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The US believes emerging cross-border payments and currency alternatives still do not pose a significant threat for proliferation financing by rivals such as Iran, North Korea and Russia.  

Proliferation financing involves funds used to procure and transport chemical or biological weapons, or simply military goods or technology that the US wants to keep out of the armories of its adversaries.  

In an annual assessment of proliferation financing risks facing the country, the US Treasury says it is “studying the potential risks from new and alternative payment systems, as some countries seek to develop strategies to avoid US jurisdiction and evade US sanctions specifically”. 

The Treasury says examples include central bank digital currencies, the growth of local currency settlement – to avoid dollar-denominated correspondent banking – and efforts to build alternatives to the bank-owned Swift payment messaging system.  

China launched its own cross-border payment system, Cips, in 2015. It has been touted as an alternative to Swift and at least 30 Russian banks have joined as indirect participants in the system as of early last year, according to Russian media.  

Russia has also launched its own payment messaging system, although the number of participating banks remains small.  

But the Treasury report, published on February 7, assesses that “US adversaries would find it difficult to translate those alternative payment systems into an at-scale replacement for U.S. global financial leadership and the strength of US currency because these systems could not replicate the foundations of US strength”, such as deeply and liquid financial markets, transparent institutions and “predictable” legal systems. 

The use of renminbi for trade finance transactions has grown rapidly in recent years, although its share remains overshadowed by the US dollar. Swift data shows the renminbi briefly overtook the euro as the second most popular currency in trade finance payment messages exchanged through Swift in December last year, with a 5.7% share. In September 2020, its share was 1.91%.  

The US dollar is still dominant, being used for 83.9% of trade finance payments handled using Swift in January this year. 

Western concerns over proliferation financing have spiked since Russia’s invasion of Ukraine, following which the US and its allies attempted to cut off Moscow’s access to the West’s military supply chains.  

The US has applied heavier scrutiny on the use of the financial system to facilitate exports of sensitive goods from the US and its allies to Russia, often routed via nearby states such as Turkey, Kazakhstan and Azerbaijan.  

Such goods, including those with both military and civilian uses, are covered by US export control regulations.  

Even if non-US financial institutions are used to make payments for such trade, dollar-denominated transactions will pass through correspondent accounts in the US.  

US authorities have repeatedly warned banks about common types of proliferation financing and export control violations, including clients accessing trade finance products.  

Last year data released by the US financial crimes watchdog in September showed that banks had detected some US$1bn-worth of transactions suspected to be linked to sanctions-busting exports to Russia.   

The Treasury’s report describes many US prosecutions against individuals or companies alleged to have exported sensitive goods. In many of the cases, the suspects used wire transfers and open account payments rather than traditional trade finance.  

As the report notes, in proliferation finance networks using open account trade, “banks will process the transactions between two parties involved in the buying/selling of goods but otherwise will not have access to supporting documentation describing, for example, the nature and purpose of the transaction or the underlying goods or services changing hands”.  

It poses a thorny problem for banks’ compliance defences. Last year the International Chamber of Commerce (ICC) said that if bank staff lack specialised qualifications and knowledge, their “ability… to understand the varying applications of dual-use goods will be virtually impossible”. 

The ICC also pointed out that export control regulations vary widely between jurisdictions. It also said technology solutions are too costly for smaller banks and generally only detect suspicious activity after a transaction has already been completed.