U.S. GOVERNMENT PUBLISHING OFFICE

31–507 PDF WASHINGTON : 2018

COUNTERING THE FINANCIAL NETWORKS 

OF WEAPONS PROLIFERATION 

HEARING 

BEFORE THE

SUBCOMMITTEE ON TERRORISM 

AND ILLICIT FINANCE 

OF THE

COMMITTEE ON FINANCIAL SERVICES 

U.S. HOUSE OF REPRESENTATIVES 

ONE HUNDRED FIFTEENTH CONGRESS 

SECOND SESSION 

JULY 12, 2018 

Printed for the use of the Committee on Financial Services 

Serial No. 115–108 

( 

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HOUSE COMMITTEE ON FINANCIAL SERVICES 

JEB HENSARLING, Texas, Chairman 

PATRICK T. MCHENRY, North Carolina, 

Vice Chairman 

PETER T. KING, New York 

EDWARD R. ROYCE, California 

FRANK D. LUCAS, Oklahoma 

STEVAN PEARCE, New Mexico 

BILL POSEY, Florida 

BLAINE LUETKEMEYER, Missouri 

BILL HUIZENGA, Michigan 

SEAN P. DUFFY, Wisconsin 

STEVE STIVERS, Ohio 

RANDY HULTGREN, Illinois 

DENNIS A. ROSS, Florida 

ROBERT PITTENGER, North Carolina 

ANN WAGNER, Missouri 

ANDY BARR, Kentucky 

KEITH J. ROTHFUS, Pennsylvania 

LUKE MESSER, Indiana 

SCOTT TIPTON, Colorado 

ROGER WILLIAMS, Texas 

BRUCE POLIQUIN, Maine 

MIA LOVE, Utah 

FRENCH HILL, Arkansas 

TOM EMMER, Minnesota 

LEE M. ZELDIN, New York 

DAVID A. TROTT, Michigan 

BARRY LOUDERMILK, Georgia 

ALEXANDER X. MOONEY, West Virginia 

THOMAS MACARTHUR, New Jersey 

WARREN DAVIDSON, Ohio 

TED BUDD, North Carolina 

DAVID KUSTOFF, Tennessee 

CLAUDIA TENNEY, New York 

TREY HOLLINGSWORTH, Indiana 

MAXINE WATERS, California, Ranking 

Member 

CAROLYN B. MALONEY, New York 

NYDIA M. VELA ́ ZQUEZ, New York 

BRAD SHERMAN, California 

GREGORY W. MEEKS, New York 

MICHAEL E. CAPUANO, Massachusetts 

WM. LACY CLAY, Missouri 

STEPHEN F. LYNCH, Massachusetts 

DAVID SCOTT, Georgia 

AL GREEN, Texas 

EMANUEL CLEAVER, Missouri 

GWEN MOORE, Wisconsin 

KEITH ELLISON, Minnesota 

ED PERLMUTTER, Colorado 

JAMES A. HIMES, Connecticut 

BILL FOSTER, Illinois 

DANIEL T. KILDEE, Michigan 

JOHN K. DELANEY, Maryland 

KYRSTEN SINEMA, Arizona 

JOYCE BEATTY, Ohio 

DENNY HECK, Washington 

JUAN VARGAS, California 

JOSH GOTTHEIMER, New Jersey 

VICENTE GONZALEZ, Texas 

CHARLIE CRIST, Florida 

RUBEN KIHUEN, Nevada 

SHANNON MCGAHN, Staff Director 

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(III) 

SUBCOMMITTEE ON TERRORISM AND ILLICIT FINANCE

STEVAN PEARCE, New Mexico Chairman 

ROBERT PITTENGER, North Carolina, Vice 

Chairman 

KEITH J. ROTHFUS, Pennsylvania 

LUKE MESSER, Indiana 

SCOTT TIPTON, Colorado 

ROGER WILLIAMS, Texas 

BRUCE POLIQUIN, Maine 

MIA LOVE, Utah 

FRENCH HILL, Arkansas 

TOM EMMER, Minnesota 

LEE M. ZELDIN, New York 

WARREN DAVIDSON, Ohio 

TED BUDD, North Carolina 

DAVID KUSTOFF, Tennessee 

ED PERLMUTTER, Colorado, Ranking 

Member 

CAROLYN B. MALONEY, New York 

JAMES A. HIMES, Connecticut 

BILL FOSTER, Illinois 

DANIEL T. KILDEE, Michigan 

JOHN K. DELANEY, Maryland 

KYRSTEN SINEMA, Arizona 

JUAN VARGAS, California 

JOSH GOTTHEIMER, New Jersey 

RUBEN KIHUEN, Nevada 

STEPHEN F. LYNCH, Massachusetts 

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C O N T E N T S 

Page 

Hearing held on: 

July 12, 2018 ..................................................................................................... 1 

Appendix: 

July 12, 2018 ..................................................................................................... 41 

WITNESSES 

THURSDAY, JULY 12, 2018 

Albright, David, Founder and President, Institute for Science and International Security .................................................................................................. 5 

Keatinge, Tom, Director, Center for Financial Crime and Securities Studies, 

Royal United Services Institute .......................................................................... 6 

Ottolenghi, Emanuele, Senior Fellow, Foundation for Defense of Democracies 8 

Rosenberg, Elizabeth, Senior Fellow, Center for a New American Security ...... 10 

APPENDIX 

Prepared statements: 

Albright, David ................................................................................................. 42 

Keatinge, Tom ................................................................................................... 65 

Ottolenghi, Emanuele ...................................................................................... 75 

Rosenberg, Elizabeth ........................................................................................ 92 

ADDITIONAL MATERIAL SUBMITTED FOR THE RECORD

Pearce, Hon. Stevan: 

Written statement from the Center for a New American Security .............. 100 

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COUNTERING THE FINANCIAL NETWORKS 

OF WEAPONS PROLIFERATION 

Thursday, July 12, 2018 

U.S. HOUSE OF REPRESENTATIVES, 

SUBCOMMITTEE ON TERRORISM

AND ILLICIT FINANCE, 

COMMITTEE ON FINANCIAL SERVICES, 

Washington, D.C. 

The subcommittee met, pursuant to notice, at 2:04 p.m., in room 

2128, Rayburn House Office Building, Hon. Stevan Pearce [chairman of the subcommittee] presiding. 

Present: Representatives Pearce, Pittenger, Rothfus, Tipton, Williams, Poliquin, Emmer, Zeldin, Davidson, Budd, Maloney, Himes, 

Foster, Sinema, Gottheimer, and Lynch. 

Chairman PEARCE. The subcommittee will come to order. Without objection, the Chair is authorized to declare a recess of the subcommittee at any time. Members of the full committee who are not 

members of the Subcommittee on Terrorism and Illicit Finance 

may participate in today’s hearing and all members will have five 

legislative days within which to submit extraneous materials to the 

Chair for inclusion in the record. 

This hearing is entitled, ‘‘Countering the Financial Networks of 

Weapons Proliferation.’’ I now recognize myself for 2 minutes to 

give an opening statement. First of all, I want to thank everyone 

for joining us today. Today’s hearing will examine the financial networks that support nuclear, chemical, and biological weapon productions, the role of the U.S. in counter-proliferation finance efforts, and the scope and effectiveness of the relevant enforcement 

actions by the U.S. to counter-proliferation financing. 

Hostile nations often use established financial mechanisms such 

as wire transfer, trade finance products, cash, checks, and credit 

cards to finance their weapons programs. This is accomplished 

through elaborate ownership structures consisting of various businesses, shell corporations, and middlemen that are often used to 

obscure any connection to the country proliferating weapons. 

As these bad actors continue to evolve in the ways that they access the traditional financial marketplace, we must ensure that our 

Government agencies and financial institutions have the tools necessary to detect illicit procurement efforts. Evidence has shown 

that hostile actors around the world have pursued the proliferation 

of various weapons for years, as country sanctions and even secondary sanctions are implemented, removed, or modified, a balance 

must be struck. 

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Financial institutions should work together to prevent illicit financing while providing agreed upon market access. In today’s 

hearing, I hope to discuss what methods are being used to circumvent sanctions to finance weapons proliferation, what tools and 

partnerships are working well to detect and disrupt procurement 

networks, and what challenges remain for Government authorities 

and financial institutions to identify proliferation activities. 

I would also appreciate any comments about deficiencies and 

weaknesses in the international system and how the United States 

can best assist to ensure that the funding of proliferation can effectively be stopped in this dynamic environment. I am especially interested in hearing about this in light of the United States assuming the presidency of the Financial Action Task Force this month. 

I would like to thank our witnesses for being here today and I 

look forward to their expert testimony on these very important 

issues. 

The Chair now recognizes Mr. Foster for 5 minutes for an opening statement. 

Mr. FOSTER. Thank you, Mr. Chairman. And I would like to 

thank all of our distinguished witnesses for testifying this afternoon. Today, the subcommittee is going to examine strategies to 

disrupt the financing and procurement of weapons of mass destruction. We are at an interesting time in our history to say the least. 

We have a number of potential threats. These include not very 

well-organized groups trying to get the parts together for a dirty 

bomb. We have states, for example, Iran, who are looking to assemble a bomb factory. And we are talking also about stolen nuclear 

weapons from states where the security is not so great. 

And finally, the big issue of making sure that we have complete 

and verifiable denuclearization of North Korea, a much more difficult problem where we are looking not for a bomb factory but for 

a single completed bomb secreted away anywhere in that country. 

And so in all but the last case, there are significant signatures to 

go after and some of the most significant ones are the financial 

footprints that lead to that. And that is why this hearing is important. 

For nearly a generation, nuclear weapons have threatened our 

national security and global safety because of their capability to 

threaten the existence of mankind. And unfortunately, this ability 

is no longer unique to just nuclear weapons. The proliferation of 

emerging technologies, chemical, biological, and radiological weapons, and the related delivery system pose a real risk to our international security. 

Even today, rogue regimes and clandestine organizations continue to exhibit the ambition to acquire materials and technologies 

that can be used to build weapons of mass destruction, which is 

why despite many challenges, prevention of the distribution and financing of these weapons remains a major U.S. policy objective. 

To date, the international community has utilized a variety of 

tools to accomplish this including export controls, sanctions, antimoney laundering (AML) laws, and international treaties. But despite these measures, proliferators have continued to use the financial system with relative ease to facilitate their illicit procurement 

of materials. 

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Alternative and creative sources of funding have allowed them 

the ability to circumvent the global counter-proliferation financing 

rules and many of the standard detection methods, posing a major 

obstacle for law enforcement and the intelligence community. 

On July 1, 2018, the United States assumed the position of the 

president of the Financial Action Task Force (FATF), an inter-governmental body tasked with developing and promoting policies to 

combat money laundering and terrorist financing. This presents an 

invaluable opportunity for us to highlight the criticality of this 

issue within the organization’s already established framework and 

to show leadership in important multilateral collaborations. 

Going forward, we must encourage the use of technological innovations and policies that improve our counter-proliferation efforts. 

I look forward to hearing your testimony and yield back the balance of my time. 

Chairman PEARCE. The gentleman yields back. The Chair now 

recognizes the gentleman from North Carolina for 3 minutes for an 

opening statement. 

Mr. PITTENGER. Thank you, Mr. Pearce and Congressman Foster, 

for holding this hearing today. Additionally, I would like to thank 

all of our witnesses for coming in today to provide us with their expertise in our efforts to counter the financing of weapons proliferation. 

As technology progresses, terrorist networks acquire new means 

for acquiring the illicit financing needed to procure weapons of 

mass destruction. The most important step in protecting our national security, and that of our allies, is to prevent these organizations from acquiring these weapons. 

Traditional financial mechanisms such as cash, credit cards, or 

wire transfers are often used by proliferation networks to facilitate 

their funding activities. We already know these mechanisms and 

must continue to ensure we are capable of identifying their use for 

malicious purposes and preventing them. 

However, we must focus our efforts on ensuring we are able to 

combat the use of new mechanisms that have developed with today’s technology for the purposes of financing weapons proliferation. Such mechanisms include the use of blockchain technology 

which serves as the public transaction ledger for bitcoin, other 

forms of cryptocurrency, or online crowd funding websites. 

While these financial mechanisms provide various positive and 

valuable opportunities, they are also very popular with terrorist 

networks due to the anonymity that is associated with their utilization. There is a global black market for nuclear technology and material that we must work to detect and eradicate. 

Hostile state actors which have been involved with this market 

pose a serious threat to our national security. States such as Iran 

can also use front companies to acquire critical nuclear technologies with use of intermediate jurisdictions in order to obfuscate 

our efforts in tracing their transactions. 

Learning how to better combat such practices in order to ensure 

sanctions are not evaded must be a priority. Additionally, we must 

strategize how to assist other nations with their capabilities to prevent proliferation financing. There are numerous countries which 

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ing, and this poses an obstacle to global counter-proliferation efforts. 

We look forward to learning how we can expand our efforts in 

combating illicit finance for weapons proliferation. Thank you, Mr. 

Chairman. I yield back the balance of my time. 

Chairman PEARCE. Gentleman yields back. Today, we welcome 

the testimony of our witnesses. Mr. David Albright is a physicist, 

is founder and President of the non-profit Institute for Science and 

International Security in Washington, DC. Notably, the institute 

publishes the Peddling Peril Index that ranks countries according 

to their capabilities and demonstrated success in implementing 

strategic export controls to prevent nuclear trafficking. 

Mr. Albright has been called the go-to guy for media seeking 

independent analysis of Iraq’s weapons program. In June 1996, he 

was the first non-governmental inspector of the Iraqi nuclear program. Prior to founding the Institute for Science and International 

Security in 1993, Mr. Albright was a senior staff scientist at the 

Federation of American Scientists and a member of the research 

staff of Princeton University’s Center for Energy and Environmental Studies. 

Mr. Albright received Masters of Science in physics from Indiana 

University in 1980, Masters of Science in mathematics from Wright 

State University in 1977, and a Bachelor of Science from Wright 

State University, 1975. 

Mr. Tom Keatinge is Director of the Center for Financial Crime 

and Security Studies at the Royal United Services Institute for Defense and Securities Studies, better known as RUSI. RUSI is 

headquartered in London and is the oldest defense and security 

think tank in world. Mr. Keatinge primarily researches areas including terror finance, counter-proliferation finance, new approaches to tackling financial crimes in human trafficking, as well 

as corruption and the implementation of financial sanctions. Prior 

to joining RUSI in 2014, he was an investment banker at 

JPMorgan for 20 years. 

Mr. Keatinge has a Masters in intelligence and international security from Kings College London. This is Mr. Keatinge’s first Congressional testimony in the United States. Thank you for traveling 

all this way to speak to us. And stop by New Mexico and spend 

money out there, too, on the way home. 

Mr. Ottolenghi is a Senior Fellow at the Foundation for Defense 

of Democracies or FDD, an expert at its Center on Sanctions and 

Illicit Finance. At FDD, he focuses on Iran’s history of sanctions 

evasion. His researches examine Iran’s Islamic Revolutionary 

Guard Corps including its links to the country’s energy sector and 

procurement networks. 

Prior to joining FDD, Dr. Ottolenghi headed the Trans-Atlantic 

Institute in Brussels and taught Israel studies at St. Anthony’s 

College, Oxford University. He obtained his PhD in Political Theory 

at the Hebrew University of Jerusalem preceded by undergraduate 

studies in political science at the University of Bologna. 

Ms. Elizabeth Rosenberg is a Senior Fellow and Director of Energy and Economics and Security Program at the Center for New 

American Security, CNAS. In this capacity, she publishes and 

speaks on the national security and foreign policy implications of 

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energy market shifts and the use of sanctions and economic 

statecraft. 

She has testified before Congress on energy and financial issues 

and we welcome her back. From May 2009 through 2013, Ms. 

Rosenberg served as a senior advisor to the assistant secretary for 

terrorist financing and financial crimes and then to the undersecretary for terrorism and financial intelligence at Treasury. She received an MA in Near Eastern Studies from New York University 

and a BA in politics and religion from Oberlin College. 

Each of you are going to be recognized for 5 minutes to give an 

oral presentation of your testimony. Without objection, each of your 

written statements will be made part of the record. Mr. Albright, 

you are recognized for 5 minutes. 

STATEMENT OF DAVID ALBRIGHT 

Mr. ALBRIGHT. Thank you, Chairman Pearce and Ranking Member Foster, for the opportunity to testify today. As the chairman 

mentioned, my institute recently published a report ranking the export control systems of 200 countries and territories based on their 

capabilities and performance in five areas addressing export control 

legislation, international commitments, illicit procurement detection, enforcement, and financing of proliferation. 

Preventing proliferation financing, albeit not a traditional component of a review of national export control systems, is one of the 

most important aspects for detecting and stopping exports of sensitive goods. To measure a country’s ability to prevent proliferation 

financing, we used a set of criteria that indicate a country’s susceptibility to being exploited or involved in proliferation financing including violations of international sanctions. 

These criteria are based on countries’ financial regulatory systems and counter illicit financing programs from which the main 

source of data for the index is a Financial Action Task Force, 

FATF. Our research for the 2017 ranking revealed that preventing 

proliferation financing is one of the counter-proliferation areas 

most in need of improvement. This effort would benefit significantly from a closer integration with export controls. 

In the ranking of a country’s ability to prevent proliferation financing, no country achieved two-thirds of the available points and 

only two received more than half the available points. About onethird of all countries achieved negative scores. Among others, significant illicit financial flows, big black markets, and high levels of 

corruption indicate that those countries are likely places where 

front companies find it relatively easy to finance nefarious activities. 

Other countries performed poorly due to having excessive bank 

secrecy, providing tax havens, or simply lacking regulations and effective institutions. A preliminary update for 2018 on preventing 

proliferation financing show similar results. Countries still performed poorly and only three countries received 50 percent and 

more of the possible points. 

Iran performs particularly poorly in the index including on proliferation financing where it ranked on the bottom. Iran has been 

given extended time to fulfill its action plan requirements set out 

by the FATF and to comply with FATF standards. Recent actions 

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have confirmed a deep involvement of Iran’s financial system in illicit activities. As a result, we recommend the re-imposition of 

FATF counter-proliferation measures against Iran. 

The institute has developed a range of other recommendations 

while producing the Peddling Peril Index and working with proliferation financing experts to develop the index’s methodology. 

One of the most critical recommendations is that countering proliferation financing needs to be integrated into other aspects of 

counter-proliferation including export controls. And I would like to 

highlight five other recommendations. 

All countries should work closely with FATF and its regional 

bodies to improve their efforts to prevent proliferation financing. 

Each country should conduct a risk assessment of proliferation financing and its agencies should address any gaps identified. 

Each government should have adequate legislation in place that 

includes an effective system of coordination among the departments 

working on proliferation financing, such as well-resourced investigative financial intelligence units and effective outreach to financial institutions. 

Countries’ financial institutions need to be able to monitor, detect, report, and act upon suspicious financial transactions. Countries should help financial institutions identify and freeze suspicious transactions. 

Because of the difficulty of accomplishing this goal, the U.S. Government should launch an inter-agency study to improve communication and information sharing with financial institutions, including insurance companies, and to develop better solutions for automated counter-proliferation financing screening tools. 

FATF is in a unique position to drive many of the 

abovementioned recommended actions and changes and should do 

so. Financing of proliferation should be treated broadly and as a 

separate subject to money laundering and terrorist financing. 

At the plenary meetings, the FATF working group should discuss 

adjusting the language in several of the existing 40 FATF recommendations to extend them beyond terrorist financing and 

money laundering to include proliferation financing. Thank you for 

the opportunity to testify. I am happy to answer any questions. 

[The prepared statement of Mr. Albright can be found on page 

42 of the appendix.] 

Chairman PEARCE. Thank you, sir. 

Mr. Keatinge, you are recognized for 5 minutes now. 

STATEMENT OF TOM KEATINGE 

Mr. KEATINGE. Chairman Pearce, Ranking Member Foster, and 

distinguished members of the subcommittee, thank you for inviting 

me to testify today, my first opportunity to do so. Given my home 

base in London and the focus of RUSI’s counter-proliferation finance research is on Southeast Asia and Sub-Saharan Africa, my 

testimony and contribution will necessarily address, to a greater 

extent, the international CPF architecture as promoted by bodies 

such as the U.N. and the Financial Action Task Force rather than 

the policies laid out the U.S. domestic agencies. 

However, as has been mentioned with the U.S. taking over presidency of the Financial Action Task Force the next 12 months, the 

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U.S. has a key role to play in strengthening this weak architecture. 

You will be familiar with the CPF requirements set forth by the 

FATF standards and the evaluations undertaken by the FATF. The 

U.S. evaluation was published in December 2016. 

As indicated by the table provided in my written submission, the 

international CPF effort is disappointing. Two-thirds of assessed 

countries are non or only partially compliant with the requirements 

to be able to impose targeted financial sanctions without delay. 

And 70 percent of assessed countries have a low or moderate level 

of effectiveness, meaning they suffer from major shortcomings. 

It is clear that notwithstanding the prioritization of CPF in 2012 

by the FATF, the global community still has considerable work to 

do to harden the financial system against abuse by proliferators. 

And it is important to note that compliance with FATF standards 

alone does not result in effective CPF controls. 

In fact, FATF’s recommendations are now increasingly out of 

touch with other international obligations on CPF. U.N. sanctions 

against North Korea incorporate measures that go beyond listbased sanctions implementation and focus, to a greater extent, on 

activity-based obligations to counter-proliferation finance. 

How do we secure the financial system against abuse by 

proliferators? Proliferation activities are made possible by the 

international financial system. Reports from the U.N. panel of experts highlight that Pyongyang is using greater ingenuity in accessing formal banking channels to support illicit activities in 

WMD (weapons of mass destruction) proliferation and continues to 

access the international financial system because of critical sanctions implementation deficiencies. 

The role played by the financial sector in disrupting proliferation 

finance has received greater attention in recent years. Some governments maintain that financial institutions have both the capability to detect and an obligation to disrupt financial transactions 

in support of illicit WMD proliferation. 

However, government initiatives on counter-proliferation finance 

vary widely between jurisdictions and often in our experience are 

nonexistent. Our research reveals extensive gaps in knowledge, 

awareness, and capabilities of banks and perhaps more worryingly, 

highlights considerable misunderstanding with regards to the risks 

posed by proliferators, often conflating CPF activity with sanctions 

compliance. 

It is therefore important that financial institutions take time to 

better understand and mitigate proliferation financing risk. But it’s 

not just in banking where vulnerability exists. As actual sanctions 

have been increasingly applied to North Korea, it is undertaking 

creative, deceptive activity to secure funding from the sale of coal 

and it is also undertaking at sea ship-to-ship transfers to secure 

the energy products it needs. 

These activities bring into scope other industries needed to secure the integrity of the international supply chain that would benefit from engagement with national governments such as shipping 

companies, commodity brokers, and insurance companies, all of 

which lag the banking sector in terms of awareness of and capability and commitment to the global CPF agenda. Whilst the banking sector must continually strive to improve its standards, a whole 

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system approach is need in order to maximize disruption opportunities. 

To conclude, as evidence by the FATF’s evaluation data and the 

detailed reports that the U.N. panel of experts on North Korea, 6 

years since the FATF introduced CPF as a third leg of focus alongside money laundering and terrorist financing, global CPF efforts 

are fragmented at best and ineffective and non-existent at worst. 

Furthermore, the current FATF standards related to CPF are 

weak and simplistic. They do not require countries to assess their 

proliferation financing risks, they focus merely on the implementation of targeted financial sanctions and they are not risk-based in 

their application. 

In sum, the global architecture for disrupting proliferation finance requires improved design and implementation. In my submission, I have set forth recommendations to the private sector, 

international organizations such as the FATF, the U.S. Government and international governments that I hope we can discuss 

further during the session. Thank you once again for the opportunity to testify today. 

[The prepared statement of Mr. Keatinge can be found on page 

65 of the appendix.] 

Chairman PEARCE. Thank you, sir. Mr. Ottolenghi, 5 minutes. 

STATEMENT OF EMANUELE OTTOLENGHI 

Mr. OTTOLENGHI. Chairman Pearce, Ranking Member Foster, 

and distinguished members of the subcommittee, I want to thank 

you for the opportunity to have me here to testify. The Islamic Republic of Iran has been under U.S. sanctions since late 1979. From 

2006 to 2016, Iran’s nuclear and ballistic missile programs were 

the target of a United Nations sanction regime which the United 

States, the European Union, and their western allies subsequently 

expanded with their own set of far-reaching measures. 

Initially designed to punish and prevent proliferation attempts, 

sanctions eventually became wider in scope, targeting Iran’s energy 

industry, financial sector including its Central Bank, shipping, 

aviation, insurance, and oil exports. 

Beginning in January 2016, the Joint Comprehensive Plan of Action or JCPOA granted Iran’s sanction relief though not to non-nuclear sanctions. Due to the president’s May 2018 decision to withdraw from the JCPOA, Iran again faces U.S. sanctions including 

secondary sanctions, which are already causing numerous international companies to withdraw from the Iranian market. 

Iran is therefore likely to ramp up its sanction evasion efforts. 

Sanctions significantly inhibit Tehran’s ability to trade with the 

world, still, Iran has adapted, engaging sanctions enforcers in a 

complex and evolving cat and mouse game. To put it bluntly, for 

Iran, sanctions are temporary roadblocks, not insurmountable obstacles. 

By building bypass roads, Iran turns crisis into opportunities. As 

a result, Iran has been able to mitigate sanctions impact on its efforts to advance its nuclear and ballistic missile programs. My 

written testimony illustrates how Iran evaded sanctions in the past 

offering typologies as well as case studies. 

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Let me briefly outline some of these practices. Procurement usually relies on a triangular structure of front companies operating 

overseas, Iranian proxies establish fronts in a foreign country to 

procure dual use technologies. Once incorporated, companies buy 

locally or from a third country. The buyer then ships the procured 

goods to a final destination in Iran or fictitiously sells them to another front company in another country before final delivery. 

These cases typically involve small companies which will shut 

down once they have accomplished their mission. For longer term 

procurement and finance operations, Iran relies more on permanent and more complex corporate structures across different jurisdictions. Their link with an Iranian parent entity is purposely 

made less obvious. 

Iranian senior corporate managers often fictitiously resign their 

government jobs to seek business ventures overseas on behalf of 

the regime, quickly emerging as proprietors of business empires 

with no formal ties with Iran. A regime proxy with no formal connection to past employers provides plausible deniability. 

Former regime procurement agents interviewed by FDD confirmed that Iranian state companies have increasingly entrusted 

their most capable senior management with significant sums to invest in industrial assets abroad. 

This includes ownership of western factories which gives Iran access to knowledge and technology. This was the case in 2013 of 

MCS International in Germany. Regime agents bought the factory 

to lay their hands on a dual use flow forming machine that MCS 

production line used to shape gas cylinders. Such machines are also 

critical in the production of uranium enrichment centrifuges. 

Iran’s evasion of financial sanctions follows the same playbook. 

The regime first established and then sought to purchase banks 

outside Iran to facilitate prohibited banking transactions adding 

successive layers of obfuscation to cover its tracks. 

This was the case for example with InvestBank in the Republic 

of Georgia. The network associated with the bank used shell companies in Canada, the U.S., Georgia, Lichtenstein, Switzerland, 

Turkey, New Zealand, and the UAE to launder billions of dollars 

according to U.S. court documents while also procuring and shipping technology to Tehran, likely on an airline owned by the network. 

Regime has also been very capable of exploiting loopholes in 

sanctions legislation. One such case was the gas for gold scheme 

its proxies ran through Turkey and which I describe at length in 

my written statement. 

The regime will not hesitate to invest significant resources to facilitate these activities and empower its agents. A typical ancillary 

service its agents rely upon is the acquisition of passports of convenience usually through costly citizenship by investment schemes 

to be able to travel, incorporate companies, and open bank accounts 

hassle-free. 

Iranian sanction evasion activity follows established patterns, financial institutions and intelligence practitioners can study these 

typologies to identify actors in transactions that are potentially 

harmful to the integrity of the financial system or pose challenges 

to international security. Treasury plays a key role in this regard, 

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its designations have helped expose Iranian efforts to circumvent 

sanctions. 

But as indicated before, this is a cat-and-mouse game, where one 

can never assume that countermeasures are the final word as Iran 

will seek a way around them. This is just one of the topics in my 

recommendations which I offered in my written statement. 

I do thank you for your time and the invitation once again. And 

I look forward to your questions. Thank you. 

[The prepared statement of Mr. Ottolenghi can be found on page 

75 of the appendix.] 

Chairman PEARCE. Thank you, sir. 

Ms. Rosenberg, for 5 minutes. 

STATEMENT OF ELIZABETH ROSENBERG 

Ms. ROSENBERG. Thank you, Chairman Pearce, Ranking Member 

Foster, and distinguished members of this committee for the opportunity to speak today on countering the financial networks of weapons proliferation. 

The financing of weapons of mass destruction proliferation is a 

grave threat facing the United States and the global financial system. The ability of rogue states or non-state actors to obtain weapons of mass destruction by using illicit financial activity and procurement networks is a major challenge to the U.S., to U.S. foreign 

policy goals, to the security of our homeland and that of our partners, and to the integrity of the global financial system and the 

global nonproliferation regime. 

Countering proliferation finance must be a core part of the policy 

approach to the United States’ most pressing national security concerns, specifically North Korea, Iran, and Syria. Furthermore, the 

United States must lead on this issue in international forums, 

doing much more than the present nascent measures. 

This essential work is undeniably challenging. Proliferation finance is difficult to detect. It is hidden within shell companies and 

among legitimate financial transactions. Looking for it is a technically challenging exercise at the intersection of sanctions enforcement, export controls, financial crimes compliance, and the global 

nuclear nonproliferation regime. 

As counter-proliferation finance work must operate across multiple jurisdictions, involve an array of different constituencies with 

different legal and regulatory authorities which have various privacy and data sharing obligations, and with major differentiation 

in political will and technical capacity, coordinating a truly effective international response is not easy. 

But the difficulties associated with countering the financing of 

proliferation should not give the false impression that creating a 

more effective policy framework is beyond the capacity of the international community. 

We know the deficiencies in the system. We certainly care about 

nuclear security and we can do better. Let us start with the regulatory regime. Compliance and oversight programs for financial institutions have historically focused on financial integrity threats 

other than proliferation finance, like anti-money laundering and 

anti-corruption, and countering terrorist financing efforts. 

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11 

Proliferation, including by North Korea and Iran, is no less significant as a security threat and must be treated as such. If policy 

leaders clarify that proliferation finance is on par with the obligation to counter terrorism, for example, it will go a long way to raise 

the profile of this issue and improve controls around it. 

This can have a direct benefit in improving the ability of vulnerable jurisdictions such as Hong Kong or Malaysia, for example, to 

deny proliferators safe haven and safe passage for their money. 

The United States should be the gold standard for information 

sharing relevant to proliferation finance between institutions, with 

governments, and across jurisdictions. 

Sections 314(a) and (b) of the USA PATRIOT Act are good models for creating the operational ability to facilitate information 

sharing, but policymakers must focus on expanding and 

incentivizing the use of these measures and in urging adoption of 

parallel measures in other jurisdictions. 

U.S. policy leaders must also work with international counterparts to harmonize such data sharing measures with privacy regulations so that justifiable concerns about misuse of personal data 

do not prevent cooperation and disrupting and preventing proliferation, an important law enforcement and international security priority. 

Congress has a direct role to play and encouraging more information collection, analysis, and public disclosure around proliferation 

finance. This includes supporting rigorous customer due diligence 

(CDD) practices by banks, by not allowing anonymous companies 

to abuse our financial system, and by supporting a regulatory sandbox and safe harbor provisions to incentivize creative strategies to 

counter proliferation finance. 

And Congress must aggressively encourage the Administration to 

publicly and privately disclose proliferation finance data and 

typologies including via FinCEN (Financial Crimes Enforcement 

Network) advisories. Moreover, Congress should strongly support 

the Administration in its new role as the Financial Action Task 

Force president, as has been discussed by several of my co-panelists here, to set tough new international guidelines for tracking and 

sharing information on proliferation finance, and for taking that 

action at the national level. 

I want to close by stating how grave the consequences are for 

failing to appreciate the seriousness of the proliferation finance 

threat. Complacency and policy inaction are weak links that help 

U.S. adversaries to actively and alarmingly develop nuclear weapons capabilities; the stakes could not be higher. 

Thank you for your attention and I look forward to answering 

questions you may have. 

[The prepared statement of Ms. Rosenberg can be found on page 

92 of the appendix.] 

Chairman PEARCE. Thanks each one of you for your presentations. I yield myself now 5 minutes for questions. First, so just 

looking at the complexity of tracking the financial aspects and the 

shell corporations, just everything is very complex. 

The sanctions have, it sounds like according to your testimony, 

an effect, but also it is very difficult for financial institutions to assess who the players are that are legitimate, who are not, legitimcarroll on FSR431 with DISTILLER

12 

mate transactions versus those that are gearing toward proliferation. 

I guess my question is how do we get around this obscurity? Let 

us back that up one section and say when a major—can we assess 

that most of the compromises of our sanctions are purposeful or 

just plain inability to see? 

Mr. Keatinge, do you want to take a shot at that? I know it is 

just going to be a guess but— 

Mr. KEATINGE. We are sitting here in the United States, surrounded by a sophisticated financial system. And yes, we are right 

that front companies and all of these are used to try and obfuscate 

the movement of funds. 

But let us not forget, look in the U.N. panel report and it is a 

litany of failures in countries where it is just that they don’t understand the risk that they are faced with. 

Chairman PEARCE. And what would we do to drive the understanding? 

Mr. KEATINGE. Your government spends a lot of money providing 

technical assistance and awareness raising to countries like Uganda, Tanzania, Mozambique, these kinds of countries where North 

Korea are earning money, raising money through providing services that they can then spend on their proliferation ambition. 

I think it is a polarized position here. There is raising very basic 

standards, implementing basic understanding, which is what we 

would expect the FATF to be doing. And then there is dealing with 

the more complex structures and obfuscation that the other panelists have spoken about. 

