FINTRAC Publishes Bulletin on Financial Activities Linked to Suspected Evasion of Counter Proliferation-Related Sanctions

• Transactions involving financial institutions that are located in jurisdictions with known deficiencies in anti-money laundering or anti-terrorist financing measures, are not signatories to international counter proliferation treaties, or have weak enforcement of export control laws.
• Transactions or financial relationships (such as correspondent banking relationships) between businesses and entities located in jurisdictions of proliferation or diversion concern or located in or in close proximity to geographic areas controlled by terrorist groups. Particular interest should be paid to electronics companies, import-export businesses, supply chain management companies, holding companies, investment and financial services firms, shipping, security solutions, engineering, food, machinery, steel, telecommunications and clothing companies.
• Transactions involving entities, including financial institutions, in jurisdictions that neighbour or are sympathetic to sanctioned jurisdictions of proliferation or diversion concern. For example, many North Korean front or shell companies and corporate service providers engaged in proliferation activities are based in China or use Chinese financial institutions to facilitate the movement of illicit funds on behalf of the Democratic People's Republic of Korea, often located in the Chinese provinces of Liaoning and Jilin. Both of these share land borders with the Democratic People's Republic of Korea.
• Transactions involving individuals known to be employed in a sensitive technological sector with potential access to proliferation-related goods or technologies, whether tangible or intangible. This can include individuals working in high-security laboratories, arms manufacturers and other similar industries.
• Transactions suspected of being related to intangible technology transfers, such as contracts, service/servicing agreements, conferences/seminars/training, investments/joint ventures, research grants/patrnerships, or salaries/commissions, involving parties with knowledge or expertise in industries of proliferation interest (e.g., nuclear technology or missile development, high performance computing and encryption technologies) with parties linked to jurisdictions of proliferation concern.
• Correspondent banking transactions involving actors that have shared owners or addresses with companies associated with jurisdictions of proliferation or diversion concern.

3. Import and Export of Military, Sensitive and Dual-Use Goods and Technologies

Proliferators often attempt to evade sanctions by rerouting military and dual-use goods through complex networks of intermediaries and jurisdictions to obscure the origin and destination of the goods. Canada's proximity to the U.S. and its reputation for high-quality goods make it an attractive source for actors seeking materials to develop weapons of mass destruction.

Proliferation networks often use complex corporate structures, such as shell and front companies, to conceal their activities, hide the origin of funds, and obscure the end-users of sensitive goods and technologies. These corporate entities are often set up in offshore financial centers, including tax havens and secrecy jurisdictions, to minimize transparency and conceal the ultimate beneficiaries.

• Transactions involving suspected shell and front companies, which may lack or have minimal online presence, have overly generic and non-descriptive names, and share directors and management, addresses, emails, phone numbers and financial infrastructure with other entities in their networks.
• The involvement of third-party nationals as directors, shareholders and other prominent positions in ownership structures of corporate entities to conceal the connection between designated individuals or entities and sanctions activities. For instance, the Democratic People's Republic of Korea has been known to use Chinese nationals for such purposes, effectively masking the true ownership and control of assets to evade international sanctions.
• Transactions related to the procurement of proliferation-sensitive and dual-use goods and technologies that involve complex networks of intermediaries, including front companies and shell companies, to conceal end-use and end-user of shipments.
• Transactions related to trade involving suspected front or shell companies in intermediary jurisdictions of proliferation concern, wherein both the buyer and consignee of a shipment appear to be shell companies.
• The incorporation of companies in jurisdictions with close geographic proximity to sanctioned jurisdictions. For instance, front and shell companies operating on behalf of the Democratic People's Republic of Korea are commonly registered in China's Liaoning province and specifically the municipalities of Dalian, Dandong, Jinzhou and Shenyang, which border the Democratic People's Republic of Korea. Corporate structures linked to the Democratic People's Republic of Korea are also commonly registered in Hong Kong, an activity facilitated by corporate service providers.

