The International Chamber of Commerce (ICC) is urging trade finance lenders to strengthen screening around goods that could have military or weaponry-related uses, noting that regulatory expectations present multiple challenges to the sector. 

Financial institutions are under pressure from authorities to identify cases of potential proliferation financing, where funds are used to purchase, transport or develop weapons of mass destruction, the ICC says in a paper published this month. 

Examples of dual-use goods include chemical or nuclear inputs, technologies such as satellite navigation or thermal imaging tools, and certain metals or metal products that could have military uses. 

But the ICC says monitoring only the names or descriptions of goods being traded is “often of limited effectiveness in isolation”, and calls for targeted screening at the customer or counterparty level. 

It says focusing on goods presents several challenges. Lists of restricted items issued by government authorities are often technically detailed and “difficult to interpret”, particularly compared to standard descriptions included in transaction documents. 

Unless bank staff have technical qualifications and knowledge across a wide range of goods, their “ability… to understand the varying applications of dual-use goods will be virtually impossible”, the paper says. 

Lists and licensing rules also vary across different jurisdictions. In the UK alone, the government’s strategic export control lists include nine categories of items, which are then broken into five further sub-categories. 

Screening for dual-use goods often raises false positives, the ICC adds. For example, searching for the term “sensor” on the UK lists returns a total of 64 matches, with some descriptions “significantly deviating” from the actual goods being targeted. 

As well as being out of keeping with the intention of export control lists, excess false positives negatively impact the client experience and add time and cost to bank processes, the paper points out. 

Although third-party technology can be used to automate the detection of suspicious activity, the ICC notes that “significant” implementation costs can mean they are beyond the reach of smaller financial institutions. 

Tech solutions also operate predominantly in the post-transaction stage, unless a bank can connect them to its live operating platforms. 

The ICC recommends that banks ensure staff have sufficient training and awareness to understand the risks associated with proliferation financing and dual-use goods trade. 

This risk awareness “should be reinforced with targeted screening against entity lists, where possible”, it says, adding: “The more effective screening approaches are at the customer/counterparty level rather than against any list of goods taken in isolation.” 

The paper comes as regulators increase pressure on participants in trade transactions to cut out potential proliferation financing. 

In a national risk assessment published last year, the US Department of the Treasury says the use of the dollar, as well as the country’s large financial system and strong manufacturing base, mean it is a “target of exploitation by proliferation financing networks”. 

It identifies North Korea, Iran and Syria for exploiting the maritime trade sector to generate revenue in support of weapons programmes, which largely have a direct connection to the US financial system – though are “often structured to obscure the interest and involvement of a sanctioned person”. 

The Treasury also highlights the risks associated with maritime trade, noting that trade in illicit commodities often uses practices such as identity laundering, flag-hopping and location signal manipulation “for obscuring their activities from relevant authorities”, it says. 

“Financial institutions, as well as other firms operating in the maritime sector, should be aware of US laws and regulations targeting proliferation-related activity.” 

In the UK, a case study reported by HM Treasury in 2021 describes the use of a British manufacturer and exporter that was asked to provide dual-use items for a non-military project near the importing country’s borders. 

The financial structure of the transaction used several newly established overseas companies to obscure the real end user, which the importer attributed to client confidentiality and commercial ring-fencing. 

However, HM Treasury later became aware the goods were destined for a military project in a neighbouring country that was subject to sanctions. 

“This case study highlights the importance of undertaking sufficient levels of customer due diligence to ensure end users are legitimate and not linked to illicit actors,” it says.  

“The evidence of illicit actors masking participants in transactions or financial networks increases the necessity of carrying out these checks.”