ECSH33206 - Proliferation Financing
What is Proliferation Financing?
Proliferation financing (PF) measures exist to prevent the build-up of chemical, biological, radiological or nuclear (CBRN) weapons of mass destruction (WMD) by certain regimes, identified in the context of UK obligations under United Nations (UN) treaties. Currently, PF sanctions regimes relate only to Democratic People’s Republic of Korea (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 been required to document their proliferation financing risk assessments and policies, controls and procedures. The risk assessment must take into account HM Government’s National risk assessment of proliferation financing (PF NRA) and any guidance issued by HMRC.
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, via the GOV.UK website.
The nature of the activity that our supervised population carries out means that most businesses will not encounter significant PF risks, however this must be carefully considered and documented in a PF risk assessment. The PF risk assessment should set 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).
Regulation 19A MLR 2017 (Polices, controls and procedures (PCPs) in relation to PF) largely mirrors the requirement for money laundering / terrorist financing PCPs however
Reference to ML/TF are replaced with proliferation financing
There is no requirement for PF policies, controls and procedures (PCPs) to include customer due diligence reliance or record keeping.
The reference in regulation 19(4)(d) to money service business agents – is not duplicated in regulation 19A
There is no reference to taking into account guidance issued by other supervisors, the FCA or HM Treasury.
What action should compliance officers take for non-compliance?
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 breaches of regulation 18A (or regulation 19A) should be treated in the same way as any other compliance failure, that is the failure to comply is a breach of a relevant requirement of MLR 2017, which means that proportionate, dissuasive and effective enforcement action should be taken. 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.
Timeline of communications to businesses about the changes to MLR 2017
Regulation 18A and 19A were an amendment to MLR 2017 and came into effect from 1 September 2022
On 20 January 2022 we issued an email for all businesses registered for supervision with HMRC stating the following:
The UK has published its first national risk assessment of proliferation financing.
Proliferation financing is the provision of funds or financial services for nuclear, chemical or biological weapons in contravention of national laws or international obligations.
The UK risk assessment provides insight into the kinds of activities that contribute to proliferation financing. It also covers threats to the UK, the consequences of proliferation financing, and the mitigations being put in place by the government, law enforcement, and the private sector.
On 31 August 2022 we issued an email to all businesses registered for supervision with HMRC stating the following:
Proliferation financing – update your risk assessment, and policies, controls and procedures
From 1 September 2022 changes to the Money Laundering Regulations (MLR) mean that your business must have a risk assessment, policies, controls and procedures in place to manage proliferation financing risks.
HM Treasury published its first National Risk Assessment of Proliferation Financing in September 2021 and you must consider this for your own risk assessment. You may be unlikely to be directly involved in proliferation financing, but you should bear in mind any indirect involvement you may have and ensure the appropriate level of due diligence is taking place, in particular businesses that are trust or company service providers.
The proliferation of chemical, biological, radiological and nuclear (CBRN) weapons and their delivery systems greatly destabilises counter-proliferation efforts worldwide and poses a significant threat to UK national security.
We’ll be updating the HMRC guidance for your business sector and will email you when this is done.
You can find all HMRC’s anti money laundering guidance for businesses on GOV.UK.
The table below explains when each set of sector guidance was updated and the date that a follow up email was sent
Sector | Date published |
|
|
ASP Sector guidance * | 20 June 2024 |
AMP guidance ** | 16 Feb 2023 |
HVD guidance | 17 Oct 2023 |
EAB/LAB guidance | 17 Jul 2023 |
MSB guidance (inc TDITPSP and BPSP) | 18 Aug 2023 |
TCSP guidance | 10 May 2023 |
* published by the Consultative Committee of Accountancy Bodies (CCAB)
** published by British Art Market Federation (BAMF)
When sanctioning a business for a breach of regulation 18A or 19A, you must consider the dates that the guidance for that sector was updated.