Operational Guidelines for Enhanced Controls Against Financing of Weapons of Mass Destruction Proliferation Programs

PROVISION CONTAINING OPERATIONAL GUIDELINES FOR THE EXERCISE OF ENHANCED CONTROLS AGAINST THE FINANCING OF PROGRAMS FOR THE PROLIFERATION OF WEAPONS OF MASS DESTRUCTION

THE BANK OF ITALY

Having regard to the resolutions issued by the United Nations Security Council under Chapter VII of the Charter of the United Nations to counter and repress the development of programs for weapons of mass destruction, and in particular resolutions no. 1540/2004, no. 1673/2006, no. 1695/2006, no. 1718/2006, no. 1737/2006, no. 1747/2007 and no. 1803/2008 of the United Nations Security Council;

Having regard to Common Positions 2007/140/CFSP of 27 February 2007, 2008/652/CFSP of 7 August 2008, 2008/479/CFSP of 23 June 2008 and 2008/842/CFSP of 10 November 2008 concerning restrictive measures against Iran;

Having regard to Council Regulation (EC) no. 423/2007 of 19 April 2007 concerning restrictive measures against Iran, as amended by Council Regulation (EC) no. 1110/2008 of 10 November 2008;

Having regard to European Parliament and Council Regulation (EC) no. 1781/2006 of 15 November 2006 concerning information on the payer accompanying transfers of funds;

Having regard to European Parliament and Council Directive 2005/60/EC of 26 October 2005 on the prevention of the use of the financial system for the purpose of money laundering and terrorist financing;

Having regard to Legislative Decree of 22 June 2007, no. 109, concerning measures to prevent, counter and repress the financing of terrorism and the activities of countries threatening international peace and security, in implementation of Directive 2005/60/EC;

Having regard to Legislative Decree of 21 November 2007, no. 231, implementing Directive 2005/60/EC concerning the prevention of the use of the financial system for the purpose of money laundering of proceeds from criminal activities and terrorist financing as well as Directive 2006/70/EC laying down implementing measures;

Having regard, in particular, to Articles 20, 28, paragraph 4 and 41 of the aforementioned Legislative Decree of 21 November 2007, no. 231;

In agreement with the Financial Intelligence Unit;

Having heard the opinion of the Financial Security Committee;

ISSUES

the attached "OPERATIONAL GUIDELINES FOR THE EXERCISE OF ENHANCED CONTROLS AGAINST THE FINANCING OF PROGRAMS FOR THE PROLIFERATION OF WEAPONS OF MASS DESTRUCTION"

Rome, 27.5.2009

THE GENERAL MANAGER Dr. Fabrizio Saccomanni

Resolution no. 357 of 27.5.2009

Operational Guidelines for the Exercise of Enhanced Controls Against the Financing of Programs for the Proliferation of Weapons of Mass Destruction

Preamble

1. The proliferation of weapons of mass destruction concerns activities related to the design and implementation of programs aimed at developing weapons of a nuclear, chemical or biological nature. These programs, pursued outside the scopes and limits permitted by existing international agreements, constitute a serious threat to international peace and security, as affirmed by United Nations Security Council Resolution 1540/2004, which imposes on Member States the obligation to adopt specific financial measures to counter the proliferation of weapons of mass destruction, highlighting the risk that this phenomenon could facilitate the acquisition of weapons material by terrorists.

The fight against the proliferation of weapons of mass destruction has highlighted the need to pay particular attention to the financial flows that support their development. The United Nations and the European Union consider the financing of proliferation programs to be an illegal activity, just like the proliferation itself, and have formulated prohibitions on providing assistance or financial support to subjects involved in the aforementioned programs.

Security Council Resolution 1673/2006 reaffirmed the aforementioned obligations and emphasized the need for all jurisdictions to adopt adequate countermeasures. Further and specific preventive and countermeasures against proliferation have been adopted by the Security Council against the Democratic People's Republic of Korea (Resolutions 1695/2006; 1718/2006) and Iran (Resolutions 1737/2006; 1747/2007; 1803/2008).