And yes, there are financial institutions that will no doubt facilitate the illicit movement of finance knowingly. Equally, there are 

many financial institutions that do that without realizing they are 

doing it because of the complexity of the structures that they use. 

Chairman PEARCE. OK. Mr. Ottolenghi, on page two you talk 

about the adapting of the purchasing system. I assume that means 

that we start with a legitimate purchasing system and then we 

begin to adapt and we get people who are selling to the companies 

familiar and then they adapt it closer and closer to proliferation. 

Is that correct? 

Mr. OTTOLENGHI. Absolutely correct, yes. 

Chairman PEARCE. OK. Then is it a profit motive? Is it just your 

complacency? Is it a combination of corruption and a profit motive 

and complacency that would drive the companies to continue selling? They just don’t watch that close? Tell me a little bit about 

that. 

Mr. OTTOLENGHI. It is a combination. On the part of those involved in helping, assisting Iran to procure, there is the profit. 

Sometimes there is also the ideology but more often than not the 

two things converge. 

Chairman PEARCE. It gets pretty difficult to assess precisely. Ms. 

Rosenberg then, so listening to that particular thing, do you think 

there would be advantage to having some piece of the sanctions 

push downstream to people who, either through carelessness or 

whatever, they began to feel, not the full sanctions but, sanctions 

of some sort against them. 

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13 

If they just didn’t pay attention, they are corrupt, we can assess 

their mindset. Is it possible to have the sanctions move downstream to the places where the financing is coming from? Is that 

too difficult? 

Ms. ROSENBERG. There are many opportunities to use sanctions 

to advance our counter-proliferation objectives. A primary focus 

area that we should attend to now is the lack of political will to 

enforce obligations. Just because the U.N. has sanctions, just because the United States has sanctions, does not mean that people 

are following them. 

Chairman PEARCE. OK, let me catch you right here though, that 

the U.S. has invoked sanctions on countries where we are trying 

to stop the proliferation and the countries where the will is lacked, 

our sanctions to North Korea or Iran or whoever would begin to 

percolate downstream to those that don’t have a strong motive for 

interrupting. Is that too egregious? 

Ms. ROSENBERG. There are opportunities. 

Chairman PEARCE. Take a quick shot. I want Mr. Ottolenghi to 

address it too. 

Mr. OTTOLENGHI. I just want to give an example. 

Chairman PEARCE. Yes, let her finish. And then I will come to 

you, just 19 seconds, so— 

Mr. OTTOLENGHI. I just want to give an example which I think 

illustrates the point you are making very well. Monday Treasury 

targeted a service provider for Mahan Air, the IRGC Airline, the 

airline that carries weapons and personnel to Syria. 

The service provider is in Malaysia. It transacts with the airline. 

Last year, in this committee, I presented a list of 67 service providers that are waiting to be punished for their support, material 

support to an entity sanctioned under Executive Order 13224. 

That is the action that the U.S. Government can take— 

Chairman PEARCE. OK. Ms. Rosenberg, wrap it up. I am over my 

time here. Go ahead and finish your statement if you would. 

Ms. ROSENBERG. There is an opportunity by looking further down 

the value chain. However, if the United States only relies on sanctions, then we will be missing an opportunity because, as has been 

pointed out before, if institutions are just looking at a sanctions list 

and making sure that their clients aren’t on the list, then we are 

missing everyone behind those front companies and the broader 

networks that are conducting the proliferation activity. 

Chairman PEARCE. We will try to delve a little bit more into that 

later in the hearing, but thank you very much. 

Mr. Foster, 5 minutes. 

Mr. FOSTER. Thank you. 

Dr. Ottolenghi, you mentioned rather unambiguously in your testimony that there must be no anonymous companies. Do any of you 

see any path to success on nonproliferation or prevention of proliferation financing as long as anonymous corporations are allowed. 

Ms. Rosenberg? 

Ms. ROSENBERG. I can speak to that. I think there is an incredible opportunity before you all today to take action on beneficial 

ownership which will have a direct effect in banning anonymous 

companies. 

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14 

And it is through those companies that an array of financial ills 

occurs through this financial jurisdiction, and the United States as 

a pace setter, as a standard setter for the entire global community, 

must lead and demonstrate that anonymity in companies through 

which proliferation can occur is unacceptable. 

Mr. FOSTER. Any other comments on that? Is the logic just that 

simple? 

Mr. OTTOLENGHI. I couldn’t agree more. Most of the networks I 

have studied over the years involving proliferation and money 

laundering for terror finance all relied on opaque jurisdictions and 

anonymous companies and beneficial ownership. It is a critical tool 

for their action. And we should definitely advocate and promote 

more transparency. 

Mr. FOSTER. And which countries besides the United States are 

going to have to clean up their act on this? 

Mr. OTTOLENGHI. A vast number of jurisdictions in the Caribbean Basin are an obvious place to start. Jurisdictions that are 

under U.S. sovereignty such as the Marshall Islands, jurisdictions 

in Europe. In small countries like Monaco, Andorra, Lichtenstein. 

These are places, the British Isles that are not, direct part of the 

United Kingdom such as the Isle of Man, such as the Channel Islands. All of these are places that are being used and abused for 

this type of activity. 

Ms. ROSENBERG. If I may add to this, there are a handful of 

countries that have received good marks on beneficial ownership of 

all of them. Everyone, including those jurisdictions of greatest proliferation concern through which we know proliferation transactions are flowing, has an opportunity, and indeed a national security obligation, to do more to identify the beneficial owners behind corporate structures. 

Mr. FOSTER. Yes. And Mr. Albright, what would it take for the 

United States to get a perfect score? What are the top five ways 

that we blow our grade? 

Mr. ALBRIGHT. In 2017, the United States was number one, so 

we have a fairly tough standard. They are not fully compliant on 

FATF recommendations. There is money laundering issues. There 

are illicit flows of money that are at issue. I think the way the 

United States can improve in our index is pretty much in the 

weeds, but it did do the best of any country. And it says that overall— 

Mr. FOSTER. We have the highest score despite allowing anonymous shell corporations? 

Mr. ALBRIGHT. Those are the kinds of things that would lower 

the score. 

Mr. FOSTER. Right. It seems like that should like blow your score 

completely. 

Mr. ALBRIGHT. Everything is weighted and everything is—there 

are a lot of parts to this. That is one important aspect. But there 

are many others. And I think, and I don’t want to beat up on the 

United States because we see much, much worse behavior in most 

of the world. 

The United States, even though it has room for improvement, it 

is still doing the best and is carrying water for most of the improvements that are sought in countering financial proliferation. 

mcarroll on FSR431 with DISTILLER

15 

Mr. FOSTER. OK. What country besides the United States do you 

think gets it the best? If you could say the world should adapt the 

standards of X, what would X be? 

Mr. ALBRIGHT. I think the European Union, those countries tended to rank much better than others. 

Mr. FOSTER. Do they allow anonymous shell corporations in the 

EU? 

Mr. ALBRIGHT. I don’t know. 

Mr. KEATINGE. We have a transparent company registry in the 

United Kingdom as opposed to the Caribbean islands that were 

mentioned. I would say, as someone not from these shores, the fact 

that the U.S. allows such opacity in company ownership does not 

do the reputation, or at least the message that the United States 

tries to deliver internationally on illicit finance, does not help that 

message, get taken on board by countries that can turn and say, 

but hang on a minute. You have this opacity in the United States. 

Mr. FOSTER. Yes. And are anonymous land transactions a big 

part of the problem? Both in the U.S. and worldwide. Which is 

something that countries are split on and some allow them and 

some don’t. 

Mr. KEATINGE. For illicit finance in general, clearly the ability to 

own a property in anonymous fashion is a huge problem. It’s a 

huge problem in the United Kingdom and a huge problem elsewhere. Specific to proliferation finance, I don’t know the answer to 

that. 

Mr. FOSTER. All right. Thank you. 

Chairman PEARCE. The gentleman’s time has expired. The Chair 

now recognizes Mr. Pittenger for 5 minutes. 

Mr. PITTENGER. Thank you, Mr. Pearce. I thank each of you for 

coming today for your expertise. It is very valued and appreciated. 

One of the outcomes of the JCPOA was the allowing Iranian 

Banks through the SWIFT authority to operate. How serious of an 

outcome is that? 

Mr. ALBRIGHT. Yes. I can answer, Emanuele can too. One of 

the—first the Iranian Banks are tied into illicit procurement networks. By removing the sanctions it also made it much easier for 

those banks to continue or expand illicit activity. 

Mr. PITTENGER. Would re-imposing the element that allowed 

those banks and preventing them from operating, as they were not 

able to prior to that agreement. Would that assist in our efforts? 

Mr. ALBRIGHT. I think— 

Ms. ROSENBERG. I can speak to that. The United States has 

plans to re-impose sanctions removed on implementation day under 

the JCPOA. That will involve putting back on the list those Iranian 

banks that were designated. Having them back on the U.S. SDN 

list (Specially Designated Nationals and Blocked Persons List) 

means, and because of the secondary nature of them, any country 

or company or person anywhere in the world providing material 

support to those SDN entities will face enforcement actions for violating those sanctions. That has the effect of de-swifting those 

same banks. 

Mr. PITTENGER. Thank you. 

Mr. Ottolenghi, you mentioned Uganda and several other countries who are not engaged with us. Let me clarify, was that a matmcarroll on FSR431 with DISTILLER

16 

ter of will or the lack of capabilities? I know OTA works with certain countries to help them enhance the capabilities and the financial systems, Egypt, for example, right now is really responding to 

be very supportive with OTA. 

Is our concern out there in the field with other countries and our 

allies, the lack of interest or the lack of technical capabilities in 

software? 

Mr. OTTOLENGHI. I think it’s a mixture of both usually. You will 

find good political will but lack of capacity in some countries and 

plenty of capacity and lack of political will in others. And one country that comes to mind where there is capacity, but there is no will, 

is Turkey. 

Mr. PITTENGER. Yes. 

Mr. OTTOLENGHI. Turkey is a country where in November 2012, 

at the height of the sanction regime, Iran had approximately 2,600 

companies incorporated through foreign direct investment, many of 

which linked to the regime. Today that number has skyrocketed 

to—I quote the exact figure in my written statement I think is 

around 4,600— 

Mr. PITTENGER. Quickly, how many countries do you see out 

there that given the right capabilities, technology, and software, 

would they be willing to raise their standards and their collaboration with us? How short are we in the process of fully engaging the 

willing countries to be supportive in getting the technology they 

need? 

Mr. OTTOLENGHI. Again, I think it is a question of allocation of 

resources and prioritizing. And the challenge in some of these countries are quite frankly overwhelming. It is not just improving their 

ability to conduct effective anti-money laundering and counterterrorism compliance in the banks. 

It is about better training and providing technology to border 

controls and customs. The challenge is large and big. And so, I 

think that it should start from testing the political will of these 

countries to engage in programs that can improve their ability to 

enforce sanctions and cooperate better with the United States. 

Mr. PITTENGER. We host these forums for partner members. We 

just had one in Berlin this past week. And we found that private 

sector is a very important element, the banks, the software companies, and others that have come in and after one such meeting we 

had in Buenos Aires 100 members of one company were down and 

became very supportive with Argentina to try to get them up to 

speed. 

And I think what I am trying to determine is how much opportunity do we have out there that OTA could be better engaged with 

those who want to participate in a stronger way? 

Mr. KEATINGE. If I may, we require the private sector to implement these sanctions on our behalf, talking to governments and expecting governments in many of these countries to communicate 

that effectively to their private sector is frankly, if not a fool’s errand, then, extremely difficult to do. 

You really need to engage with the banks and others in these 

countries to bring to their attention what they should be being told 

by their own governments. 

Mr. PITTENGER. Thank you. My time has expired. 

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Chairman PEARCE. The gentleman’s time has expired. 

The Chair now recognizes the gentlelady from the neighboring 

State to New Mexico, to the west, Ms. Sinema for 5 minutes. 

Ms. SINEMA. Thank you, Chairman Pearce and thank you to our 

distinguished witnesses for being with us today. 

As residents of a border State, Arizonians are deeply concerned 

about the national security threats we face. Rogue states and terrorist organizations are developing weapons of mass destruction 

that threaten our homeland. 

Drug cartels like Sinaloa and other international criminal syndicates traffic illegal weapons across our southern border and endanger our communities. We must be tough and smart to combat 

these threats. 

Secure borders and a strong military, enduring and collaborative 

relationships with our allies, and strategically applied sanctions 

are all essential tools to keep us safe from the likes of North Korea, 

ISIS, and other dangerous entities. 

We must do more. Cracking down on weapons proliferation is essential to our national security and that is why I worked with Congressman Tipton of Colorado to introduce H.R. 6332, the Improving 

Strategies to Counter Weapons Proliferation Act. 

Our legislation improves the Federal Government’s ability to stop 

the financing of rogue states, transnational criminal organizations, 

and terrorist groups. Our bill facilitates development of intelligence 

products that financial institutions, the intelligence community and 

law enforcement can use to identify and stop transactions linked to 

weapons proliferation. 

We shouldn’t let a terrorist organization get away with building 

a dirty bomb or chemical weapon because our government wasn’t 

using all of the tools at its disposal. And we must do everything 

possible to keep Arizona families safe. 

With that, I have two questions for Ms. Rosenberg with the Center for New American Security. My first question, Ms. Rosenberg. 

Our bill’s reporting requirement improves the types of intelligence 

products FinCEN offers to financial institutions. 

Given your expertise, could you elaborate on the kinds of unique 

insights that FinCEN has that financial institutions, the intelligence community, and law enforcement might not have on their 

own? 

Ms. ROSENBERG. The information that FinCEN gathers as supplied to it by all manner of reporting institutions, banks, first and 

foremost among them, money services business, important in border States in particular, brings together information on suspicious 

activity and cash movements. 

And when this information is aggregated in FinCEN and is accessible by the law enforcement community and intelligence community, there is an opportunity to look broadly for trends here. 

This may include structuring or other activities, the footprint of 

which you can see for drug cartel activity, for example, or our other 

illicit activity. 

Now, there are plenty of authorities and opportunities for 

FinCEN to gather this information, to analyze it, for the law enforcement community to do that and to use these intelligence prodmcarroll on FSR431 with DISTILLER

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ucts to go after these concerns in various ways, with sanctions and 

with law enforcement activity. 

But the United States would be in a better position, and FinCEN 

data would be better, and there will be even more reporting to 

FinCEN, if there was more disclosure about the entities, the companies that are doing these cash transactions and that are making 

these wire transactions. 

With more information, for example, information that would be 

generated by the beneficial ownership requirements that this Committee has put forward in draft form in this Congress, in the 

FinCEN database and accessible to the law enforcement and intelligence community, there would be even better insights. 

Ms. SINEMA. Thank you. 

My second question is related to legal small arms and light 

weapons that are trafficked across our southern border. This is a 

dangerous and persistent problem in my State of Arizona. The flow 

of these weapons across the border is often carried out by violent 

drug cartels like the Sinaloa who threaten communities all across 

our State. 

We must be doing more to stop groups like Sinaloa in their cross 

border trade in humans, drugs, and weapons. How could FinCEN’s 

intelligence products assist law enforcement in cracking down on 

these drug cartels? And could these intelligence products be useful 

in helping financial institutions combat structuring, which cartels 

like Sinaloa use to avoid our current anti-money laundering regime? 

Ms. ROSENBERG. You brought up a good point about the cross 

border money flows related to small arms and other criminal activity across the border. Right now the United States doesn’t have a 

requirement for reporting cross border financial transactions. 

That’s something that Australia and Canada do. And it has been 

the basis for those countries to track illicit activity, including proliferation finance which is the topic of this hearing today. 

The United States could pursue that, and it has been floated. 

There is a draft rule that has been put out and considered but not 

taken forward. 

That rule would be a huge asset for combating cross border 

criminal activity including small arms transfers and the money 

moving with them. 

Ms. SINEMA. Thank you so much. Chairman, my time has expired. 

Chairman PEARCE. The gentlelady’s time has expired. The Chair 

now recognizes Mr. Rothfus for 5 minutes for questions. 

Mr. ROTHFUS. Thank you, Mr. Chairman. 

Dr. Ottolenghi, Iran and its terror proxy Hezbollah are currently 

engaged in hostile or criminal actions around the world and most 

notably against Israel and her allies. The Trump Administration’s 

decision to withdraw from the JCPOA was wise in my opinion. Before the JCPOA when nuclear related sanctions were in place in 

Iran, was there an increased awareness on Iran’s illicit procurement efforts? 

Mr. OTTOLENGHI. Based on my research which is all open source, 

I can tell you two things. One, that Iran’s proliferation networks 

which preexisted the JCPOA and which, if Iran had intended to 

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19 

genuinely dismantle it or walk away from its nuclear weapons ambitions and rejoin the international community as a responsible 

player, those networks would have been dismantled, would have 

been taken apart, would have been shut down. 

We have evidence that none of that happened. That those networks continue to be active and networks that were targeted by 

sanctions prior to the JCPOA have been reconstituted in some 

cases. That gives you a sense of the intention. 

The second point is that, of course, Iran’s proxies have continued 

and even expanded dramatically their efforts to continue to raise 

cash through cooperation with criminal cartels across the world 

from Latin America to West Africa in an effort to finance their terrorism and their military activities in the Middle East. 

On both accounts, you can see that the JCPOA has not in any 

way pushed Iran to become more responsible on either proliferation 

or terror finance. 

Mr. ROTHFUS. Has there been any evidence of Iran seeking illicit 

goods or technology outside agreed upon channels since JCPOA 

went to effect in January 2016? 

Mr. OTTOLENGHI. By all means, yes, I believe that the latest 

U.N. report on this matter highlights a number of procurement attempts that were done outside the accepted or the procurement 

channel organized by the JCPOA. 

We are aware of some procurement attempts of what we think 

is dual use technology. We cannot share it publicly, but I would be 

happy to brief the members in private. There is by all means plenty of evidence that Iran has continued to seek technology that could 

be put to use for nefarious purposes. 

Mr. ROTHFUS. What impact will President Trump’s May 8, 2018 

announcement of the exit of the U.S. from the JCPOA have on proliferation financing? 

Mr. OTTOLENGHI. I think that you will see as I said the rampedup attempts by Iran to procure and also to just evade sanctions on 

a broad front in order to keep its own economy afloat. I think that 

there are two differences between the situation now, the current 

situation and the situation before 2006 when the U.N. sanctions regime began and created international consensus for economic pressure against Iran. 

The first is that, of course, this time the United States right now 

does not have the international community going along with it on 

withdrawing from the JCPOA, but on the other hand, you have 10 

years of experience of U.S. secondary sanctions that are very vividly in the mind of the international financial sector, the business 

community and so on. 

And we are seeing already that regardless of steps taken and 

countermeasures by the European Union or other countries that 

want to preserve the JCPOA, the vast majority of global business 

is walking away from Iran because they just do not want to take 

the risk of finding themselves on the wrong side of U.S. authorities. 

Mr. ROTHFUS. A recent staff report from the Permanent Subcommittee on Investigations reveal that contrary to Congressional 

testimony of Obama-era officials, the U.S. Department of the 

Treasury authorized a specific license allowing a conversion of $5.7 

billion in oil revenue held by Bank Muscat in Omani riyals to 

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20 

euros, which would necessitate a conversion to the U.S. financial 

system. What do you make of the Treasury Department’s issuance 

of this license? 

Mr. OTTOLENGHI. I really can’t speak to this matter or on behalf 

of the Treasury Department, if any of my colleagues would like to 

add. 

Mr. ROTHFUS. Let me ask you this, despite urging from OFAC, 

two U.S. banks declined to convert the money, citing compliance 

and reputational risk, what implications for proliferation finance 

could such conversion have had? 

Again, two U.S. banks declined to convert the money, citing compliance and reputational risk, what implications for proliferation finance could such a conversion had it taken place have had? 

Mr. OTTOLENGHI. It would give Iran access to dollars, and the 

ability to transact in dollars, it would give legitimacy to these types 

of transactions. The whole purpose of the financial sanctions regime is to deny Iran access to legitimate financial avenues for financial transactions of the global level. The whole idea of deswifting Iran is not so much that you are going to shut down their 

banks or prevent them from buying and selling, but it is basically 

pulling the plug on an international platform that allows for millions of transactions and legitimate transactions on a daily basis. 

It makes it extremely difficult for Iran to transact, and it makes 

it easier for financial institutions to avoid being exposed to these 

types of transactions. When you allow these transactions to go 

through nevertheless, you expose your financial system to 

reputational risk. 

Chairman PEARCE. The gentleman’s time has expired. The Chair 

now would recognize the gentleman, Mr. Lynch. You have the floor, 

sir. 

Mr. LYNCH. Thank you, Mr. Chairman. 

I want to thank the witnesses, very thoughtful testimony. It is 

ironic though and somewhat counterintuitive, so we talk about 

these sanctions against Iran, and against Russia, but we allow 

them, we allow them set up shell corporations in the United States 

to purchase property, to purchase aircraft, because we don’t have 

any way of telling who owns the property. You have Iranians who 

have bought high rises in New York City, you have Russian 

oligarchs that have bought a lot of property in Florida. 

And because we refuse, we thump our chests every time we assert sanctions, but the reality of the situation is that we don’t know 

who is buying property here in the United States, we don’t have 

a public registry like the U.K. Is that right, Ms. Rosenberg? 

Ms. ROSENBERG. I certainly agree that is an enormous problem. 

Anonymous companies, and the ability for those transactions you 

have described to occur, as well as the ability for U.S. financial institutions to bank entities, the beneficial owner or the natural person behind which they are not sure, is an enormous financial crime 

vulnerability, not just for proliferation finances we are discussing 

today, but across an array of potential financial criminal activity. 

There is a new customer due diligence rule that has just gone 

live. However, I am concerned by some efforts to slow walk the implementation of that, and you all are poised to encourage its urgent 

implementation. It is one of the few tools available at present, 

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21 

given that there is a massive gap in beneficial ownership information, to try and understand who customers of financial institutions 

are. I would encourage you all to look aggressively at the need to 

implement it immediately. 

Mr. LYNCH. Thank you. Mr. Keatinge. Do you think I would be 

helpful if the United States as a leader, a global leader, adopted 

a system where they required people to disclose who they were 

when they purchased property in the United States or do business 

here in the United States? 

Mr. KEATINGE. Without doubt. I think you have to put yourself 

in the position of those countries around the world that are visited 

by U.S. Treasury officials telling them to do certain things in order 

to strengthen the integrity of the global financial system. And 

those things that they are being asked to do are absolutely right. 

But do what I say not what I do, is often the cry. 

The other thing I would like to say is when I arrived yesterday, 

I had to show my passport, United States knew I was coming, I 

filled out all the forms in advance, to Liz’s point, I don’t think you 

know what money is coming into this country, we have the same 

problem in our own country, and that to me is a national security 

issue, if you don’t know what money is coming this country, you 

don’t know how that money is then going to be used to manipulate 

this country. Understanding what money is entering your country 

I think is an important security consideration. Forget money laundering. 

Mr. LYNCH. Thank you. I think we are the laggards in this, I was 

speaking for the United States and our financial system, so you 

have the U.K., and I think a couple of other countries, Denmark 

is another one that has a public registry, so you can actually go online and figure out who owns what company or real estate. It is 

public. And you have 20 other countries in the EU that have committed to adopting this system, so the world is moving toward this 

more transparent system, but we here in the United States are 

keeping this nontransparent, this opaque corrupt system, in operation. 

I know that Mrs. Maloney has a bill on beneficial ownership. I 

have one on aircraft because we have a running problem here 

where we had someone affiliated with Hezbollah that actually registered an aircraft you think after 9/11 we would be concerned 

about that. But, we have Hezbollah registering aircraft here in the 

United States because we don’t require beneficial ownership. 

I love the tough talk about the sanctions, but the fact of the matter is, we are not doing our job to protect the American people and 

to protect our financial system because we don’t require beneficial 

ownership information when investments and real estate purchases 

are made here in the United States. I thank you for your testimony 

and I yield back. 

Chairman PEARCE. The gentleman yields back. The Chair now 

recognizes the gentleman looking for balance in life, that would be 

Mr. Poliquin. Five minutes. It is not a new quest. 

Mr. POLIQUIN. Thank you, Mr. Pearce, very much, I appreciate 

it. Now, gentlemen, a couple of years ago, the House of Representatives voted strongly against the Iran nuclear deal, I was one of the 

people who voted against that, it then went over to the Senate, and 

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22 

never received a vote. I am sure we all recall that deal allowed 

about $150 billion in cash to be released to the folks that run the 

Iranian regime. It kept the nuclear arms program intact and this 

to a country that chants on a regular basis, Death to America. 

My question to you and will start with you Mr. Ottolenghi, do 

you think American families, now we are looking 2 years beyond 

when that deal was put into effect by the prior Administration, do 

you think American families are less or more safe today as a result 

of that deal, and why? 

Mr. OTTOLENGHI. A large premise of that deal was that Iran 

would moderate its behavior and become, over time, a more responsible interlocutor in the region. I think that the evidence is in plain 

sight that the opposite has happened, as a consequence of releasing 

resources to the Iranian regime, returning Iran from the cold into 

the fold of the international community. Iran has become more aggressive in its behavior, in its posture, and it has been allowed to 

wreak havoc in the region even more so than it did before. 

Mr. POLIQUIN. Therefore, we would both conclude that American 

families are less safe? 

Mr. OTTOLENGHI. We are less safe. 

Mr. POLIQUIN. Is that correct? And we were also told that if the 

United States pulled out of that deal, it would be impossible to reimpose sanctions on the country of Iran, is that true? And would 

those sanctions be effective? 

Mr. OTTOLENGHI. The United States doesn’t need the rest of the 

world to have permission to impose or re-impose, expand, elaborate, extend sanctions against Iran. I think that the key will be 

how credible the threats and the deterrence of sanctions are as we 

move forward. And for that, you need the Executive Branch to be 

willing to vigorously enforce sanctions, and punish those who will 

challenge and violate U.S. law. 

Mr. POLIQUIN. Mr. Keatinge, I have introduced a bill in this committee called the Iranian Leaders Asset Transparency Act, you 

might not be familiar with that. It received a significant bipartisan 

vote here in the House, and has not gone anywhere in the Senate. 

It effectively looks at the 70 or 80 individuals that run the Iranian 

government, whether it be political leaders or military leaders, it 

requires the United States Treasury Department to post on its 

website the assets that are held by those 70 to 80 individuals, post 

them in not only English but the three languages that are practiced in Iran, such that the world can see the assets accumulated 

illegally in many cases by these individuals and not reaching their 

people. 

Do you think that’s a good or a bad idea to show the world how 

the Iranian people have been ripped off by these folks that chant 

Death to America? 

Mr. KEATING. I think the transparency of asset ownership by any 

politician, any leader is an important—is an important consideration. The posting of that kind of list, you see the impact that the 

posting of the list of Russian names had certainly in Europe when 

the treasury posted that list early in the year, people sat up and 

took note, OK, are these people likely to be subject to sanction by 

the United States, we perhaps just stood clear of them and some 

of them were subsequently sanctioned, but transparency of political 

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23 

leadership asset ownership anywhere in the world is a critical 

issue. 

Mr. POLIQUIN. Mr. Keatinge, also to continue please, are the 

demonstrations the best of your ability still continuing in Iran? 

Mr. KEATINGE. As reported, yes, but I don’t know them in detail. 

Mr. POLIQUIN. Anybody have any further—Mr. Albright, any? 

Ms. Rosenberg? Any idea? 

Ms. ROSENBERG. I too read about them in the newspapers. I have 

no personal knowledge of that. 

Mr. POLIQUIN. OK. Thank you very much, Mr. Pearce, I yield 

back my time. Thank you. 

Chairman PEARCE. Thank you. The gentleman’s time has expired. The gentleman from North Carolina, Mr. Budd, is recognized 

for 5 minutes. 

Mr. BUDD. Thank you, Mr. Chairman. I want to thank all our 

witnesses today, and Ms. Rosenberg, I want to give you a special 

thank you and a shout out for your help through CNAS’ assistance 

with our virtual currency task force legislation H.R. 5036, really 

appreciate it, so thank you again. And, Ms. Rosenberg, we have financial sanctions on proliferators to stop them from raising and 

moving money for their nuclear weapons programs. In your own 

opinion, are these sanctions enough to stop the proliferation finance or is the problem a lack of enforcement of these sanctions? 

Ms. ROSENBERG. Thank you for the question and your kind 

words. They are not enough, sanctions are not enough, and it is not 

just because there are no sanctions. Surely there’s more opportunity to impose more sanctions to expose and go after proliferation 

activities where it occurs. 

But as we were discussing earlier, there is a broader approach 

toward counter-proliferation activities than just looking at a set of 

sanctions. It exposes a vulnerability that we have, because if we 

know as we do, that North Korean proliferators, Iranian 

proliferators are good at using front companies and shell companies, and trusted agents who change their names, then it is a near 

impossible task to keep that sanctions list up to date so that we 

can be sure that we are not providing a means for moving money, 

for raising money, to proliferators. As the United Nations has 

pointed out in calling for a broader approach to counter-proliferation activity and counter-proliferation finance, we must look at the 

nature of the conduct, not just specific entities. 

Mr. BUDD. Thank you. If sanctions are not enough, what would 

you suggest Congress do to counter this threat? 

Ms. ROSENBERG. One set of immediate things that Congress can 

do and that you all are very well placed to do is to take action to 

promote transparency for companies, for entities that would use 

the U.S. financial system, not just to prevent proliferation activities 

moving through the U.S. financial system, and by the way, we 

know that is occurring, that North Korea has even in the recent 

past, moved money through the U.S. financial system. 

We must safeguard our financial system, and also serve as a 

standard for other jurisdictions internationally. As Tom was just 

saying, transparency is our friend here, and that can be accomplished through beneficial ownership legislation, through requiring 

more information in cross border payments, knowing who brings 

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24 

what kind of money into this country, and removes it again. And 

also, in encouraging aggressive implementation of the CDD rule. 

Mr. BUDD. I appreciate you are mentioning North Korea. Thank 

you. And now I will switch over on North Korea, to Mr. Albright. 

Can you discuss how North Korea most regularly accesses the global financial system? And according to Ms. Rosenberg, even the U.S. 

system? 

Mr. ALBRIGHT. Typically, the North Koreans, if they are going to 

use banks, they are going to use Chinese banks, I think one of the 

challenges has been for Administrations to sanction those banks. 

You can—obviously China is deeply opposed that, but I think—if 

things don’t work out well with North Korea, and it is—and I 

wouldn’t give it a 50/50 chance that they will, namely the negotiation succeed, and I think it is very important for Congress to be 

willing and prepared to pass even harsher sanctions going after 

even what Chairman Pearce called going after these secondary, second row of sanctions violators. 

And I think there has been legislation that has been drafted and 

discussed that it could help the game, because in the end it is not 

just a question of going after entities—the tactics change, countries 

adapt to the sanctions, so you constantly have to refresh them and 

think of new ways to improve them. And I think the U.S. Congress 

and particularly the House of Representatives has been a major 

leader in coming up with new sanctions approaches that are or 

have been quite effective. 

Mr. BUDD. Thank you, Mr. Albright, just to continue and since 

you narrowed it down to China and their financial institutions, 

what do they do to help with North Korea’s access to critical components and technology? It is something you have insight into? 

Mr. ALBRIGHT. They haven’t done enough. It is better than it was 

a couple years ago, but, the concern now is just that some of the 

actions China took will diminish—China is their shop—it is North 

Korea’s shopping market, and it is not just Chinese, it is American, 

German, British, you name it, companies are there. And they are 

selling goods to China, and the North Koreans are masters at acquiring fairly sensitive goods for their nuclear and missile programs and to be able to exploit China’s weak export controls. 

Now they did clamp down, and that was a positive sign, but 

there are some signs that they are weakening, and I think if things 

don’t go well, one of the things that is going to have to be done is 

to make sure that China understands that it can no longer be a 

marketplace for the North Korean WMD and missile programs. 

Mr. BUDD. Thank you. My time has expired, but before I yield, 

if you would add in any of your further answers that you are able 

to, just anything you would suggest to the legislative branch or the 

Executive Branch that we can do to address some of the shortcomings. Thank you again. I yield back. 

Chairman PEARCE. Thank you. And just for those of you still 

here, it is the Chair’s intention to go to a second round and I think 

that is going to be the focus of the round, so if you can hang 

around. New Mexico neighbor to the north now, Mr. Tipton, Colorado, is recognized for 5 minutes. 

Mr. TIPTON. Thank you, Mr. Pearce. I thank the panel for taking 

the time to be here. I think we have a pretty evident case lined out, 

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25 

particularly the doctor had lined out some of the complex webs that 

we see in terms of being able to create shell corporations, that are 

going to be able to seek financing, but part of the challenge obviously is when you get those smaller sized corporations, we do get 

into the financial institutions, that are facing some reputational 

risk, institutional risk, when it comes to frankly funding illicit firearms and weapons with perhaps not even the knowledge that they 

are actually doing that. 

And that—Ms. Rosenberg, if you maybe speak to really here in 

the U.S., we have a pretty robust system to be able to identify and 

counter some of the elicit finance that does go on. But when it 

comes to our smaller financial institutions, do you believe that 

there is an actual awareness that exists in some of the contemporary realities that we really face with the proliferation finance, 

and in the threats that they have? 

Ms. ROSENBERG. I should start by saying the United States is 

best in class when it comes to identifying potential proliferation activities, to analyzing this, to taking law enforcement or sanctions 

action. But that is not enough. We still witness a North Korean nuclear program that is very dangerous and scary. We must do more 

even if the United States is best in class. 

There are a few institutions that sit atop the best in class status, 

some of the major U.S. global banks, financial institutions, and corporations have their own financial intelligence units, and are able 

to proactively look for patterns of proliferation, and communicate 

that directly to our law enforcement community. We are in their 

debt, those two constituencies. 

However, these smaller companies that you have mentioned or financial institutions, regional credit unions, we have seen in a number of instances, that they don’t have the staff, the awareness, or 

the compliance culture to recognize when certain kinds of financial 

abuse comes through their system. However, not all of them have 

direct international relationships, they must go through some of 

these bigger money center banks in order to conduct international 

transactions. That becomes a check on their activities, but it is 

really up to the Federal and State level banking supervisors and 

regulators to help them to understand and to follow the law and 

to identify and stop proliferation activity where it may occur and 

affect them. 

