FATF Report ¦ Complex Proliferation Financing and Sanctions Evasion Schemes

FATF Report highlights major gaps in global response to Proliferation Financing and Sanctions Evasion

The recent FATF report from June 2025 provides a detailed analysis of the increasingly complex methods used by state and non-state actors to finance the proliferation of weapons of mass destruction (WMD) and evade sanctions. This illicit activity poses a significant threat to global security and the integrity of the international financial system. Despite decades of targeted financial sanctions and export controls, proliferation financing (PF) networks remain resilient, exploiting vulnerabilities in national and international systems.

The Current Landscape of Proliferation Financing

The report highlights that the Democratic People’s Republic of Korea (DPRK) continues to be the most significant state actor in proliferation financing. Subject to UN sanctions for nearly 20 years, the DPRK has diversified its revenue streams to sustain its WMD programs. This includes cyberattacks on virtual asset platforms, illicit trade in sectors like wigs and false eyelashes, illegal wildlife trafficking, and employing overseas IT workers whose earnings funnel back into sanctioned programs.

Iran and Russia are also identified as major actors engaging in sanctions evasion schemes relevant to PF, despite not being under UN proliferation-related sanctions. Iran uses militarized proxies such as Hezbollah to facilitate smuggling and money laundering, exploiting foreign exchange houses as conduits for illicit funds. Russia’s strategic partnership with the DPRK has extended to financial and military cooperation, including deploying DPRK soldiers in conflict zones, which further complicates sanctions enforcement.

Sophisticated Methods to Evade Sanctions

The report categorizes the tactics proliferators use into four main typologies:

1. Enlisting Intermediaries:

   Proliferators use front and shell companies, transit through third countries, and complex banking arrangements involving correspondent banks to obscure their activities. Examples include Australian and French companies acting as intermediaries for sanctioned goods destined for DPRK, Iran, or Russia.

2. Obscuring Beneficial Ownership Information (BOI):

   Illicit actors frequently falsify ownership details using complex corporate structures, third-party facilitators, unlicensed financial service providers, and stolen identities. The DPRK’s use of foreign nationals and front companies to mask ownership of assets and movement of funds is a prime example.

3. Using Virtual Assets and New Technologies:

   Virtual assets offer anonymity and rapid cross-border transfer capabilities, exploited by actors like the DPRK to launder stolen cryptocurrency proceeds from cyberattacks. The use of anonymity-enhancing cryptocurrencies, mixers, decentralized finance platforms, and over-the-counter brokers complicates detection efforts.

4. Exploiting Maritime and Shipping Sectors:

   The maritime industry is highly vulnerable due to its complexity and global reach. Tactics include altering vessel identification, ship-to-ship transfers in international waters to disguise cargo origins, disabling AIS tracking systems to go “dark”, and falsifying shipping documents. These methods are widely used by DPRK vessels transporting prohibited coal or petroleum products.

Bastian Schwind-Wagner_Follow "Complex proliferation financing and sanctions evasion schemes threaten global peace by enabling WMD programs to flourish despite international sanctions. Addressing these threats requires concerted efforts across governments, financial institutions, regulatory bodies, customs agencies, and international partners. Enhanced coordination, innovative detection techniques, comprehensive legal frameworks, and continuous risk assessment will be key to safeguarding the global financial system from these illicit threats."

Challenges in Detection, Investigation, and Prosecution

Detection primarily relies on Suspicious Activity/Transaction Reports (SARs/STRs) and sanctions screening. However, many countries face challenges such as inconsistent reporting requirements, limited understanding of PF risks among designated non-financial businesses and professions (DNFBPs), and difficulties integrating sanctions lists into screening tools without excessive false positives.

Customs agencies play a critical role in identifying illicit shipments but need enhanced coordination with financial intelligence units (FIUs) and law enforcement agencies (LEAs). Public-private partnerships (PPPs) can improve information sharing but are underutilized or limited by data privacy concerns.

Investigating PF is more complex than traditional money laundering or terrorist financing cases due to the involvement of state actors, opaque ownership structures, legitimate trade activities concealing illicit ends, and limited criminalization of PF in some jurisdictions. Prosecution faces evidentiary challenges, diplomatic immunity issues, and difficulties proving direct links between financial flows and PF activities.

Good Practices and International Cooperation

Successful detection and enforcement hinge on strong interagency cooperation domestically and internationally. Countries have established specialized task forces combining customs, FIUs, LEAs, export control authorities, and intelligence agencies to combat PF. Sharing risk indicators, typologies, case studies, and intelligence across borders is essential for identifying complex schemes.

International bodies such as the Egmont Group enable secure FIU-to-FIU communication, while multinational task forces improve investigative reach. Training programs supported by organizations like the UNODC and regional initiatives strengthen institutional capacities in countries with limited resources.

Priority Areas for Future Action

The FATF recommends ongoing updates to threat assessments given the rapidly evolving nature of proliferation financing tactics. Enhancing public-private sector collaboration is critical to improving detection capabilities through better guidance on suspicious activities beyond basic reporting obligations.

A standardized definition of WMD proliferation financing within FATF’s glossary is suggested to harmonize international legal frameworks and facilitate cooperation. Conducting horizontal reviews of national PF risk assessments can identify good practices and gaps in implementation.

Countries are urged to bolster AML/CFT/CPF frameworks with particular attention to transparency of beneficial ownership, regulation of virtual asset service providers (VASPs), export controls on dual-use goods, and enhanced monitoring of maritime trade.

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