The European Union and its Member States, within the framework of the EU Strategy against the proliferation of weapons of mass destruction, adopted by the European Council in December 2003 and revised in December 2008, support the initiatives of the international community for the prevention and counteraction of the phenomenon. In this context, specific acts have been issued to implement the provisions adopted at the UN level (see Common Positions 2007/140/CFSP and 2008/652/CFSP and EC Regulation 423/2007).

In particular, Regulation (EC) no. 423/2007, as amended by Regulation (EC) no. 1110/2008, provides for a series of restrictive measures against Iran, including the freezing of funds and economic resources of persons or entities associated with the development of activities sensitive in terms of proliferation, and prescribes credit and financial institutions the obligation to report suspicious transactions related to the financing of proliferation activities detected in dealings with other banks and financial institutions domiciled in Iran, their foreign branches and subsidiaries, or controlled by persons or entities domiciled in Iran.

Furthermore, in order to support the action of Member States in the fight against the financing of proliferation programs, the Financial Action Task Force (FATF) has developed guidelines aimed at assisting Member States in implementing the provisions on financial sanctions contained in United Nations Security Council Resolutions 1718(2006) against North Korea, and 1737(2006), 1747(2007) and 1803(2008) against Iran1.

1 See FATF-GAFI, Guidance regarding the Implementation of Financial Provision of United Nations Security Council Resolutions to Counter the Proliferation of Weapons of Mass Destruction, June 2007; id., Guidance regarding the Implementation of Activity Based Financial Prohibitions of United Nations Security Council Resolution 1737, October 2007; id., Guidance on Implementation of Financial Provisions of United Nations Security Council Resolution 1803, October 2008.

In this framework, it is considered that the establishment, even unintentional, by the intermediaries referred to in Article 11 of Legislative Decree no. 231/2007 of relationships with subjects involved in the aforementioned proliferation programs can entail significant negative effects on stability as well as important reputational and operational risks.

For the purpose of safeguarding the integrity and stability of intermediaries, as well as the confidence of the financial system as a whole, it is therefore considered necessary to provide intermediaries with guidelines regarding the behaviors to adopt and controls to perform in relations and operations possibly conducted with counterparties involved, directly or indirectly, in programs for the development of weapons of mass destruction.

Identification and Risk Assessment

2. Intermediaries must use information regarding their clientele and the operations carried out by them, acquired within the framework of due diligence procedures, in order to assess whether transactions and relationships (which also include correspondent accounts, as well as business relationships such as joint ventures, syndicated loans, etc.) are directly or indirectly attributable to subjects or entities involved in programs for the development of weapons of mass destruction.

3. Intermediaries must establish control procedures capable of determining the correspondence of identification data, acquired within the scope of ordinary customer due diligence activities, with those contained in lists of subjects and entities subject to sanctions based on current Community legislation or identified within the scope of decrees issued by the Ministry of Economy and Finance in concert with the Ministry of Foreign Affairs, upon proposal of the Financial Security Committee pursuant to Article 4 of Legislative Decree no. 109/2007, in order to apply the prescribed measures for the freezing of assets and economic activities. Such controls must be carried out, in the case of new customers, before the establishment of the relationship or the provision of the requested service; in the case of existing clientele, updates to the aforementioned lists must also be considered.

4. Based on the risk-based approach introduced by Article 20 of Legislative Decree no. 231/2007, information regarding the clientele and the operations carried out by them, acquired by intermediaries during due diligence procedures, must be analyzed within specific assessment procedures to determine the degree of risk of involvement in proliferation activities attributable. For this purpose, among the general criteria indicated, those referring to the geographical area or the predominant activity carried out assume particular importance.

The determination of the degree of risk of involvement in proliferation activities can also be performed using the anomaly indices provided in Annex 1.

With reference to occasional operations, intermediaries must pay particular attention to gathering all necessary information to determine the actual degree of risk attributable to the specific service requested, prioritizing – if operations are assessed as high risk – operational methods of execution that ensure the greatest traceability.

Enhanced Control Measures

5. In the case of operations or relationships that present a high risk of involvement in proliferation activities, intermediaries must adopt enhanced control measures aimed at monitoring the evolution of the relationship with particular attention. In particular, such measures may consist of:

a) Request for additional information, also through the production of suitable documentation, on: i) origin of the funds used or to be used; ii) beneficial owner of the relationship or the requested service; iii) nature and purpose of the requested operation;

b) In the case of payment operations, request for complete information on the payer and the beneficiary, also through verification of documentation related to the commercial transaction to which the payment refers.