Mr. TIPTON. Do you have some direct suggestions along those 

lines? You had spoken a little bit transparency obviously, and we 

understand certainly that some of the corresponding banking 

connectivity that’s going to be there, but just being able, some actions that the smaller institutions institutionally could take, or is 

it simply a matter of scale, size, and dollars? 

Ms. ROSENBERG. And understanding risk. The United States has 

a risk-based approach to its financial supervision, and the Fed, the 

OCC that oversee the biggest financial institutions and those they 

supervise have a rock solid understanding of what that looks like. 

But risk is different for different institutions, of course, there are 

smaller regional banks in the United States that have much broader exposure to Latin America, for example. Even while they are not 

the biggest money center banks, they should have a good sense of 

their risk. Who is coming to Miami? Who is structuring transmcarroll on FSR431 with DISTILLER

26 

actions in the United States and buying anonymously real estate 

in that market? 

Understanding their risk well, is up to their regulators at the 

State level. Federal regulations can help them calibrate their risk 

appropriately. We should emphasize that banks must understand 

the particular risk they have with their footprint and their orientation for financial activities. It is different for every financial institution. 

Mr. TIPTON. Would you maybe share with us a couple of your 

thoughts. Just focus a little bit on the SARS (suspicious activity report) reports that American banks are required to be able to submit to FinCEN and do you think we have sufficient information 

about how the SARs reports are used by law enforcement, to be 

able to combat proliferation financing? 

Ms. ROSENBERG. Do you have sufficient information? I don’t 

know what kind of briefings that FinCEN gives to you, I would encourage you to have a full and frank conversation with them. It is 

not just them, because they administer the BSA (Bank Secrecy Act) 

and collect BSA data, and I think any law enforcement officer looking at terrorism finance or proliferation finance might take issue 

that these SARS are FinCEN SARs. They belong to the entire law 

enforcement and intelligence community, and they should be empowered to have access to them and to use them. 

Mr. TIPTON. This can probably just be a yes or no, but do you 

think it would be helpful to know more about what kind of suspicious activity reports, what they use the actions for when the reports are made? 

Ms. ROSENBERG. Yes, on proliferation finance, because it will signal to them that you care, it will give a demand signal to them, 

and the financial institutions that they oversee, that must submit 

the SARs to know that this is a priority, that they must look for 

and take action on. 

Mr. TIPTON. Great. Thank you and my time is expired. Thank 

you, Mr. Pearce. 

Chairman PEARCE. The gentleman’s time has expired. Now, before I recognize Mr. Davidson, I would like to inquire our panels 

if you are able to stay around for a second round, does your time 

allow that? Also, in direct for us as members, of what I am going 

to do on this next round. What I am going to do on this next round 

after, we are going to take the two more with five questions each? 

And then I think there is a consensus among the minority and majority that we would really like to hear from you specific suggestions. 

And so we are going to go through, one, two, three, four, with one 

specific. And if your specific it sort of general and not picking on 

you Mr. Rosenberg, but you said, if we were going to do something, 

it has to be on transparency, then give us two things on transparency. I will give you one big item and two sub items. 

And then I would like the questions to delve into this where we 

see from a policymaker’s point of view what it is that these experts 

are suggesting that we do if we want to ratchet up the pressure 

on this financing of weapons of mass destruction one or two 

notches, we can reach for the sky, but it is not going to happen between now and the end of the year. 

mcarroll on FSR431 with DISTILLER

27 

We might get a specific bill with specific recommendations that 

is lightning quick, and if you have one chance to do something before the session ends, what would you do, so that’s where we are 

going after the two or 5 minutes here. Please be prepared, you 

have to be concise, we have a vote series coming up. 

Mr. Davidson, make it a good 5 minutes, sir. 

Mr. DAVIDSON. Thank you, chairman. Thank you for our witnesses, and Mr. Albright, it is great to have an Ohio-educated 

Wright State grad in the room which is not in the district, but adjacent and Oberlin also a great Ohio education system. And I assume the rest of you by your resumes are all sufficiently well-educated as well. 

Thanks for your expertise in the matter, but I want to spend a 

little bit of time specifically to deal with Iran, and the threat of 

weapons of mass destruction, weapons proliferation in Iran, but 

also how they might deploy them. Under the previous Administration, as part of negotiating the JCPOA, there was Operation Cassandra, activities involving fundraising, potentially other activities, 

and I just wonder if—I apologize for the potential error in your 

name, Mr. Ottolenghi, could you address that? 

Mr. OTTOLENGHI. Absolutely. The, Iran remains the main sponsor financially of Hezbollah, but over the past decade or so, 

Hezbollah’s budget has grown exponentially and dramatically for 

its needs because of its involvement in Syria after 2011, because 

of its obligation to reconstruct the destroyed south of Lebanon after 

the war in 2006, while Iran’s contribution has become unreliable 

due to the increased pressure of sanctions. 

Hezbollah has developed networks and cooperation with criminal 

syndicates across the globe to finance these activities through this 

type of convergence. Narco-terrorism is the word most commonly 

used. This activity is yielding, in our conservative estimate that I 

have based on open source research done by some of my colleagues, 

to about $300 million a year, out of an estimated budget of about 

a billion dollars a year. 

People who were involved in the Project Cassandra over a decade 

would probably estimate that the contribution to Hezbollah’s finances through these type of illicit activities is dramatically larger. 

We are talking about a global criminal syndicate that cooperates 

with local criminal syndicates, affecting the security and the 

wellbeing of our societies this is not just a national security issue, 

it is about our neighborhoods and our lifestyle, and the safety of 

society. 

Mr. DAVIDSON. If we look at how they are doing this, not just 

what they are doing, how much of this is conventional movement 

of money, wire transfers and whatnot between Iran and proxy 

groups and how much is moved by Hawala networks or cash? 

Mr. OTTOLENGHI. I don’t have accurate estimates, but I can say 

based on my research that a significant part of these funding activities go through trade-based money laundering that is conducted 

through front companies, transacting through or with the assistance of regular banking institutions, money exchange houses, but 

it is mostly wired into the formal global financial system. And a lot 

of it goes through the United States. 

Mr. DAVIDSON. Thank you. 

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28 

Mr. Albright, one of the things that we are wrestling with is because of these front companies, knowing the beneficial ownership 

and if all this data was used for good purposes to only catch criminals, there would still be a burden of who has to collect it and monitor it. In the current system the government has effectively nationalized parts of our banks and commissioned them as law enforcement officers to collect lots of data. 

While this data is very valuable for national security, some approaches would have the burden shifted from banks out to every 

company that there is reporting requirements, that they fill out 

every year, over and above the other forms and documents that 

they fill out every year. 

What is your best recommendation as we prepare to transition 

into? How might we best know the beneficial ownership of corporations and balancing the right to privacy that is perhaps unique to 

America because of the fourth amendment? 

Mr. ALBRIGHT. I think that transparency is important and it has 

been discussed, better than I can do, by other witnesses. I would 

add though that we don’t have a good system here for companies 

to report like banks do. There are all kinds of suspicious transactions that occur and the system has not been established here, 

as in let us say in Britain and Germany, for companies to easily 

pass on those suspicious reports. 

FBI, ICE do a great job of collecting things, but we don’t have 

a routine system like the SAR system— 

Mr. DAVIDSON. Where we do for banks. Thank you and valid 

point. Hopefully that informs our debate going forward and my 

time is expired. 

I yield, chairman. 

Chairman PEARCE. The gentleman’s time is expired. 

The Chair now recognizes Mr. Emmer for 5 minutes. 

Mr. EMMER. Thank you, good Chair. Thanks to the panel. Following up on where my colleague and my friend, Mr. Davidson was 

headed, I have major concerns even though the area that we are 

trying to address today is incredibly important to our national security, I think you can become a prisoner of your need for security, 

and I really am troubled at the tone that suggests that U.S. citizens should give up more of their privacy rights and the private entities and my colleague just said banks being nationalized as part 

of the Federal law enforcement. 

They do. They become an extension of Federal law enforcement 

activities. And it sounds even from the panel at times as though 

the United States is a problem when in fact this is about thirdparty facilitators. This is about countries and entities in other 

countries that are breaking the law and we need to focus on them 

and figure out how we stop them from doing that. The best example was North Korea earlier. The problem isn’t North Korea. We 

know North Korea is going to break the law. The problem is China 

or anyone that would aid North Korea in that activity. 

I am not saying that I am adamantly opposed to doing certain 

things on our end. But it seems to me that should be the secondary 

phase. The focus should be on those that are committed to breaking 

the law, supporting international criminals, crime networks, terrorists and the proliferation issue that we are talking about. 

mcarroll on FSR431 with DISTILLER

29 

Ms. Rosenberg, I think somebody commented or started to go 

into this a little earlier, do you believe that our banks currently understand the contemporary realities of the proliferation, late in the 

day, finance threats that they face? 

Ms. ROSENBERG. Thank you for the question. A number of the big 

U.S. and biggest global banks certainly understand the nature of 

the threat. And what should be concerning to us is that even when 

they understand it, they know that they may be incapable of getting after it. 

They may be asked by a client to host a set of transactions, and 

will look at a particular customer, or host or facilitate a lot of shipping transactions. They may be given a list by the U.S. Coast 

Guard of vessels that may be involved in illegal ship-to-ship transfers, and have to make a decision about whether they should provide services to the shipping agent or the flagging registry. 

What decision are they to make? They have inadequate information about potential proliferation activity. That is the concerning 

part. Even the people who know that they have inaccurate information, which is to say nothing about those who are committed to 

breaking the law and are utterly unconcerned about facilitating 

proliferation activities. 

Mr. EMMER. Right. That goes to the next question which I think 

the chairman touched on a little bit early in this questioning and 

it goes to what you just talked about. They are given a list by U.S. 

Customs. 

If banks screen against sanctions lists, not necessarily the type 

that you just said, but that could be included, I suppose, does that 

put them in a position to understand whether or not proliferation 

is—that they are involved or is that the whole topic of this hearing 

is that they can’t be sure that is what they are dealing with? Does 

that make sense? 

Ms. ROSENBERG. Yes. Perhaps, let me put it this way: All major 

global banks, not just U.S. banks, major regional banks as well, 

adopt sanctions lists from the United States, United Nations, et 

cetera. They are screening transactions against this list. 

If they get a hit and it is a known proliferator, they could realistically assume that they have a much bigger problem than one 

person who tripped. 

And even if they say understanding their obligation is not to provide material support to that entity and close their account, they 

may know that person will go down the road and open an account 

at the next bank. 

They are aware of the problem. They have some limited tools and 

certain jurisdictions where these banks are prevented from talking 

to one another about proliferation activity they notice in their own 

ledger of accounts, that is a problem. 

Mr. EMMER. Wow. That is a great point and I was going to ask 

you because it would have led in to the next question. What are 

the gaps in the financial institutions’ responses to counter-proliferation finance? But I have ran out of time and perhaps after the 

hearing, we can follow up with the panelists. I really appreciate it. 

I yield back. 

Chairman PEARCE. The gentleman yields back. 

mcarroll on FSR431 with DISTILLER

30 

OK. We are going to shift the process just a bit here. You see 

the hustle over in the corner there. Each one of you are going to 

get one statement up there, OK? It needs to be tight. You are going 

to put your statement up there. If it is a general statement like 

transparency, then, you are going to have an A and a B under it, 

fair enough? And then, we are going to try to probe that from this 

side because we are the ones that have to try to figure out the policy. You all know the process and you know everything. 

We are just trying to take a great, big leap today. We are running out of legislative time in the year. If we are going to do anything in this year almost it has to be very quick. We are just going 

to go right down the row. 

Mr. Albright? And this is going to be much more open here, not 

the 5 minutes. If you have questions from this end, then, flag me 

and let me know. But let us get the statements up there. Mr. 

Albright, what would your statement be? 

Mr. ALBRIGHT. Alright. 

Chairman PEARCE. And Molly is going to keep with every— 

Mr. ALBRIGHT. I would say first of all, the Government, the Congress should require a report from the Executive Branch on revising the reporting, like under SARs, how to educate the banks if 

they don’t understand the goods. But again, they are—am I speaking too quickly? 

Chairman PEARCE. Yes. Help her out—help get the text exactly 

right up here. We are taking steps that would generally take us 

weeks to get this done. OK. 

Mr. ALBRIGHT. Review SARs and other reporting requirements 

by financial institutions and develop methods for banks to better 

understand the strategies being used by illicit networks and the 

goods that are being sought. 

Chairman PEARCE. Right. 

Has that got you close enough with the script? Get this a little 

bit bigger just the font, if you can over there. We are going to let 

you come back—OK, there we go. And you can read it right behind 

you if you want. 

Mr. ALBRIGHT. The SARs, what is in the SARs? An example 

would be—I don’t think there is a box on SARs where you check 

that there is suspected activity related to proliferation. 

Chairman PEARCE. Make sure we have it right, we will come 

back and tighten it up after we get everybody and generalized. 

Are we ready to move on to the second one? Molly, are you ready 

to go? 

Kristine, excuse me. Kristine, excuse me, I am getting mixed up 

here. 

Mr. Keatinge, are you ready to go on your statement? 

Mr. KEATINGE. I would suggest that the right body—you have to 

apologize, my knowledge of your system is not as it should be. You 

have Section 314(a) and 314(b) of the USA PATRIOT Act, which allows for information sharing from the public sector, the Government, to the private sector. We should be seeing that actively used 

to share information with the private sector such that they can actually understand the threat that they are trying to counter. Information sharing needs to be the cornerstone of this initiative. 

Chairman PEARCE. OK. Let her catch up. 

mcarroll on FSR431 with DISTILLER

31 

Mr. KEATINGE. Sorry. 

Chairman PEARCE. Let us—somebody help out down there. That 

is 314(a) and (b). 

Mr. KEATINGE. 314(a) and (b) of the PATRIOT Act. 

Chairman PEARCE. To be used more actively and you had much 

more descriptive language there. Go ahead. 

Mr. KEATINGE. To ensure that the financial system is able to 

combat the threat of proliferation finance. 

Chairman PEARCE. All right. Mr. Davidson, I expect the question 

here in a minute, but we are going to get all four. OK. You are 

going to see the process playing out. 

Mr. Ottolenghi, now, tell me again what—you just passed some 

significant roadblock or some hurdle in your quest for permanent 

status here. Tell us what that is and we are going to give you a 

big round of applause here. 

Mr. OTTOLENGHI. It is commonly called the green card. 

Chairman PEARCE. Yes. OK, all right. 

Mr. OTTOLENGHI. It came yesterday. 

Chairman PEARCE. Congratulations. 

Mr. OTTOLENGHI. Thank you. 

Chairman PEARCE. Thanks for working through that and we appreciate you being here. 

Mr. OTTOLENGHI. It is an honor and it is an honor and a privilege to have it. 

Chairman PEARCE. We thank you. All right, what is your statement? 

Mr. OTTOLENGHI. My statement is that the United States should 

address urgently Iran’s abuse of foreign passports by denying access to the visa waiver program to any country that sells its citizenship for investments. And it could make exceptions if countries 

are willing to share on an ongoing basis names and due diligence 

packages done on those to whom they sold their passports. 

This is a technique that the Iranians have used in order to evade 

sanctions, establish front companies. It speaks again to the issue 

of transparency and I think that by leveraging this tool, the United 

States would devalue this program or discourage people— 

Chairman PEARCE. She is running a little bit behind you. These 

Italian guys, they run fast. Take a look at the script and tell her 

what you need to fill in and look behind you if you can’t see it. You 

have the script here behind you and on the side. Take a look and 

see what we need to get to catch your idea completely. 

Mr. OTTOLENGHI. Yes. The United States should address Iran’s 

abuse of foreign passports by denying access to the visa waiver program, the program that allows people to apply for a visa electronically. 

Chairman PEARCE. Yes. Any country that allows— 

Mr. OTTOLENGHI. Any country that sells its citizenship. 

Chairman PEARCE. Yes. Iran would be the main focus, but any 

country that does this, that sells or facilitates the illegal use of 

passports should be denied access to the visa waiver program or 

any other— 

Mr. OTTOLENGHI. No. No, not the illegal use, but that they sell 

their citizenship through investment programs. 

mcarroll on FSR431 with DISTILLER

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In other words, people who instead of taking up residency like 

I just did, just bring money in and in exchange, within a matter 

of weeks or months become citizens of that country. 

Mr. FOSTER. Could you give us a brief list of the countries that 

currently do that? 

Mr. OTTOLENGHI. There are a number of Caribbean nations. The 

best known ones are Saint Kitts and Nevis which were actually the 

target of a FinCEN advisory in May 2014 and the advisory spoke 

to the fact that this program was being abused by Iranian citizens 

with the purpose of evading sanctions. 

Other countries in the region, the Republic of Dominica, Antigua 

and Barbuda, Saint Lucia, but also other countries including 

Malta, a member of the European Union which has recently created an investment program to give people citizenship. And it has 

become the center of a very dramatic case involving money laundering for Iran by an Iranian national with a Saint Kitts and Nevis 

passport that was recently detained at Dallas International Airport 

upon coming into the country in March 2018. 

Chairman PEARCE. OK. 

OK. We need to—Ms. Rosenberg. 

Ms. ROSENBERG. Mr. Pearce, in your bill, H.R. 6068, Section 10, 

please transform the study requirement on beneficial ownership to 

a binding requirement to collect and report beneficial ownership in 

the corporate formation process. 

Chairman PEARCE. OK. 

Did you get it, Kristine? 

Mr. FOSTER. This would be as the corporations are established or 

on an ongoing basis with the duty to report any change? 

Ms. ROSENBERG. I would love both. 

Chairman PEARCE. And by the way, we are in deep in discussion 

today after talking to Secretary Mnuchin on that one section of the 

bill to make it much tighter, but that is—OK, so, now I would like 

for each of you four to take a look and if you want to, we just got 

them in random order. If you agree that any of these should be 

placed at the top of the list, that you look at someone else’s statement and think that should be at the top of the list, I would like 

for you all to reorient those now and then we are going to go kind 

of questions from up here. 

Mr. ALBRIGHT. Can we edit ours? 

Chairman PEARCE. Say again. 

Mr. ALBRIGHT. Can we edit them or should we do that after? 

Chairman PEARCE. Yes, please do. Yes. Edit and this is the time 

where you should really get it more accurate. It is the reason we 

are putting them up here exactly for that reason. Yes. 

Mr. ALBRIGHT. Alright— 

Chairman PEARCE. Kristine, can you follow what they are saying 

there. 

Mr. ALBRIGHT. Executive branch to review the information 

sought in the SARs. 

Chairman PEARCE. Sought, S-O-U-G-H-T. Sorry. 

Mr. ALBRIGHT. Yes, sought in the SARs from banks and other 

FIs. And how to more effectively—and then, so, how to more effectively educate FIs to better understand. 

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Chairman PEARCE. Alright. Any other—this is precisely the reason we got here because again this process would take weeks, trust 

me between you all and us, just the way it works. 

Any other amendments, anybody want to tighten it up? Do you 

want to amend it? 

Ms. ROSENBERG. I will amend briefly. 

Chairman PEARCE. Sure. 

Ms. ROSENBERG. I will take your excellent suggestion, Mr. Ranking Member, and add not just upon incorporation but let us be sure 

that we are following it on a continuing basis, so, evaluating beneficial ownership. 

Chairman PEARCE. All right. Kristine, are you getting that? 

Ms. ROSENBERG. Thank you. 

Chairman PEARCE. Make sure we got it. Is that good? 

Mr. FOSTER. Yes. I think there is a grammar problem. You can 

put ‘‘and on a continuing basis’’. 

Chairman PEARCE. Yes. Right, which articles of corporation for 

a small company can change tomorrow? My wife owns the company 

and when we bought it, we changed from complete ownership here 

to one person to us. And if it is not on an ongoing basis, then, we 

have not done it. 

Alright, so, everybody comfortable here? 

Alright, Mr. Davidson, I know you already have a question on 

314(a) and (b). Ask the question, push just a light bit, sir. 

Mr. DAVIDSON. Yes, so, 314(a) and (b) and the PATRIOT Act 

really stretched the bounds of U.S. privacy protections, not something that the U.K. seems to enjoy or appreciate much. But, I can 

appreciate from the intelligence gathering perspective why we 

would want to share this information. 

But, let me illustrate some of the activities that happened in the 

U.S. and how do we get this balance right in your estimation. The 

safeguards are important. Under the previous Administration, 

there were reputational risk directives given by regulators that 

said we really don’t think you should bank with this company because they sell weapons or something, which is perfectly legal in 

the United States, but not appreciated by the previous Administration. 

Companies that had strong balance sheets were told that because 

of reputational risk, we can’t bank you. That meant that they lost 

access to that bank. Once you start sharing all the information 

across the market, these are law abiding companies that could face 

a scenario where they are not just locked out of their current bank. 

They are locked out of the U.S. banking system. When we are targeting illicit finance, we want these people to be locked out of the 

U.S. system to the extent that we want to block their actions from 

happening and we want them to use the U.S. financial system so 

that we can actually detect their activities. 

There is a paradox there. How do we get this right and protect 

the things that we established and supported in the PATRIOT Act 

while protecting our founding documents and principles? 

Mr. KEATINGE. The issue of de-risking that you refer to is something that I have studied extensively and it is not just weapons 

companies. It is charities, money service businesses, et cetera, et 

cetera. At the heart of much of the de-risking and I don’t know the 

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case you refer to, but at the heart of much of the de-risking is a 

lack of knowledge and understanding on the part of the banking 

system. 

Charities are a risk, OK? We get rid of all charities. What about 

if you were told charities X, Y, and Z for this demonstrated reason 

are a risk? OK. Then, we don’t get rid of all charities. We just get 

rid of charity X, Y, and Z. 

We have something in the United Kingdom called the Joint 

Money Laundering Intelligence Taskforce which is a taskforce 

where banks and the Government sit together and talk about financial crime risk in a way that makes the financial system in the 

U.K. understand the nature of the risk that the Government sees, 

that the authorities see in a more effective way than simply just 

saying ‘‘We are not going to deal with anybody from country X or 

country Y.’’ 

The risk that you point out isn’t entirely fair risk, but that is 

why this has to be done as a partnership rather than just a direction from the State to say, ‘‘This company blank is bad.’’ Why is 

it that company X or company Y presents a risk? And the way that 

I would categorize this is that historically, the financial system and 

Governments have operated a parent-child relationship. Thou shall 

not file a suspicious activity report and you won’t get any feedback, 

by the way. 

OK. We have to continue to have that relationship, but there is 

also a partnership relationship which needs to be developed. And 

for the complex, challenging issues like proliferation finance, we 

will fail until we embrace partnership, because the banks will 

never be able to solve this on their own. Channels for sharing information in the appropriate way should be encouraged so that we 

don’t get this blanket knee-jerk reaction such as de-risking. 

Chairman PEARCE. Mr. Foster. 

Mr. ALBRIGHT. Can I add to this? Because, actually in the commodity world it is the same problem. If you just go through and 

check, do your corporate compliance responsibilities, if you just go 

and do it by a sanctions list, you may meet the letter of the law 

but you are not going to accomplish anything. You need to have to 

apply some intelligence to it internally and that is often missing in 

the banks. 

But, unfortunately, what complicates it here is that—and you see 

it also in the commodity side—is that the United States system 

puts roadblocks in the way of Government intelligence sharing and 

that doesn’t exist in Britain, doesn’t exist in Germany. 

Chairman PEARCE. OK. 

Mr. ALBRIGHT. A system I am much more familiar with. 

Chairman PEARCE. Let us move to Mr. Foster and then if you 

can hold that comment— 

Mr. ALBRIGHT. And then, so, if you need to change the law to 

allow—and from the reports we get from the U.S. intelligence community that you have to change the law to more mandate the intelligence community to share information with commercial industry 

on these key kinds of non-proliferation questions. 

Chairman PEARCE. Mr. Foster. Thanks. 

Mr. FOSTER. Yes. This is something that we actually get into in 

the whole issue of the consolidated audit trail on a related thing 

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which in its eventual plan will have beneficial owner identified behind every stock trade that is made, which there are sorts of interesting money laundering strategies having to do with international 

stock trades where you agree to lose money in this market and win 

money in this market in a different country, and very complicated 

things are possible and maybe even being done. 

And the only way that the regulators are able to imagine dealing 

with that is to have in the fullness of time for every completed 

trade and in fact, every bid and offer, the beneficial owner identified behind that, and moreover, only the regulator that sees everything can net it out. You can’t ask one broker to identify whether 

or not there is some weird manipulation going on based on the 

fraction of the data they see. 

Similarly, a bank may see completely legitimate operations from 

everything that they can see and not know that the prices are 

bogus for the goods that are being traded. And so, ultimately, if you 

have to solve this problem, it gets more and more intrusive. 

And so, my question—the only system that you can write down 

that you know will work is that the Government sees every financial transaction in the place, which smells a lot like China, where 

certainly on the commercial side, where everyone pays by cellphone 

and everyone assumes the Government sees every dime that is 

spent by consumers in China. 

And we seem to be—when you try to write a system that might 

work, you rampantly are led down that road. There has to be some 

single entity that can run massive software because no set of humans could do this—massive software to look for patterns of suspicious activity and they have to have access to everything from all 

countries. And, boy, that scares me. 

Is there any way out of that conundrum or is that really the only 

system that will eventually work? 

Mr. ALBRIGHT. I think there is a way. I think—again, I don’t 

want to oversell it, but I know on the idea of Government industry 

cooperation, one way around that is to actually have it. This in our 

country, it is much too dominated by police officers whether FBI 

are showing up with handcuffs in their pocket and they are the 

ones having the discussion with the banks or the companies and 

it is intimidating. 

It should be the intelligence system. It can be, I hate to use the 

word, a front. We want to get around some of the quirks of our system. And you want to have a discussion between our best intelligence people and the people who are dealing with the financial 

system and also with the goods that these—and that gets around 

a lot of this. And I think Britain has done an excellent job on this 

and I don’t think they are— 

Mr. FOSTER. But in Britain, does the Government have access to 

all financial transactions if it wants to see them? 

Mr. KEATINGE. No. No. It doesn’t. Obviously— 

Mr. FOSTER. There is a de minimis threshold. And so, how do you 

avoid large numbers of de minimis threshold under de minimis 

threshold type transactions for example unless you—someone has 

to add them up. 

Mr. KEATINGE. The way the U.K. is trying to develop this is by 

involving the financial sector in discussions around certain forms 

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of threat, whether it is human trafficking, terrorist finance, whatever it might be, educating the financial sector on what to look for. 

And then, wanting them to go back into their systems and say, 

‘‘Right, given this information, this understanding, guidance we 

have been given by law enforcement or by intelligence services, 

now, let us interrogate our data ourselves.’’ 

They are not handing over all the transactions undertaken by 

one of the big banks. They are being guided. 

Mr. FOSTER. This is a huge burden. You don’t have small banks, 

but we do here. 

Mr. KEATINGE. We do. We have small banks. Don’t worry. 

Mr. FOSTER. OK. Wouldn’t this be just a colossal burden that 

every transaction, they have to say, ‘‘Might this be some weird flavor of dual use goods that we are unaware of?’’ Do they have to 

have someone trained in dual use technology at every small bank? 

Mr. KEATINGE. The system that we have created over the last 25 

years or so puts a huge burden on the banks, on all banks full stop. 

We would not create the system that we have today if we started 

with a blank sheet of paper today. The way I think we are trying 

to address that as I say is by making the assessments risk-based, 

so, don’t spend all your time trying to find everything all the time. 

Focus on this particular area, this particular theme, this lead 

and that is what we are trying to do in the U.K. through this thing, 

the Joint Money Laundering Intelligence Taskforce, just trying to 

empower the banking system to be smarter at interpreting their 

own data themselves. 

Chairman PEARCE. Ms. Rosenberg. 

Ms. ROSENBERG. If I may offer a comment following up to this 

and it comes through the theme we have been discussing and to 

your question. 

Chairman PEARCE. On 314(a) and (b), yes. 

Ms. ROSENBERG. Right, on information sharing, if you will. There 

are some bright spots of partnership in the United States. If I may 

just offer a note of praise to your legislation, Mr. Pearce, 

prioritizing the financial criminal threats. That is an excellent innovation in our current system and it will help get better at evaluating risk and understanding what are the supervisory priorities, 

what is the risk. 

To the issue about information sharing, I would like to offer some 

praise for the outstanding work of TFOS at the FBI working on 

terrorism financing in the United States. They have managed in 

what is legitimately a fairly chilly relationship between regulated 

financial entities in the United States and the regulators to bridge 

a number of divides, to have excellent working relationships with 

financial institutions and with the intelligence community in order 

to speak together and gather information pursuant to terrorist 

threats, Orlando, San Bernardino, Las Vegas, ones that affect us 

here at home, foreign fighters that also affect us, and security concerns outside our borders. 

And they have managed to pioneer a unique relationship in our 

financial system, in our law enforcement community, where they 

are able to use official subpoenas and official tools to gather information and also relationships of trust and constructive exchange 

between these constituencies to do excellent work. 

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I hope that model can be used also in the counter-proliferation 

sphere, where WMD folks work on that issue in the law enforcement community and others. This is a bright example I think we 

should hold up and praise and try to see emulated elsewhere in the 

law enforcement community. 

Chairman PEARCE. OK. 

Mr. Davidson. 

Mr. DAVIDSON. Yes. Thank you and thanks for the note. I am 

glad that you called some attention to and praise for our existing 

law enforcement folks whether they are in Treasury or Department 

of Justice or Homeland Security. We have had some really great 

capabilities and by and large, these people are there doing the 

right things and looking for better tools to be effective in it. 

And frankly, the banks, it is amazing to me how enthusiastic 

they have been about trying to help with national security. Certainly, they do have true reputational risk and some fraud that 

they want to protect, but a lot of it is just genuine desire to make 

sure that they help the cause of securing our country. 

I guess, to Mr. Foster, I think you highlighted the point that 

where the state of technology and everything is, to truly know 

what is going on. If you really wanted to write good algorithms, you 

would probably want to know every transaction and who is the 

beneficial owner of every transaction. We are doing it with stocks 

with the consolidated audit trail. We could easily do it with everything else as long as it is not cash. 

If it is digital, it theoretically could be done. And at this point, 

you have pushed ‘‘We have to collaborate more with the banks. We 

have to collaborate more with the banks.’’ And if they don’t collaborate sufficiently enough, now, they really have reputational risk. 

You are not being good deputies, OK? And we are not here yet and 

in many cases though, we have approached it. If you think about 

where the logical end of this might be, it is almost like the Government is actually putting brownshirts into the organization and 

when the bank needs some more, they just call up and send more 

brownshirts in. That is where we could go to. 

Why not just let the Government operate it? It is such a synergistic partnership. It is approaching other ideologies that the world 

is seeing become very abusive that we have tried to use civil liberties to protect against and in the U.S., the bill of rights is that 

bulwark. I guess that is the Pandora’s Box we are all reluctant to. 

And the premise that as you highlighted in 6068, the base language that we are going to criminalize every—the least sophisticated businesses, less than $5 million in revenue, less than 20 employees, if they don’t fill out this form, if you changed companies 

and you added a new shareholder, you didn’t go get permission 

from the Government—or, not really permission, just disclosure. 

But then, it turns into permission. 

This is a system we have worked hard in America to reject and 

help the world reject and it seems in the name of security, we are 

trading away an awful lot of liberty and I guess that is the concern. 

Hopefully, we get it right. I appreciate your input and I think you 

added a lot to some of that dialog. We will probably have it offline 

with some of the— 

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Mr. ALBRIGHT. Can I add—can I respond in some ways to it because— 

Chairman PEARCE. Yes, please do. 

Mr. ALBRIGHT. I have been involved in trying to set up big data 

systems at the Department of Homeland Security on querying essentially U.S. exports. We have hundreds of millions that have to 

be queried and you set up big data systems to try to understand 

it better and ferret out illicit networks. One has an acronym of 

BEEP. 

The problem in the banks is that I don’t think you could do what 

you are most fearful of. I don’t think you could digitize and assess 

all the banking information that is taking place. The numbers are 

just too vast. Maybe if there is—in the future, maybe that is possible. But I think that what you mentioned about being a good citizen I think is the driver and should be the driver, that the banks 

want to be good citizens fundamentally and are willing to voluntarily or meet the requirements of the law to provide certain information. 

I think it is the job of the Government to make sure that information is what is really needed and to be able to guide the banks 

on how to do the searches. That is part of the problem is the banks 

don’t know how to do these searches. And I think it is the responsibility of the Government to step in and try to help resolve that, essentially, that search problem. And cooperation I think is the key, 

not getting more data because I don’t think in the Government we 

can actually process it in an effective manner. It is so much. 

Chairman PEARCE. Mr. Budd, do you have a question? 

Mr. BUDD. I just want to elaborate a little bit on Mr. Albright. 

Number one, we have the banks very concerned about the SARs 

and how much information and compliance cost that they have. 

With this potential review, one of the problems with the banks is 

that they are so demoralized by having to put all this information 

in the system and comply with it, but they don’t know if it actually 

does anything. 

Would the banks be a part of this? Would they understand? 

Would they narrow it down? Would they change the SARs to make 

the banks know that they are actually accomplishing a mission 

here? 

Mr. ALBRIGHT. Yes. And I think you certainly would want to talk 

to the banks a lot about this about what is in their mind is useful. 

In a sense, they are the first line of defense and they understand 

criminal activity, non-ethical activity. And so, they are— 

Mr. BUDD. Let me interrupt. The SARs actually—are there other 

questions that you think would be better on the SARs or does it 

need an overhaul? 

Mr. ALBRIGHT. One is—and again, I am not—I don’t know. I 

haven’t confirmed this, but I am reading from a colleague’s article 

that there is no check box on the SARs if the banks suspect the 

activity is related to proliferation. 

When we think that for what we are talking about, that would 

be a critical check box and that would educate the companies, too, 

of what to look for. I also think there has to be some give and take. 

Our system has such levels of classification. I know it is hard. 

