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House Subcommittee Testimony of David Albright on Countering Financial Networks of Proliferation

July 12, 2018

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Testimony of David Albright, President of the Institute for Science and International Security, before the House Subcommittee on Terrorism and Illicit Finance, of the House Financial Services Committee
"Countering the Financial Networks of Weapons Proliferation"
July 12, 2018 Oral Testimony:¹ My Institute recently published a report ranking the export control systems of 200 countries, territories, and entities. This report, the Peddling Peril Index (PPI) of 2017², is the first comprehensive and in-depth ranking of countries’ national strategic export controls. In the index, we rank 200 countries and territories based on their capabilities and performance in five areas addressing export control legislation, international commitments, illicit procurement detection, enforcement, and financing of proliferation. Preventing proliferation financing, albeit not a traditional component of a review of national export control systems, is one of the most important aspects for detecting and stopping exports of sensitive goods. To measure a country’s Ability to Prevent Proliferation Financing, the Institute used a set of criteria that indicate a country’s susceptibility to being exploited or involved in proliferation financing, including violations of international sanctions. These sub-criteria are based on countries’ financial regulatory systems and counter-illicit financing programs, for which the main source of data for the PPI is the Financial Action Task Force (FATF). Our research for the 2017 PPI ranking revealed that preventing proliferation financing is one of the counterproliferation areas most in need of improvement. This effort would benefit significantly from a closer integration with export controls. Moreover, measuring countries’ performance in this area proved difficult because of a lack of available data and public discourse on the topic, including a paucity of organizations that conduct training in countries that need assistance. In the ranking of a country’s ability to prevent proliferation financing, no country achieved two-thirds of the available points and only two received more than half the available points. About one-third of all countries achieved negative scores. Among others, significant illicit financial flows, big black markets and high levels of corruption indicate that those countries are likely places where front companies find it relatively easy to finance nefarious activities. Other countries perform poorly due to having excessive bank secrecy, providing tax havens, or simply lacking regulations and effective institutions. A preliminary update for 2018 on preventing proliferation financing shows similar results. Countries still perform poorly overall, and only three countries received 50 percent or more of the possible points. Iran performs particularly poorly in the PPI, including on proliferation financing where it ranked at the bottom. Iran has been given extended time to fulfill its Action Plan requirements set out by the FATF and to comply with FATF standards. Recent actions have confirmed the deep involvement of Iran’s financial system in illicit activities. As a result, we recommend the re-imposition of FATF counter-measures against Iran. Summary of Key Findings and Recommendations: The Institute has developed a range of recommendations while producing the PPI and working with proliferation financing experts to develop its methodology. One of the most critical recommendations is that countering proliferation financing needs to be integrated into other aspects of counterproliferation including export controls. I would like to highlight five other recommendations: 1. All countries should work closely with FATF and its regional bodies to improve their efforts to prevent proliferation financing. 2. Each country should conduct a risk assessment of proliferation financing, and its agencies should address any gaps identified. 3. Each government should have adequate legislation in place that includes an effective system of coordination among departments working on proliferation financing, such as well resourced, investigative Financial Intelligence Units and effective outreach to financial institutions. 4. A country’s financial institutions need to be able to monitor, detect, report, and act upon suspicious financial transactions. Countries should help financial institutions identify and freeze suspicious transactions. Because of the difficulties of accomplishing this goal, the U.S. government should launch an interagency study to improve communication and information sharing with financial institutions, including insurance companies, and to develop better solutions for automated counter-proliferation financing screening tools. 5. FATF is in a unique position to drive many of the above-mentioned recommended actions and changes and should do so. Financing of proliferation should be treated broadly and as a separate subject to money laundering and terrorist financing. At the plenary meetings, the FATF working group should discuss adjusting the language in several of the existing 40 FATF recommendations to extend them beyond terrorist financing and money laundering, to include proliferation financing. Thank you for the opportunity to testify. The full written testimony is available in the pdf linked above.

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^{1. This testimony is the collective work of the Institute for Science and International Security, in particular the work of David Albright, Sarah Burkhard, Ramya Ramjee, Naomi Silverstein, and Andrea Stricker.↩ 2. “How to Obtain the Book,” Institute for Science and International Security, http://isis-online.org/ppi/detail/obtain-the-book/↩}