When intermediaries, within the framework of the customer due diligence procedure, are unable to adopt such enhanced control measures, they cannot establish the relationship, nor execute the transaction, or they terminate the existing relationship, evaluating whether to file a report with the UIF, pursuant to Article 41 of Legislative Decree no. 231/2007.

Correspondent Relationships

6. In the case of correspondent relationships, intermediaries, within the framework of the measures provided for in Article 28, paragraph 4 of Legislative Decree no. 231/2007, must ensure to verify the regularity of the relationship maintained with subjects who may present a high risk of proliferation, derived also based on the anomaly indices of Annex no. 1. In particular, it is incumbent upon intermediaries to:

a) Conduct a risk assessment on: i) customers on whose behalf the correspondent operates; ii) products or services offered by the correspondent.

b) Review, based on the risk assessment referred to in letter a), the procedures and controls applicable to the correspondent relationship with the counterparty presenting a high proliferation risk.

When intermediaries, within the framework of the customer due diligence procedure, are unable to adopt such enhanced control measures, they cannot establish the relationship, nor execute the transaction, or they terminate the existing relationship, evaluating whether to file a report with the UIF, pursuant to Article 41 of Legislative Decree no. 231/2007.

Obligations of Intermediaries

Communication Obligations

7. Intermediaries must also:

• communicate to the UIF within thirty days from the date of entry into force of Community regulations adopted in this matter or of the decrees referred to in Article 4 of Legislative Decree no. 109/2007 the measures for the freezing of funds and economic resources applied, indicating the subjects involved as well as the amount of capital and funds frozen;

• communicate to the UIF the operations, relationships, as well as any other available information attributable to designated subjects; as well as to those pending designation of which the UIF provides them with information based on indications formulated by the Financial Security Committee.

Reporting Obligations

8. The financing activities of proliferation programs represent a complex and dangerous phenomenon, to which intermediaries must respond in a responsible and aware manner.

Intermediaries must therefore proceed to report suspicious transactions related to the financing of proliferation activities to the UIF with the utmost timeliness, utilizing for the detection thereof also the anomaly indicators reported in the annex, as provided for in Article 41 of Legislative Decree no. 231/2007, in order to allow the UIF to exercise the power of suspension provided for in Article 6, paragraph 7, letter c of Legislative Decree no. 231/2007.

Annex

In order to detect profiles of anomaly that can be attributed to the financing of proliferation programs, intermediaries make use of the following indicators, developed based on the specificities of this phenomenon and complementary to those provided by the Decalogue.

Anomaly Indicators Related to Counterparties of Operations

1. Operations, requests or transactions made, in the absence of reasonable and adequately documented motives, especially if for overall significant amounts from: a) customers or intermediaries established in geographical areas identified as at risk of proliferation of weapons of mass destruction; b) intermediaries on behalf of companies or other entities having their headquarters in geographical areas identified as at risk of proliferation of weapons of mass destruction; c) customers or intermediaries established in geographical areas known for deficiencies of a regulatory or application nature regarding export controls or regulatory deficiencies in the field of combating money laundering and terrorist financing.

Anomaly Indicators Referring to the Characteristics of the Operation

2. Operations, requests or transactions made, in the absence of reasonable and adequately documented motives and according to operational schemes differing from current practice relating to: a) export or trade of goods susceptible to use for the production of weapons of mass destruction, especially if the value is inconsistent with market prices; b) commercial transactions in which: • the declared value of the shipment has been underestimated compared to shipping costs; • the subject providing the transport of goods appears as the final recipient of the shipment; • the goods are destined for geographical areas apparently unrelated to the customer's economic activity; • the passage of goods occurs through countries different from that where the final recipient is based; • informational inconsistencies are detected in the overall documentation regarding the parties involved, addresses, final destination. c) payments made by subjects not appearing in letters of credit or other documentation related to the underlying commercial transaction;

   d) acquisition of companies producing goods susceptible to use for the production of weapons of mass destruction by subjects attributable to geographical areas at risk of proliferation, especially if inconsistent with the economic activity carried out.