Mr. BUDD. True. 

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Mr. ALBRIGHT. But there has to be a way to tell the banks who 

in a sense the bad guys are and how are they operating today, a 

lot of times, these lists are how they operated yesterday, not today 

and I think you have to find a way to share the intelligence information in real-time so these banks then become better lookouts 

and a better frontline of defense. 

Mr. BUDD. We are essentially telling the banks how to comply. 

I am sorry, Mr. Pearce, but we tell them how to comply, but does 

that compliance lead to us catching more bad guys? I don’t know. 

That is something we should certainly take a look at. 

Chairman PEARCE. But at the end of the day, it looks like that 

there is a fairly large consensus that some form of beneficial ownership actually needs to be reported. We have to solve that problem 

among us here, among us policymakers here. I think that probably 

is going to begin to address in the largest way possible this financing of threats that come through weapons of mass destruction or 

whatever the process is of breaking the sanctions. Again, a very 

thorny problem, but we are dedicated to it. 

I very much appreciate you spending the extra time with us and 

addressing these extra questions. I appreciate the focus here to 

give us really good talking points for this second round of questions. Thank you again for your time and for your testimony today. 

The Chair notes that some Members may have additional questions for this panel, which they may wish to submit in writing. 

Without objection, the hearing record will remain open for 5 legislative days for Members to submit written questions to these witnesses and to place their responses in the record. Also, without objection, Members will have 5 legislative days to submit extraneous 

materials to the Chair for inclusion in the record. 

This hearing is adjourned. 

[Whereupon, at 4:10 p.m., the subcommittee was adjourned.] 

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(41) 

A P P E N D I X 

July 12, 2018 

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Testimony1 of David Albright before the 

Subcommittee on Terrorism and Illicit Finance of the House 

Financial Services Committee 

Countering the Financial Networks of Weapons Proliferation 

July 12, 2018 

A mission of the Institute for Science and International Security is to work to prevent the 

proliferation of weapons of mass destruction and the wherewithal to make them. As part of this 

mission, since the Institute was founded 25 years ago, we have focused on detecting, 

understanding, and characterizing the trafficking of commodities that can be used in sensitive 

weapons programs with an emphasis on nuclear-related commodity trafficking, also known as 

illicit trade. In addition to dozens of case studies, reports on our website, and books analyzing 

such illicit procurement schemes, my Institute recently published a report ranking the export 

control systems of200 countries, territories, and entities. This report, the Peddling Peri/Index 

(PPJ), 2 is the first comprehensive and in-depth ranking of countries' national strategic export 

controls. In the index, we rank countries based on their capabilities and performance in five 

areas, which we call super criteria: International Commitment, Legislation, Ability to Monitor 

and Detect Strategic Trade, Ability to Prevent Proliferation Financing, and Enforcement. 

Several related publications can be found on the Institute's wcbsite. 3 

Preventing proliferation financing, or Financing of Proliferation (FoP), albeit not a traditional 

component of a review of national export control systems, is one of the most important aspects 

for detecting and stopping exports of sensitive goods. Our research revealed that countries' 

ability to prevent proliferation financing is one of the counterproliferation areas most in need of 

improvement globally and would benefit significantly from a closer integration with export 

controls. 

1 This testimony is the collective work of the Institute for Science and International Security, in particular the work 

of David Albright, Sarah Burkhard, Ramya Ramjee, Naomi Silverstein, and Andrea Stricker. 2 "How to Obtain the Book," Institute for Science and Iuternational Security, http://isis-online.orgi.tm.i!4etaiFobtainthc·book! 

3 For more information and additional PPI studies, see: http://www.isis-online.orgfppj 

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Under the super criterion, Ability to Prevent Proliferation Financing, the Institute attempted to 

measure countries' susceptibility to being exploited or involved in FoP, including violations of 

international sanctions. The methodology we use is outlined in the appendix to this testimony 

and is contained in the book Peddling Peril Index 2017. For this hearing, we have updated our 

2017 FoP results on a preliminary basis and included both the results for 2017 and 2018 here. 

The final2018 analysis will not be issued until later this year but enough has changed to warrant 

the inclusion of this preliminary update. 

In the Institute's PPI ranking, the proliferation financing super criterion is the one under which 

countries collectively perfom1ed tbe worst. Moreover, this super criterion offers the fewest subcriteria for measuring countries' performance because of a lack of available data and public 

discourse on tbe topic, including a paucity of organizations that conduct training in countries that 

need improvement. 

To develop a numerical ranking of performance under the super criterion Ability to Prevent 

Proliferation Financing, countries received points based on sub-criteria that assess countries' 

capabilities to prevent money laundering and FoP. These sub-criteria are based on their financial 

regulatory systems and counter-illicit financing progran1s, for which the main source of data for 

the PPI is tbe Financial Action Task Force (FATF). In particular, our starting point was FATF's 

Mutual Evaluation and follow-up reports on countries' compliance with Anti-Money Laundering 

(AML) and Countering the Financing of Terrorism (CFT) recommendations. Early in our 

process, we brought in experts with knowledge of FoP to advise the project on the most effective 

way to evaluate the FATF-collected data to draw out information relevant to an evaluation of 

proliferation financing. To supplement the FATF data, the evaluation utilizes additional 

measures and information relevant to judging a country's ability to prevent proliferation 

financing, such as estimates about the size of a country's black market or the extent of 

corruption. 

Results 

A central conclusion is that most countries do not perform well on preventing proliferation 

financing. In the ranking of this super criterion in 2017, no country achieved two-thirds ofthc 

available points and only two received more than half tbe available points. Many countries 

perform poorly due to having excessive bank secrecy, providing tax havens, and being places 

where front companies find it easier to finance nefarious activities. Other countries simply Jack 

regulations and effective institutions. 

Iran performs particularly poorly in tbe PPI, including on proliferation financing where it ranked 

at tbe bottom. Iran has been given extended time to fulfill its Action Plan requirements set out 

by tbe FATF and to comply witb FATF standards. Recent actions have confirmed tbe deep 

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involvement oflran's financial system in illicit activities. As a result, we recommend thereimposition ofFATF counter-measures against Iran. 

The pie chart in figure 1 shows the fraction of countries that have scores exceeding 50 percent of 

the total, between 50 percent and 25 percent of the total, less than 25 percent down to a score of 

0, and below a score of 0. Only two countries received more than half of the available points. 

About one-third of all countries achieved negative scores. 

Countries' Score Distribution in Super Criterion Ability to 

Prevent FoP 2017 

:Figure 1. The pie chart shows the score distribution of countries in their Ability to Prevent Proliferation 

Financing in the PPI for 201 7. The majority of countries score less than 25 percent of the available 

points. This figure includes corrected values for VietNam and Venezuela. 

The PPI lists countries by score in the super criterion Ability to Prevent Proliferation Financing, 

which leads to a ranking. Although we do not release this ranking publicly, we provide below 

those countries that are in the top third and bottom ten percent by ranking. 

Top third by rank (in alphabetical order): 

Albania, Andorra, Antigna and Barbuda, Armenia, Australia, Austria, Bahamas, Bahrain, 

Barbados, Belgium, Bhutan, Botswana, Bulgaria, Burkina Faso, Cameroon, Canada, Chile, Cook 

Islands, Cyprus, Czech Republic, Denmark, Estonia, Fiji, Finland, France, Germany, Greece, 

Grenada, Hungary, Iceland, Ireland, Israel, Italy, Japan, Latvia, Lesotho, Liechtenstein, 

Lithuania, Macedonia, Malawi, Malta, Mauritius, Monaco, Nauru, Netherlands, New Zealand, 

Niue, Norway, Palau, Poland, Portugal, Romania, Samoa, San Marino, Singapore, Slovakia, 

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Slovenia, Solomon Islands, Spain, Sweden, Timor-Leste, Togo, Tonga, United Kingdom of 

Great Britain and Northern Ireland, United States of America, Urugnay, and Zambia. 

Bottom 10% by rank (in alphabetical order): 

Afghanistan, Belarus, Burundi, Democratic People's Republic of Korea (DPRK), Egypt, Eritrea, 

Iran (Islamic Republic of), Iraq, Lebanon, Libya, Morocco, Myanmar, Paragnay, Russian 

Federation, Serbia, Somalia, South Sudan, Sudan, Syrian Arab Republic, Thailand, and Ukraine. 

Updates Since the Publication of the PPI 2017 regarding proliferation financing 

Since the publication of the index, Institute stafT have continuously updated and revised the data 

for a 2018 version of the ranking. Throughout the process, trends observed in the 2017 data on 

proliferation financing remain. Countries still perfonn poorly overall, and only three countries 

received 50 percent or more of the possible points. 

Countries' Score Distribution in Super Criterion Ability to 

Prevent FoP 2018 

Figure 2. The pie chart shows the score distribution of countries in their Ability to Prevent Proliferation 

Financing, 2018 ranking. The majority of countries score less than 25 percent of the available points. 1n 

general, the distribution in these four broad categories has only minimally changed from 2017 and the 

need for further action is clearly visible. 

As stated before, the PPI lists countries by score, generating a ranking. Although we do not 

release this ranking, we again provide those countries that are in the top third by ranking and the 

bottom ten percent in the 2018 ranking. 

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The top third of countries in the 2018 version are 80 percent the same as the 2017 version. 13 

countries in the top third were replaced by other countries. For 2018, the top third countries are 

(alphabetically): Andorra, Angola, Antigua and Barbuda, Armenia, Australia, Austria, Bahrain, 

Bangladesh, Bhutan, Brazil, Bulgaria, Cameroon, Canada, Chile, Cook Islands, Croatia, Czech 

Republic, Estonia, Fiji, Finland, France, Gennany, Grenada, Hungary, Iceland, Ireland, Israel, 

Italy, Japan, Latvia, Lesotho, Liechtenstein, Lithuania, Macedonia, Malawi, Malta, Mauritius, 

Mexico, Monaco, Mongolia, Nauru, Netherlands, New Zealand, Niue, Oman, Palau, Panama, 

Papua New Guinea, Poland, Portugal, Republic of Korea, Romania, San Marino, Saudi Arabia, 

Singapore, Slovakia, Slovenia, Solomon Islands, Spain, Sweden, Tonga, Trinidad and Tobago, 

United Kingdom of Great Britain and Northern Ireland, United States of America, Uruguay, 

Venezuela (Bolivarian Republic of), and Zambia. 

The bottom 10 percent remained the same, except for three countries. For 2018, they are, 

alphabetically: Afghanistan, Belarus, Burundi, Central African Republic, DPRK, Egypt, Eritrea, 

Iran (Islamic Republic of), Iraq, Lao People's Democratic Republic, Lebanon, Libya, Morocco, 

Myanmar, Para!,'llay, Russian Federation, Serbia, Somalia, South Sudan, Sudan, and Tajikistan. 

Comparison of Proliferation Financing Scores of PPI 2017 and PPI 2018 

The point distribution graphs of countries' scores show that scores are generally increasing. 

Figures 3 and 4 show the point distribution graphs for 2017 and 2018, respectively. On average, 

all countries received two more points in the 2018 round of data collection than in the 2017 

version. 4 Countries that received updates in FATF data, whether it be a new Mutual Evaluation 

Report or a new follow-up report, gained an average of six points based on that data alone. Since 

the end of the data collection period for 2017, the following countries received a new Mutual 

Evaluation Report: Andorra, Barbados, Botswana, Cambodia, Cuba, Denmark, Ethiopia, Ireland, 

Mexico, Mongolia, Nicaragua, Panama, Portugal, Slovenia, Thailand, and Ukraine. The 

following countries received a new follow-up report: Austria, Fiji, Hungary, Samoa, Suriname, 

Tunisia, and Vanuatu. Institute staff noted, however, that a new Mutual Evaluation Report did 

not always result in improvements and increased points. In some instances, countries' 

compliances were re-evaluated and given a "lower grade" than in a previous report. 

The overall scores still cluster well below half the possible points (see figure 4). Ideally in the 

future, the cluster would move as a group toward higher points. 

4 The averages of points received are eight and ten in 2017 and 2018, respectively. 

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Point Distribution 2017 

Point intervals 

Figure 3. Point distribution based on data collected in 2017 out of a total of II 0 points, excluding extra 

credit. 

Point Distribution 2018 

40 

30 

:n 

~ 0 20 (.) 

0 

2l 

~ z 10 

Point Intervals 

Figure 4. Point distribution based on revised data collected in 2018 out of a total of 110 points, excluding 

extra credit. 

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Summary of Key Findings and Recommendations: 

In the Institute's PPI for 2017 ranking, the proliferation financing super criterion is the one in 

which countries collectively performed the worst. An overriding conclusion is that most 

countries do not perform well on preventing proliferation financing. 

The Institute has developed a range of recommendations while producing the PPI and working 

with proliferation financing experts to develop its methodology. One of the most critical 

recommendations is that countering proliferation financing needs to be integrated into many 

more aspects of counterproliferation including export controls. Some specific recommendations 

follow. 

I. All countries should work closely with F ATF and its regional bodies to improve their 

efforts to prevent proliferation financing. 

1.1. They should also work to improve compliance with proliferation financingrelevant FA TF recommendations. 

1.2. All countries should join or aspire to join FATF, if they have not already done so, 

and work closely with the organization to improve the integrity of their national 

financial controls against proliferation financing and other financial crimes. Israel 

is an example of a country that has prioritized joining FATF and is involved in a 

process of reviews. Membership and cooperation with FA TF would not only 

reduce the chances that states' financial institutions will be used for the financing 

of proliferation, but also will reduce illicit outflows, the rise and permeability of 

black markets, and other nefarious business that could be taking place. Joining 

FA TF is a way for countries to attract foreign investment and trade. 

1.3. Following coordination and assistance in bringing their controls into line with 

FATF-recoguized best practices, countries should apply to have a mutual 

evaluation report conducted on them. 

2. Each country should conduct a risk assessment of proliferation financing, and its agencies 

should address any gaps identified. 

2.1. Even though money laundering and terrorism financing may have similar 

indicators to proliferation financing, they should be differentiated from 

proliferation financing so that FoP risk assessments are comprehensive and 

accurate. Assessments should include expansive models of FoP rather than be 

based mainly on previous export and sanctions case studies. 

2.2. Each government should have adequate legislation in place; an effective system 

of coordination among departments working on FoP; well resourced, investigative 

Financial Intelligence Units; adequate enforcement; outreach to financial 

institutions; a system of mandatory sharing of information domestically 

(including sensitive information); ability to share information internationally; and 

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effective coordination with other governments. 

3. A country's financial institutions need to be able to monitor, detect, report, and act upon 

suspicious financial transactions. 

3.1. Financial institutions need to have access to a secure and reliable mechanism to 

report suspicious financial transactions to the government. This includes the 

government creating adequate legislation mandating reporting, conducting 

outreach, and setting up points of contacts, as well as reporting mechanisms and 

ideally reporting requirements. 

3.2. Countries should help financial institutions identifY and freeze suspicious 

transactions. Because of the difficulties of accomplishing this goal, the U.S. 

government should launch an interagency study to improve communication and 

information sharing with financial institutions, including insurance companies, 

and to develop better solutions for automated counter-proliferation financing 

screening tools. 

4. Countries should participate in bilateral, multilateral, and law enforcement mechanisms 

to share FoP information and collaborate to enhance the effectiveness of counter 

proliferation financing efforts and facilitate adherence to international standards. 

4.1. Although there are many ways to implement this recommendation, one promising 

group for promoting cooperation among Financial Intelligence Units (FlUs) on 

FoP is the Egmont Group, which is a united body of 155 countries' Financial 

Intelligence Units. 5 The Egmont Group members' collaboration on money 

laundering and terrorism financing greatly improves the efficacies of the Financial 

Intelligence Units. The Egmont Group should expand its focus to specifically 

include proliferation financing. This could be accomplished through the inclusion 

of FoP criteria in the membership application and also through the development 

of an "Information Exchange on FoP Working Group."6 

5. The Committee on United Nations Security Council Resolution 1540 (2004) should 

continue to promote the implementation of the financial control aspects of the resolution. 

5.1. The financing aspects of the 2017 matrix template mostly focus on terrorism 

financing. While item 11 in II. OP 2- Nuclear Weapons (NW), Chemical 

Weapons (CW) and Biological Weapons (BW) refers to "Finance[ing] above 

mentioned activitics,"7 the matrices should be updated to more specifically 

5 "About- The Egmont Group," The Egmont Group, https:/iegmontgroup.orgien/content!about (Accessed July 9, 

2018). 

6 The suggested name would be in line with the already existing "Information Exchange on MUTF Working 

Group." See: "Information Exchange on ML!TF Working Group (IEWG)," The Egmont Group, 

https://egmontgroup.org/content/information-exchange-mltf-working-group-iewg {Accessed July 6, 2018). 7 "Approved 1540 Committee Matrix (2017)," 1540 Committee, http://www.un.org/en/sc/1540/nationalimplementation/1540-matrices/matrix-template.shtml (Accessed July 9, 2018). 

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reference proliferation financing. 

6. Efforts to prevent proliferation financing should be incorporated into export control 

regimes on a national basis and vice versa. 

6. L National export control legislation should systematically include mechanisms and 

regulations to incorporate countering financial proliferation into governmental 

entities, including Financial Intelligence Units, in the processes of export control, 

including licensing decisions, enforcement, and customs clearance. 

6.2. Multilateral export control regimes should include FoP information in their 

deliberatious and promote these efforts by adjusting their membership guidelines 

and sharing best practices to prevent proliferation financing. 

7. FATF is in a unique position to drive many of the above-mentioned recommended 

actions and changes and should do so. Financing of proliferation should be treated 

broadly and as a separate subject to money laundering and terrorist financing. 

7.1. The FATF should add recommendations that more specifically focus on 

improving countries' capabilities to prevent and detect financing of proliferation. 

For example, it could integrate its 2008 "Indicators of Possible Proliferation 

Financing"8 into recommendations, allowing them to evaluate countries' actions 

on preventing proliferation tinancing. 

7.2. At the plenary meetings, the FATF working group should discuss adjusting the 

language in several of the existing 40 FATF recommendations to extend them 

beyond CFT and AML, to include FoP. For example, FATF could encourage 

countries to conduct risk assessments for FoP by adding it to the language in 

Recommendation 1. 9 

7 .3. FATF should expand the number of categories it uses to evaluate countries with 

regard to proliferation financing and financial crime. For example, countries that 

actively improve their financial controls often remain in the partially compliant 

category, which may not encourage further improvements. 

7.4. FATF should standardize the evaluation process for all its regional bodies. It 

should seek to diminish disparities in levels of stringency utilized in the 

evaluations in order to bring about improved understanding of where countries 

stand in the F ATF mutual evaluations and compliance categories. 

8. Developed countries should encourage and provide resources to the FA TF to increase the 

speed at which they conduct follow-up Mutual Evaluation Reports. This would reduce 

' "Indicators of possible proliferation financing," as mentioned in Annex 1 to the 2008 FA TF T_'vpologies Report on 

Proliferation Financing. See: FATF, "Proliferation Financing Report," June 18,2008, p. 54, http://www.tatt~ 

fafi.orglrnedialfatf/documentsireports1Twologies%20Report%20on%20Proliferatio]!'%20Financing.pdf 

FATF Recommendation I is called "Assessing risks & applying a risk-based approach." For the full text of 

recommendations see: FATF, Tnternational Standards on Combating Money Laundering and the Financing of 

Terrorism and Proliferation-The FATF Recommendations, Paris, France, published February 2012, 

https:/iwww.un.orglsc/ctc/wp-content'uploads/20 16/l 0/fatf recommendations reprint20 !2.pdf 

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current lag times between countries self-reporting on their performance following a 

Mutual Evaluation Report, and FA TF' s verification process. 

9. Fulfilling many of the PPI' s sub-criteria under the Ability to Prevent Proliferation 

Financing super criterion, particularly improving a country's performance under many of 

the negative indicators, would strengthen financial controls overall. 

10. Countries with advanced knowledge and experience in the area of countering 

proliferation financing should establish outreach programs that provide training and share 

best practices with countries seeking to improve financial controls. 10 

1 0.1. In this effort, certain groups of countries should be prioritized and put under extra 

scrutiny and pressure. Such groups include responsible countries that nonetheless 

score particularly low in the PPI, those planning to acquire nuclear power 

reactors, and countries known to have violated financial sanctions on North 

Korea. 11 

1 0.2. All UN member states should be encouraged to make use of a platform provided 

by the 1540 Committee, which helps to match countries seeking assistance with 

countries able to provide assistance. 

Iran and FA TF 

Iran performs particularly poorly on the PPI and also does exceptionally poorly under the super 

criterion Ability to Prevent Proliferation Financing. It ranked 199 out of200 in the ranking of 

this super criterion in 2017, and last overall for 2018. 

Every year from at least 2008, Iran has been listed in the F ATF annual public statements as a 

country with concerning anti-money laundering (AML) and counter-financing of terrorism 

(CFT) deficiencies. On February 25,2009, FATF decided to publicly "call on its members and 

urge all jurisdictions to apply effective counter-measures to protect their financial sectors from 

money laundering and financing of terrorism risks emanating from Iran." 12 The only other 

country for which F ATF had called such drastic measures was North Korea. Iran remained on 

the list of"high-risk and non-cooperative jurisdictions" for the subsequent seven years, until in 

June 2016, FA TF suspended its countermeasures based on an Action Plan submitted by Iran. 

However, in February 2018, FATF stated that "Iran's action plan has now expired with a 

majority of the action items remaining incomplete." 13 It also stated, "Given that Iran has draft 

10 The PPI team was unable to locate many such programs outside ofFATF. 11 "How to Obtain the Book,'" Institute for Science and International Security, http://isis-online.org!ppi/detaiJ!obtainthc-book/ 

12 FATF, "FATF Public Statement- 16 February 2012," Paris, February 16,2012, http://www.fatfgafi.orgipublicationslhigh-riskandnon-cooperativejurisdictionsidocumentslfatfuublicstatement -16february20 l2.html 13 FATF, "Monitoring Iran's actions to address deficiencies in its AMUCFT system," Outcomes of the FA TF 

Plenary, February 21-23, 2018, Paris, February 23, 2018, http://www.fatf-gafi.org/countries/aclargentina/documentsfoutcomes-plenarv-february-2018.html 

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legislation currently before Parliament, the F ATF decided at its meeting this week to continue 

the suspension of counter-measures. Depending upon Iran's progress in completing its action 

plan, the FATF will take further steps in June 2018." 

Civil society is not able to attend the FATF plenary meetings, but a Reuters report suggests that 

Iran was given extended time to fulfill its Action Plan requirements and that FA TF will again 

address the issue in October. 14 Nevertheless, we assess that it is unlikely that Iran intends to 

fully implement its Action Plan and comply with F ATF and the standards it sets in the future. In 

May 2018, the governor of the Central Bank oflran was sanctioned by the U.S. Treasury's 

Office of Foreign Assets Control for assisting the Islamic Revolutionary Guard Corps' Quds 

Force with channeling money to Hezbollah. This shows how deeply involved Iran's financial 

system is in illicit activities. 15 On June 10,2018, the Iranian parliament voted to suspend efforts 

to join the U.N. Convention for the Suppression of Financing of Terrorism, one ofFATF's major 

requirements ofiran. On June 20, 2018, Iran's Supreme Leader Ayatollah Ali Khamenei, who is 

the ultimate decision maker on the country's policies, announced that he has no interest in 

joining the convention. 16 Therefore, we recommend the re-imposition of counter-measures 

against Iran. 

14 "Anti-money laundering body gives Iran until October to complete reforms," Reuters. June 29, 2018, 

https://www.reuters.com/article/us-iran-sanctions-fatflanti-money-laundering-body-gives-iran-until-october-tocomplete-reforms-idUSKBNIJP34N 

15 Toby Dershowitz, "Risks of Doing Business with Iran," FDD Background Resource Guide (Foundation for 

Defen'e ofDemocracies, Washington, D.C., June 21. 2018), bttp://www.defenddemocracy.org/media-hit/tobydershowitz-risks-of-doing-business-with-iranl/ 

16 Toby Dershowitz and Saeed Ghasseminejad, "Iran's supreme leader just torpedoed his country's best chance to get 

off the terror financing blacklist," Business Insider, June 22, 2018, http://www.busincssinsider.comliran-sank-itsbest-chance-to-get-off-terror-fmancing-blacklist-2018-6 

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Appendix: Methodology used for the Super Criterion Ability to Prevent 

Proliferation Financing in the Peddling Peril Index for 2017 

To develop a numerical ranking of performance on the super criterion Ability to Prevent 

Proliferation Financing, countries received points based on sub-criteria derived mostly from the 

FATF determinations. These sub-criteria assess countries' theoretical capabilities to prevent 

money laundering and proliferation financing based on their financial regulatory systems and 

counter-illicit financing programs. These eleven sub-criteria are characterized as "positive 

indicators." 

The PPI then takes away points according to five "negative indicator" sub-criteria, or tangible 

information and examples of poor controls, such as when countries are known to have been 

involved in illicit finance, are sanctioned by major world economies for illicit financing 

activities, have assisted others in proliferation financing, or consistently do not act to prevent 

illicit financing efforts. 

The positive and negative indicators are assigned a low, medium, or high impact for scoring 

purposes. 

The project next assigns or takes away available "extra credit" points according to two other 

FATF-related sub-criteria. Finally, the judgment of experts in proliferation financing is used to 

take away or assign points based on their knowledge of proliferation financing in certain 

countries. After extra credit and expert knowledge points, a country could receive a total of 110 

points for its Ability to Prevent Prol[{eration Financing. 

Overall, there is little international effort devoted to assessing proliferation financing, which is 

why the PPI relies heavily on F ATF evaluations. However, much of the FATF's information 

applies to broader illicit financing activities rather than specifically to proliteration financing. 

FATF only added proliferation financing as a focus in 2012. Since then, FATF evaluations 

include looking at countries' theoretical ability to implement intemational financial sanctions 

and the effectiveness of the controls against those countries under international financial 

sanctions, including investigation and enforcement actions. This evaluation data was only 

available for a limited number of countries. Thus, the PPI team decided to factor in the other 

point addition and subtraction categories. 

Positive indicators: 

• Compliance with selected F ATF recommendations (for how recommendation 7 and 

Immediate Outcome 11 are evaluated, see below under Extra Credit) 

FA TF is the organization that provides the most data regarding a country's banking 

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regulations and practices. The objectives ofF A TF arc to set standards and promote 

effective implementation oflegal, regulatory, and operational measures for combating 

money laundering, terrorist financing, and other related threats to the integrity of the 

international financial system. It publishes a periodically updated set of 

recommendations that all member countries should follow to prevent financial crimes and 

publishes evaluations of individual counties' compliance with each recommendation. 

The evaluations are conducted by F ATF or its regional F ATF bodies and are titled 

Mutual Evaluation Reports. For each recommendation, potential deficiencies are listed, 

and a final conclusion is drawn, which can be that the country is Not Compliant, Partially 

Compliant, Largely Compliant, or Compliant with the specific recommendation. With 

the emergence of additional threats to the international financial system, including 

terrorist financing, and subsequently proliferation financing, F ATF recognized the need 

to update its recommendations in 2003, and again in 2012. The Mutual Evaluation 

Reports based on the 2003 guidelines versus the 2012 guidelines often number their 

recommendations differently, and as a result the PPI lists a recommendation and its 

associated year, such as FATF Recommendation 2 (20 12), meaning it is the one from the 

2012 guidelines. As of April2017, only 31 countries have undergone an evaluation 

based on the 2012 standards. (As of June 2018, 43 countries have undergone a FATF 

evaluation based on 2012 standards). To establish conunon ground between countries 

that have undergone a FATF evaluation before and after 2012, the PPI team only took 

into consideration recommendations found in both the new and old guidelines. The 

following FATF recommendations (FATF R.'s) have been carefully evaluated and 

selected by consulting financing of proliferation experts as most relevant to preventing 

proliferation financing, based on their experience with what governments need the most 

to prevent this illicit activity 17: 

o FATF Recommendation 2 (2012) 31 (2003) National Coordination18: "Countries 

should have national [anti-money laundering/counter-terrorist financing] policies 

[ ... ] . Countries should ensure that [ ... ] relevant competent authorities, at the 

policymaking and operational levels, have effective mechanisms in place which 

enable them to cooperate, and, where appropriate, coordinate domestically with 

each other concerning the development and implementation of policies and 

activities to combat money laundering, terrorist financing and the financing of 

proliferation of weapons of mass destruction." This is a high impact indicator. 

17 For the full text of recommendations see: FATF, International Standards on Combating Money Laundering and 

the Financing ofTerrorism and Proliferation- The FATF Recommendations, Paris, France, published February 

2012, updated October 2016, http://www.fatfr,afi.org/medialfatlJ documentslrecommendationslpdfs/F A TF Recommendations. pdf 8 This fonnulation reflects the fact that Recommendation 2 in 2012 standards is the equivalent of Recommendation 

31 in 2003 standards. 

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o FA TF Recommendation 40 (2012 and 2003) International Cooperation I Other 

Forms of Cooperation: "Countries should ensure that their competent authorities 

can rapidly, constructively, and effectively provide the widest range of 

international cooperation in relation to money laundering, associated predicate 

offences and terrorist financing." This is a high impact sub-criterion. 

o FATF Recommendation 10 (2012) 5 (2003) Customer Due Diligence (CDD): 

"Financial institutions should be prohibited from keeping anonymous accounts or 

accounts in obviously fictitious names. [ ... ]The principle that financial 

institutions should conduct CDD should be set out in law. [ ... ] Financial 

institutions should be required to verify the identity of the customer and beneficial 

owner before or during the course of establishing a business relationship or 

conducting transactions for occasional customers." This is a medium impact 

indicator. 

o FATF Recommendation 13 (2012) 7 (2003) Correspondent Banking: Financial 

institutions should collect additional information before conducting cross-border 

correspondent banking, and they "should be prohibited from entering into, or 

continuing, a correspondent banking relationship with shell banks." It is a 

medium impact sub-criterion. 

o FATF Recommendation 26 (2012) 23 (2003) Regulation and Supervision: 

Financial institutions should be licensed, registered, regulated, and subject to 

monitoring. "[ ... ] Countries should not approve the establishment, or continued 

operation, of shell banks." This is a medium impact sub-criterion. 

o FATF Recommendation 30 (2012) 27 (2003) Law Enforcement Responsibilities: 

"Countries should ensure that designated law enforcement authorities have 

responsibility for money laundering and terrorist financing investigations[ ... ]." 

This is a low impact indicator. 

The PPI assigned points (with a maximum score of 65 points) based on country 

compliance with this selected set ofF ATF recommendations that encapsulate 

critical elements or essential features of a system that prevents proliferation 

financing. 

• Unavailability of Trade Financing 

As part of its 2014 Global Enabling Trade Index, The World Economic Forum measures 

how easily a business can finance trade at an affordable cost, based on conducted 

Executive Opinion Surveys. According to the World Economic Forum definition, the 

cost of financing trade includes trade credit insurance and trade credit, such as letters of 

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credit, bank acceptances, advanced payments, and open account arrangements. Countries 

are ranked out of 138, with 1 being the easiest country in which to obtain trade financing 

and 138 being the most difficult. For the PPI, this is used as a low impact indicator to 

assess how attractive a country is as an illicit finance hub. In other words, the 

unavailability of trade finance can be a small deterrent to proliferation financing. 

The reasons for this include: 1) 80 percent of trade financing takes place through "open 

accounts," i.e. wire transfers. So, the unavailability of trade finance can render only 20 

percent of all transactions in a country susceptible to illicit financing activities 19 ; 2) 

Trade financing applies mainly to countries at the origin and end point of transactions and 

not to countries in-between, limiting the opportunities for exploitation; and 3) Statesponsored proliferation networks are likely willing to dedicate more financial resources 

than profit-seeking businesses, which could make unavailability of trade financing a 

deterrent because of the additional time, documentation, and paper trail required. 

Developing countries often have an unavailability of trade financing, but surprisingly 

some small, developed countries such as Lithuania or Portugal, have an unavailability of 

trade financing as well. Greater availability of trade financing is seen in common trading 

hubs such as Hong Kong and Malaysia, but also in smaller, inconspicuous countries such 

as Malta, Oman, and Bahrain. It is a medium impact indicator. 

• Low cumulative illicit financial outflows20 

This indicator measures iiiicit financial outflows from developing countries in 2013. 

Data is collected and published by Global Financial Integrity. According to the 

organization: 

Illicit outflow, measured in millions of U.S. dollars, is money illegally earned, 

transferred, and/or utilized. Some examples of illicit financial outflows listed might 

include: 

o A drug cartel using trade-based money laundering techniques to mix legal money 

from the sale of used cars with illegal money from drug sales; 

o An importer using trade misinvoicing to evade customs duties, value added taxes 

(VAT), or income taxes; 

o A corrupt public official using an anonymous shell company to transfer dirty 

money to a bank account in the United States; 

19 Jonathan Brewer, Study of Typologies of Financing ofWMD Proliferation, Interim Report (London, United 

Kingdom: Project Alpha, King's College London, February 5, 2017), htto://projectalpha.eu/wpcontent/uploads/sites/21120 17 /02/Study-of-Typologies-of-Financing-of-Proliferation-Interim-Report-5-Feb-20 17 .pdf 20 Global Financial Integrity, Illicit Financial Outflows from Developing Countries, 2004-2013, See Appendix Table 

5, Illicit Hot Money Narrow Outflows (HMN), May I, 2017, http://www.gfintegrity.org/report/illicit-financialflows-to-and-from-developing-countries-2005-20 14/ 

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o A human trqfficker carrying a briefcase of cash across the border and depositing 

it in a foreign bank; or 

o A terrorist wiring money from the Middle East to an operative in Europe. 

As none of these are directly related to proliferation financing, the measure is deemed a 

medium impact indicator. Data are only collected for developing countries, which is 

useful as it balances out points that countries may have undeservedly received for having 

unavailable trade financing. Although illicit outflow is measured in absolute values, the 

PPI team took into account the size of illicit financial outflows in relation to a country's 

gross domestic product (GDP). Countries are awarded more points for not having large 

cumulative illicit outflows. 

