A Special Bulletin providing background information relevant to financial transactions associated with the suspected evasion of sanctions related to counter proliferation has been produced by the Financial Transactions and Reports Analysis Centre of Canada (FINTRAC).

It seeks to inform businesses subject to the Proceeds of Crime (Money Laundering) and Terrorist Financing Act and the public about the characteristics of completed or attempted financial transactions related to this activity to facilitate their detection, prevention, and deterrence.

Risk and challenges

Proliferation refers to efforts by state and non-state actors, including terrorist organizations, to acquire the goods, technologies, resources and knowledge needed to develop chemical, biological, radiological, and nuclear weapons and high-yield explosives, including their precursors and delivery systems. 

The risks to international security and stability are heightened by the clandestine efforts of proliferators to procure a range of sensitive and restricted items, the bulletin notes.

Two of the ways Canada regulates goods within Canada are through administration of the Controlled Goods Regulations and the Controlled Goods List found in the Defense Production Act and through export controls that ensure that goods leaving the country do so lawfully and are not sent to countries or entities that would misuse them.

Proliferators are getting more savvy and are targeting objects that have both military and civilian purposes, ones that can be used or modified for the development of weapons of mass destruction.

Besides the civilian-use facade problem, other issues make this a challenging arena:

• Transfers often involve the exchange of knowledge, technical data, and expertise can be carried out through seemingly innocuous means, such as academic collaborations, research partnerships, or a consultant entity. And they can be shared across borders almost instantaneously through the Internet and encrypted communications.
• The increasing use of cryptocurrencies and alternative financial channels, which may be used to conceal financial trails and evade scrutiny from authorities, further complicates efforts to detect and control the transfer of sensitive materials.
• To circumvent sanctions, border and export controls, the bad actors often raise funds to finance the programs to develop weapons of mass destruction, disguising and transferring funds to support the purchase of related materials, and using those funds to procure proliferation-related goods and technologies through international financial and trade systems.
• They often disguise transactions as legitimate trades, exploiting markets with permissive export controls and free trade zones, using collaborative and business relationships to acquire goods and information for illicit purposes. And they often use shell and front companies, as well as intermediary jurisdictions.

Canada’s sanctions regime

Canada relies on the implementation and enforcement of its sanctions and strategic export control regimes to disrupt threat actors and their networks, and ministerial directives are in force for the Democratic People’s Republic of Korea (DPRK), the Islamic Republic of Iran, and Russia.

Sanctions associated with counter proliferation efforts are imposed under the Special Economic Measures Act, which has obligations to report transactions where there are reasonable grounds to suspect that they are related to money laundering and terrorist activity financing offences.

Canada’s geographic proximity and status as the US’s largest trading partner puts it at risk of being targeted by those seeking US-origin controlled items for transfer to sanctioned jurisdictions.

Reporting entities must also report transactions suspected to be related to sanctions evasion to FINTRAC using the disclosure guidance offered in these two documents: FINTRAC’s compliance guidance: Report suspected sanctions evasion and the Special Bulletin on financial activity associated with suspected sanctions evasion.

FINTRAC beseeches firms to apply risk-based approaches to their transaction monitoring and customer due diligence programs, reminding them that tech solutions are often not enough by themselves..

The agency says that “sanctions regimes since list-scanning software and other automated compliance programs, while they are potential tools to support businesses in meeting their obligations under the Act, may not adequately capture financial transactions associated with sanctions evasion.”

And this is because sanctions can target specific activities beyond just named individuals and entities. Sanctioned entities and individuals also typically use nominees and hide behind opaque corporate structures to avoid detection.

It’s important companies use a fulsome approach that appreciates these risks and nuances, carefully looking for the indicators and characteristics of suspected sanctions evasion.

A lot of these risk factors have to do with examining the jurisdictions involved, as transactions involving financial institutions located in jurisdictions with known deficiencies in anti-money-laundering (AML) or anti-terrorist-financing measures or that have weak enforcement of export control laws are often high risk.

The same is true of transactions or financial relationships (such as correspondent banking relationships) between businesses and entities located in jurisdictions of proliferation or diversion concern, or located in or close to geographic areas controlled by terrorist groups.

And, FINTRAC notes how Canada’s geographic proximity and its status as the US’s largest trading partner puts it at risk of being targeted by those seeking US-origin controlled items for transfer to third-parties and ultimately to sanctioned jurisdictions.

Virtual currencies and underlying tech

FINTRAC observes that virtual currencies are used to circumvent Canadian and international counter proliferation-related sanctions as proliferation financiers and their associated networks benefit from the pseudo-anonymous nature of these alternative financial instruments.

Virtual currencies are both a tool for obtaining funds to support proliferation activities (such as in the case of the Democratic People’s Republic of Korea’s financing of its weapons of mass destruction and ballistic missile programs through hacking virtual currency exchanges and decentralized finance platforms) and for the movement of funds.

Potential characteristics associated with virtual currency transactions linked to the evasion of counter proliferation-related sanctions may include:

• A customer’s transactions are initiated from or sent to beneficiaries with IP addresses in sanctioned jurisdictions or neighboring jurisdictions of proliferation concern.
• A transaction has direct or indirect transactional exposure to virtual currency exchanges located or registered in sanctioned jurisdictions, jurisdictions of proliferation concern, geographic areas that are controlled by or that are in close proximity to areas controlled by terrorist organizations, or in high-risk jurisdictions with known AML and anti-terrorist financing deficiencies.

A grim statistic: According to the United Nations Panel of Experts, the Democratic People’s Republic of Korea (DPRK) relies on cyber-enabled crimes, such as hacking cryptocurrencies exchanges and decentralized finance protocols, to generate revenue for its weapons of mass destruction and ballistic missile development programs. From 2019 to 2020 alone, an estimated $316.4m worth of virtual assets were stolen by the DPRK.