Money Laundering, Terrorism and Financial Institutions - USA Patriot Act Monitor

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8/27/2008 Proliferation Financing Study Describes Red Flags, Role of Financial Institutions

A U.S. manufacturer receives an order from a Belgian broker for a high energy switch that can be used in a number of manufacturing processes, many of which are conventional, but some of which involve making nuclear bombs. The manufacturer asks for details about the end-user of the switch, since there are export restrictions on where the item can be shipped. The Belgian broker seems to lose interest. Two weeks later, a U.S. company submits an order for the same piece of equipment. There would be no problem with such a sale, as it is not an export, but individuals in the manufacturer’s sales unit notice that the domestic buyer is copying the Belgian broker on emails regarding the purchase. An investigation discloses that the domestic buyer is a front company controlled by foreign interests that are seeking supplies for an Iranian business. This is a red flag with suspicion arising because a party to a transaction is copying someone who is not a party, and not known, or known in a different context, to the seller (or manufacturer, or financial institution) on emails. The Financial Action Task Force, in a report on proliferation financing for weapons of mass destruction, notes the increasing dangers of proliferation that come with added complexities in the market for WMD. Among those complexities are the number of middlemen, including brokers and front companies, which often make determination of the ultimate buyer very difficult if not impossible. Since buyers need to finance purchases of precursor equipment, financial institutions may be able to detect suspicious activity where the seller cannot. The FATF report on proliferation financing will be the subject of a forthcoming Monitor. The Red Flag Checklist associated with this treatise has been updated to include a WMD proliferation section.

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