• Country has F ATF or F ATF Regional Body Membership21 

FA TF has established eight regional bodies to achieve global dissemination and 

coordination in order to promote better understanding and implementation of its 

international standards as highlighted in the F ATF 40 ( 49 for post-2003) 

recommendations. Most countries are either FATF members or members of a FATFstyle regional body; some are members of both. The level of organization and dynamic 

varies within the different groups. Before being able to become a FATF member, 

countries undergo a rigorous review process. FA TF membership is awarded more points 

than regional body membership. The regional bodies are: 

o The Eurasian Group (EAG) 

o Asia/Pacific Group (APG) 

o Caribbean Financial Action Task Force (CFA TF) 

o Committee of Experts on the Evaluation of Anti-Money Laundering Measures 

and the Financing of Terrorism of the Council of Europe (MONEYVAL) 

o Eastern and Southern Africa Anti-Money Laundering Group (ESAAMLG) 

o Financial Action Task Force on Latin America (GAFILAT) 

o Intergovernmental Action Group Against Money Laundering in West Africa 

(GIABA). 

o Middle East and North Africa Financial Action Task Force (MENAF ATF) 

o The Task Force on Money Laundering in Central Africa (GABAC) 

This is a medium impact indicator. 

21 FATF, Countries, 2017, http://www.fatf-gafi.org/countries/ 

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• FA TF compliance score22 

The FATF compliance score is available for 90 countries on the 2015 Financial Secrecy 

Index (FSI), published by the Tax Justice Network. In the FSI, FATF compliance is 

indicator 11, "Anti-Money Laundering." According to the FSI report, compliance with 

all available recommendations (49 recommendations post-2003, or 40 recommendations 

post-2012) was calculated as a percentage, where "a 100% rating indicates that all 

recommendations have been rated as 'compliant', whereas a 0% rating indicates that the 

jurisdiction is wholly 'non-compliant. "'23 Working with FATF to comply with general 

recommendations by implementing regulations and best practices is the first step for a 

country to prove its full commitment to financial transparency and anti-money laundering 

efforts. Despite some degree of duplication with the FA TF recommendations above, this 

is a good indicator of general ability to prevent financial crimes. This is a medium 

impact indicator. 

• Lack of denied parties by United States and European Union24 

Countries without entities sanctioned by the United States' OFAC, BIS, or the European 

Union's sanctions lists are viewed in general as having done better at detecting illicit 

activity and stopping it. Thus, for the PPI, these countries are viewed as capable of 

monitoring and detecting illicit activities and gain points. This sub-criterion allows for a 

rough measure of what a country knows about its internal business. Since it is only a 

rough measure, it is assigned low impact. 

Variability in FATF compliance evaluations 

In ranking the 31 countries that underwent the 2012 FATF evaluation, the PPI team noted that 

the way compliance judgments are made is not standardized throughout the regional FA TF 

bodies. While some FA TF bodies appear very strict and require that all deficiencies are removed 

before awarding a country the two highest levels of compliance (Largely Compliant and 

Compliant), other evaluating bodies seem to be more generous in assigning compliance levels. 

For example, the PPI team found that the European regional F ATF body tends to be harsher in its 

22 Tax Justice Network, "Financial Secrecy Index- Country Reports," 2015, 

http://www.financialsecrecyindex.com/iurisdictions 

23 Tax Justice Network, "Key Financial Secrecy Indicators," July 22, 2015, 

http://www.financialsecrecyindex.com/PDF/ll-Anti-Money-Laundering.pdf 

24 United States Department of the Treasury, Office of Foreign Assets Control, "SDN List by Country," 

httos://www.treasury.gov/ofac/downloadslctrylst.txt; United States Department of Commerce, Bureau oflndustry 

and Security, "Supplement No.4 to Part 744- ENTITY LIST," Export Administration Regulations, 

httns://www.bis.doc.gov/index.php/fonns-documents/regulations-docs/federal-reglster-notices!federal-rcgister20 14/957-744-supp-4-1/fi1e (Accessed Winter 20 16); European Commission, "European Union -

Restrictive measures (sanctions) in force," Updated April26, 2017, 

https://eeas.europa.eu/sites/eeaslfiles/restrictive measures-2017-04-26-clean.pdf. A change from last year is that the 

United States is not treated differently in regard to European Union sanctions. 

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assessments. The CFATF, or Caribbean regional body, and GAFILAT, or Latin American 

regional body, seem more generous in their assessments, which skews the outcome for a ranking. 

Explanation for the need for additional negative indicators: 

The final ranking would be less reliable if only the positive F ATF-derived sub-criteria above 

were used to derive a ranking in this super criterion. Although F ATF is the only organization 

that systematically tracks countries' actions to improve legal financial controls aimed at reducing 

threats to the integrity of the international financial system, its reporting contains many gaps. As 

discussed above, not all countries have been evaluated based on the 2012 standards, in particular 

F ATF Recommendation 7 and Outcome 11, which directly relate to preventing proliferation 

finance. These gaps complicate gaining insights into what many countries do to prevent 

financial crime. The extent to which these gaps impacted the PPI ranking is difficult to evaluate. 

Another issue concerns the FA TF' s evaluation methodology. Although the FA TF evaluations 

are strong, there appear to be some potential weaknesses or biases that argue for the use of more 

sub-criteria. For example, compliance judgments published in follow-up FA TF reports are 

derived based on a less rigorous evaluation process than the full reports. In follow-up reports, 

self:reporting plays a much greater role. 25 In addition, there are differences in how regional 

FA TF organizations evaluate countries, as discussed above. This issue could risk that countries 

in certain FA TF regions are ranked higher than what would be expected, based on other 

indicators such as money laundering. Lastly, FA TF evaluations do not include the impact of 

enforcing UN financial sanctions on Iran and the DPRK. Those sanctions include a number of 

financial measures such as activity-based sanctions, vigilance requirements, and many others. 

Although these are described in non-binding F ATF Guidance dated June 2013, they are not 

formally evaluated during the mutual evaluation processes. This issue could imply that countries 

may be doing better than the Mutual Evaluation Reports conclude. 

A method was developed to more effectively rank countries under this super criterion because 

the number of positive sub-criteria based on FATF information has already relatively low and 

FA TF information was not complete. This additional set of sub-criteria focus on negative 

outcomes, such as the existence of substantial black markets in countries or countries having a 

high number of sanctioned entities. A negative sub-criterion means that points are subtracted 

instead of added. 

Negative indicators: 

25 See Organisation for Economic Co-operation and Development, Annex 2. AI, "A Note on FATF Data," in Illicit 

Financial Flows from Developing Countries: Measuring OECD Responses, 2014, 

https:llwww.oecd.org/corruptionllllicit Financial Flows from Developing Countries.pdf 

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• Presence of denied parties by United States and European Union26 

Countries with entities sanctioned by the United States' OFAC, BIS, or the European 

Union's sanctions lists likely failed to detect illicit activity until after it occurred. Thus, 

for the PPI, these countries are treated as less capable of monitoring and detecting illicit 

activities. When assigning points for this sub-criterion, the number of entities was not 

taken into consideration, but more points were taken away for a country having entities 

on multiple sanctions lists. It is measured as a negative indicator with high impact, since 

it indicates actual instances where illicit activity has been detected. 

• Appearance on the 2017 State Department List of Countries posing Money Laundering 

and Financial Crime concerns27 

The State Department Bureau for International Narcotics and Law Enforcement Affairs 

identifies in its March 2017 report "Countries/Jurisdictions of Primary Concern" for 

"Money Laundering and Financial Crimes." Using country profiles, the report points out 

weaknesses in those countries' enforcement or justice systems which pose challenges to 

the implementation of financing regulations. Examples of observed implementation 

challenges include "limited resources, lack of technical expertise, and poor 

infrastructure" as well as "administrative hurdles" and "corruption." This sub-criterion is 

medium impact. 

• Worldwide Biggest Black Markets ranking28 

This indicator is a ranking of the world's 93 biggest black markets published by 

Havoscope, measured by their size in U.S. dollars. Although the size was measured in 

absolute values, the PPI team took into account the size of the black market in relation to 

a country's GDP. Black markets are linked to financial proliferation because they 

facilitate the financing of the illicit procurement of goods, which require secretive means. 

It is a medium impact sub-criterion. 

26 United States Department of the Treasury, Office of Foreign Assets Control, "SDN List by Country," 

https://www.treasurv.gov/ofac/downloads/ctrylst.txt; United States Department of Commerce, Bureau oflndustry 

and Security, "Supplement No. 4 to Part 744 - ENTITY LIST, "Export Administration Regulations, 

httos://www.bis.doc.gov/index.php/forms-documents/regulations-docs/federal-register-notices/federal-register2014/957-744-supp-4-l/file (Accessed Winter 2016); European Commission, "European Union- Restrictive 

measures (sanctions) in force," Updated April26, 2017, 

https://eeas.europa.eulsites/eeas/files/restrictive measures-20 I 7-04-26-clean.pdf 27 United States Department of State, "International Narcotics Control Strategy Report- Money Laundering and 

Financial Crimes," Bureau for International Narcotics and Law Enforcement Affairs, Volume 2, March 2017, 

httos://www.state.gov/documents/organizatiou/268024.pdf 

28 Havocscope Global Black Market Information, "Havocscope Country Risk Ranking," 

http://www.havocscope.com/country-profile/ (Accessed July 20 17). 

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• Significant illicit financial outflows29 

This indicator again uses data collected and published by Global Financial Integrity, 

measuring illicit financial outflows from developing countries in 2013. The PPI team 

decided that significant illicit financial outflows should be penalized. Points are taken off 

for countries that had more than $100 million in illicit financial outflows in 2013. It is a 

medium impact indicator. 

• Lack of influence ofcorruption30 

Corruption can interfere significantly in the implementation of financial controls. 

Companies engaged in exporting may believe they can simply ignore any legal export or 

financial requirements if they believe there is little likelihood of being investigated or 

prosecuted. Corruption would likely inhibit strong financial controls and enforcement. 

In this sub-criterion, the 2016 Corruption Perceptions Index (CPI) by Transparency 

International is used as a measure of corruption in 176 countries. This index was selected 

from a variety of corruption measures and indices, mainly because this index lists the 

most countries and is widely respected. The PPI team used the rank of a country in the 

CPI to assign points, rather than its score derived by Transparency International. The 

points in this sub-criterion were assigned in an inversely proportional way to their 

relative rank. If the country or entity did not appear on the CPI, it was not assigned 

points. This sub-criterion has a medium impact. 

"Extra-Credit" Opportunity: 

For the 31 countries that were evaluated according to post-2012 FA TF standards, the PPI offered 

an "extra credit opportunity," which allowed for the addition (or in a few cases the subtraction) 

of points. Information on those countries is included in the PPI scoring because the 2012 

standards are of higher relevance than the previous sets of recommendations. For the first time, a 

recommendation specifically addresses a country's ability to implement targeted financial 

sanctions related to proliferation as laid out under relevant UN Security Council resolutions. 

Normally, if data were available for only about 30 countries, the PPI would not include this subcriterion in the total. In this case, however, because of the direct relevance and importance of 

these post-2012 evaluations, the PPI adjusted its methodology to include the eountries in a way 

that did not punish the other 170 countries. Therefore, the above-mentioned 31 countries were 

able to obtain extra points (or suffer subtractions) on top of the II 0 total possible points if they 

29 Dcv Kar and Joseph Spanjers, "Appendix Table 5: Illicit Hot Money Narrow Outflows (HMN)," in Illicit 

Financial Flows from Developing Countries: 2004-2013 (Washington, D.C.: Global Financial Integrity, 2015), 

http://www.gfintegrity.org/report/illicit-financial-flows-from-developing-conntries-2004-2013/. This sub-criterion 

was modified in the 20 18 ranking. 30 Those countries or entities not included in the CPI but evaluated by the PPI are: Andorra, Antigua and Barbuda. 

Belize, Cook Islands, Equatorial Guinea, Fiji, Holy See, Kiribati, Liechtenstein, Marshall Islands, Micronesia, 

Monaco, Nauru, Niue, Palau, Palestine, Saint Kitts and Nevis, Samoa. San Marino, Swaziland, Tonga, and Tuvalu. 

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were evaluated as largely compliant or compliant (or non-compliant) with the new UN financial 

sanctions-related recommendation. 

Extra Credit indicators: 

• Compliant or largely compliant with F ATF Recommendation 7 (2012)31 

FATF recommendation 7 (2012) refers to implementation of targeted financial sanctions 

related to proliferation. It states, "Countries should implement targeted financial 

sanctions to comply with United Nations Security Council resolutions relating to the 

prevention, suppression and disruption of proliferation of weapons of mass destruction 

and its financing. These resolutions require countries to freeze without delay the funds or 

other assets of, and to ensure that no funds and other assets are made available, directly or 

indirectly, to or for the benefit of, any person or entity designated by, or under the 

authority of, the United Nations Security Council under Chapter VII of the Charter of the 

United Nations." A compliant or largely compliant score for R. 7 would allow a country 

to receive 10 additional points. 

• FA TF Immediate Outcome (IO) 11: Proliferation financial sanctions32 

Immediate Outcome 11 states, "Persons and entities involved in the proliferation of 

weapons of mass destruction are prevented from raising, moving and using funds, 

consistent with the relevant UNSCRs." As such, IO II also refers to implementation of 

targeted financial sanctions related to proliferation. It assesses whether persons and 

entities involved in the proliferation ofWMD are prevented from raising, moving, and 

using funds consistent with the relevant UNSCRs. IO II is measured in terms of a low, 

moderate, or substantial level of effectiveness, where a country only received points for 

"substantial." Examples of outcomes evaluated by the FATF are concrete actions that 

have been taken, including investigations and prosecutions relating to sanctions. A 

substantial rating for IO II allows a country to gain five points. 

Expert Judgment: 

One final ~odification to the super criterion score resulted from extensive expert discussions. 

The PPI team considered the fact that there may be missing data relevant to the sub-criteria and 

experts often have the best, first-hand information about a country performing significantly 

31 F ATF, International Standards on Combating Money Laundering and the Financing of Terrorism and 

Proliferation- The FATF Recommendations, Paris, France, published February 2012, Updated October 2016, 

http://www.fatf-gafi.org/medialfatf/documents/recommendations/pdfs/F A TF Recomrnendations.pdf 32 Financial Action Task Force, "An effective system to combat money laundering and terrorist financing," 

http:/ iwww. fatf-gafi.orgipublications/mutualevaluations/ documents/effectiveness.html (Accessed November 20 17). 

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better or worse than scored. In some cases, experts judged that a country had received too many 

or too few points based on real-world knowledge and information. 

Impact and Flow Chart of Sub-Criteria: 

The PPI assigned a low to high impact for weighting each of the positive and negative subcriteria. Table 5.1 found in the Peddling Peril Index for 2017, and reproduced at the end of the 

appendix, shows the flow chart of steps in the evaluation where positive indicators add points, 

negative indicators take away points, extra credit takes away or adds points, and expert judgment 

is factored in. 

Other Criteria Considered 

Institute staff considered additional sub-criteria but were unable to find enough information, so 

they were not included in the scoring. An example is the extent of training and knowledge of 

financial officials. 

Ideally, the PPI team would measure if a country has access to, and participates in, training and 

outreach programs relating to proliferation finance. However, information on this topic proved 

difficult to find. There does not seem to be much international assistance offered to countries 

wanting to improve proliferation financing prevention. General bilateral trainings to prevent 

financial crimes are conducted by the United States Federal Reserve System, Department of 

Homeland Security, Department of Justice, Federal Bureau of Investigation, Department of 

State, and Department of Treasury. The U.S. State Department has organized regional 

conferences and specific outreach events for countering FoP training, such as in South Korea and 

Qatar (2013) and Vienna (20 15). The Asia-Pacific Group has also actively holds workshops for 

its members. 

Scoring: 

The Ability to Prevent Proliferation Financing super criterion incorporates 11 positive subcriteria, five negative sub-criteria, two extra credit, case-by-case sub-criteria, and finally expert 

judgment, where countries could receive or lose additional points. The positive and negative 

sub-criteria are evaluated in terms oflow, medium, or high impact. Of the 11 positive subcriteria, two are considered low impact, seven are medium impact, and two are high impact. 

They are worth 5, 10, and 15 points, respectively. Of the five negative sub-criteria, four are 

medium impact and one is high impact. Before extra credit and expert knowledge points, a 

country could receive a total of 110 points under this super criterion. Because of subtractions, 

negative scores are possible. This raw score is used later to arrive at a total, weighted score and 

rank for each country. It is also used to derive a ranking for the country. 

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y of trade finance 

Extra credit (points are added or subtracted on a case-by-case basis): 

r largely compliant with FATF R. 7 (2012) 

tiallevel in FATF Immediate Outcome 11 

ud~rmemt ,(po,ints are added or subtracted on a case-by-case basis) 

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TESTIMONY BEFORE THE HOUSE COMMITTEE ON FINANCIAL 

SERVICES SUBCOMMITTEE ON TERRORISM AND ILLICIT FINANCE 

Countering the Financial Networks of Weapons of Proliferation 

Tom Keatinge, Director of the Centre for Financial Crime and Security Studies at the 

Royal United Services Institute 

Introduction 

Chairman Pearce, Ranking Member Perlmutter, and distinguished members of the Subcommittee, 

thank you for inviting me to testify today about strategies to disrupt the financing and procurement 

of weapons of mass destruction; and the role financial institutions (broadly defined) can play in 

identifying proliferation financing activities. Given my home base is London and the focus of RUS!'s 

counter proliferation finance (CPF) research is on Southeast Asia and sub-Saharan Africa, my 

remarks will necessarily address to a greater extent the international CPF architecture, as promoted 

by bodies such as the United Nations and Financial Action Task Force (FATF), rather than the policies 

laid out by US domestic agencies. The US however, has a key role to play in strengthening this 

architecture, particularly as it takes on the Presidency of the FATF for the next 12 months. 

Since 2015, thanks to the generous funding support of the John D and Catherine T MacArthur 

Foundation, RUS! has conducted extensive and wide-reaching research into the global counterproliferation finance regime, assessing the awareness and effectiveness of governments and their 

private sectors in implementing proliferation finance controls. 

Our research has produced four main papers as detailed below, all of which are freely available to 

governments and private sector actors: 

• 2016: Out of Sight, Out of Mind? A Review of Efforts to Counter Proliferation Finance 

• 2017: Countering Proliferation Finance: An Introductory Guide for Financial Institutions 

• 2017: Countering Proliferation Finance: Implementation Guide and Mode! Law for 

Governments 

• 2018: Underwriting Proliferation: Sanctions Evasion, Proliferation Finance and the Insurance 

Industry 

We have also conducted outreach and training presentations in a number of countries in Southeast 

Asia, Europe and Africa, working closely with key government and private sector stakeholders in 

those countries to strengthen national responses to the illicit financial networks of proliferators. 

This work will continue in 2018/2019. 

Consistent with the focus of the hearing, this submission, primarily based on the above-referenced 

titles published by RUSI, will cover the following fields: a background to the CPF status quo; a review 

of currently assessed global CPF capabilities; observations on and recommendations for the role of 

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financial institutions in tackling proliferation; wider supply chain vulnerabilities; and 

recommendations for stakeholder action. 

Background 

\~~ ¥ RUSI 

In 2012, the Financial Action Task Force (FATF), the international organisation responsible for coordinating government actions to counter financial crime and in which the US plays a leading role, 

broadened its recommendations to include measures relating to countering the financing of WMD, 

their delivery vehicles, and related goods and activities. The move to include this subject alongside 

terrorist financing and money laundering was seen by many of FATF' s member states as a vital next 

step. 

Prior to 2012, national efforts to combat proliferation finance had been highly uneven, and in many 

cases non-existent, despite UN Security Council resolutions, including Resolution 1540 and countryspecific regimes, that detailed actions to counter proliferation finance. Although most countries had 

procedures in place to detect and prevent the flow of goods related to illicit WMD programmes, 

they did not have similar procedures in place to stem the flow of funds used to facilitate this 

dangerous trade. 

Thus, independent, international leadership was needed to create a standard for CPF that would 

hinder the ability of proliferators to access and exploit the financial system. The FATF seemed 

ideally placed to offer such leadership. 

When we began our research at RUS!, nearly four years had passed since the FATF incorporated 

recommendations on CPF into its international standards. Yet, despite the focus brought to the 

issue of proliferation finance by the FATF, RUSI's extensive interviews with governments, regulators 

and financial institutions (Fis) revealed that many of the shortcomings of the pre-2012 CPF 

landscape persisted. Put simply, very little had been done to put into effect the intentions 

expressed by the FATF in 2012 when it added CPF to its priorities. Governmental interest in 

proliferation finance and related outreach to Fls was highly uneven between national jurisdictions, 

with many countries providing no guidance on CPF to their financial sectors at all. The wide 

spectrum of approaches resulted in mixed messages being passed down from governments and 

regulators to their Fls. 

For their part, Fls within FATF jurisdictions appeared generally alert to their obligations to enforce 

targeted financial sanctions (TFS} against individuals and entities specified in UN Security Council 

resolutions. Yet they were often ignorant of the enabling role of finance for proliferation networks 

and thus the proliferation threat beyond those sanctioned entities; they demonstrated a poor 

understanding of the nature of proliferation as an activity distinct from general sanctions evasion by 

states such as Iran and North Korea. 

Fls were therefore often unclear as to what, if anything, they were expected to do to address the 

issue of proliferation finance beyond implementing TFS, believing in many cases that the CPF 

objective was achieved purely by avoiding business related to Iran and North Korea. 
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The combination of mixed messages, unclear expectations and lack of guidance meant that 

unsurprisingfy F!s were struggling to devise their own internal approaches to mitigate relevant risks. 

This has resulted in proliferators, such as North Korea, being able to access and abuse the 

international financial system in support of their proliferation ambitions with relative ease. 

The nuclear ambition of a state such as North Korea requires both the procurement of material and 

the raising of funds to source the required goods and services, and access to the international 

financial system is key to carrying out these activities. It thus seems axiomatic that targeting the 

financial networks of proliferators should be a global response to such threats. 

To-date, the international community has primarily addressed state~based proliferation activity via 

controlling certain goods and sanctioning bad actors. Yet this approach is fragmented, poorly 

enforced and too narrowly focused. As a cursory review of the UN North Korea Panel reports will 

reveal, proliferators such as North Korea employ an array of funding operations, such as repairing 

and servicing military equipment; training police forces; and building statues, and a range of 

commercial trading activities which involve both a logistical and financial operation. All of these 

activities generate money flows. 

Thus, focusing merely on goods, either preventing their sale or interdicting their transfer once 

purchased, is just one part of establishing an effective response. Proliferators depend on access to 

financial assets and services, and the international financial system has become a critical lifeline for 

the regime. Detecting and stopping financial access will complicate and obstruct the wider 

operations of proliferation networks. 

Reviewing Current International Capabilities 

The FATF is currently undertaking a global evaluation of countries' compliance with its 40 

Recommendations for combatting financial crime, and the effectiveness of such compliance. 

As of mid-May, 50 countries have been reviewed in the current round, running since 2014 (the US 

review was published in December 2016).1 

Two primary elements of the FATF's review address CPF: 

• Recommendation 7 assesses whether countries have the necessary frameworks in place to 

'implement targeted financial sanctions to comply with United Nations Security Council 

resolutions relating to the preventionr suppression and disruption of proliferation of 

weapons of mass destruction and its financing' and that such frameworks should ensure that 

countries can 'freeze without delay the funds or other assets ot and to ensure that no funds 

and other assets are made available, directly or indirectly, to or for the benefit of, any 

1 United States, Mutual Evaluation Report (December 2016), available at http://www.fatf*g.afi.org/countries/u* 

ti.!J.n.\.t.edstates/documents/mer-united-states-20JJi.-html 
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person or entity designated by, or under the authority of, the United Nations Security 

Council under Chapter VII of the Charter of the United Nations.'' 

• Immediate Outcome 11 characterises an effective system as one in which 'Persons and 

entities designated by the United Nations Security Council Resolutions (UNSCRs) on 

proliferation of weapons of mass destruction {WMD) are identified, deprived of resources, 

and prevented from raising, moving, and usinKfunds or other assets for the financing of 

proliferation. Targeted financial sanctions are fully and properly implemented without 

delay; monitored for compliance and there is adequate co-operation and co~ordinatlon 

between the relevant authorities to prevent sanctions from being evaded, and to develop 

and implement policies and activities to combat the financing of proliferation of WMD.' 

Compliance with FATF Recommendations and Immediate Outcomes is assessed on a four-step scale 

from 'non-compliant' to 'compliant' and 'high' to 'low', respectively. The chart below, drawn from 

data provided by the FATF,' depicts the extent of assessed compliance and effectiveness for R7 and 

1011 thus far. 

As can be clearly seen, two-thirds of assessed countries are non- or only partially-compliant with the 

requirement to be able to impose TFS without delay; and 70% of assessed countries have a low or 

moderate level of effectiveness, meaning they suffer from major shortcomings. 

It is clear that notwithstanding the prioritization of CPF in 2012, the global community still has 

considerable work to do to harden the financial system against abuse by proliferators. 

It is important to note that compliance with FATF standards alone does not result in effective CPF 

controls. In fact, FATF's recommendations are now increasingly out of touch with other 

international obligations on CPF. UN sanctions against North Korea incorporate measures that go 

beyond list-based sanctions implementation, and focuses to a greater extent on activity-based 

obligations to counter proliferation finance. This includes requirements to restrict relationships with 

North Korean financial institutions and joint ventures. The recent FATF guidance published in March 

2018 acknowledged this risk, stating that 'as list-based targeted financial sanctions alone cannot 

2 The FATF Recommendations, pll 3 The Financial Action Task Force, Consolidated Assessment Ratings {18 May 2018), available at http:/!www.fatfgafi.org/pub!ications/mutualeva!uationsLdocumen_lliassessment-ratings.html 

4 
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address illicit procurement and proliferation financing' implementation of UN measures that go 

beyond FATF requirements 'contributes to a stronger counter proliferation financing regime'. 4 

Furthermore, while the FATF requirement to implement targeted financial sanctions technically 

goes beyond those individuals and entities named on sanctions lists (to also include anyone owned 

by, controlled by or acting on behalf of or at the direction of those designated entities and 

individuals}, this is not always reflected in implementation. It is RUS!'s experience that countries and 

financial institutions focus on designated entities and individuals alone, and not their associated 

networks. 

Securing the Financial System Against Abuse by Proliferators 

Despite export control measures and international treaties seeking to prevent the further spread of 

nuclear, chemical and biological weapons and their related delivery systems, pro!iferators have 

been able to procure and acquire goods for these programmes with relative ease. International 

efforts to counter this have typically been devoted to the detection and seizure of physical goods, 

materials and technologies. 

However, proliferation efforts rely also on finance to facilitate this illicit trade. Indeed, procurement 

of sensitive WMD-related goods is made possible by the international financial system. Reports 

from the UN Panel of Experts on North Korea, for example, have highlighted that Pyongyang is 

'using greater ingenuity in accessing formal banking channels' to support illicit activities and WMD 

proliferation-' The most recent Panel report observes that North Korea 'continued to access the 

international financial system because of critical [sanctions] implementation deficiencies, which 

resulted in the country's evasive activities not being duly identified and prevented. The deceptive 

practices of the Democratic People's Republic of Korea and the lack of appropriate action by many 

Member States are systematically undermining the effectiveness of financial sanctions.'6 

The role played by the financial sector in disrupting proliferation finance has received greater 

attention in recent years. Some governments maintain that financial institutions have both the 

capability to detect, and an obligation to disrupt, financial transactions in support of illicit WMD 

proliferation. However, government initiatives on countering proliferation finance vary widely 

between jurisdictions. 

In addition to the research we have undertaken at RUSI to assess the capabilities of governments 

and their private sectors as relates to CPF, we also undertake training and provide technical 

assistance to these stakeholder groups- particular Fls who are placed on the frontline of 

4 FATF, 'FATF Guidance on Counter Proliferation financing', March 2018, p. 15. 5 UN Security Council, 'Report of the Panel of Experts Established Pursuant to Resolution 1874 (2009)', S/2017/150, 27 

February 2017, p. 4. 

6 UN Security Council, 'Report of the Panel of Experts Established Pursuant to Resolution 1874 (2009)', S/2018/171, 1 

March 2018, p. 59. 
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implementation by their governments with limited support provided -to help equip them to better 

understand and mitigate proliferation financing risks. 

This capacity-building activity reveals extensive gaps in knowledge, awareness and capabilities, and 

-perhaps more worrying!y- highlights considerable misunderstanding with regards to the risks 

posed by proliferators, often conflating CPF activity with compliance with sanctions' regimes. We 

have found that while many Fls may have certain basic controls in place to counter proliferation 

finance, 'on the whole [they} do not understand the contemporary realities of the threat they are 

facing'/ and are failing to implement adequate internal approaches to counter proliferation finance. 

However, as outlined earlier, financial institutions have an important role to play in preventing 

proliferators from accessing the formal financial system and securing financial services in support of 

proliferation sensitive trade that goes beyond simply implementing targeted financial sanctions- as 

those on sanctions lists are unlikely to seek to transact in their own names. 

It is therefore important that financial institutions take time to better understand and mitigate 

proliferation financing risk. Proliferators have become increasingly skilled at circumventing the 

sanctions imposed against them and gain access to the financial system through extensive networks 

of corporate entities (including front companiesL middlemen and circuitous payment patterns. 

In most cases, there will be no obvious paper connection to jurisdictions of proliferation concern. 

For financial institutions that have carried out little or no concerted thinking on this subject as 

distinct from other forms of financial crime, there are a number of approaches that can easily be 

adopted to improve the Fls contribution to CPF efforts. From our research at RUSI, we have 

identified three primary means by which the financial sector can support the hardening of the 

financial system against abuse by proliferators. 

• First, situational awareness and education about the risk at hand: this includes conducting 

an internal risk assessment to better understand potential exposure to proliferation 

financing- as distinct from sanctions risk- and the areas of concern which would require 

mitigation. Few Fls interviewed by RUSI have made use of key information sources such as 

UN Panel reports and very few Fls identified a relevant staff member who tracked CPF 

associated publications from the FATF, UN or other government or academic bodies. 

• Second, 'know your customer' (KYC) efforts should move beyond fOcusing merely on the 

entities and individuals listed on sanctions lists. Instead, Fls should familiarise themselves 

with the wider networks of proliferating actors. This includes ensuring that customer due 

diligence processes include the gathering of information that is relevant to proliferation 

financing, and not just other types of financial crime, and dedicating resources to conducting 

investigations into the networks of customers considered higher risk or operating in certain 

areas of the world, or sectors of the economy. While no approach to countering proliferation 

1 Emil Dall, Andrea Berger and Tom Keatlnge., 'Out of Sight, Out of Mind? A Review of Efforts to Counter Proliferation 

Finance', RUSI Whitehall Report, 3~16 (June 2016), p. 19. 

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finance is fool-proof, a few simple adjustments to internal policies can go a long way to 

ensuring that a financial institution has a baseline policy for dealing with proliferation 

financing risk and can help mitigate the risk of inadvertently being caught up in proliferation 

financing activity. 

• Third, identifying proliferation sensitive goods and technology: whilst the first two actions 

are relatively straightforward for Fls, identifying the procurement and shipping of 

proliferation sensitive goods is highly challenging, and arguably impossible for a financial 

institution to achieve, absent the provision of intelligence leads. Still, Fls should familiarise 

themselves with export control regimes, and which clients fall under those controls. Fls 

should also, having educated themselves about the risk of proliferation finance as part of the 

two previous actions, be aware of any transactions that fall outside of usual business activity 

and fit proliferation finance patterns. 

Whilst there are clearly considerable improvements that Fls can make in staff awareness and finetuning KYC checks and due diligence processes to reflect proliferation finance risk, the CPF 

effectiveness of financial institutions will be greatly enhanced by information and intelligence 

support provided by national governments and international organisations. In our research, we 

found very few cases where governments worked with Fls to enhance their CPF capabilities, even if 

they had established partnership mechanisms for engaging with F!s on other issues such as terrorist 

financing and human trafficking. 

Vulnerabilities Across the Supply Chain 

The need for governments to engage with the private sector is not limited to a narrow definition of 

the financial sector. As sectoral sanctions have been increasingly applied to North Korea, it has 

undertaken creative and deceptive activity to secure funding from the sale of coal; it has also 

undertaken at sea ship-to-ship transfers to secure the energy products it needs. These activities 

bring into scope other industries needed to secure the integrity of the international supply chain 

that would benefit from engagement with national governments such as shipping companies, 

commodity brokers and insurance companies, all of which lag the banking sector in terms of 

awareness of, capability and commitment to the global CPF agenda. 

Whilst the banking sector must continually strive to improve its standards, it is not right that it 

should be the only element of the private sector that invests in capabilities to address the deceptive 

practices of proliferators. A 'whole-of~system' approach is needed in order to maximise disruption 

opportunities. 

Conclusions and Recommendations 

As evidenced by the FATF's evaluation data and the detailed reports of the UN Panel of Experts on 

North Korea, six years since the FATF introduced CPF as a third leg offocus alongside money 

laundering and terrorist financing, global CPF efforts are fragmented at best and ineffective/nonexistent at worst. 
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Furthermore, the current FATF standards related to CPF are weak and simplistic: 

• They do not require countries to assess their proliferation financing risks 

• They focus merely on the implementation of targeted financial sanctions 

• They are not risk-based in their application 

In sum, the global architecture for disrupting proliferation finance requires improved design and 

implementation. 

The following recommendations are therefore offered for the Subcommittee's consideration. 

For the private sector 

Financial institutions must expand their awareness of proliferators' activities and ensure that 

CPF is an integral part of their financial crime compliance and investigations capability, with 

designated expertise. 

Other related private sector actors such as insurance companies, commodity brokers and 

shipping companies need to demonstrate greater commitment to disrupting the ambitions 

of proliferators, in particular North Korea. 

The private sector as a whole needs to develop methods of collaboration that create a 

joined-up, whole-of-system response, that hardens the supply chain to abuse by 

proliferators. 

