Emerging Threats in Combating Proliferation Finance

The international community, led by the United States, needs to demonstrate a renewed sense of urgency in response to an evolving threat environment. This effort involves the long and hard work of building new rules, forging new international partnerships, and understanding dizzying technological change. The consequences of failure in this endeavor would be quite stark: the unchecked proliferation of weapons of mass destruction and their delivery systems.

Introduction

Despite the efforts of the international community, a variety of illicit actors continue to exploit the international financial system to provide resources, material, and know-how for clandestine weapons of mass destruction (WMD) programs. These networks, which specialize in what experts refer to as proliferation finance, continue to pioneer methods to move through the global financial system in a way that is difficult for even the most sophisticated and well-resourced international banks to detect.¹ Likewise, many nation-states struggle to police their own financial and commercial sectors, due to a lack of resources or political will. In recent months, U.S. authorities have targeted with legal action Chinese banks that were operating brazenly on behalf of North Korea and have sanctioned Iranian-linked companies in multiple countries that were trafficking in WMD-precursor goods for Iran.² These are but a few examples of how this works in practice.

North Korea remains the principal threat actor in this space and shows no signs of slowing its WMD and ballistic missile programs, despite Pyongyang and Washington’s ongoing diplomacy. Iran had been trying to pressure the other parties to the Joint Comprehensive Plan of Action (JCPOA), also known as the Iran nuclear deal, to provide the economic relief to convince Tehran to continue complying with the deal.However, the Iranian leadership is currently testing the international community’s patience by expanding its enrichment activities beyond the limits the JCPOA imposed. Other states such as Syria, as well as various non-state actors, including terrorist groups, continue to pursue WMD capabilities.³ These actors represent a stark security threat for the international community.

The United States and its international partners have focused legal, regulatory, and intelligence resources on tracing these proliferation networks that operate through financial institutions around the world. Stronger implementation of export controls, sanctions, and other vigilance measures, such as customer due diligence, know-your-customer policies, and, for some jurisdictions, collection of beneficial ownership information, has been the center of that response.⁴ If the United States wishes to continue the policy leadership role it has adopted over the previous several years, it will need to understand how these networks are adapting to the international community’s efforts to discover and disrupt their activities.⁵ None of these adversaries has been stagnant; they continue to learn new methodologies and find loopholes and have been especially adept at leveraging new technology.

Successive United Nations Panel of Experts reports and open source reporting and analysis have highlighted the creativity of the most sophisticated networks.⁶ As the difficulty of doing illicit business in the United States and western Europe has increased, these networks are directing more of their activity to jurisdictions with less sophisticated legal and financial systems. Not only do these networks search out countries with weak financial crimes compliance frameworks, but they are also poised to exploit countries that are adding advanced manufacturing capabilities to their domestic economy. A recent example includes the U.S. sanctioning of an Iranian procurement network that was purchasing dual-use goods from China. In the past, these actors would have sought these goods from the United States or Europe.⁷ Proliferation networks have always ridden the wave of expanding globalization; they will continue to do so.

Policymakers should pay attention to two emerging threats. The first is proliferators’ adoption of new financial technology, particularly by exploiting platforms and payment systems designed to keep users and transactions anonymous or pseudonymous. Bitcoin is only the most prominent of the cryptocurrencies that the international community and the United States have linked to North Korean and Iranian illicit activity.⁸ There are several other cryptocurrency options that offer even greater ability to evade detection (for example, so-called privacy coins).⁹ Also, there is a rise in efforts by sovereign states to create national cryptocurrencies, with prominent examples in Russia and Venezuela, both of which are motivated to evade U.S. sanctions exposure. While many of these efforts have been unsuccessful at their stated purpose, they are suggestive of the future prospects of alternative monetary products and value transfer systems, where the financial crimes compliance infrastructure needs to be much nimbler at responding to new typologies enabled by new financial technology (fintech), which include a wide array of methods designed to leverage digital means to compete with traditional financial services.

When the proliferators are not mining or trading virtual currency, they are stealing it outright, exploiting a digital finance environment where cybersecurity protections are uneven. As a result, it is growing easier to move money onward without touching U.S. jurisdiction, or outside of the view of many national regulators. The international community, as well as private sector firms innovating in this space, is in the early days of thinking through the proper regulatory responses. To be effective, this effort must include how to extend know-your-customer and customer due diligence protocols from the traditional financial space to this new technology realm, including answering questions about the notion of identity and jurisdictional reach. The responses must also focus on constantly strengthening a global cybersecurity posture that hardens cybersecurity infrastructure around virtual asset providers, to say nothing of those who transact in fiat currencies.

Second, international regulators and law enforcement must address threats from new technology in the advanced manufacturing, chemical, and biological space, which can make advanced dual-use goods more accessible to more users; these technologies may also entail significant national security risks, especially in the hands of nation-state actors. To respond to this, international regulators and their law enforcement counterparts must recognize that such innovations can rob the United States and its partners of their leverage in ensuring the responsible use of technology and materials with potentially harmful uses. Export controls are an important cornerstone of nonproliferation policy, but they may lose their utility in a world with radically democratized access to national security-sensitive technology, such as combinatorial chemistry and viral genome synthesis. The international control regime—the network of intergovernmental and private sector institutions that governs trade in dual-use goods—must be structured to confront this new reality and account for the accelerated pace of technological change.

The United States and its international partners have clear policy options at their disposal for addressing these security threats as they change over time. Previous innovations in countering proliferation finance have needed significant political will; budgetary resourcing has also been important. The international community, led by the United States, needs to demonstrate a renewed sense of urgency in response to an evolving threat environment.