• Trade documentation for shipments wherein the description of goods involved is vague or otherwise misrepresented, including false, misleading or non-specific description of goods on trade or financial documentation (e.g., "samples", "machines", and "for business purposes").
• Inconsistencies between information contained in trade documents and financial flows such as names, addresses and destinations, including discrepancies related to the goods on trade documentation compared to the actual goods, and discrepancies between invoicing and shipping documentation, involvement of unexplained third parties, last minute changes in shipment destinations and the types of goods being shipped.
• Evidence that documents or representations related to shipping, customs, or payment are falsified or fraudulent, including trade documentation that appears illogical, altered or fraudulent, or documentation that is absent despite being expected for the nature of the trade.
• The use of open account trade, where the terms and conditions of the transaction are only known to the importer and exporter, is susceptible to abuse by proliferators by limiting the visibility of financial institutions into the underlying activities and documentation of the transactions they process.

6. Virtual Currencies and Underlying Financial Technology

Virtual currencies provide proliferation financiers with pseudo-anonymity, which allows them to bypass traditional financial controls. These tools are increasingly used to raise and move funds for illicit activities, including the financing of weapons programs by sanctioned states like the Democratic People's Republic of Korea. In some cases, this involves hacking virtual currency exchanges and decentralized finance platforms for the movement of funds, allowing proliferation actors such as the Democratic People’s Republic of Korea, Iran and Russia, to evade the traditional financial system.

Money services businesses dealing in virtual currencies must remain vigilant, comply with the regulatory requirements under the Act and implement robust client identification measures to prevent misuse of their platforms. 

• A customer's transactions are initiated from or sent to beneficiaries with Internet Protocol addresses in a sanctioned jurisdiction or neighbouring jurisdictions of proliferation concern.
• A transaction has direct or indirect transactional exposure to virtual currency exchanges located or registered in sanctioned jurisdictions, jurisdictions of proliferation concern, geographic areas that are controlled by or are in close proximity to areas controlled by terrorist organizations, or in high-risk jurisdiction with known anti-money laundering and anti-terrorist financing deficiencies.
• A customer sends funds to or receives funds from virtual currency exchanges which are known to have deficient anti-money laundering and anti-terrorist financing compliance procedures, are located in high-risk jurisdictions, or are known to facilitate transactions in jurisdictions of proliferation concern.
• A customer engages in excessive chain hopping (i.e., exchanging virtual assets between different blockchains without trading through a centralized exchange) to exchange more volatile virtual assets (e.g., BTC or ETH) for stablecoins (particularly those pegged to the U.S. dollar such as USD Tether and USD Coin).
• A transaction involves virtual currency exchanges that are known to engage in high-volume trading involving fiat currencies associated with sanctioned jurisdictions or jurisdictions of proliferation concern.
• A customer engages in behaviour that suggests efforts to obfuscate activity on the blockchain-such as chain-hopping, cross-chain bridges, pass-through transactional activity or transfers that otherwise seem to lack economic purpose-and appears to be associated with sanctioned entities, individuals and/or jurisdictions.

Reporting suspicious transactions to FINTRAC

Like the June 2024 Bulletin, the Bulletin requires reporting entities to submit STRs to FINTRAC if there are reasonable grounds to suspect that a financial transaction that occurred or is attempted is related to the commission or the attempted commission of a money laundering, terrorist financing or sanctions evasion offence. For guidance on submitting STRs to FINTRAC, see Reporting suspicious transactions to FINTRAC.

For further information concerning the matters referenced in the Bulletin, please contact any member of our Financial Services Regulatory Group.

The authors would like to thank Monica Creery, Research Lawyer, for her assistance in writing this Update.

¹ Proliferation refers to efforts by state and non-state actors, including terrorist organizations, to acquire the goods, technologies, resources and knowledge needed to develop chemical, biological, radiological, and nuclear weapons and high-yield explosives, including their precursors and delivery systems. 

² The Financial Action Task Force (FATF) defines proliferation financing as the risk of raising, moving, or making available funds, other assets or economic resources, or financing, in whole or in part, to persons or entities for the proliferation of weapons of mass destruction. This includes the proliferation of their means of delivery or related material (including both dual-use technologies and dual-use goods) for non-legitimate purposes.