For international organisations such as the FATF 

• Although the FATF has recently made a welcome update to its CPF guidance,' with certain 

notable exceptions (such as the work undertaken by the FATF-style regional body in Asia, the 

Asia Pacific Group on Money Laundering), work across the FATF network on CPF lacks 

prioritisation. The country assessments conducted since 2014 highlight serious, systemic 

failings that need to be urgently addressed. 

For the US Government 

• From July 2018, the US assumes the presidency of the FATF (led by the Treasury 

Department's Office of Terrorist Financing and Financial Crimes). CPF is a stated priority of 

the US Presidency of the FATF over the next 12 months? The US should use this position not 

only to continue efforts to raise global standards in line with current requirements, but also 

to review the adequacy of current FATF standards in order to promote opportunities to 

strengthen and broaden the status quo. 

• Weaknesses in the global financial system will be exploited by bad actors, including 

proliferators and those seeking to raise funds in support of proliferation activities. A 

8 The Financial Action fask Force (2018), Guidance on Counter Proliferation Financing- The Implementation of Financial 

Provisions of United Nations Security Council Resolutions to Counter the Proliferation of Weapons of Mass Destruction, 

FATf, Paris www.fatf-gafi.org/publications/fatfrecommendat!ons/documents/guidance-counter-proliferat!onfinancing.htm! 

9 Outcomes F-ATF-MENAFATF Joint Plenary, 27-29June 2018, available at http://www.fatfgafi.org/pubHcations/fatfgeneral!documents/outcom~_?.:f!J.?Jl~e-201Rhtml 
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continued, relentless focus on strengthening the integrity of the financial system, in its 

entirety, should be prioritised by the US Government. 

For a!! national governments 

• Financial institutions are placed on the frontline by the FATF, the UN and national 

governments. A failure by national governments to support the security role delegated to 

Fls results in material and systemic vulnerabilities. Establishing information exchange 

partnerships between governments and relevant private sector actors can greatly enhance 

the effectiveness of the role Fls are required to play.10 The complexity of CPF for the private 

sector makes such partnerships critical to the development of an effective CPF response. 

1

° For further details see Nick J Maxwell and David Artingstall (2017), The Role of Financial Information-Sharing 

Partnerships in the Disruption of Crime, RUSI Occasional Paper 

9 
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Annex: Speaker and Organisation Details 

Tom Keatinge, Director of the Centre for Financial Crime and Security Studies at the 

Royal United Services Institute 

This submission is prepared by Tom Keatinge, the Director of the Centre for Financial Crime and 

Security Studies (CFCS) at the Royal United Services Institute (RUSI). RUSI is a donor-funded 

London-based defence and security think-tank, founded in 1831, and is registered with the Charity 

Commission for England and Wales (registration number: 210639). 

Founded in December 2014, the CFCS is dedicated to addressing the challenges and effects of 

financial/economic crime and threat finance to the UK and international security and the important 

role finance can play in identifying and disrupting a range of globally-recognised threats. The team 

includes expertise from banking, law enforcement and international policy bodies such as the 

Financial Action Task Force. 

Prior to joining RUSI in 2014, Tom was an investment banker with J.P. Morgan in London and New 

York for 20 years. 

He has a Masters in Intelligence and International Security from King's College London, completed 

in 2012 whilst on a one-year sabbatical from J.P. Morgan. His Masters research focused on the 

effectiveness of the global counter-terror finance regime. 

He has a BA in Modern Languages from the University of Durham (1990-1994). 

10 
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0 

House Financial Services Committee 

Coun 

N 

1)1!, I!!YIANUEllliS Q'ICr<:f'tiENGJi!! 

Senior Fellow 

Washington, DC 

July 12, 2018 
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Emanuele Ottolenghi July 12, 2018 

INTRODUCTION 

Chairman Pierce, Ranking Member Perlmutter, members of the subcommittee, on behalf of the 

Foundation for Defense of Democracies and its Center on Sanctions and Illicit Finance, I thank 

you for inviting me to testify. 

The Islamic Republic ofiran has been under U.S. sanctions since late 1979. From 2006 to 2016, 

Iran's nuclear and ballistic missile programs were the target of a United Nations sanctions regime, 

which the United States, the European Union, and their Western allies (Australia, Canada, Japan, 

New Zealand, Norway, South Korea, and Switzerland) subsequently expanded with their own set 

of far-reaching measures. Initially designed to both punish and prevent proliferation attempts, 

these sanctions over time became wider in scope, eventually targeting Iran's energy industry, 

financial sector (including its Central Bank and most of its banking institutions), shipping, 

aviation, insurance, and oil exports. 

Beginning in January 2016, the Joint Comprehensive Plan of Action, or JCPOA, granted Iran 

sanctions relief, though non-nuclear sanctions remained in force. Due to President Trump's May 

2018 decision to withdraw from the JCPOA, Iran again faces U.S. sanctions, including secondary 

sanctions, which are already causing numerous international companies to withdraw from the 

Iranian market. Iran is therefore likely to ramp up its sanctions evasion efforts. 1 

Sanctions significantly inhibit Tehran's ability to trade with the world. Still, Iran has adapted, 

engaging sanctions enforcers in a complex and evolving cat-and-mouse game. With over three 

decades of experience eluding sanctions, Iran has displayed ingenuity and inventiveness to defy 

the embargo on its oil and petrochemical exports, bypass financial restrictions on its banking 

activities, and procure critical technology. Its responses to new sanctions have been quick and 

sophisticated. As a result, Iran has been able to mitigate sanctions' impact on its efforts to advance 

its nuclear and ballistic missile programs while keeping its economy afloat. 

My testimony will outline how Iran evaded sanctions in the past, offering typologies as well as 

case studies in four areas of sanctions evasion: procurement, financial networks, fraudulent 

practices, and reliance on ancillary services. 

PROCUREMENT 

The simplest example oflranian procurement is a triangular structure of front companies operating 

overseas. Iranian proxies usually establish fronts in a foreign country to procure dual-use 

technologies. Once incorporated, companies buy locally or from a third country. The buyer then 

ships the procured goods to the final destination in Iran, or fictitiously sells them to another front 

company in another country before final delivery. 

A key factor in these schemes is the existence of an intermediate jurisdiction that obfuscates the 

merchandise's final destination. Over the years, the Iranian regime has established companies in 

Armenia, Azerbaijan, Georgia, India, Malaysia, Malta, Turkey, and the UAE for this purpose. 

1 See, for example: Storay Karimi, "Opportunities for Afghan money traders as sanctions loom," Reuters, June 30, 

2018. (https://af.reuters.com/article/worldNews/idAFKBNIJRI37) 

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Emanuele Ottolenghi July 12, 2018 

Take, for example, the 2009 case of Majid Kakavand,2 an Iranian citizen who established Evertop 

Services Sdn Bhd in the Malaysian capital of Kuala Lumpur to buy aerospace technology from 

Western suppliers for Iranian end-users.3 Once the procured goods were delivered to Malaysia, 

Kakavand transferred them to Iran using an Iranian commercial cargo flight. Kakavand was 

arrested in France in March 2009 on charges of U.S. sanctions violations, though he successfully 

fought his extradition to the U.S.4 

In a similar case, U.S. authorities accused Iranian national Hossein Tanideh of procuring 

technology on behalf of sanctioned Iranian nuclear procurement company MITEC, 5 through front 

companies he established in Turkey and Azerbaijan. Specifically, Tanideh sought to purchase 

valves for Arak's heavy water reactor from German manufacturers. 6 Locally based dual GermanIranian nationals facilitated the deal in Germany. When German officials grew suspicious, Tanideh 

turned to Indian manufacturers in his quest for a suitable alternative. Tanideh was added to 

OFAC's SDN list1 and was sanctioned by the U.S. Department of State in July 2012 under 

Executive Order 13382 for proliferation.8 

Such a scheme usually involves Iranian nationals opening companies abroad. But Tehran has also 

relied on Iranian expatriates who, as dual nationals, may raise less scrutiny, and foreign 

intermediaries, who act on their behal£ In a few cases, the intermediary works directly for the 

Iranian regime. More frequently, the proxy operates independently and works for a commission. 

Mahan Air- an Iranian commercial airline under U.S. sanctions since 2011 and its procurement 

efforts illustrate how a procurement scheme can adapt over time.9 Initially, Mahan relied on 

overseas procurement companies to buy its planes and spare parts. These included Equipco UK 

2 David Albright, Paul Brannan, and Andrea Scheel Stricker, "Case Study - Middleman Majid Kakavand Arrested 

for Malaysia-Based Iranian Illicit Procurement Scheme," Institute for Science and International Security, February 

26,2010. (http://isis-online.org/isis-reportsfdetail/middleman-arrested-for-directing-m~&._bascd-iranian-illifit: 

procurement/20) 

3 "Providing Additional Information to the Gos on Activities of the Swiss Firm Quartzcom (S)," WikiLeaks Cable: 

08STATE132055 _a, December 17, 2008. (http:i/cables.mrkva.eu!cable.php?id~ 183498); "Providing Belgium 

Additional Info on Malaysian Firm's Efforts to Purchase Data Acquisition Systems on Behalf oflranian End-User 

(S)," WikiLeaks Cable: 08STATE92637_a, August 28,2013. 

(https://www. wikileaks.org/plusd/cahles/08ST A TE92637 a.html) 4 Steve Erlanger and Nadim Audi, "France Won't Extradite Iranian Sought by U.S.," The New York Times, May 5, 

2010. (http://www.nytimes.com/2010/05/06/world/europe/06france.html? r-oO) 5 "Modern Industries Technique Company," Iran Watch, January 16,2016. (http://www.iranwatch.org/iranian-

~ntities/modem-industries-technigue-companv) 

6 Daniel Salisbury, "Illicit Procurement of German and Indian Valves for Iran's Arak Heavy Water Reactor," Alpha, 

June 20,2013. (https:l/www.acsss.info/proliferation/item/242-mitec-s-procurement-of-valves-for-arak-heavv-waterreactor) 

7 U.S. Department of the Treasury, "Non-proliferation Designations; Non-proliferation Designation Removals; Iran 

Designations," July 12,2012. (http://www.treasmy.Qov/resource-center/sanctionsiOFACEnforcement/Pages/20 120712.aspx) 8 U.S. Department of State, "Increasing Sanctions Against Iran," July 12, 2012. (https://2009-

20 17 .state.gov/r/pa!prs/ps/20 12/07 /194924.htm) 9 U.S. Department of the Treasury, Press Release, "Treasury Designates Iranian Commercial Airline Linked to 

Iran's Support for Terrorism," October 12, 2011. (http://www.trcasurv.gov/press-centerlpressreleases/Pages/tg 13 22 .aspx) 

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and Skyco UK in Great Britain, Kerman Aviation and Zarand Aviation in Paris, and Mahan Air 

General Trading and Sirjanco Trading in the United Arab Emirates- all run by Iranian nationals. 10 

In the case of Turkey-based Pioneer Logistics, a Thai national who worked as a managing director 

for Mahan General Sales Agent in Bangkok appeared as a shareholder for the company, though he 

later admitted in a sworn affidavit that Mahan was the shares' real owner. 11 

When U.S. sanctions began to restrict Mahan Air procurement, Mahan again relied on proxies for 

its needs. Between 2006 and 2008, the airline sought the services of the British-based Balli Group 

to obtain Boeing aircraft. To conceal the end user for the planes, Mahan purchased the aircraft 

through UK-based subsidiaries and registered it with an Armenian subsidiary, Blue Airways. 12 

Using a similar scheme, in May 2015, Mahan took delivery of nine used Airbus aircraft13 from AlNaser Airlines, a small and privately owned Iraqi airline. Al-Naser bought eight planes from 

European companies and one smaller aircraft from a Chinese carrier, and then ferried them over 

to Iran after holding them in its custody for a short period. Treasury sanctioned Al-Naser shortly 

after the planes were delivered. 14 

More recently, Qeshm Fars Air, a carrier operating flights between Tehran and Damascus that are 

part of Iran's ongoing deliveries of military aid to Syria, procured two old Boeing 747 aircraft 

previously leased by a Georgian company and a now-defunct Armenian airline. The Iranian carrier 

began operating the aircraft in 2017. 15 Corporate records obtained by FDD suggest the aircraft 

owner was a Dubai-based company, at least until 2015, when the Armenian carrier took 

consignment of the aircraft. 16 

Such small triangular schemes are often temporary. Companies will typically shut down once they 

have accomplished their mission. For longer-term procurement and finance operations, Iran relies 

more on permanent corporate structures. Indeed, before sanctions forced Iran's procurement 

operations to go underground, large Iranian state companies had their own senior managers run 

their official procurement offices overseas. Some were eventually sanctioned, while others escaped 

designation even when their parent companies in Iran did not. 17 

10 U.S. Department of Commerce, Press Release, "BIS Adds Three Parties to Temporary Denial Order Against 

Iranian Airline," Aprill7, 2012. (http://www.bis.doc.gov/index.php/component/content/artic\~_9_8_,_;;Q9utbis/newsroom/press-re leases/press-releases-20 12/335-bis-adds-three-parties to-temporary-denial-orde:r.:J!&illnstiranian-airline) 

11 U.S. Department of Commerce, Bureau of Industry and Security (BIS), "Order Renewing Order Temporarily 

Denying Export Privileges," June 21, 2018. (https://www.fedcralrcgister.gov/documents/20 18/06/2!/20 18-

13289/ order -renewing -order-temporarilv-denying-cxport -privileges) 12 Laura Rozen, "UK firm pleads guilty to selling U.S. 747 to Iran," Politico, February 5, 2010. 

(https://www.politico.comiblogs/laurarozcn/0210/UK firm pleads guilty to selling US 747s to Iran.html) 13 Eli Lake, "With Plane Delivery, Sanctions Collapsing Already," Bloomberg, May 11, 2015. 

(http:/ /www.bloombergview.com/artic les/20 15-05-11 /with-plane-delivery-iran-sanctions-collapsing-already) 14 U.S. Department of the Treasury, Press Release, "Treasury Department Targets Those Involved in Iranian Scheme 

to Purchase Airplanes," May 21, 2015. (http://www.treasury.gov/press-center/press-releases/Pages/jll 006l.aspx) 15 "Iran's Qeshm Fars Air begins B747 freighter ops," Ch-Aviation, April!, 2017. (accessed via Cit-Aviation) 16 "Aircraft Details- EP-FAA" Ch-Aviation, updated February 28, 2018, accessed July 5, 2018. (accessed via CitAviation) 

17 For example, NIITCO GmbH, in Hamburg, Germany and its London subsidiary NIITCO 

(http://www.niitco.co.uk/contact.htm) belong to the Iranian Mines and Mining Industries Development and 

Renovation Organization (JMIDRO), a, Iranian govermnent entity delisted by the JCPOA and therefore under U.S. 

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Emanuele Ottolenghi July 12,2018 

Iran has responded to sanctions by creating complex corporate structures across different 

jurisdictions, making the link with an Iranian parent entity less obvious. Iranian senior corporate 

managers often fictitiously resigned their government jobs to seek business ventures overseas on 

behalf of the regime, quickly emerging as proprietors of business empires with no formal ties with 

Iran. A regime proxy with no formal connection to past employers provides plausible deniability. 

Former regime procurement agents interviewed by FDD confirm that Iranian state companies have 

increasingly entrusted their most capable senior management with significant sums to invest 

industrial assets abroad. 18 Ownership of Western factories gives Iran access to knowledge and 

technology. This was the case ofMCS International GmbH a gas cylinder factory in Germany 

formerly known as Mannesmann Cylinder Systems GmbH. Iranian interest in the factory derived 

from a dual-use flow-forming machine that MCS's production line used for carbon fiber and 

chromium molybdenum steel mixed products. Such machines are critical in the production of 

uranium enrichment centrifuges. 

The story ofhow Tehran gained access to such sensitive dual use technology begins in 2003, when 

a group of Iranian investors purchased Mannesman Cylinder Systems in Dinslaken, Germany and 

renamed it MCS International GmbH. The company changed its name again in 2011 to MCS 

Technologies GmbH, and after a bankruptcy procedure, it was liquidated in April2013. Corporate 

records show that from 2003 to 20 II, MCS was owned by Reyco GmbH, a German subsidiary of 

Rey Investment Co. According to Treasury, Rey Investment Company was: 

... formerly run by Ayatollah Mohammad Mohammadi Reyshahri, who previously served 

as the Iranian Minister of Intelligence and Security. Rey Investment Company collected 

and invested donations obtained from Iranian Shi'a shrines. However, amidst allegations 

of mismanagement and embezzlement of shrine donations from the company, the Iranian 

Government cut off its funding to the point of nearly bankrupting the company. In mid-tolate 2010, Reyshahri was removed and control ofRey Investment Company was transferred 

to EIKO [a conglomerate owned by the Supreme Leader of Iran] and its director. EIKO 

subsequently appointed a new Managing Director ofRey Investment Company. 19 

Rey Investment's mismanagement undermined the performance of its overseas holdings, 

including, critically, MCS International. But in 2011, Iranian assets in Europe operated under a 

new, more difficult business climate. The UN Security Council had passed four resolutions 

imposing sanctions against Iran's financial, commercial, and transportation sectors. The European 

Union had adopted expansive sanctions against the same sectors, as well as Iran's energy industry. 

The U.S. sanctions regime also included new executive and legislative measures. Rather than 

closing the factory and looking for new investments, Iran salvaged its German asset, obfuscating 

its ownership in the process. According to the June 4, 2013 Treasury designation: 

sanctions since the U.S. stopped enforcing the JCPOA. Evidence obtained from the German and British commercial 

registries. 

18 Michael Birnbaum and Joby Warrick, "A mysterious Iranian-run factory in Germany," The Washington Post, 

April 17, 2013. (http://www. washingtonpostcom/worldJeurope/a-mvsterious-iranian-run-factorv-ingermany/2013/04/15i92259d7a-a29f-11e2-82bc-511538ae90a4 story.html) 19 U.S. Department of the Treasury, Press Release, "Treasury Targets Assets oflranian Leadership," April4, 2013. 

(https:/ /www. trcasu;ry.,.gQ..yj~ss-center/press-releases/Pages/j ll968.aspx) 

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MCS International was audited by [an EIKO subsidiary] in October 2010 and determined 

to be in poor financial standing. However, EIKO management rescued MCS International 

from bankruptcy and insisted on keeping the company open because it viewed MCS 

International as key to facilitating business in Europe. EIKO management viewed MCS 

International as being too important to EIKO's international plans to allow it to go bankrupt 

and believed that it would be easier to rescue MCS International from bankruptcy than to 

create or acquire new foreign companies on behalf of EIKO due to U.S. and international 

sanctions. EIKO subsequently ordered that responsibility for MCS International be 

transferred from EIKO-controlled TEACO to Iranian businessmen, who were sent to 

oversee the company. Following this transfer, the two individuals owned the shares for 

MCS International, but answered directly to EIK0.20 

Commercial registry entries for MCS Technologies GmbH (aka MCS International) show that both 

registered owners were Iranian-Canadian dual nationals and Canadian residents. 

Berichtigte Liste der Gesellschafter der Kronen tausend674 GmbH, 

Berlin kiinftig: MCS Systems GmbH, Dinslaken, gemaB § 40 Abs. 2 

GmbHG 

Nr; Gesellschafter Wohnort Anteil mit Nr. 

1 Abdoulrasoul Dorri- No. 130 b, Belsize 1 - 12.750 Ober je 

Esfahani (geb. Drive, Toronto, On- EUR 1,00 

04.04.1945) tario M4S 1 L8, KaNo. 130 b, Belsize nada 

Drive, Toronto, Ontario 

2 Eshagh Hajizadeh (geb. 1189 Shavington 12.751 -25.000,00 

03.11.1967) Street, North Van- Ober je EUR 1,00 

couver, BC, V7LILI, 

Kandada 

Commerc1al Extract for MCS Technologies GmbH showmg two owners as rest dents of Canada 

Though unable to move the equipment to Iran because of tough U.S. and EU sanctions, the 

regime's proxies controlled the asset for 10 years and arranged for periodic visits by engineering 

delegations from Iran. Iranian engineers spent time familiarizing themselves with MCS technology 

used for the production of uranium enrichment centrifuges. Eventually, Rey Foundation 

established a replica ofMCS (Pars MCS) in Iran.21 

Another prominent example of a former Iranian official entrusted with significant assets and 

latitude to assist the regime's sanctions evasion schemes is Mehdi Shamszadeh, the former 

20 U.S. Department of the Treasury, Press Release, "Treasury Targets Assets oflranian Leadership," April4, 2013. 

(https:l/v.ww. treasury. gov/press-center/press-releases/Pagesi j 11968 .aspx) 21 "Home: Pars Mcs," Pars Mcs Website, accessedJnne 22,2015. (http://wwv..parsmcs.comicontents/indcx/1a!!!W;n) 

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commercial director for the Islamic Republic of Iran's Shipping Lines (IRISL). 22 Treasury 

sanctioned IRISL in 2008 for facilitating "shipments of military-related cargo destined for [Iran's 

Ministry of Defense Armed Forces and Logistics] and its subordinate entities, including 

organizations that have been designated by the United States pursuant to E.O. 13382 and listed by 

United Nations Security Council Resolutions 1737 and 1747."23 

Shamszadeh moved to London in 2005 to serve as the local director of IRISL UK, a subsidiary of 

IRISL, and of IRINVESTSHIP Ltd, a financial holding company co-owned by IRISL. Treasury 

eventually sanctioned both in September 2008.24 Shamszadeh, however, resigned both positions, 

launched his own businesses, acquired British nationality, and shortened his name to Shams. 25 He 

was never sanctioned, but Iranian authorities arrested him in 2015 upon entry into Iran and tried 

him for embezzling government money he acquired in the course of running a complex sanctions 

evasion scheme. Shamszadeh, who boasted of his contribution to the sanctions evasion effort 

during the trial procecdings,26 was sentenced to death in early 2016. He appealed and his case is 

pending.27 

FINANCIAL EVASION 

Iranian officials in 2011 admitted that sanctions on its banking sector were painful. 28 UN sanctions 

only listed a handful of Iranian banks. U.S. and EU sanctions added more banks to the list, 

including Iran's Central Bank, and targeted Iranian banking subsidiaries overseas. From 2012 to 

2016, Iranian banks were also removed from SWIFT, the Belgian-based cooperative clearing 

platform for international banking transactions. 29 With U.S. financial sanctions now re-imposed, 

Iranian banks will likely, once again, be cut off from the international financial system. 

Iran's evasion of financial sanctions follows the same playbook as commercial restrictions. The 

regime first established and then sought to purchase banks outside Iran to facilitate prohibited 

banking transactions, adding successive layers of obfuscation to cover its tracks. Over the years, 

large Iranian banks have incorporated subsidiaries overseas: Arian Bank in Afghanistan,30 Bank 

22 Cynthia Busuttil, "Iranian firm denies 'pressure' c!aims," Times of Malta, June 4, 2004. 

(http://www. timesotinalta.com/articles/view/20040604/local/iranian-finn-denies-pressure-claims. 121313) 23 U.S. Department of the Treasury, Press Release, "Major Iranian Shipping Company Designated for Proliferation 

Activity," September 10,2008. (httns://www.treasury.gov/press-center/press-releases/Pages/hp1130.aspx) 24 U.S. Department of the Treasury, Press Release, "Major Iranian Shipping Company Designated for Proliferation 

Activity," September IO, 2008. (https://www.treasurv.gov/prcss-center/prcss-reieasesfPagesihpl 130.aspx) 25 "Directors' Particulars of Change," Company House, Corporate entry for Global Holding Investments Ltd., July 

I6, 20Il. 26 Tom Cogblan and Sean O'Neill, "Britain pleads for life of confessed sanctions buster," The Times (UK), April I 1, 

2016. (https://www.thctimes.co.uk/articlefbritain-pleads-for-life-of-confessed-sanctions-buster-nOddjtcwg) 27 Michael O'Kane, "Mehdi Shams sentenced with Babak Zanjani for Iran sanctions evasion," European Sanctions, 

April13, 20I6. (https://europeansanctions.com/2016/04/13/medhi-shams-sentenced-with-babak-zanjani-for-iransanctions-evasion/) 

28 Rick Gladstone, "Iran Admits Western Sanctions Are Inflicting Damage," The New York Times, December 20, 

201 I. (http:/ /w\vw.nytimcs.com/20 11/1 2/20/wor1dlmidd1eeast/iran -admits-wcstem-sanctions-are-inflictingdamage.html? t=O} 29 "Payments system SWIFT to expel Iranian banks Saturday," Reuters, March 15, 2012. 

(http:/ /www.reuters.com/articlc/20 12/03/ 15/us-nuclear -iran-idUSBRE82E 15M20 120315) 30 "Arian Bank," Iran Watch, January 16,2016. (!li!p_:l/www.iranwatch.org/iranian-entitics/arian-bank) 

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Melli ZAO in Russia, 31 Future Bank in Bahrain,32 Mellat Bank SB CJSC inArmenia,33 Oner Bank 

ZAO in Belarus,34 Persia International Bank PLC in Great Britain,35 and Trade Capital Bank in 

Belarus.36 

Iran also sought to facilitate Iranian financial activities by creating joint banking ventures in 

friendly jurisdictions.37 Iranian banks established the European-Iranian Commercial Bank (EIH)38 

in Hamburg, Germany. In Venezuela, Iran created the Iran-Venezuelan Binational Bank39 as a 

joint venture between the Export Development Bank of Iran and the Banco Industrial de 

Venezuela. 

Once these were sanctioned,40 Iranian strategy shifted from trying to establish banking institutions 

abroad to taking control of foreign banks. Iranian proxies did so at least twice. 

In 2008, three Iranian businessmen, whom the U.S. Department of Treasury later sanctioned for 

acting on behalf of Iran, purchased a controlling stake in a small bank in Tbilisi, Georgia. The 

three incorporated a foundation in Liechtenstein, KSN Foundation, for the purpose of controlling 

Invest Bank JSC, as well as funds in Switzerland and New Zealand.41 A December 2016 sanctions 

evasion case against a U.S.-Korean dual national acting on Iran's behalf revealed that the same 

three Iranians helped launder as much as $I billion and more than € I billion in oil revenues through 

their network. 42 

31 "Bank Melli Iran Zao," Iran Watch, January 16,2016. (bJ.lJl:/l~"·w.iranwatch.orgliranian-entities/bank-melli-iranzao) 

32 33 "Future Bank," Iran Watch, January 16,2016. ~Ta~~~~:~:::~~:~:it!~~i!l::bl!l!k: "Mellat Bank SB CJSC," Iran Watch, January 16, 2016. 

sb-cisc) 

34 "Onerbank Zao," Iran Watch, January 16,2016. (htm:l/www.iranwatch.org/iranian-entities/onerbank-zao) 35 "Persia International Bank PLC," Iran Watch, January 16,2016. (http://www.iranwatch.org/iranianentitics/persia-intemational-bank -p lc) 36 "Trade Capital Bank," Iran Watch, January 16,2016. (http://www.iranwatch.org/iranian-entities1

trade-capitalbank) 

37 Douglas Farah, "Iran Moving Banking Operations to Latin America," Douglas Farah B/og, May 30, 2008. 

(http:/iblog.douglasfarah.corn!article/356/iran-moving-banking-operations-to-venezuela.com) 

38 "Europaisch-Iranische Handelsbank AG," Iran Watch, January 16. 2016. (http://www.iranwatch.org/iranianentities/europaisch-iranlsche-handclsbank-ag) 

39 "Inaugurado Banco Binacional Iran-Venezuela," Partido Socialista Unido de Venezuela, April3, 2009. 

(http://www.psuv.org.ve/temas/noticias/Inaugurado-banco-binacional-Iran-Venezuela/) 

40 The U.S. Department of the Treasury targeted EIH in September 2010: U.S. Department of the Treasury, Press 

Release, "Treasury Department Targets Iranian-Owned Bank in Germany Facilitating Iran's Proliferation 

Activities," September 7, 2010. (htm:l/www.treasurv.gov/press-centerlpress-rcleascs/Pages/tg847.aspx); The 

European Union followed suit in May 20 II: Council Implementing Regulation (EU) No 503/20 II of 23 May 20 II 

Implementing Regulation (EU) No 961/2010 On Restrictive Measures Against Iran, Official Journal of the 

European Union, May 23,2011. (http://eurlex.europa.eu/LexUriServ/LexUriServ.do?uri~OJ:L:2011:136:0026:0044:EN:PDF); The U.S. Treasury sanctioned 

the Iran-Venezuela Binational Bank in May 2013: U.S. Department of the Treasury, Press Release, "Treasury 

Targets Iranian Attempts to Evade Sanctions," May 9, 2013. (http://www.treasury.gov/press-center/prcssreleases/Pages/jll933.aspx) 

41 Benoit Faucon, Jay Solomon, and Farnaz Fassihi, "As Sanctions Bite, Iranians Invest Big in Georgia," The Wall 

Street Journal, June 20, 2013. (http://'Www.wsj.com/articles/SB I 00014241 ?7887323864304578320754133982778) 42 United States of America vs. Real Property Located at 11621 A/derwood Loop, Anchorage, Alaska et al, 3:14-cv00065 (D. Alaska April 7, 2014), page 20. (accessed via PACER) 

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Control over Invest Bar!lc was wrested from Iranian hands in June 2013. The U.S. Treasury 

subsequently sanctioned KSN and the Iranian proxies involved,43 though they were all delisted in 

January 2016 pursuant to the JCPOA. Evidence suggests44 that their Georgia-based network is 

fully reconstituted to include a money exchange business, a financial assets management company, 

a stake in a new bank, and other assets. 

Iran has also evaded sanctions by moving its assets to foreign accounts. The simplest destination 

for such funds is overseas subsidiaries of Iranian companies not yet sanctioned. These entities bank 

locally. They also transact locally with business counterparts, purchasing merchandise that transits 

through the countries where the subsidiaries are incorporated. With all business conducted locally, 

usually no red flags are raised. 

A good example of this mechanism is Mapna Group's overseas operations. Mapna45 is one ofthe 

largest Iranian energy sector service companies, with high profile public projects both in Iran and 

abroad. Iran's supreme leader gave his 2014 "resistance economy" speech, extolling the virtues of 

enduring sanctions and engaging in sanctions evasion, from Mapna's headquarters.46 Mapna has 

been repeatedly denied export licenses by the British government for WMD proliferation 

concerns.47 

The company holds great importance for the Iranian regime. Mapna's current chairman, Abbas 

Aliabadi, was a faculty member and the deputy manager of Emam Hossein University the 

defense college of Iran's Islamic Revolutionary Guard Corps (IRGC). Mousa Refan, the founder 

of the IRGC air force, previously sat on the company's board of directors. Mapna belongs to the 

Reza Shrine Foundation (Astane Ghods Razavi),48 whose chairman, Ayatollah Ebrahim Raisi, was 

directly appointed by, and reports to, the supreme leader. 

Despite its close connections to the regime and its possible past role in WMD procurement, Mapna 

was never designated by the EU, UN, or U.S. However, its 33 subsidiaries in Iran, like every other 

Iranian business, suffered (and are likely to suffer again) from financial sanctions against Iran's 

banking sector. 

To service its financial transactions, Mapna built a network of overseas subsidiaries and 

companies. These include: Mapna International FZE in Dubai; Mapna Europe GmbH in Germany; 

43 U.S. Department of the Treasury, Press Release, "Treasury Targets Networks Linked to Iran," February 6, 2014. 

(http://www.treasury.¥ov/press-center/press-releases/Pages/jl2287.aspx) 

44 Emanuele Ottolenghi, "Snap-Back: A journey through Iranian sanctions evasion in Georgia," Tablet Magazine, 

July 1, 2015. (https://www.tabletmag.comljewish-news-and-politics/191903/iranian-sanctions-evasion) 45 "Fields of Activity," MAPNA Group Website, accessed June 22, 2015. (http://www.mapnagroup.coml) 46 Grand Ayatollah Sayyid Ali Khamenei, "Supreme Leader's Speech in Meeting With Laborers ofMAPNA 

Group," The Center for Preserving and Publishing the Works of Grand Ayatollah Sayyid Ali Khamenei, April 30, 

2014. (!mp:/ienolish.khamenei.irliindex.php?option=com content&task-cview&id=I903&Itemid=4) 47 UK Department for Business Innovation & Skills, "Iran List (Last Amended 5 October 2015)," October 5, 2015. 

(https://web.archive.org/web/20 160409060415/https://www.gov. uklgovemment/uploadslsystemluploadslattaclunent 

_ datalfile/46614 7/iran-list-oct -15 .pdf) 48 '\;_,..,._, <Y'.liui.:Wl C"4- JwY,," Astan Qud' Razavi (Iran), accessed June 22, 20!5. 

(hHp;!/Jvww .am.:ir/J~Qrt4}./.Home!Default.aspx) 

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Mapna Italia SRL in Italy; Mapna International Shanghai in China; Qam Muscat LLC in Oman; 

MS Uluslararasi Enerji Yatirim Anonim ~irketi, Ozgiine~ Elektrik Par9alan Ticaret Limited 

~irketi, and Energy Trading Elektrik Sanayi Ve Ticaret Limited ~irketi in Turkey; and Kura 

Industrial Trading LLC in Thilisi, Georgia. Corporate documents filed by some of these companies 

show that they lend each other funds. Documents leaked to FDD demonstrate that as of December 

2011, both Mapna Europe GmbH and Mapna International FZE held an account at the Frankfurt 

branch of a major European financial institution. 

Iran has also established opaque shell companies in offshore jurisdictions. By incorporating these 

entities, and often obfuscating their corporate link to their real owner, Iranian companies maintain 

access to reputable banking services. Local payments, as noted earlier, elicit less concern and will 

frequently stay under the radar of sanctions enforcement authorities. 

EXPLOITING LOOPHOLES 

For Iran, sanctions are temporary roadblocks, not insurmountable obstacles. By building bypass 

roads, Iran turns crisis into opportunities. Iran's response to U.S. oil sanctions offers a case in 

point. 

Section 1245 of the National Defense Authorization Act for Fiscal Year 201249 imposed secondary 

sanctions against Iran's oil exports. However, U.S. legislators made an exception for countries that 

would demonstrably reduce the purchase oflranian oil over time. Iran's oil deliveries would then 

be purchased with local currency and placed in local escrow accounts, which Tehran could only 

access to purchase non-sanctioned goods from local companies. The money could not be 

repatriated. 

