The financiers of proliferation of nuclear and other weapons of mass destruction (WMD) traditionally have been states seeking to expand their military capabilities, often in defiance of international controls or treaties such as the Nuclear Nonproliferation Treaty. The threats to international peace and stability represented by the Democratic People’s Republic of Korea’s (DPRK) nuclear program, and even by the relatively mature programs of India and Pakistan, are testament to the success of their financiers. Nevertheless, although experts in the international community understand how financing of WMD proliferation takes place, the international framework to counter it, based on sanctions and export control laws, is relatively weak.
Countering the financing of proliferation (FoP) should be an important foundation of U.S. counter-proliferation efforts. The United States is uniquely placed to make this a global priority. First, thanks to the global dominance of the U.S. dollar as a reserve currency and as a tool of international trade, U.S. regulators are the preeminent global financial rule-makers. Second, U.S. intelligence and financial investigation abilities are among the best in the world. Third, the United States already plays a key role in global counter-proliferation efforts. It is leading the response to the most pressing proliferation crisis today by coordinating international efforts, at the United Nations (U.N.) Security Council as well as bilaterally, to counter North Korea’s WMD program. It is also trying to build a stricter sanctions regime to prevent Iran from obtaining a nuclear weapon.
The financial elements of a WMD program can be divided into three stages. During the first (program fund-raising), the proliferating state raises funds for the program through its domestic budget, perhaps supplemented with funds raised by networks overseas or by criminal activity (conducted by or on behalf of state actors). During the second stage (disguising the funds), the proliferating state transfers these funds into the international financial system. If the state is not sanctioned, this is straightforward. For states subject to comprehensive sanctions like North Korea and Iran (prior to implementation of the Joint Comprehensive Plan of Action, or JCPOA), it is a major challenge. During the third stage (procurement of materials and technology), the proliferating state uses these funds in the international financial system to pay for goods, materials, technology, and logistics needed for its WMD program. Throughout this third stage, international financial institutions (FIs) will be involved in processing the related transactions.
Although experts in the international community understand how financing of WMD proliferation takes place, the international framework to counter it is relatively weak.
It is often difficult for government authorities or FIs to identify FoP. The networks of procurement agents involved may be complex and may involve front companies operating in a number of different jurisdictions. The goods and materials involved are, for the most part, standard industrial or occasionally dual-use items. The latter, although subject to controls, still may be hard to identify. For due diligence, most FIs rely on screening transactions and customers against lists of sanctioned individuals or entities. Governments and regulators generally require nothing more of FIs.
U.N. and independent experts recently have published several reports on financing of proliferation typologies, intended to assist government authorities and financial institutions to control the threat. One such report, by Project Alpha at King’s College London, is a comprehensive collection of case studies for different typologies.1 These case studies involve classic and established financial mechanisms – wire transfers, trade finance products, cash, checks, and, in a few cases, credit cards. Notably, there are no examples of virtual currencies or other new payment methods. Presumably, the proliferation networks were able to conduct their procurement and financial transfer activities by traditional means and did not need more sophisticated and anonymous financial value and storage mechanisms. It is likely that the financial signatures of any program over the next five to ten years would follow these classic patterns.
This paper examines the international framework of controls on proliferation financing. It also identifies areas that require further work to fill current gaps in the framework and to safeguard the international community against future WMD proliferation threats. The global players involved in this response will include the U.N. Security Council, the Financial Action Task Force (FATF), the Egmont Group (an informal network of Financial Intelligence Units [FIUs]), multilateral export control regimes, and national authorities.
Figure 1. Three stages of FoP
- Jonathan Brewer, “Study of Typologies of Financing of WMD Proliferation, Final Report,” (Project Alpha, King’s College London, October 13, 2017), https://projectalpha.eu/final-report-typologies-of-proliferation-finance/. ↩