The Financial Action Task Force (FATF) have just released a new report on Complex Proliferation Finance and Sanctions Evasion Schemes. Clearly topical and despite FATF’s mandate limited to UN sanctions this is by extension a back door way of also applying FATF expectations on UN approved sanctions compliance to other sanctions compliance expectations. Compliance with FATF Recommendation 7 and Immediate Outcome 11, from 194 countries needs significant improvement so findings from this report will help.

North Korea (DPRK) and Iran are the main targets, but Russia also comes in to the report, due to its ties in particular with DPRK. As all are currently persona non gratis at FATF, there is an opportunity to push the envelope a bit here and readers will consider some of the contents also applying in practice to other non UN approved sanctions.

The 80 page long report on PF/sanctions evasion identifies the:

• threats (DPRK, Iran, Russia and non state terror and criminal groups),
• vulnerabilities, including both structural and sectoral at the national level
• typologies, 4, from 38 case studies from 19 countries
• 78 potential risk indicators, covering customer risk, transaction risk and trade risk
• challenges and good practices in mitigating risks
• 4 key recommendations and further actions for countries to consider

Financial Crime News has summarised the report and it’s key findings into a 2 page Dashboard, (see below). 

A few personal takeaways:

• 3 of the 4 typologies are really illicit finance typologies and not PF/sanctions evasion typologies. It is clear that illicit finance typologies are utilised in PF/sanctions evasion cases.
• In most of the 38 case studies used to make up the 4 typologies, there is insufficient information provided for readers to ascertain how in fact the PF/sanctions evasion link was detected.
• The 78 potential risk indicators listed (in Annex 1) are mostly illicit finance related indicators and whilst of interest, listing these in this paper, despite some caveats, can create challenges for regulated entities from in particular rules based regulators and or auditors looking to test the private sector (regulated entities) PF risk assessment and control responses in a technical compliance manner. This may lead to over compliance and financial exclusion, as has been experienced in the past.
• This despite a very powerful single sentence which most will miss, but should be in bold and up front which reads, “In the absence of robust information sharing mechanisms, it may be difficult for the private sector to detect complex PF & sanctions evasion schemes through standard risk management processes”.

The 4 recommendations to improve country responses to PF and sanctions evasion risk are directed at Countries and FATF itself, namely:

• Periodic updates on PF risk by countries
• Follow up in country on the contents of this report with the private sector
• FATF to conclude a final definition of WMD within 5 years
• FATF to conduct a horizontal review of PF risk assessments within 3 years

We would add another not considered yet:

• to consider tackling PF and sanctions evasion, by tackling activity that doesn’t need to show it’s PF or sanctions evasion, but instead is activity that is designed to hide from, alter, or otherwise seek to deceive any regulated party involved including those facilitating the financing and or processing payments.