that were operating brazenly on behalf of North Korea and have sanctioned Iranian-linked companies in multiple countries that were trafficking in WMD-precursor goods for Iran. These are but a few examples of how this works in practice.

Despite the ongoing diplomatic process between the United States and North Korea, Pyongyang continues to augment its arsenal, including through testing missiles, like the one pictured. North Korea remains one of the world’s most sophisticated exploiters of the international financial system to acquire these capabilities. (Woonhae Cho/Getty Images)

North Korea remains the principal threat actor in this space and shows no signs of slowing its WMD and ballistic missile programs, despite Pyongyang and Washington’s ongoing diplomacy. Iran had been trying to pressure the other parties to the Joint Comprehensive Plan of Action (JCPOA), also known as the Iran nuclear deal, to provide the economic relief to convince Tehran to continue complying with the deal.However, the Iranian leadership is currently testing the international community’s patience by expanding its enrichment activities beyond the limits the JCPOA imposed. Other states such as Syria, as well as various non-state actors, including terrorist groups, continue to pursue WMD capabilities. These actors represent a stark security threat for the international community.

The United States and its international partners have focused legal, regulatory, and intelligence resources on tracing these proliferation networks that operate through financial institutions around the world. Stronger implementation of export controls, sanctions, and other vigilance measures, such as customer due diligence, know-your-customer policies, and, for some jurisdictions, collection of beneficial ownership information, has been the center of that response. If the United States wishes to continue the policy leadership role it has adopted over the previous several years, it will need to understand how these networks are adapting to the international community’s efforts to discover and disrupt their activities. None of these adversaries has been stagnant; they continue to learn new methodologies and find loopholes and have been especially adept at leveraging new technology.

Successive United Nations Panel of Experts reports and open source reporting and analysis have highlighted the creativity of the most sophisticated networks. As the difficulty of doing illicit business in the United States and western Europe has increased, these networks are directing more of their activity to jurisdictions with less sophisticated legal and financial systems. Not only do these networks search out countries with weak financial crimes compliance frameworks, but they are also poised to exploit countries that are adding advanced manufacturing capabilities to their domestic economy. A recent example includes the U.S. sanctioning of an Iranian procurement network that was purchasing dual-use goods from China. In the past, these actors would have sought these goods from the United States or Europe. Proliferation networks have always ridden the wave of expanding globalization; they will continue to do so.

Policymakers should pay attention to two emerging threats. The first is proliferators’ adoption of new financial technology, particularly by exploiting platforms and payment systems designed to keep users and transactions anonymous or pseudonymous. Bitcoin is only the most prominent of the cryptocurrencies that the international community and the United States have linked to North Korean and Iranian illicit activity. There are several other cryptocurrency options that offer even greater ability to evade detection (for example, so-called privacy coins). Also, there is a rise in efforts by sovereign states to create national cryptocurrencies, with prominent examples in Russia and Venezuela, both of which are motivated to evade U.S. sanctions exposure. While many of these efforts have been unsuccessful at their stated purpose, they are suggestive of the future prospects of alternative monetary products and value transfer systems, where the financial crimes compliance infrastructure needs to be much nimbler at responding to new typologies enabled by new financial technology (fintech), which include a wide array of methods designed to leverage digital means to compete with traditional financial services.

When the proliferators are not mining or trading virtual currency, they are stealing it outright, exploiting a digital finance environment where cybersecurity protections are uneven. As a result, it is growing easier to move money onward without touching U.S. jurisdiction, or outside of the view of many national regulators. The international community, as well as private sector firms innovating in this space, is in the early days of thinking through the proper regulatory responses. To be effective, this effort must include how to extend know-your-customer and customer due diligence protocols from the traditional financial space to this new technology realm, including answering questions about the notion of identity and jurisdictional reach. The responses must also focus on constantly strengthening a global cybersecurity posture that hardens cybersecurity infrastructure around virtual asset providers, to say nothing of those who transact in fiat currencies.

When the proliferators are not mining or trading virtual currency, they are stealing it outright, exploiting a digital finance environment where cybersecurity protections are uneven.

