Illicit Trade Networks - Connecting the Dots, Volume 1

Press Release – New Institute Book

By David Albright, Sarah Burkhard, Spencer Faragasso, Linda Keenan, and Andrea Stricker

February 2020

Illicit procurement of strategic commodities is an ongoing threat perpetuated by states that operate outside of global nonproliferation norms and agreements. Such countries rely heavily on outside supply to obtain the commodities needed to build or augment covert or sanctioned nuclear, missile, and conventional military programs.

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Many countries remain at risk for exploitation by state-directed illicit nuclear, missile, and military procurement networks, either by attempts to obtain sensitive and controlled equipment from their territories, or through the use of their territories in other ways, such as points for transshipment of those goods or as proliferation financing hubs. Driving the threat is also the fact that there has recently been an increase in the number of countries that make and supply strategic and dual-use goods in the developing world, creating greater availability of sensitive commodities worldwide. As adversaries seek to obtain the wherewithal to create and augment nuclear, missile, and military programs, the United States and its partners and allies must be better prepared to detect and stop those attempts. Despite many recent, particularly U.S.-led successes, stopping this trade remains difficult. Preventing illicit trade is imperative to U.S. and international security and to the creation of a world safer from the spread and use of nuclear and other destructive or destabilizing weapons.

In Volume 1, Section I, this report explains strategic commodity trafficking, or illicit procurement, to assist in understanding what this activity is, who is involved, and how it occurs. It explains the most basic activities of illicit trade and general structures of illicit networks. A series of illicit trade cases studies, focused on the ordering process, show key illicit procurement methods in action. Section II discusses the international framework of and recent developments in proliferation financing. It shows how illicit procurements are financed, with special emphases on cases involving Iran and North Korea. Section III explains how goods are shipped, once illicitly acquired, and also includes case studies. An annex to the shipping section discusses more on the main stakeholders involved.

Section IV, a special case section, draws out findings from a once-prominent transnational illicit network centered in China, the Cheng/Jamili network, which outfitted Iran’s nuclear, missile, military, and other sensitive programs. David Albright, one of the authors of this report, was an expert witness for the United States Attorney for the District of Massachusetts on Cheng’s 2016 sentencing hearing. Cheng pled guilty to six U.S. grand jury charges and was sentenced to nine years’ incarceration. Albright was permitted to assess raw evidence in the case and much evidence was released publicly in the course of Cheng’s trial. The detailed case information, including chat records, e-mails, and other associated documentation, is an enormously rich collection which also includes information about the activities of two other illicit trading networks. That which was open, or made public during the course of court filings, hearings, the trial, and sentencing hearing, is included in Section IV. This report contains a separate, confidential Volume 2 with additional content available to readers allowed under the rules of the court proceedings that was prepared with the permission of the U.S. prosecutor.

Volume 2 is especially useful to U.S. counter-proliferation officials who have not had the opportunity to review this important enforcement case. Although Volume 2 is confidential, the lessons and insights from these cases are included in Volume 1.

The case studies in this report are focused on the ordering, financing, and shipping processes, and showcase key illicit procurement methods in action. Many of the case studies identify ways in which proliferant states and their associates seek and successfully obtain sensitive commodities. Other ones show when counter-proliferation methods have worked to thwart those efforts. These cases highlight ways in which countries can improve their detection and prevention of illicit procurement.

The cases describe:

• Types of goods sought, particularly those aimed at subverting, undercutting, or bypassing control lists on sensitive commodities;

• Tactics for concealment;

• Current and emerging methods of buying, shipping, and financing acquisition of controlled and sensitive commodities;

• Nature of intermediaries working on behalf of proliferant states, and emerging trends and use of new kinds of intermediaries;

• Methods of shipping goods from supplier to proliferant state, including routes and concealment methods; and

• Methods of financing proliferation, including circuitous payment, money laundering, and virtual payment methods.

The cases identify intervention points for detecting and stopping illicit procurement including: points along the process of first contact with suppliers, ordering, checking of bona fides of customers, obtaining end-use and end-user certification for the sale of goods, export licensing, shipment arrangements, customs checks, and financing arrangements. The cases show where suppliers and governments can intervene or better detect illicit actors.

In Section V, the report ties together all the previous sections and makes available a large quantity of illicit procurement methods and tactics and their warning signs, commonly called “red flags.” These methods and warning signs are drawn out of the cases and are of particular importance to governments and private sector actors. All parties must become aware of common and less common methods and warning signs of illicit procurement, and understand that better familiarization allows them to act as a net to detect and prevent illicit procurements from successfully making their way to proliferant states.

This section also recommends a range of policy steps that the United States and likeminded countries can take to more effectively detect and prevent illicit procurement today and in the future. The policy recommendations can help governments and private actors operationalize warning sign information and become more efficient at this goal.

Among the dozen recommendations are ways to improve the timely detection of illicit trade, expand outreach to the private sector, increase government/industry cooperation, better detect proliferation financing, and improve controls over shipping. The recommendations would also assist the enactment and tightening of sanctions against countries and their destabilizing weapons programs.

The policy chapter further recommends that the U.S. government more frequently exploit and comprehensively assess illicit trade evidence from federal or other prosecutions, on an unclassified, albeit confidential, basis. The information in these cases often points out new threats and loopholes to close, as well as methods for better thwarting illicit trade.

Countering proliferation financing remains a difficult area in which to make progress, but even as technology is exploited by illicit networks to route payments for goods, it can also be harnessed toward better detection of data that show illicit activity. Counter-proliferation financing efforts must continue to be bolstered internationally, requiring leadership by the United States, as the global financial center of the world economy. Defenses against cyber-hacking and electronic thefts of funds need to be improved as states increasingly turn to more virtual methods of funding proliferation.

Not enough has been done to prevent the misuse of shipping to obtain strategic goods. Transshipment of ill-gotten goods remains a major issue, and the use of front companies, freight forwarders, and free trade zones as intermediaries can create such complexity that it is nearly impossible to track the circuitous route of some illicit shipments to their final destination. Yet, customs, border, air, and maritime enforcement officials can better use intelligence and other data, combined with more sophisticated analysis, to conduct more sophisticated risk-based inspections. Moreover, despite the frequently unclear jurisdiction and complication of stopping goods in transit internationally, a complex web of international law supports and clarifies such interdictions on land, sea, and air.

The ultimate goal of U.S. and partner country policies should be to bolster their defenses and better hone their offenses in order to create a more functional counter-proliferation system as a whole. The findings and recommendations of this report aim to complement and strengthen U.S. government efforts in export licensing, outreach, intelligence, law enforcement, sanctions implementation, and other counter-proliferation programs, while anticipating and heading off future threats. It is our hope that this report contributes to efforts more broadly to prevent additional proliferation by adversaries of the United States and safeguard U.S. and international security.

This book was made possible in large part by support from the Project on Advanced Systems and Concepts for Countering Weapons of Mass Destruction (PASCC), Center on Contemporary Conflict, Naval Postgraduate School, under Grant N00244-16-1-0029. PASCC is supported by the Defense Threat Reduction Agency (DTRA).  In addition, research for this report was supported over the years by a range of U.S. foundations that have funded Institute for Science and International Security nonproliferation research.

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