Proliferation Financing: How To Protect Your Firm

In 2023, the Solicitors Regulation Authority (SRA) identified four emerging threats in the Sectoral Risk Assessment, one of which is Proliferation Financing. This relatively new concern, which covers the movement of funds or financial services to support the development, acquisition or distribution of weapons of mass destruction, poses particularly complex challenges for law firms, whose trusted client relationships and cross‑border transactions can be exploited to mask illicit finance or support.
This article will guide you through some of the warning signs of Proliferation Financing, explore the regulatory expectations set by the SRA, and lay out a practical framework for firms to strengthen due diligence, improve transaction monitoring, and enhance internal controls.
What Is Proliferation Financing?
Proliferation financing (PF) is the act of:
“providing funds or financial services for use, in whole or in part, in the manufacture, acquisition, development, export, trans-shipment, brokering, transport, transfer, stockpiling of, or otherwise in connection with the possession or use of, chemical, biological, radiological or nuclear (CRBN) weapons, including the provision of funds or financial services in connection with the means of delivery of such weapons and other CBRN-related goods and technology, in contravention of a relevant financial sanctions obligation.”
Although Proliferation Financing is covered by the MLR, it is a different financial crime to money laundering:
- Proliferation Financing is the provision or movement of funds specifically to develop, acquire or distribute weapons of mass destruction.
- Money laundering is the process of disguising the origins of illicit proceeds so they appear legitimate.
In short, Proliferation Financing’s end‐use is weapons‑related activity; money laundering’s end‐use is to integrate “dirty” money into the lawful economy.
2023 Updates to the Money Laundering Regulations (MLR) 2017
In April 2023, the Money Laundering and Terrorist Financing (Amendment) (No.2) Regulations 2022 amended the MLR 2017 by:
- Imposing a new obligation to conduct Proliferation Financing risk assessments.
- Revising the duty to notify company registries of any discrepancies.
In light of these updates, the Legal Sector Affinity Group (LSAG) has refreshed its AML guidance to include information on your duties to detect and combat money laundering for terrorist purposes.
How Does Proliferation Financing Affect Law Firms?
Proliferation financiers often hide behind sham or shell businesses; entities that appear legitimate but exist solely to move funds toward weapons‑related programs. Law firms advising or transacting with these entities may unknowingly facilitate the movement of illicit funds, creating exposure to money laundering offences and severe regulatory, reputational, and even criminal sanctions.
Moreover, the complex, cross‑border nature of proliferation schemes - often involving multiple jurisdictions with varying disclosure requirements - means that even well‑meaning firms can struggle to spot and disrupt the movement of illicit funds. Currently, there are widely known concerns in the Democratic People's Republic of Korea (DPRK) and Russia, and potential complex translation structure hotspots in nations such as Turkey, the United Arab Emirates (UAE), Syria, and China.
To counter this threat, firms must explicitly assess Proliferation Financing risk, either by embedding a dedicated module within their existing Firm‑Wide Risk Assessment (FWRA) or by producing a standalone Proliferation Financing risk assessment. Such an assessment should identify potential exposure based on factors such as:
- Client sectors and activities
- Client locations and geographic ties
- Services offered
- Transaction patterns
- Delivery channels
- Legal services provided as part of a ‘supply chain’
The LSAG has provided further sectoral guidance for law firms regarding risk factors such as:
- Jurisdictions with known proliferation programmes, e.g. Russia.
- Jurisdictions that share physical/maritime borders with jurisdictions known to have proliferation programmes, where the border is known to be poorly guarded or otherwise the subject of frequent trade (whether legitimately or illegally).
- For example, the border between North and South Korea should not be considered as an example of this due to the tight controls there, but the border between Iran and Azerbaijan is more likely to be in this category.
- Jurisdictions known to have significant numbers of state-directed temporary workers from jurisdictions with known proliferation programmes.
What Is Counter‑Proliferation Financing (CPF)?
Counter‑Proliferation Financing (CPF) encompasses the policies, controls, and procedures (PCPs) designed to detect, deter and disrupt the flow of funds that might control the development, acquisition or distribution of weapons of mass destruction.
CPF extends traditional anti‑money‑laundering (AML) measures by focusing specifically on proliferation‑related end‑uses, ensuring that every client relationship, transaction, and corporate structure is vetted not only for illicit proceeds but also for links to sanctioned programs, controlled technologies, or dual‑use goods.
The key areas of a CPF framework involve the following:
- Targeted sanctions screening against individuals, entities, and jurisdictions associated with proliferation programmes.
- Enhanced Due Diligence (EDD) on clients in high‑risk sectors (e.g. chemicals, aerospace, logistics).
- Transaction‑monitoring rules designed to flag abnormal payments that could mask the procurement of goods or technology transfers.
- Ongoing staff training to recognise PF red flags, such as requests for unusually complex corporate ownership, transactions involving Politically Exposed Persons (PEPs), last‑minute changes to payment instructions, or involvement of jurisdictions subject to export‑control restrictions.
Example of Proliferation Financing: Iran (June 2025)
The UN Security Council Resolution (UNSCR) 1696 marked the beginning of Targeted Financial Sanctions (TFS) on Iranian individuals and entities involved in the country’s nuclear programme. These were later lifted in October 2023 under UNSCR 2231 following Iran’s agreement in the Joint Comprehensive Plan of Action to limit its nuclear activities in exchange for sanctions relief.
