Arms trafficking is listed as a predicate offense to money laundering within the European Union and is regularly cited in Europol reports on organized crime as a “source of wealth” for global criminal networks. “Controversial weapons”, which can be part of arms trafficking, are of significant concern to businesses and governments alike, given links with various, interconnected criminal activities. Addressing this threat is a priority across the EU and beyond.
Controversial weapons can include anti-personnel mines; cluster munitions; chemical, biological, nuclear, and incendiary weapons; and more. Use of these weapons was either restricted or prohibited by the UN in the 1980s due to being “considered excessively injurious” or subject to indiscriminate use.
Screening for connections to the production, sale, or funding of controversial weapons is becoming an increasingly important issue for financial institutions, government entities, and corporates.
With the potential for human and environmental harm, reputational damage, and legal penalties for non-compliance with laws governing this area, organizations in different sectors need to have means of screening their counterparty network to identify risks associated with controversial weapons.
A key challenge in screening for risks related to controversial weapons has been the acquisition of robust and reliable data for use in investigations in order to make informed decisions. This means it has been difficult for organizations to perform their initial due diligence and achieve reliable results, let alone consider the requirement for ongoing risk monitoring in this area.
Not all manufacturers and distributors associated with production of weapons will be open about their business practices. Those engaged in malpractice may use means to obscure their involvement in a supply chain or distribution network. This means businesses need to access different types of data to take a unified approach and create a fuller picture of potential risks.
Key questions in a screening and risk assessment process might include:
While laws in certain EU countries - such as Italy where a law has been enacted prohibiting the financing of companies involved in the production and supply of anti-personnel mines – are focused on financial institutions and funding of the controversial weapons industry, screening across other sectors may be helpful in understanding and mitigating potential risks.
Government agencies, for example, may want to focus investigations to uncover bad actors trying to acquire controversial weapons, or disrupt money laundering and terrorist groups. And corporate entities involved in manufacturing and production of legitimate weapons or component parts that could be leveraged illegally may find screening methods helpful to avoid association with risks related to their supplier, customer, or distribution networks.
Numerous corporations in Europe are also now subject to the Corporate Sustainability Due Diligence Directive (CS3D), the aims of which include: “…to foster sustainable and responsible corporate behavior in companies’ operations and across their global value chains.” This CS3D requirement can extend to the manufacture and use of controversial weapons, meaning corporates want and need to understand their risk exposure in this regard.
A solution to the challenges of screening for controversial weapons within a counterparty network involves creating a methodology that combines key data on manufacturers, such as entity verification, business ownership, and sanctions information, with due diligence and monitoring in other areas of third-party-related risk. By leveraging entity data, ownership and control information, suspicious corporate activity, such as connections to shell companies, and relevant negative news stories, organizations can begin to bridge data gaps and build a more solid screening process.
The benefits of implementing a risk-based approach to screening in relation to controversial weapons are clear. Not only does it help organizations avoid reputational damage and penalties for non-compliance, but it also demonstrates a commitment to corporate social responsibility and ethical business practices.
By screening for controversial weapons, businesses can ensure they are not inadvertently engaging in production of illegal arms; money laundering and terrorist financing; or funding companies involved in illicit activities. And government agencies can conduct investigations to help disrupt the actions of terrorist groups and serious organized crime networks.
For more information on how Moody’s can help you understand risks associated with your counterparty network by integrating data, AI-led screening, and workflow automation, please get in touch - we would love to hear from you.