What is Proliferation Financing and Why Should the Cross-Border Payment Industry Care?

A Report by CYS Global Remit Legal & Compliance Office

Part 2: How Proliferation Financing Exploits the Cross-Border Payment Ecosystem

Introduction 

Now that we've introduced what Proliferation Financing (PF) is and why it matters, it's time to zoom in on how PF risks specifically affect the cross-border payment industry. This sector is vulnerable due to its global reach, high transaction volumes, and reliance on complex networks of intermediaries.

In this article, we explore how PF actors exploit cross-border payment systems and what makes this industry a key target.

1. Why Cross-Border Payments Are Attractive to PF Networks

PF actors—whether state-sponsored or private—seek to move funds and goods across borders without detection. Cross-border payment systems offer several features that can be misused:

• Speed and Volume – High transaction volumes and fast processing times make it easier to hide illicit transactions amongst legitimate ones. 

• Jurisdictional Complexity – Payments often pass through multiple countries, each with different regulatory standards and enforcement capabilities. This fragmentation creates gaps that bad actors can exploit. 

• Use of Intermediaries – Correspondent banks, payment processors, and remittance agents can create layers of separation between the originator and beneficiary, obscuring the true nature of transactions. 

• Limited Transparency – In some cases, beneficial ownership or the true purpose of a transaction is not clearly visible to all parties in the chain, making it difficult to spot red flags.

The combination of these factors makes cross-border payment systems an attractive vehicle for those looking to circumvent sanctions and export controls.

2. Common PF Exploitation Methods in Cross-Border Payments 

Understanding the tactics used by PF networks is crucial for developing effective countermeasures. Here are some ways PF schemes can infiltrate cross-border payment systems:

• Front and Shell Companies – Entities with no real operations are used to send or receive payments related to dual-use goods or sanctioned programmes. These companies often have minimal staff, vague business purposes, and frequently changing ownership structures. 

• Trade-Based PF – Payments are disguised as part of legitimate trade, often involving falsified invoices or mis-declared goods. This method is particularly difficult to detect as the transactions appear routine on the surface. 

• Third-Country Transshipment – Payments are routed through countries with weak export controls to obscure the real destination. Goods may change hands multiple times, with each transfer designed to break the audit trail. 

• Use of Digital Payment Channels – Virtual assets and fintech platforms may be used to bypass traditional financial controls, taking advantage of emerging technologies where regulatory oversight is still developing.

These methods are often combined to create complex schemes that are challenging to unravel without sophisticated monitoring systems.

3. Real-World Examples and Typologies 

To illustrate how these exploitation methods manifest in practice, consider the following scenarios:

• A payment processor unknowingly facilitates a transaction for a company that is a front for a sanctioned North Korean entity. The company appears legitimate with proper registration documents, but deeper investigation reveals no genuine business activity. 

• A remittance firm processes multiple small-value payments to a supplier of dual-use chemicals, avoiding detection thresholds. The payments are structured to remain below reporting requirements whilst collectively representing significant funds. 

• A trade finance transaction involves goods shipped to a third country but ultimately destined for a sanctioned regime. Documentation shows one destination, but the goods are redirected through a network of intermediaries.

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These examples demonstrate how legitimate financial services can be exploited for PF if controls are not robust. What appears routine may, upon closer examination, reveal patterns consistent with proliferation activity.

4. Risk Factors for Compliance Teams to Monitor 

Compliance professionals should pay close attention to:

• Customers with opaque ownership structures – Difficulty identifying beneficial owners or frequent changes in company structure may indicate attempts to conceal true parties involved. 

• Transactions involving high-risk jurisdictions or goods – Payments linked to countries under sanctions or goods with dual-use potential warrant enhanced scrutiny. 

• Unusual payment patterns or routing paths – Payments that take circuitous routes through multiple jurisdictions without clear commercial rationale should raise concerns. 

• Lack of commercial rationale for cross-border activity – Transactions that don't align with a customer's stated business purpose or profile require further investigation.

Building effective monitoring systems requires not just technology but also staff training and a risk-based approach that prioritises resources where threats are most acute.

Conclusion 

The cross-border payment industry is a vital part of the global economy—but it also presents opportunities for abuse by PF actors. Understanding how these risks manifest is essential towards building effective compliance controls.

Compliance teams must remain vigilant, especially when dealing with high-risk geographies, complex trade flows, or unfamiliar counterparties. As PF networks become more sophisticated, so too must the defences designed to prevent their activities. In the next part of this series, we'll examine the practical steps organisations can take to strengthen their PF risk management frameworks.