Despite this, many countries continue to impose national sanctions on Iran due to ongoing threats, especially in light of the recent conflict with the US. Iran has found a way around economic restrictions using militarised proxies and transnational criminal organisations, relying on networks of business-people, banks, gold traders, and foreign exchange houses for smuggling and money laundering. Hezbollah has played a central role, operating global laundering schemes and facilitating the transfer of weapons and sanctioned goods, in breach of international sanctions.
Download Latest Financial Action Task Force (FATF) Report
Legal Services Risks & Vulnerabilities
Unfortunately, not all law firms realise that PF obligations apply to them; even UK-only firms can be affected by illicit cross-border structures. Proliferation Financing relies on a supply chain, of which your firm could inadvertently find itself becoming involved. For example:
- A law firm may give advice to a bank, which is providing funding to a commercial client.
- Later on in the supply chain, the commercial client purchases part of a shipping port in a jurisdiction that is close to a high-risk country.
- The shipping port includes facilities for storing and shipping certain types of chemicals.
- Those same chemical storage and shipping facilities could be used to move or store chemicals used to make weapons of mass destruction.
Unfortunately, this is how simple it is to become involved in a Proliferation Financing supply chain. However, by including PF in your FWRA and/or by establishing a thorough Proliferation Financing risk assessment, you give your firm a platform to stay vigilant against this rising threat.
What Are the Stages of Proliferation Financing?
Just like money laundering, proliferation follows a multiple-step process to obscure the movement of funds and goods as much as possible. In its simplest form, here’s how the stages of proliferation financing work:
-
Raising Funds
- State Sponsorship: Direct budget allocations or covert transfers from government funds in proliferating states.
- Illicit Activities: Revenues from drug trafficking, smuggling, illicit mining, or cybercrime are diverted into proliferation chains.
- Money Laundering: Criminal proceeds are “cleaned” through successive transactions, such as casinos, real estate or shell‑company networks, to create plausible sources of funds.
-
Obscuring Funds
- Shell Companies: Creation of legally registered entities with opaque ownership to mask the true Ultimate Beneficial Owners (UBOs).
- Layered Transactions: Funds are routed through multiple accounts or jurisdictions to complicate audit trails.
- Trade‑Based Schemes: Over or under‑invoicing of goods, or phantom shipments, to justify cross‑border payments that conceal value diversion.
-
Procurement & Shipping
- Component Sourcing: Purchasing dual‑use technologies, such as specialised chemicals, electronics, or machinery, via trusted commercial suppliers or intermediaries.
- False End‑User Certificates: Falsified documentation declares harmless final destinations to bypass export controls.
- Transhipment Facilities: Goods pass through third‑party ports or free‑trade zones, where oversight is weaker, before onward delivery to proliferation programmes.
How to Identify the Red Flags of Proliferation Financing
There are many red flags to keep in mind when screening clients or transactions for PF. It is worth noting that a great deal of these are shared with typical money laundering warning signs.
These key risk indicators include:
- Clients in sectors that involve chemicals, arms, or restricted materials
- Unusual end-users or a lack of clarity on the end-use
- Involvement in the sales or shipping of dual-use goods
- Transactions involving nations that had been identified as posing a risk in this respect, such as North Korea and Russia
- Complex ownership structures, often involving hidden Ultimate Beneficiary Owners
- Transactions involving Politically Exposed Persons
- Unfamiliar or opaque intermediaries
- Payments that don’t match the nature of the goods
- Clients that deal primarily in cryptocurrencies (either for assets or transactions)
Practical Steps to Detect and Protect Your Firm From Proliferation Financing
In order to detect Proliferation Financing and protect your firm from inadvertently contributing, here are some actionable steps:
- Involve Proliferation Financing questions in your client-onboarding process.
- Incorporate CPF into your FWRA (or maintain a standalone PF risk document).
- Include a question about PF in your CMRA forms.
- Deliver targeted staff training and regular awareness refreshers on PF red flags.
- Automate daily screening of clients and transactions against up‑to‑date sanctions lists.
- Apply EDD for clients, sectors, or jurisdictions that are currently identified as high‑risk.
- Conduct regular audits of PF controls and update policies to close any gaps.
- Stay aware of emerging risks through the latest National Crime Agency (NCA) guidance.
- Implement transaction‑monitoring systems to flag unusual layering or trade‑based payment patterns.
- File Suspicious Activity Reports (SARs) with the NCA and notify the Office of Financial Sanctions Implementation (OFSI) or Office of Trade Sanctions Implementation (OTSI) of any sanctions‑related breaches.
Ensure Compliance Through PDA Legal’s Training Today
In a world where new methods for financial crime seem to appear all the time, it may feel challenging to help your firm stay on top of the latest guidance. However, at PDA Legal, our bespoke training services ensure your team is well-informed on your obligations to recognise and report the biggest threats to the sector.
From spotting PF red flags to understanding your lines of responsibility within your firm, we can tailor each training session to fill in the compliance gaps within your team. We can also provide FWRA support to ensure your risk policies are effective and up-to-date. For more information or to arrange a FREE initial consultation, please contact a member of our team today.