Second, international regulators and law enforcement must address threats from new technology in the advanced manufacturing, chemical, and biological space, which can make advanced dual-use goods more accessible to more users; these technologies may also entail significant national security risks, especially in the hands of nation-state actors. To respond to this, international regulators and their law enforcement counterparts must recognize that such innovations can rob the United States and its partners of their leverage in ensuring the responsible use of technology and materials with potentially harmful uses. Export controls are an important cornerstone of nonproliferation policy, but they may lose their utility in a world with radically democratized access to national security-sensitive technology, such as combinatorial chemistry and viral genome synthesis. The international control regime—the network of intergovernmental and private sector institutions that governs trade in dual-use goods—must be structured to confront this new reality and account for the accelerated pace of technological change.

The United States and its international partners have clear policy options at their disposal for addressing these security threats as they change over time. Previous innovations in countering proliferation finance have needed significant political will; budgetary resourcing has also been important. The international community, led by the United States, needs to demonstrate a renewed sense of urgency in response to an evolving threat environment.

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  1. See additional CNAS reports on combating the financing of WMD proliferation: Elizabeth Rosenberg, Neil Bhatiya, Claire Groden, and Ashley Feng, “Financial Networks of Mass Destruction,” (Center for a New American Security, January 30, 2019), https://www.cnas.org/publications/reports/financial-networks-of-mass-destruction; and Jonathan Brewer, “The Financing of WMD Proliferation” (Center for a New American Security, October 30, 2018), https://www.cnas.org/publications/reports/the-financing-of-wmd-proliferation.
  2. “U.S. appeals court upholds ruling against Chinese banks in North Korea sanctions probe,” Reuters, July 30, 2019, https://www.reuters.com/article/us-usa-trade-china-banks/us-appeals-court-upholds-ruling-against-chinese-banks-in-north-korea-sanctions-probe-idUSKCN1UQ03U; and “Treasury Sanctions Global Iranian Nuclear Enrichment Network,” U.S. Department of the Treasury, press release, July 18, 2019, https://home.treasury.gov/news/press-releases/sm736.
  3. Daniel R. Coats, Director of National Intelligence, “Worldwide Threat Assessment of the US Intelligence Community,” Statement for the Record to the Select Committee on Intelligence, U.S. Senate, January 29, 2019, https://www.dni.gov/files/ODNI/documents/2019-ATA-SFR---SSCI.pdf.
  4. For a description of how these policies fit together, see Sohail Akbar, “How to Audit Know Your Customer (KYC) and Customer Due Diligence (CDD),” (Association of Certified Anti-Money Laundering Specialists, October 2018), http://files.acams.org/pdfs/2019/Sohail-Akbar-White-Paper.pdf.
  5. For a review of U.S. priorities at the Financial Action Task Force, see “Objectives for FATF-XXX (2018-2019),” Financial Action Task Force, http://www.fatf-gafi.org/media/fatf/content/images/Objectives-FATF-XXX-(2018-2019).pdf.
  6. “Midterm report of the Panel of Experts established pursuant to resolution 1874 (2009),” (United Nations Security Council, August 2019), https://undocs.org/S/2019/691; Lucas Kuo and Jason Arterburn, “Lux and Loaded: Exposing North Korea’s Strategic Procurement Networks,” (C4ADS, July 2019), https://www.c4reports.org/lux-and-loaded; and Andrea Berger and Anagha Joshi, “Countering Proliferation Finance: Implementation Guide and Model Law for Governments,” (Royal United Services Institute, July 21, 2017), https://rusi.org/publication/other-publications/countering-proliferation-finance-implementation-guide-and-model-law-0.
  7. “U.S. sanctions network selling materials for Iran nuclear program,” Reuters, July 18, 2019, https://www.reuters.com/article/us-mideast-iran-usa-sanctions/u-s-sanctions-network-selling-materials-for-iran-nuclear-program-idUSKCN1UD2PV.
  8. “Midterm report of the Panel of Experts established pursuant to resolution 1874 (2009).”
  9. Privacy coins offer different protocols for disguising the digital identities, amounts, and locations for virtual currency holders and transactions. Many exchanges have rejected the presence of privacy coins, fearing that criminal actors may be using them to avoid anti-money laundering checks. Will Heasman, “Privacy Coins in 2019: True Financial Freedom or a Criminal’s Delight?,” CoinTelegraph.com, January 2, 2020, https://cointelegraph.com/news/privacy-coins-in-2019-true-financial-freedom-or-a-criminals-delight.

Authors

  • ​Neil Bhatiya

    Adjunct Fellow, Energy, Economics, and Security Program

    Neil Bhatiya is an Adjunct Fellow with the Energy, Economics, and Security Program at the Center for a New American Security. He is also an Associate at the Financial Integrit...

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