Six countries adhered to this mechanism: China, India, Japan, South Korea, Turkey, and South 

Africa. Thus, Iran's oil revenues were locked in yuan, rupees, yen, won, lira, and rand, and only 

accessible for local purchases of approved goods. 

These measures, while ensuring that the global oil markets remained stable, quickly depleted Iran's 

foreign currency reserves. Iran responded by establishing front companies in all six jurisdictions. 

Iran used these entities to circumvent Section 1245's provisions, and to serve as ATM machines. 

Classic money laundering techniques like over-invoicing and false invoicing enabled front 

companies to access the locked-up cash in local transactions. Payments to these companies could 

then be converted into foreign currency and moved to Iran, or made available to other Iranian 

overseas operations, as needed, for purchase of other goods. 

A significant portion of the revenue was reinvested into gold and other precious metals and jewels, 

which are convenient substitutes for foreign currency. During 2012-2013, Turkey's sales of gold 

to Iran skyrocketed. The Iranians apparently recognized that gold sales to individual gold traders 

was authorized under the sanctions regime, so long as the stated destination was not the 

49 National Defense Authorization Act For Fiscal Year 2012, Pub. L. 112-81, codified as amended at 112 U.S.C., 

§ 1245. (http://www.treasury.gov/resourcc-ccntcr/sanetions/ProQrams!Documents/ndaa publaw.pd!) 

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government ofiran. With Turkish help, Iran exploited this "golden loophole" 50 to the tune of$12 

billion in the first year. 

The loophole was ultimately addressed when Congress prohibited gold exports to Iranian 

government entities in U.S. legislation that passed in January 2013. Curiously, the Obama 

administration delayed the enactment of the law until July 2013, enabling the "gas-for-gold" 

scheme to continue for six more months. 51 

Iran responded with sophistication to U.S. sanctions against its petroleum exports by leveraging 

its access to the Turkish market. Since the passage of Section 1245, the number of Iranian 

companies in Turkey has grown exponentially from 2,300 in November 2012 to 4,624 in 

December 2017.52 Among them are numerous regime-affiliated companies suspected of sanctions 

evasion schemes. 53 

Iran has also evaded financial sanctions through remittance networks and currency exchange 

providers. These services help Iran launder money before it is repatriated or transferred to accounts 

overseas that Iranian proxies access for procurement purposes. 54 Because they are small, they are 

often harder to track - making them essential tools for Iranian financial sanctions evasion. In her 

November 2013 testimony to Congress, then-Financial Crimes Enforcement Network Director 

Jennifer Shasky Calvery noted that such tools are an ideal money laundering method, and not just 

for Iran, because they offer anonymity and usually elude custom controls. Unlike banking 

transactions, they leave almost no digital footprint. 55 

Many of the aforementioned cases of sanctions evasion included remittance providers. The Iranian 

network in Tbilisi that took control of Invest Bank JSC included money exchange businesses 

50 Gary Clark, Mark Dubowitz and Rachel Ziemba, "Iran's Golden Loophole," Roubini Global Economics & 

Foundation for Defense of Democracies. May 13,2013. 

(http://www.defcnddcmo\:IlJ9'~9.I&'con!Q!ll/1!llliliill>idoct!J!t<;n!§iEI2D__RQE Iran Go! Report Mav 2013 FINAL 

.f.&® 

51 Mark Dubowitz and Jonathan Schanzer, "Iran's Turkish Gold Rush," Foreign Policy, December 26, 2013. 

(http:/ I foreignpolicy.com/20 13il2/26/irans-turkish-gold-rush!) 52 Republic of Turkey, Ministry of Economy, "FDI" accessed June 28,2018. 

(https://www.cconomy.gov.tr/portal/content/conn/UCM/uuid/dDocName:EK-253303) 

53 U.S. Department of the Treasury, Press Release, "Treasury Targets Procurement Networks and 31 Aircraft 

Associated with Mahan Air and Other Designated Iranian Airlines," May 24, 2018. 

(https://home.treasury.gov/index.php/news/prcss-rcleases/sm0395) 

54 For an overview of these informal money networks and how money can be laundered through them, see: Financial 

Action Task Force, "Money Laundering Through Money Remittance and Currency Exchange Providers," June 

2010. (http://www.fatfgafi.org/media/fatfiML %20through%20Remittance%20and%20Currency%20Exchange%20Providers.pd0 55 Jennifer Shasky Calvery, "Statement of Jennifer Shasky Calvery, Director Financial Crimes Enforcement 

Network United States Department of the Treasury," Testimony before the Senate Committee on Banking, Housing, 

and Urban Affairs, Subcommittee on National Security and International Trade and Finance Subcommittee on 

Economic Policy, November 19, 2013. (httus://www.fincen.gov/news/testimonyistatemcnt-jcnnifer-shaskv-calverydirector-financial-crimes-enforcement-network) 

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incorporated in Thilisi, Dubai, Toronto, and Delaware; 56 three prepaid credit card companies57 

(one in Dubai, one in Thilisi, and one both in Georgia and lran);58 an offshore online private 

banking company in New Zealand, 5

9 and another in Switzerland;60 and a gold trader in Dubai. 

According to a March 2015 Reuters report, over the course of several months in late 2014, money 

exchange businesses in Dubai helped Iran launder and exchange $1 billion in Emirati dirhams that 

were ferried across the Gulf by money couriers.61 These schemes continue. Last May, working 

with authorities in the United Arab Emirates, Treasury moved to designate a Dubai-based money 

exchange network that laundered money and procured bulk cash in dollar denominations to Iran's 

Revolutionary Guard.62 

Prepaid cards - another business that Iranian regime proxies have embraced - are a more 

contemporary, convenient version of traveler's checks. A variety of card types allow for reloading 

of funds; card-to-account, account-to-card, and card-to-card transfers; and worldwide cash 

withdrawals through A TM machines. 63 Numerous Iranian financial cross-border operations have 

offered prepaid cards among their products for years. 64 

Iranian companies offering online trading and high-end investment services are also becoming 

more frequent, especially in offshore jurisdictions like the Cayman Islands, Malta, Switzerland, 

and Uruguay. 

FRAUDULENT PRACTICES 

56 New York Exchange LLC was sanctioned on February 6, 2014: 

U.S. Department of the Treasury, Press Release, "Treasury Targets Networks Linked to Iran," February 6, 2014. 

(http://www.treasury.gov/press-center/press-releases/Pages/il2287.aspx) 

57 Orchidea Gulf Trading LLC and its Turkish subsidiary were sanctioned on February 6, 2014: U.S. Department of 

the Treasury, Press Release, "Treasury Targets Networks Linked to Iran," February 6, 2014. 

(http://www.treasury.gov/press-center/press-releases/Pages/j12287.aspx); Invest Bank Business Card Services 

Company LLC (http://www.companyinfo.ge/en!corporations/4043998061) was in all likelihood forcibly closed by 

Georgian authorities. 58 "Travel Card FlyGeorgia," Facebook, accessed June 28, 2018. 

(httos:i/www.facebook.com/TraveiCardFiyGeorgia) 

59 "New York Fund Limited," OpenCorporates, January 5. 2015. 

(https://opencorporates.com/companies/nz/4062438); Corporate filings for New York Fund Ltd can be accessed at 

New Zealand's Companies Office website: 

http://\vww.business.govt.nz/companies/app/ui/pages/companies/4062438. 

60 EOT European Oil Traders SA was sanctioned on February 6, 2014: U.S. Departtnent of the Treasury, Press 

Center, "Treasury Targets Networks Linked To Iran," February 6, 2014. (Jillp;ilwww.trcasury.gov/prcsscenter/press-re1eases1Pages/jl2287 .aspx) 61 Jonathan Saul, Parisa Hafezi, and Louis Charbonneau, "Exclusive: Iran smuggles in $1 billion of bank notes to 

skirt sanctions- sources," Reuters, February 24, 2015. (http:/lwww.reuters.com/articlei2015/02/24/us-iran-dollarsexclusive-idUSKBNOLS I L V20 150?24) 62 U.S. Department of the Treasury, Press Release, "United States and United Arab Emirates Disrupt Large Scale 

Currency Exchange Network Transferring Millions of Dollars to IRGC-QF," May 10, 2018. 

(htt,ps:i/home.treasury.gov/news/press-releases/sm0383) 

63 See: Financial Action Task Force, "Guidance for a Risk-Based Approach: Prepaid Cards, Mobile Payments, and 

Internet-Based Payment Services," June 2013. (http://www.fatfgafi.org/medialfatJJdocuments/recommendations/guidance-rba-npps.pdO 

64 See, for example, Kiasun Card (http://www.kiasuncard.com/), and the associated Kiasun Exchange 

( www.kiasunexchangt&om), which also trade in cryptocurrencies. 

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Iranian procurement and illicit finance activities face a 21st-century dilemma: how to disguise 

themselves in a digital world where information is difficult to conceal. The answer for them has 

been to hide in plain sight. Efforts by IRISL to elude sanctions are a case in point. 

IRISL was sanctioned in 2010 under UN Security Council Resolution 1929.65 Many of its 

subsidiaries had already been targeted by U.S. sanctions in 2008. To evade sanctions, IRISL 

incorporated a parallel structure of companies in Hamburg, all called "Ocean," numbering them 

from First to Sixteenth. Each "Ocean" had an "Administration"- First Ocean GmbH & Co. KG, 

First Ocean Administration GmbH - and all could be traced back to an Ocean Capital 

Administration GmbH. The parent company, in tum, traced back to IRISL. 

Once this corporate structure was established, each company took ownership of IRISL ships. 

Vessels kept changing names and flags to elude further detection. Once the network was exppsed, 

the U.S. Treasury had to include the International Maritime Organization number of each ship to 

ensure that each burdensome new designation would not be deferred or neutralized by Iran simply 

painting its vessels' names over the previous one. 66 

Transshipment (shipping goods to an intermediate destination, where new paperwork for the 

merchandise is produced before transporting it to another location) enables Iran to obfuscate the 

final destination of the merchandise it procures, especially via free zones. In 2014, for example, 

eight refrigerating units suitable for underground facilities were sold by an Italian subsidiary of a 

U.S. company to a Turkish contractor, ostensibly for a sport facility in Central Asia. Italian 

authorities, however, blocked the shipment at the port on suspicion that the machines were destined 

to Iran and constituted a WMD proliferation risk.67 

Another case involved the aforementioned MCS International GmbH, which sent a shipment of 

gas cylinders to Golden Resources Trading Co., a Dubai-registered company. Authorities 

inspected the cargo, but- based on its documentation identifYing the end user as a Dubai-based 

trading house- released it. The U.S. Treasury later sanctioned the trading house as part of a 

network of companies controlled by EIK0. 68 Golden Resources Trading's main function was 

allegedly to take consignment of the merchandise, prepare new paperwork showing Dubai as its 

origin, and then transfer it to Iran. 

65 United Nations Security Council, "Security Council Imposes Additional Sanctions on Iran, Voting 12 in Favour to 

2 Against, with 1 Abstention," June 9, 20!0. (https://www.un.org/prcss/en/2010/sc9948.doc.htm) 66 For further details of Iran's shipping shell game, see: Claudia Rosett, "Iran Sanctions: A Tale of Two Fleets," 

Forbes, February 27, 2012. (http://www.forbes.com/sites/claudiarosett/2012/02/27/iran-sanctions-a-tale-of-twofleet~/); Claudia Rosett, "How Iran Steams Past International Sanctions," The Wall Street Journal, July 12,2012. 

(bttp:llwww.wsj.com/articles/SB 10001424052702303919 504577522431458614636 ); Claudia Rosett, "Have Tehran 

Tankers hijacked Tanzania's Flag?" Forbes, July 12, 2013. 

(http://w\vw.forbes.com/sites!claudiarosett!2013/07/12/have-tehrans-tankers-hijacked-the-tanzanian-flag/) 

67 "Rapporti Tra Accesso C.D. Difensivo E Documenti Coperti Dal 'Segreto' A Tutela Di Interessi Pubblici," 

JUSforYou.it, February 7, 2014. (http://www.jusforyou.itimain/?MID-1.4707 .4714.4857 &b~25248) 

68 U.S. Department of the Treasury, "The Execution of Imam Khomeini's Order (EIKO) International Financial 

Network," accessed June 22,2015. (lntp:llwww.treasury.govlresourcecenter/sanctions/ProgramsrDocuments/eiko chart.pdi) 

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Iran also resorts to simple tricks. Iran's network in Georgia used similarly named companies to 

make them harder to track. Its companies included names such as "Invest Fund Management," 

"New York Exchange," "New York Fund," and "New York Shipping." Another set of companies 

used the "Merchants Savings and Loans" label, which came in multiple variations, such as 

"Offshore Financial Company" or "Group.'' 

Brand appropriation is another common practice. Rather than burying their company records under 

millions of Google search entries bearing similar word combinations, Iranian fronts link 

themselves to names, logos, and branding of credible financial and commercial institutions. This 

enables them to boost their credibility and give an aura oflegitimacy to their operations. 

ANCILLARY SERVICES 

All of Iran's sanctions-busting activities rely on a service industry that enables Iranian agents, 

proxies, and intermediaries to conduct business in the most discreet way possible. This discretion 

can be achieved through the systematic acquisition of foreign passports. Iranian nationals routinely 

come under added scrutiny at border controls and financial institutions. Tehran's answer to this 

challenge has been to seek passports of convenience for its procurement agents, to enable 

undetected travel and, when needed, to relocate pcm1anently to foreign jurisdictions to establish 

businesses that cannot be traced back to Iran. 

The growing trend of citizenship-by-investment programs has created an opportunity for Iranians 

seeking to travel and conduct business overseas. There is now a growing number of available 

citizenship and permanent residency options available in return for real estate or business 

investments. 69 

The aforementioned case of Mehdi Shamszadeh is a good illustration: As reported by Kayhan 

London, Iranian officials instructed him to seek British citizenship to better facilitate his sanctions 

evasion activities. 70 Ali Sadr, the chairman of Malta's Pilatus Bank, who was recently arrested 

upon entry into the U.S. and indicted for money laundering and sanctions evasion/1 held a St. 

Kitts and Nevis citizenship. So did the three Iranians implicated in the aforementioned Georgia 

network. And just recently, a Reuters investigation revealed that more than a hundred Iranians, 

many of them government officials, obtained Comoros Islands passports under a citizenship-byinvestment scheme designed to attract foreign investment in the island nation.72 

69 The Dubai-ba>ed, Iranian-owned Capital Immigration LLC is one of the most comprehensive platfonns for 

permanent residency or citizenship-by-investment programs. "About Us," Capital Immigration Website, accessed 

June 29, 2018. (h!ll2c'L'>Y''"v.capitalimmigmtion.net!cj__l:b.lllml) 70 Potkin Azarmehr, "On Trial in Iran: A Dual National Accused of Stealing $40 Billion," Kayhan London (UK), 

July 10,2017. {ht!ps:t/kavhan.london/fa!l396/04/19/on-trial-in-iran-a-dual-national-accused-of-stcgliilll:.4Q:.lilllion) 71 Nate Raymond, "U.S. arrests Iranian over alleged $115 million sanctions evasion scheme," Reuters, March 20, 

2018. (httQs:iiwww.reuters.com/articleius-usa-iran-crime/u-s-arrests-iranian-over-alleged-!15-million-sanctionsevasion-scheme-idUSKBNl GW32E) 72 Bozorgmehr Sharafedin and David Lewis, "Special Report: As sanctions bit, Iranian executives bought African 

passports," Reuters, June 29,2018. (httns:/I'Www.reuters.com/article/us~iran~passports-comorosspecialrcportispecial-rcport-as-sanctions-bit-iranian-executivcs-bought-a.fri£!l.1l:lllh~Sports- idUSKBN 1 JP 14 Y) 

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Iranian front companies have used offshore jurisdictions such as Panama, Liechtenstein, 73 the 

Channel Islands74 and the Isle ofMan/5 the British Virgin Islands,76 and Malaysia's Labuan.77 To 

avoid detection, Iranian fronts relied heavily on the principle ofbeneficial ownership. The purpose 

of such practices is to obfuscate the real ownership of businesses that, if directly linked to Iranian 

citizens, might attract scrutiny or denial of banking services or licenses. 

Ownership transfer is also routinely used to evade sanctions. The case of Babak Zanjani, 

Shamszadeh's senior associate illustrates the practice. In 2010, Zanjani established Kont Group, a 

holding company in Turkey. Kont Group established a holding company in Dushanbe, Tajikistan, 

and bought a local bank. The bank, Kont Bank Investment, 78 controlled a bank in Labuan, 

Malaysia, which was renamed First Islamic Investment Bank. 79 According to the U.S. Treasury, 

the two financial institutions were used to facilitate financial transactions by Iran's oil industry. 

Eventually, the EU sanctioned Zanjani and his network of companies in December 2012. 80 The 

U.S. followed suit in April2013. 81 However, twelve days after EU sanctions were imposed, Kont 

Group appointed Turkish national Merve Irmak as managing director and soon thereafter, Zanjani 

transferred all his shares to Irmak. The new ownership of Kont Group was extended to its 

subsidiaries. In May 2013, the Dushanbe-based Kont Investment Bank, now under the 

chairmanship of a former Iranian Bank Mellat official, issued a press release declaring U.S. 

sanctions "unfounded" due to the new ownership structure at Kont Group. 82 

CONCLUSION 

Mr. Chairman, Iranian attempts to obfuscate and conceal illicit procurement and sanctions evasion 

activity follow established patterns and share common features. Financial institutions and 

intelligence practitioners can use these typologies to identifY actors and transactions that are 

73 KSN Foundation, sanctioned by the U.S. Treasury on February 6, 2014, is a Liechtenstein-based foundation. 74 Naftiran Intertrade Company LTD, under U.S. and EU sanctions, was originally registered in Jersey, Channel 

Islands, before being moved to Switzerland and, subsequently, to Labuan, Malaysia. 75 IRJSL registered vessels in the Isle of Man: Allan Urry, "Why did Iran register ships in the Isle of Man?" BBC 

News (UK), July 14, 2010. (http://www.bbc.com'newsil0604897) 76 Pearl Energy Company LTD, a front for Bank Mellat, was sanctioned in June 2010 by the European Union: The 

Council of the European Union, "Council Decision 2011/299/CFSP," Official Journal of the European Union, May 

23, 2011. (http://eur-lex.europa.eu/lerral-contentiENiTXTi?uri=celex:3201lD0299) 77 Pearl Energy Services LTD, a front for Bank Mella!, was sanctioned in June 20 I 0 by the European Union: 

Council Decision 2011/299/CFSP of 23 May 20 II amending Decision 20 I 0/413/CFSP concerning restrictive 

measures against Iran, Official Journal of the European Union, May 23,2011. (http://eur-lex.europa.euilegalcontent/ENiTXT/?uri~celex:3201lD0299) 

78 "Welcome to Kont Bank," Kont Bank Investment Website, accessed June 22,2015. Qillr.s://w-ww.kontbank.tjl) 79 "First Islamic Services," First Islamic Investment Website, accessed June 22, 2015. C!ill!2://www.ftc,'1::islamicban1ccom/Dcfault.aspx) 

80 Council Implementing Regulation (EU) No 1264/2012 of21 December 2012 Implementing Regulation (EU) No 

267/2012 Concerning Restrictive Measures Against Iran, Official Journal of the European Union, December 21, 

2012. (http://eur-lex.europa.euiLexUriServ/LexUriServ.do?uri~OJ:L:2012:356:0055:0060:en:PDF) 

81 U.S. Department of the Treasury, Press Release, "Treasury Targets Network Attempting to Evade Iran Sanctions," 

April II, 2013. (http:/lwww.treasury.gov/press-center/press-releases!Pages/jll893.aspx) 82 Zarina Ergasheva, "Kont Investment Bank: U.S. Treasury Department's Actions Unfounded," ASIA-Plus 

(Tajikistan), February 5, 2013. (http ://news. tj/en/news/kont -investment -bank -us-treasurv-department -s-actionsunfounded) 

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potentially harmful to the integrity of the financial system or pose challenges to international 

security. 

The Treasury Department plays a key role in this regard. Its sanctions and designations over the 

years have helped name and expose Iranian efforts to circumvent sanctions. But as my testimony 

indicates, this is a cat-and-mouse game, where one can never assume that countermeasures are the 

final word. Once designations are announced, we must assume that Iran will seek a way around 

them. A constant update of sanctions and rigorous enforcement is therefore a key part of 

Treasury's ongoing effort. 

Congress, for its part, should strongly consider updates to the Bank Secrecy Act (BSA), 

which requires reporting of suspicious activity and transactions. The BSA legislation was first 

passed in 1970 and amended in title Ill of the USA PATRIOT Act. It needs to be updated to 

combat emerging trends in money laundering, including new forms of value transfer. With new 

and emerging payment systems, including virtual currency and mobile payment platforms, it is 

essential our regulatory regime keeps pace. 

Iranian networks have always preferred procurement in Europe to Asia, and they have relied on 

Turkey and Gulf countries as transshipment points for their networks. It is critical that Treasury 

leverages secondary sanctions to deter malfeasance in friendly jurisdictions. 

Europe needs to take a stronger stance against Iran and its proxies the IRGC and Hezbollah. The 

IRGC is reportedly involved in ballistic missile procurement throughout Europe and must be held 

accountable for this destabilizing behavior. The IRGC has gone so far as printing fake currency in 

order to finance their operations. 83 Congress should encourage Europe to designate all of 

Hezbollah as a terrorist entity aud continually investigate the IRGC and their investments. 

In the past year, the U.S. has sanctioned foreign banks, companies, exchange houses, shipping 

assets, and individuals for providing money and services to the IRGC and Hezbollah. The U.S. 

should continue these designations to put pressure on these terror proxies to limit their ability to 

use the formal financial sector. In addition, law enforcement must continue to crack down on 

sanctions evaders that operate on the black market and in areas of high corruption. 

The most egregious money laundering networks feed off areas oflow governance, such as the TriBorder region between Argentina, Paraguay, and Brazil. Congress should continue to resource 

the important work of the Drug Enforcement Administration, Department of Justice, the 

Coast Guard, and Treasury as they take on this daunting task. Investigations of complex money 

laundering and sanctions evasion require significant time, and Congress should ensure that the 

resources provided match the scope of the problem. 

Better transparency laws and regulations are needed in the United States and worldwide. 

Transparency is a powerful tool against Iranian efforts to procure technology and evade financial 

sanctions. The recent push by the United Kingdom and the European Union to require more 

transparency on the issue of beneficial ownership of companies is an important start. Jurisdictions 

83 U.S. Department of Treasury, Press Release, "Treasury Designates Large-Scale IRGC-QF Counterfeiting Ring," 

November 20, 2017 .(https://www. treasury.gov/press-centerlprcss-releases/Pages/sm0219 .aspx) 

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Emanuele Ottolenghi July 12,2018 

such as Delaware and the Marshall Islands regrettably lack the necessary transparency to reduce 

the risk for sanctions evasion. 

Finally, the United States should address Iran's abuse of foreign passports by denying access 

to the visa-waiver program to any country that sells its citizenship for investment. Of course, 

exceptions can be made for countries that are willing to share, on an ongoing basis, updated lists 

of beneficiaries of these programs as well as their due diligence packages. 

These are some of my recommendations, Mr. Chairman. Thank you for the opportunity to testify 

and I look forward to your questions. 

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July 12, 2018 

Center fora 

New American 

Security 

Testimony before the House Financial Services Committee 

Subcommittee on Terrorism and Illicit Finance 

Countering the Financial Networks of Weapons Proliferation 

Elizabeth Rosenberg, Director and Senior Fellow 

Energy, Economics, and Security Program, Center for a New American Security 

Thank you, Chairman Pearce and Ranking Member Perlmutter, for convening this hearing on 

countering the financial networks of weapons proliferation and for inviting me to appear before this 

subcommittee. 

The financing of weapons of mass destruction proliferation is a grave threat facing the United States 

and the global financial system. The ability of rogue states and, potentially, malicious non-state 

actors to obtain weapons of mass destruction by using illidt financial activity and procurement 

networks is a major challenge to U.S. foreign policy goals, to the security of our homeland and that 

of our allies and partners, and to rl1e integrity of the global financial system and the global 

nonproliferation regime .. 

Countering proliferation finance must be a core parr of the policy approach to the United States' 

most pressing national security concerns, specifically North Korea, Iran, and Syria. Furthe-.rmore~ the 

United States must lead on this issue in international forums such as the United Nations Security 

Council. This body and several others have taken important, though merely nascent, measures to 

place obligations on member states to halt proliferation finance. There is broad opportunity for the 

United States to advance policy and global cooperation on an important security issue, with nearterm and meaningful benefits for global nuclear security. 

Advancing the critical, even essential, global policy regime to counter the financing of proliferation 

will feature several primary challenges. First, proliferation finance is difficult to detect. Proliferation 

networks and specific individuals in these networks leverage the openness and interconnectedness of 

the global financial and trading system to achieve their malicious goals. For example, in 2013 

Spanish authorities intercepted a shipment of corrosion-resistant valves destined for an oil field 

services company in the United Arab Emirates. Subsequent investigation found that the valves were 

going to be diYerted to Iran for potential use in Tehran's nuclear program. 1 As evident from this 

case study, the global financial system prizes frictionless transfers of goods and capital, which 

1 Jonathan Brewer, "Study of 'l'ypologies of Financing of \X"MD ProHferation, Final Report," (Project Alpha, King's 

CoHege London, October 13, 2017), https:/ /projectalpha.eu/final-report-typologies-of-proliferation-finance/. 

Bold. 

Innovative. 

Bipartisan. 
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pro1iferators have taken advantage of on multiple occasions. ~foreover, proliferatorR have taken 

advantage of gaps in different national rebrnlatory regimes to evade detection. For example, although 

paragraph 16 of U.N. Security Council resolution 2321 (2016) requires U.N. member states to limit 

the number of bank accounts held by DPRK Emhassy staff, the U.N. Panel of Experts on DPRK 

noted that states differed in their interpretation of the range of staff covered by this provision. 

Second, countering the financing of proliferation is a highly technical subject, sitting at the 

intersection of sanctions enforcement, export control, financial crimes compliance, and d1e global 

nuclear nonproliferation regime. As these networks operate across multiple jurisdictions, involve an 

array of different constituencies-,with different legal and regulatory authorities, various privacy and 

data-sharing obligations, and with major differentiation in political villl and technical capacitycoordinating a truly effective international response is difficult. Many countries that othenvise lead 

on financial transparency and nuclear nonproliferation have struggled to summon the political will to 

tackle proliferation finance head-on, and even where there is political \Vill government authorities 

and plivate sector compliance professionals may lack knowledge about how to do this work 

properly.' 

1t is truly alarming that rhe community of nations concerned by the threat of nuclear challenges, 

not\vithstanding the ostensible commitment of many nations to this issue through support of 

multiple U.N. Security Council resolutions, nevertheless pays relatively less attention to the low 

probability but extraordinary high impact threat-the usc of a weapon of mass destruction-than to 

the threat of a terrorist attack. \'Vhile larger international financial institutions may have the resources 

and know-how to examine their transactions for the footprint of financing of proliferation, smalJer, 

regionally-focused banks may not. Indeed, in some cases these smaller institutions may not even be 

aware of their obligations under international law, particularly if the local regulatory environment is 

weak. 

The undeniable difficulties associated viith countering the financing of proliferation, however, 

should not give the false impression that creating a more effective policy framework is beyond the 

capacity of the international community. 'W'c know the deficiencies ln the system, and we can 

identifY strategies to ameliorate them. 

To begin with, there are major gaps in the regulatory regime that hamper a better response to this 

crjticaJ issue. Compliance and oversight programs for financjal institutions have historically focused 

on financial integrity threats other than proliferation finance, like anti-money laundering, anticorruption, and countering terrorist financing. This focus has led to a less-than-optimal outcome for 

checking the ability of North Korea and Iran, for example, to develop nuclear weapons capabilities. 

For policy leaders to darjfy that counter-proliferation fmance is on par \Vith an obligation to counter 

terrorism will go a long way to raise the profile of this issue and update compliance posture. 

Beyond a compliance footing, there are significant expertise and sophistication gaps in tracking 

proliferation financing not just among banks, but also among jurisdictions. Wbile the United States, 

2 See e.g., Andrea Berger, "A House \Vithout Foundations: The North Korea Sanctions Regime a tid Its 

Implementation," \'{'b.itehall Report 3-17 (Royal Cnited Services Institute, June 2017), 40, 

https:/ I rusi.org/ sites/ default I files/20 1706_ whr_a_house_ u.ithout_foundations._ wehpdf 

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the United Kingdom, and other European countries like France and Belgium have invested in 

building tbe institutional and intellectual capital needed to understand and counter this threat, many 

vulnerable jurisdictions such as Hong Kong or Malaysia have only recently begun to do so, and 

many more jurisdictions have not yet faced the issue. These countries will require more education 

and technical assistance, which the United States and a few in Europe, as well as Australia, are well 

positioned to provide. Some U.N. agencies offer workshops on proliferation financing (often 

together v.~th terrorist financing), funded by countries such as Canada and Japan. Capacity building 

is important: as prolifetation finance ncn.vorks operate globally, and are quite adaptable, international 

efforts to combat them are only as strong as the weakest jurisdiction. 

Given the size and reach of the U.S. financial system, as well as the sophistication of the legal and 

regulatory tools at the disposal of U.S. officials, Washington's policymakers must lead the way on 

disrupting the financing and procurement of weapons of mass destruction. U.S. policy leadership 

will :1eld numerous dividends. Not only will better regulation of the U.S. financial system foreclose 

avenues of proliferation finance in the United States, and via the U.S. dollar anywhere else in the 

world, but it \Vill also offer important models for other jurisdictions to follow. Better U.S. rules can 

serve as standards of excellence for other jurisdictions and for financial institutions around the 

world. Global regulators and banks already look to the United States as the regulatory standardsetter for numerous aspects of the internationaJ financial system. A strong counter proliferation 

fimmce regime must be a part of that. 

Expanding Mechanisms for Information Sharing 

Perhaps the most significant policy adaptation tlmt will help to counter the financing of proliferation 

is the crafting of better mechanisms for the timely collection and dissemination of information. 

Governments and banks must be able to share relevant information with one another or risk 

regularly, if unwittingly, facilitating the financing of proliferation. Banks must be able to '.¥-idely, 

though securely and with appropriate data protections, share the information they collect relevant to 

proliferation finance through their routine business operations. Because most proliferation networks 

extend across multiple countries, individual jurisdictions, enforcement agencies, and financial 

institutions can acquire only a partial view of any one proliferation net\:vork. ln one example of a 

prominent North Korean proliferation network, the web of trusted associates had operational nodes 

in China, Hong Kong, Malaysia, and Singapore.' Ensuring that policymakers can create the 

regulatory framework, nationally and internationally, to connect these partial perspectives, and thus 

successfully map international networks, will be critical to addressing this threat. 

There are examples for information sharing in U.S. law that Congress, the administration, and U.S. 

allies and partners can build on. Sections 314 (a) and 314 (h) of the USA PATRIOT Act can serve as 

models for creating the operational ability to facilitate information sharing both between 

goyernment and financial institutions and between financial institutions. These approaches, though, 

are only starting points. Many stakeholders claim significant concerns around different privacy 

regimes that prevent seamless sharing of information across national borders. Policymakers should 

1 Jonathan Brewer, "The Financing of Nuclear and Other w·eapons of Mass Destruction Proliferation" (Center for a 

:New Amencan Security, January 2018), 7, https:/ /s3.amazonaws.com/filcs.cnas.org/documents/L~ASReportProliferationFinancc-Finalb.pdf?mtime=20180202155127. 

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identify how to harmonize privacy regulations so that justifiable concerns about misuse of personal 

data do not prevent cooperation on an important law enforcement and international security 

priority.4 

Better information sharing and data analysis tools can make the most of the data the U.S. 

government and counterparts already collect. Suspicious Activity Reports (SARs) generated by banks 

across the world for their regulators are an important source of insight into global proliferation 

tina nee networks. Congress should explore the development of ne\'-'' ways to gather and analyze this 

data in order to aid investigators in uncovering proliferation finance networks. There are new 

technology tools, including the application of machine learning and artificial intelligence 

methodologies, that may be of use. The United States can pilot fusion cells of experts with access to 

SAR and other relevant data (such as shipping data, travel records, or other sources) to experiment 

with new methodologies and technology for uncovering proliferation finance. 

If policymakcrs pursue better information sharing mechanisms, or data analytics, solely in the United 

States, however, their effectiveness 'Will be limited. Proliferation finance networks can span multiple 

jurisdictions so other major financial centers like Hong Kong, or major proliferation conduit 

jurisdictions such as Malaysia and Singapore, will need to adopt similar approaches to ensure the 

timely collection and use of information. It is encouraging that important U.S. partners, like the 

United l<ingdom, are pioneering their own efforts to facilitate the sharing of sensitive information 

through its Joint Money-Laundering Intelligence Taskforce (JMLIT). Many jurisdictions have only 

started to work on how to incorporate best practices from these efforts into their own local policy 

and regulatory framework. 

U.S. technical assistance can play a critical role in a process of replicating successful information 

sharing or analytical processes. Observers around the world have highlighted the utility of efforts by 

the U.S. Export Control and Related Border Security (EXBS) and the Defense Threat Reduction 

Agency (DTRA) programs to-date. T11e U.S. government should encourage and prioritize the 

provision of technical assistance to counterparts in jurisdictions with less-developed proliferation 

finance controls to expand relevant data and typology gathering, and strategies for producing 

proliferation-related red flags and SARs. Congress has an important role to play in funding and 

overseeing this strong and effective work. Legislators concerned with a comprehensive and 

successful approach to addressing North Korean and Iranian proliferation concerns, for example, 

must focus on proper rcsourcing and funding for these initiatives, 

The Need for More Awareness-Raising 

As previously noted, m:my countries and firms exposed tD proliferation finance risk are unaware of 

this threat and their legal obligations to counter it. The U.S. government can foster efforts to better 

counter proliferation finance by offering more information to the public about the dangers facing 

the global financial system. Advisories by the Financial Crimes Enforcement Network (FinCEN) are 

invaluable in educating a wide variety of financial and legal sector stakeholders about threats to the 

4 See e.g., Andrea Berger and Anagha Joshi, "Countering Pro1iferatJon Finance: implementation Guide and Model Law 

for Governments," Guidance Paper (Royal United Services Institute, July 2017), 23, 

https:// rusi.org/ sites/ default/ files/20 1707 _rusi_cpf_implementation_guide_and_model_law _herger_josh.i_O.pdf. 

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global financial system. By making more informacion available to financial institutions and outside 

experts, policymakers can also help create a virtuous cycle. 11ore informacion from the government 

will lead to more useful and targeted detection of proliferation finance from the banks, which, in 

turn, will lead to even better information shared by the government. This entire process will lead to 

stronger law enforcement outcomes to counter proliferation finance and a stronger deterrent to 

proliferators to engage in this illicit activity in the first instance. 

Polkymakcrs must do more to release information about proliferation finance typologies to the 

public and key financial institutions and counterpart regulators. Outside experts have conducted 

useful work in this space that has significantly informed financial institutions' approach. Dr. 

Jonathan Brewer's "Study of Typologies of Financing of\'\IJ\1D Proliferation" serves as a valuable 

example of private study of these networks 5 Similarly, the reports of the United Nations Panel of 

Experts created pursuant to Resolution 1874 have shone a light on global proliferation networks and 

offered an invaluable stream of information to banks seeking to shut these networks out of their 

institutions. 6 However these efforts are partial. Policymaker~ can significantly augment them by 

disclosing greater information about typologies of the financing of proliferation either in the public 

domain or through classified or private net\vorks. 

Law Enforcement and Disruption of Proliferation Finance Networks 

Law enforcement will play a key role in any successful framework to counter proliferation finance. 

Over the past eight years, due to the attention paid to Iran and North Korea as proliferation threats, 

the U.S. law enforcement community has garnered an international reputation for its ability to 

investigate, disrupt, and prosecute those who operate proliferation finance networks. These 

professionals have unique strengths in asset tracing, compiling of typologies to dissect how 

proliferation finance networks have operated, and identifying shell companies to learn the true 

beneficial owner behind proliferation activitics.7 

Often, disruption of facilitation, including financial facilitation, networks is the preferred strategy of 

U.S. law enforcement officials when they are involved in work to counter proliferation. This is the 

case because many of the criminal actors in proliferation networks reside in jurisdictions outside of 

the reach of U.S. criminal prosecution. Asset seizure or forfeiture may also be an effective tool to 

raise the cost of doing this illicit business. Of particular utility are civil asset forfeiture authorities, 

and the 981 (k) provisions which allow the United States to restrain, seize, and forfeit funds held in 

5 Brewer, "Study of Typologies of Financing ofWMD Proliferation, Final Report." 6 See especially "Report of the Pand of Experts established pursuant to resolution 1874 (2009)," United Nations 

Security Council (UN document S/2017/150), February 27,2017, 

htms: II \\'\n.\·securin-cotJncilreporU)rg I atf! cf/~'l,7b(l5B1 ;CF9l\-M)27 -4 E0C-B<:DJg::6E4FF96FF9"1D 7d Is 2017 150.pdf and "Report of the Panel of Experts established pursuant to resolution 1874 

(2009)," United Nations Security Council (UN document S/2018/171), March 5, 2018, 

hnps: i /ww;,v,:;ccuritvcounc!lreport.org/arflcf/lj'(l7b65BFCF9H-6D27-4E9C-8CDJCF6E4FF96FF9~'o7dfs 2018 l71.pdf. 7 See, for example, the Department of Justice's investigation of Dandong Hongxiang Industrial Development Co. Ltd. 

(DHID). "Four Chinese Nationals and China-Based Company Charged with Using Front Companies to Evade U.S. 

Sanctions Targeting North Korea's Nuclear Weapons and Ballistic Missile Programs," United States Department of 

Justice, September 26,2016, bttps: i /v, .. ww.jusrice.gm·/opa/pr/four·chincse-nat!onals-and~china~bascd-compan\'" 

ch:J.ro-ed-using-front-companies-ev.tdc-us. 

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foreign bank accounts located abroad by seizing an equivalent amount of funds in correspondent 

bank account of that foreign financial institution located in the United States. Put another way, this 

provision allows U.S. law enforcement to disrupt criminal activity even in jurisdictions with which 

the United States does not have extradition treaties. Here too international efforts will be important. 

In other jurisdictions authorities have faced difficulties and delays in carrying out seizures and 

freezes quickly. 8 

Financial System Transparency 

Congress has a direct role to play in improving the legal and regulatory framework to counter 

proliferation finance. As a first priority, Congress should increase transparency in the financial 

system, and there must be no anonymous companies. This work is essential to arresting the ability of 

illicit proliferation networks to abuse our financial system to advance their dangerous work. 

The recent introduction of H.R. 6068, "the Counter Terrorism and Illicit Finance Act," can be a 

step forward in reform of the Bank Secrecy Act to empower the administration to put in place 

strong counter proliferation finance strategies. It allows the sharing of suspicious activity reports 

within a financial group across international borders. However, in providing an 18-month safe 

harbor for violations of the customer due diligence rule it walks back existing supervisory 

expectations according to which regulators have been citing banks for years. It is indeed important 

to encourage financial institutions to self-report without fearing harsh legal action, but lawmakers 

must not water down existing practices related to customer due diligence, particularly the need to 

clearly determine customer activity and risk profile, that are so important-and must be built upon--

to preventing illicit finance and abuse of the financial system. 

Beyond this legislation Congress should partner with enforcement authorities to create incentives 

for U.S. financial institutions to innovate in their countering proliferation finance practices. Offering 

safe harbor from enforcement liability for financial institutions that demonstrate innovative 

approaches in their financial integrity controls is one potential incentive. Currently, the Bank Secrecy 

Act contains safe harbor from civil liability for Suspicious Activity SARs and Section 314 

disclosures. Congress should ask the U.S. Treasury Department to develop safe harbor options to 

spur banks to allocate t,l"feater resources to information sharing and more effective analysis. The 

Financial Services Information Sharing and Analysis Center (FSISAC), which provides shielding and 

liability protection to members from certain regulatory requirements such as the Freedom of 

Information Act (FOIA), offers one model. While less beneficial to banks, Justice Department 

Cooperative Agreements may be another way in which tlnancial institutions can receive credit for 

their cooperative efforts with government. Regulatory "sandboxes" that allow experimentation in 

countering proliferation finance while shielding institutions fron1liability are yet another means to 

incentivizc private-public collaboration. 

Given the importance of greater transparency to effectively counter proliferation finance, it is 

regrettable that Congress has not acted more swiftly in requiring complete and total disclosure of 

beneficial ownership information in regulations governing corporate entity creation. There must be 

no anonymous companies in the United States. Willie the report to be generated under Section 10 of 

8 Berger, "A House Without Foundations." 

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H. R. 6068 would provide useful information about how criminal investigators use the limited 

beneficial ownership information they currently collect, the requirements of the bill do not spur any 

immediate action to cut off proliferators and other illicit actors from the ability to create 

innumerable shell and front companies to disguise their criminal activity. If countering North 

Korea's and Iran's proliferation networks are truly top priorities of this Congress, legislators should 

consider requiring more concrete action on beneficial ownership in the short term. 

Congress should also expand the amount of information required in financial payment messages. 

Lawmakers should also initiate a formal process with international counterpart parliamentarians to 

push for complementary requirements abroad. J\iany proliferators, along with other criminals, omit 

information incident to a transaction, and these data are only verified in a limited manner. 

Additionally, proliferators often use open account trade transfers, which, compared to letters of 

credit, convey only the most basic information about the purposes of a transaction and the parties 

involved, and which can often be falsified. The amount of information required in payment 

messages currently is insufficient to assist with countering proliferation finance investigations and to 

realistically protect financial system integrity. 

Deepening Oversight of Non-Bank Commercial Institutions 

In practice, the current countering proliferation finance regime relies on bank compliance to 

generate actionable intelligence. In particular, it does not well integrate other sources of trade or 

shipping data which could clarifY and present opportunities for interdiction earlier in the supply 

chain. At present, banks may be able to eventually track proliferation products through retroactive 

investigation of transaction data, but they have virtually no ability to catch or interdict this 

commerce in real time. Shifts in the conduct of global trade finance, in particular the shift from 

letters of credit to open account transactions-have exacerbated this reality. The chance for 

disrupting proliferation finance exists when proliferation activities are identified before the final 

exchange of money and goods, which is difficult to do with open account transfers. Additionally, the 

amount of information conveyed is much less with open account transfers as compared to trade 

finance funded transactions. 

U.S. policymakers can spearhead changes in global trade practices that may diminish the window of 

opportunity for proliferation networks. Today, the lack of standardized classification of goods and 

information included in trade and shipping documents is an information gap that both banks and 

governments confront. Too often inconsistent labeling can allow proliferation goods to slip through 

import-export controls. In my research on proliferation fmance I have found that banks say these 

inconsistencies make it difficult to move with certainty in flagging suspicious trading activity. Closing 

this information gap by standardizing the taxonomy for goods within and across jurisdictions will 

ensure better customs compliance and enforcement, including through machine-driven screening 

and analytics across data sets, and it will help prevent labeling whlch obscures the real products 

being shipped. 

In addition to the problem of labeling inconsistency, another core challenge to countering 

proliferation finance work associated with trade and shipping data is the inadequate supply of such 

financial documentation to banks. At present, regulatory requirements or cross-industry data-sharing 

mechanisms do not exist to close thls gap. However, many stakeholders note that more, and more 

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consistent, trade information could provide critical insight for financial institutions screening~ 

analyzing, and ideally disrupting, proliferation-linked transactions and networks. More cross-industry 

information sharing and more information in payment messages, both mentioned previously, can 

help address this issue. 

The U.S. Presidency of the Financial Action Task Force (FATF), which began on 1 July 2018, is an 

invaluable opportunity for the United States to promote these critical issues within the framework of 

FATI', and to leave as it.' legacy a global financial system significantly strengthened against the threat 

of proliferation financing. 

Working with U.S. allies and partners 

Almost all global financial centers, particularly those in East Asia at the front lines of countering 

North Korean proliferation activities, are only beginning ro acknowledge and understand the nature 

of the proliferation finance threat. 1'fany of these jurisdictions are contemplating how to issue 

bruidance on proliferation finance based on their own experiences with investigations and collection 

of data from SARs, as well as the development of information sharing mechanisms based on models 

used in the United States and the United Kingdom. 

Financial institutions the world over will be key partners for policymakers in identifying the 

financing of proliferation. Institutional risk assessments "ill help inform this process and large, 

international banks who can do this work should pursue it aggressively and model it for smaller, 

regional banks who are at high risk. The increased use of dsk assessments will be to the advantage of 

the non-proliferation regime, and the big banks, who have correspondent relationships with the 

smaller banks. As a result, it will make the whole system safer. The U.S. Congress can raise the flag 

on this issue in oversight of the executive branch and in the statements members make on how 

policymakers in the United States and abroad should address proliferation finance. 

I want to close by stating how important it is for governments and financial lnstitutions to avoid 

complacency over operations that might implicate North Korean and Iranian proliferation interests. 

The broader financial services and national security communities must understand that compliance 

'I.Vith sanctions is insufficient on its own to counteract the activities of proliferation finance networks 

or to safeguard the integtity of the global financial system. The consequences for failing to 

appreciate the seriousness of the threat are real. International financial institutions face risk of 

expensive enforcement measures and the reputational hann that would come from facilitating 

transaction by rogue states. Governments face the risk of being the weak link that gives a \VAtiD 

capability to a U.S. adversary. The stakes could not he higher. 

Thank you for your time and attention. I look fotward to your ans'l.vering your questions. 

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Written submission to the United States House of Representatives 

Committee on Financial Services 

Subcommittee on Terrorism and Illicit Finance hearings 

"Countering the Financial Networks of Weapons Proliferation" 

12 July 2018 

Jonathan Brewer, Adjunct Senior Fellow, Center for a New American 

Security, Washington, DC, and Visiting Professor, King's College London 

1. Thank you Chairman Pearce and Ranking Member Perlmutter for 

inviting me to appear before you. I regret not being able to do so and 

hope this written statement will be helpful to your enquiries. The 

statement is focused on strategies to disrupt the financing and 

procurement of weapons of mass destruction, on how financial 

institutions can identifY the financing of proliferation activities, and on 

the scope and effectiveness of relevant enforcement actions brought by 

various Cabinet Departments to counter proliferation financing, including 

the Departments of Justice, Treasury, Commerce and Homeland 

Security. 1 

Background 

2. WMD proliferation can be carried out by States or by terrorist groups. 

State-sponsored WMD proliferation involves a range of industrial 

activity including construction and maintenance of in-country 

infrastructure and equipment, and management and administration of the 

technical workforce. Most WMD programmes also need to procure 

equipment and materials from overseas (particularly if their industrial or 

resource base is limited). Overseas WMD procurement networks may be 

elaborate, comprising front companies and individual agents, extending 

over several continents, and structured so as to obscure the end-users of 

equipment and materials that are sought and the sources of funds to pay 

for them. The network set up by Pakistani scientist A Q Khan/ which 

1 Topics listed in the Chairman's letter of invitation of3 May 2018. 2 See for example Nuclear Black Markets: Pakistan, A Q Khan and the rise of 

proliferation networks, International Institute for Strategic Studies, London, Strategic 

Dossier 2007. 
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became public in 2003, is best known although other elaborate networks 

have been prosecuted by US and other authorities. 

3. Like all industrial activity WMD proliferation needs to be paid for, yet 

very few States try to attack procurement funding channels. "Following 

the money", a recognized tool to track financial crime, is rarely used to 

counter WMD proliferation. It should be used more. 

4. The international community's primary tools to address the threat of 

WMD proliferation are UN Security Council resolutions. These impose 

requirements for action by every UN Member State. Resolution 1540 

(2004) is intended to prevent proliferation by non-State actors (such as 

the elements of the AQ Khan network, or terrorists). The Security 

Council can also impose sanctions or other controls on state-sponsored 

proliferation programs (such as those ofiraq, DPRK or Iran). Other 

WMD programs may be the target of unilateral sanctions (imposed by the 

EU, US or other countries). The Syrian program is an example. The core 

of such sanctions is usually prohibitions on transfers of proliferationsensitive equipment and materials, in order to slow or stop technical 

progress. They are usually implemented by individual states in the forn1 

of export controls. 

5. However, these controls are not in themselves sufficient to guarantee the 

security of the international community from the threat of proliferation or 

its financing. First, not every potentially threatening WMD program is 

subject to sanctions (there are no sanctions on India's or Pakistan's 

programs) and although some states implement export controls focused 

on such programs, or on transfers of proliferation-sensitive equipment 

and materials more generally, these usually focus on stopping transfers of 

items rather than on their financing. Second, to get around sanctions or 

export controls, proliferation networks often exploit jurisdictions whose 

financial or export control systems are perceived as weak or easy to 

circumvent, or jurisdictions with political, trade, commercial/financial or 

historical links to countries with WMD programs.3 So even though 

national authorities or financial institutions may argue that they have no 

exposure to proliferation financing risk (for example because they have 

no direct business dealings with states with proliferation programs), they 

3 See for example the 2012 Report if the UN Panel of Experts established pursuant to 

resolution 1874 (2009) (UN Document S/2012/422). 

2 
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may still be exposed through business with banks or with companies that 

do, or business conducted in States nearby or where proliferation 

networks are active. 

6. The theme of this testimony, which is based on published researeh,4 is the 

need for the US, a recognized leader of international efforts to combat 

WMD proliferation, to persuade overseas jurisdictions to implement and 

enforce better systems to combat the financing of proliferation. This 

needs to be done bilaterally, through multilateral institutions such as the 

Financial Action Task Force (FA TF) and by leveraging the role of the 

financial sector. 

The practical problems of countering the financing of WMD 

proliferation 

7. Proliferation finance is difficult to identify. WMD procurement 

financial transactions are usually difficult to distinguish from legitimate 

international trade and the number of such transactions is small in 

comparison. This is also true of terrorism financing, yet by comparison 

with terrorism financing little work has been done on proliferation 

financing typologies. FATF produced a report in 2008.5 The Alpha 

Project at King's College London published a collation of case studies 

provided by national authorities and financial institutions in 2017 

(research funded by US Department ofState).6 

8. Proliferation finance is given low priority. International organisations 

such as the G7 and UN have not treated proliferation finance with the 

same high priority as terrorist finance. The international framework to 

control proliferation financing is much less developed. In consequence 

most national authorities devote their energies to other threats to financial 

4 Jonathan Brewer, The Financing of Nuclear and other Weapons of Mass Destruction 

Proliferation, Center for New American Security, 24 June 2018. 5 FATF Proliferation Financing Report 18 June 2008 (http://vvww.fatf-gafi,QigL 

publications/methodsandtrends/documents/typologiesreportonproliferationfinancing.html 

) 

6 Project Alpha King's College London Final Report in Typologies of Financing of 

Proliferation of Weapons of Mass Destruction, 13 October 2017 (h!tps:/fur:Qj_ect'!)pha.eui 

final-report-typologies-of-proliferation-finance!). Funded under US State Department 

Award S-LMAQM-16-GR-1138, 16 August 2016-31 July 2017. 
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systems. In tum, few regulators require financial institutions to look for 

and report proliferation finance transactions. As a result little information 

is publically available on the scale of the problem. 

9. Inadequate coordination within national authorities. Information on 

proliferation financing may be held by financial authorities, customs 

authorities, intelligence agencies or other departments but few countries 

have effective systems in place to share information or coordinate action. 

Export control authorities focus counter-proliferation efforts on stopping 

shipments of physical goods and may not have the powers or resources to 

investigate their financing. Financial Intelligence Units (FlUs) or other 

financial authorities may prioritise work on other forms of financial 

crime or threats to financial stability. 

10. The international community should be developing fresh strategies to 

combat the financing of proliferation. These should take into account: 

• The critical importance of factoring the threat of proliferation 

finance into national risk assessments. National authorities should 

prioritise the collection and assessment of information relating to 

proliferation financing, and implement measures to mitigate risk; 

• The need for effective national legislation to counter proliferation 

financing. The provisions should create an offence of financing of 

WMD proliferation, not simply the financing of prohibited exports 

(to enable countries through which financing networks pass to take 

action against the financial transactions, independent of the 

location of items involved). Regulatory expectations regarding 

proliferation financing need to match high expectations regarding 

money laundering and terrorist financing; 

• The need for sharing information between international partners. 

Jurisdictions should have systems in place to disseminate and 

protect information, including sensitive intelligence, received from 

partners. Such information could be shared bilaterally or on 

multilateral channels (for example the Egmont Group of Financial 

Intelligence Units (FlUs)); 

• The need for a mechanism to share information (including 

intelligence) and coordinate action within national authorities, 

departments and agencies. The UK Restricted Enforcement Unit 

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(REU) is an example of an effective mechanism; 1 

• The need to share information with banks and financial 

institutions. This should include both lead information (perhaps desensitised intelligence) and also feedback on material provided to 

authorities by banks. A refrain from some US banks is that they 

cooperate willingly with law enforcement but receive no feedback, 

so cannot judge how better to support law enforcement efforts; 

• National authorities should also disseminate public guidance on 

WMD proliferation finance and information on typologies. This 

will help raise awareness. 

How financial institutions can identify the financing of proliferation 

11. Given the issues outlined in paragraphs 6-9 above, many financial 

institutions question the extent to which they should be playing a role in 

countering WMD proliferation. They argue that exporters or traders 

should be on the front line of controls since they need to apply for 

licenses for exports of dual-usc or other strategically sensitive goods, and 

so should have a better understanding of proliferation-sensitive 

equipment and materials. This view is understandable but misguided. All 

private sector entities that might be involved in proliferation finance 

should be committed to contributing to international peace and security. 

Second, although the front line of controls should indeed be manned by 

exporters and traders, in many jurisdictions export control legislation is 

deficient and weakly enforced. Third (as noted above), shipping networks 

and financial networks may pass through separate jurisdictions. In the 

latter case, banks may be the only potential source of information. 

12.Risk assessments. Most financial institutions comply with financial 

crime (money laundering) legislation and sanctions using a mix of rules7 The REU meets every two weeks. According to its website, "The Restricted 

Enforcement Unit regularly considers the latest intelligence relating to potential 

breaches of export controls or other exports of concern and coordinates action by its 

member departments. These actions can include alerting UK exporters to the 

activities ofproliferators (Awareness), seizing goods (Enforcement), investigating 

potential breaches of UK export controls (Legislation) and informing the authorities 

in other countries of proliferation activities under their jurisdiction and encouraging 

them to take action against them." 
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based and risk-based procedures. They screen transactions against UN, 

US, EU and other sanctions lists to ensure compliance with proliferationrelated targeted financial sanctions (although as noted above, WMD 

financiers circumvent targeted sanctions by operating through front 

companies and complex financial networks in multiple jurisdictions). 

Financial institutions comply with money-laundering regulations using 

risk-based transaction-monitoring systems, calibrated to match an 

individual institution's type of business and risk appetite. They are 

usually purchased from commercial vendors. Few banks incorporate 

proliferation financing risk indicators into transaction monitoring 

procedures. 

13.Screening for equipment and materials. Some financial institutions are 

experimenting with systems to screen transactions to detect proliferationsensitive materials and equipment. This is possible if banks are involved 

in trade finance, and so have access to documentation that can be checked 

for proliferation-sensitive materials and equipment. The majority of trade 

finance takes place in Asia, 8 

so investment in these sorts of checks seems 

sensible given the proliferation threats in that region. However on a 

global scale most international trade (perhaps 80%) is conducted not on 

trade finance terms but on "open account" tenns, settled by wire 

transfers.9 The SWIFT messages relating to such transactions carry little 

or no information about the nature of the business, such as goods, 

shipping routes, etc, and there is little value in screening them. 10 

14.Giobal reach of proliferation networks. Given the scale and 

complexity of proliferation finance networks any one individual financial 

institution, if unwittingly involved in the transactions, is unlikely to be 

involved in the complete network, end-to-end. Some financial institutions 

argue that their internal transaction-level controls are therefore unlikely 

to enable them to identifY such a network. They need information from 

authorities or other sources. 

8 International Chamber of Commerce, 2017, Rethinking Trade and Finance, An ICC 

Private Sector Development Perspective. 9 Page 19, paragraph 6.1 (a) of"The Wolfsberg Group, ICC and BAFT Trade Finance 

Principles," http://www.wolfsberg-principles.com/pdflstandardsffrade-FinancePrinciples-Wolfsberg-Group-ICC-and-the-BAFT -20 I 7 .pdf. 10 SWIFT (Society for the Worldwide Interbank Financial Telecommunication) is a financial 

messaging system used by the large majority of the world's financial institutions. 
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15.What banks should do to support counter proliferation financing. 

Many US financial institutions argue that their databases can be useful 

for analysis and investigation when combined with open source 

information or intelligence shared by governments. 11 US Treasury Under 

Secretary for Terrorism and Financial Intelligence Sigal Mandelker 

earlier this year encouraged financial institutions to " ... come forward 

with information. The more information you provide to us, the better 

able we are to assist you in tracking and tracing illicit actors and 

preventing them from accessing your institutions". 12 The financial sector 

should be pro-active in providing information to US authorities. Banks 

and financial institutions should also provide information to overseas 

jurisdictions where banking secrecy restrictions allow. This will 

encourage and support efforts by overseas authorities to assess 

proliferation finance and implement systems to mitigate the risk, if not in 

place. 

16.1ntemational banks and financial institutions should screen their business 

transactions not only against US sanctions lists, but all proliferationrelated sanctions lists (such as the UN, EU and others). They should then 

do the following. 

• Conduct an assessment of the risk to their business from proliferation 

financing, taking into account specific proliferation financing indicators. 

FA TF guidance is available, as are lists of possible indicators. 13 Based on 

this assessment they should incorporate indicators of possible 

proliferation financing into existing anti-money latmdering and counterterrorist financing compliance systems, focused on customers, 

counterparties, correspondent banks and international trade transactions. 

Financial institutions that purchase commercial compliance systems 

should require vendors to incorporate proliferation finance indicators into 

their products. 

• Ensure that effective channels of communications are established with 

authorities so that intelligence or other information can be incorporated 

11 Although not always available in digital format and so not easily incorporated into 

financial institutions' monitoring systems. 12 U.S. Department of the Treasury Under Secretary Sigal Mandelker Speech before the 

Securities Industry and Financial Markets Association Anti-Money Laundering and 

Financial Crimes Conference, New York City, 13 February 2018. 13 See footnotes 4 & 5 above. 

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securely into databases, or used to establish internal lists of high-risk 

individuals or entities. In the US such information is shared by authorities 

under Section 314a of the USA PATRIOT Act. In the UK it is shared 

within the framework of the Joint Money Laundering Intelligence Task 

Force (JMLIT). A few other countries have similar arrangements to the 

UK. 

• Ensure that information can be exchanged with other banks. Combining 

information might enable identification of networks that, as noted above, 

due to complexities or scale, might not be visible to any one bank alone. 

In the US such information is shared under Section 314b of the USA 

PATRIOT Act. In the UK it is shared in the JMLIT framework. A few 

other countries have similar arrangements to the UK. 

• Foreign banks must comply with the requirements oftheir US 

correspondents in order to maintain access to the US financial system. By 

incorporating proliferation financing checks into their own business 

procedures and requiring the same of their respondents, US banks will 

help spread effective counter-proliferation financing practices throughout 

the global banking system. Foreign banks in tum should submit 

Suspicious Transaction Reports (STRs) to their local regulators if 

proliferation finance is detected. These STRs should include the 

indicators of proliferation finance in order to assist investigations by local 

authorities (outside the US very few authorities have proliferation finance 

expertise). Where local legislation does not require such STRs banks 

should find other channels to alert authorities. As noted above, such 

actions will encourage overseas jurisdictions to compile data to assess the 

proliferation finance threat and to put in place measures to control it. 

• Compliance and investigative staff do not need to be experts in WMD 

proliferation programs, but maintaining a general brief on global 

developments (by monitoring information from governments, academia 

and media) should be a central element of their job description. In 

particular they should know sources of specialist advice if needed (such 

as academic institutions and think tanks in Washington DC, London and 

elsewhere). Banks and financial institutions should also dedicate teams to 

investigate suspected proliferation finance transactions to help build inhouse expertise. 

17.None of these proposals require banks or other financial institutions to 

introduce new compliance and due diligence procedures. They involve 
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modifications to existing procedures, and so should not be unduly 

resource intensive. 

Scope and effectiveness of relevant enforcement actions brought by 

various Cabinet Departments to counter proliferation financing, 

including the Departments of Justice, Treasury, Commerce and 

Homeland Security 

18. The Department of Justice publishes annually a summary of selected 

export enforcement and other cases.

14 Some of these involve WMD 

proliferation and are a rich source of information about proliferation 

finance typologies. US Department of the Treasury publishes advisories 

that may relate to proliferation finance. 15 These are valued by US 

financial institutions. 

19.No overseas jurisdiction can match the resources of the Department of 

Justice, nor the expertise of the officers involved. However in almost all 

cases the action has been brought primarily on export controls grounds 

with money laundering included if information is available about 

financing or funding of prohibited exports. Within the US legal system 

there is no offence of WMD proliferation financing as such. 

20.FATF awarded the US the top rating for implementation of UN targeted 

financial sanctions related to proliferation ("high level of effectiveness") 

following the mutual evaluation review of the US in 2016. 16 No other 

country evaluated by FA TF has achieved this rating. FA TF noted close 

cooperation and coordination amongst US authorities, sharing of 

information and intelligence, and extensive outreach and guidance to 

financial institutions. FATF commended the U.S. for a leading role in 

promoting effective global implementation of targeted fmancial 

14 "Summary of Major U.S. Export Enforcement, Economic Espionage, Trade Secret and 

Embargo-related Criminal Cases (current version published 19 January 2018) 

https://www.justice.gov/nsd/page/filc/l 044446/download 15 See for example FIN-2017-A007 of November 2, 2017, Advisory on North Korea's 

Use of the International Financial System (https:f(w~y.;wJlJl£(;)Il.gQy/sites/default/ 

files/advisory/20 17-ll-02/DPRK%20Financing~20Advisory"lo 20FINAL% 

20ll022017.pdf) 

16 Anti-money laundering and counter-terrorist financing measures, United States. Mutual 

Evaluation Report, FA TF, December 2016 (http://www.fatJ:!@fi,9rg/media[f<J.1fL 

doc11ffients/rcports/mer4/MER -United-States-20 16.pdf) 

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sanctions. The US is therefore uniquely well-placed to encourage other 

governments to do more to combat proliferation financing. 

2l.The US intention to use its Presidency ofFATF to enhance FATF's work 

to combat WMD proliferation financing is highly encouraging. US 

efforts will include prioritizing work to close the gap in its standards 

between measures against proliferation financing, and those against 

money laundering and terrorist fmancing; ways to address the full range 

of proliferation financing activities in addition to targeted financial 

sanctions; the risks associated with proliferation financing and policies 

and controls to address those risks; and criminalization of proliferation 

financing. 17 

22.1n addition, US authorities should consider: 

• Publishing additional advisories relating to proliferation financing. 

These are helpful to banks and financial institutions, and could be 

based on case studies relating to proliferation financing described in 

the annual Department of Justice report; 

• Encouraging the Egmont Group of FlUs to circulate case studies and 

assessments of proliferation financing. This will help sensitise 

national financial authorities about the threat. 

Final Word 

23. Countering the financing of procurement networks is a crucial element in 

combating WMD proliferation. All members of the international 

community need to be part of this joint endeavor. The networks are too 

big for any one jurisdiction to handle on its own. At a national level, 

countering proliferation finance requires a form of public-private 

partnership involving national authorities (intelligence agencies and 

security policymakers, customs and financial authorities) and banks and 

financial institutions. 

17 Objectives for FATF XXX (2018-2019) Paper by the Incoming President United 

States Presidency Priorities for the Financial Action Task Force (FATF) 

(http://www.fatf-gafi.org/media/fatf/ contcnt/images/Objcctivcs%20for"/o20F A TFXXX%20(2018-2019).pdf). 

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24. WMD proliferation is likely to threaten international peace and security 

for the foreseeable future. The US is uniquely well-placed to lead the 

international response. US authorities should persuade overseas 

jurisdictions to implement and enforce better systems to identifY and 

combat proliferation financing. This should be done bilaterally and by 

leveraging the role of the financial sector. The US Presidency ofF A TF is 

a crucial opportunity to cement in place effective international measures 

to counter WMD proliferation finance. 

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involvement oflran's financial system in illicit activities. As a result, we recommend thereimposition ofF ATF counter-measures against Iran. 

The pie chart in figure I shows the fraction of countries that have scores exceeding 50 percent of 

the total, between 50 percent and 25 percent ofthe total, less than 25 perct."l1t down to a score of 

0, and below a score of 0. Only two countries received more than half of the available points. 

About one-third of all countries achieved negative scores. 

Countries' Score Distribution in Super Criterion Ability to 

Prevent FoP 2017 

Figure 1. The pie chart shows the score distribution of countries in their Ability to Prevent Prol(fCration 

Financing in the PPI for 2017. The majorityofcotmtrics score less than 25 percent of the available 

points. This figure includes corrected values -fix VietNam and Venezuela. 

The PPI lists countries by score in the super criterion Ability to Prevent Proliferation Financing, 

which leads to a ranking. Although we do not release this ranking publicly, we provide below 

those countries that are in the top th1rd and bottom ten percent by ranking. 

Top third by rank (in alphabetical order): 

Albania, Andorra, Antit,rua and Barbuda, An11enia, Australia. Austria, Bahamas, Bahrain~ 

Barbados, Belgium, Bhutan, Botswana, Bulgaria, Burkina Fa....:;o, Cameroon, Canada, Chile, Cook 

Islands, Cyprus, Czech Republi<; Denmark, Estonia., Fiji, Finhmd, France, Gcnnany, Greece, 

Grenada, Hungary, Iceland, Ireland, Israel, Italy, Japan, Latvia, Lesotho, Liechtenstein, 

Lithuania, Macedonia~ Malawi, Malta, Maur-itius, Monaco, Nauru, Netherlands, New Zealand, 

Niue, Norway, Palau, Poland, Portugal, Romania, Samoa, San Marino, Singapore, Slovakia, 
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Slovenia, Solomon Islands, Spain, Sweden, Timor-Lestc, Togo, Tonga, United Kingdom of 

Great Britain and Northern Ireland, United States of Ameiica, Uruguay, and Zambia. 

Bottom lOo/o by rank (in alphabetical order): 

Afghanistan, Belarus, Burundi, Democratic People's Republic of Korea (DPRK), Egypt, Eritrea, 

Iran (Islamic Republic of), Iraq, Lebanon, Libya, Morocco, Myanmar, Paraguay, Russian 

Federation, Serbia, Somalia, South Sudan. Sudan, SyTian Arab Republic, Thailand, and Ukraine. 

Updates Since the Publication of the PPI 2017 regarding proliferation financing 

Since the publication of the index, Institute staff have continuously updated and revised the data 

for a 2018 version of the ranking. Throughout the process, trends observed in the 2017 data on 

proliferation financing remain. Countries still perform poorly overall, and only three countries 

received 50 percent or more of the possible points. 

Countries' Score Distribution in Super Criterion Ability to 

Prevent FoP 2018 

f'igure 2. The pie chart shows the score distribution of countries in their Ability to Prevent Proliferation 

Financing, 2018 ranking. The majority of cow1trics score tess than 25 pt."rccnt of the available points. In 

general, the distribution in these four broad categories has only minimally changed from 2017 and the 

need for furth<..,--r action is clearly visible. 

As stated befOre, the PPI lists countries by score, generating a ranking. Although we do not 

release this ranking, we again provide those cmmhics that are in the top third by ranking and the 

bottom ten percent in the 20 I 8 ranking. 
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Honse Financial Set-vices Committee 

Seninr FeUo'"