By Carol Prasad and Anton Moiseienko -
As the commencement of Tranche 2 anti-money laundering and counter-terrorist financing (AML/CTF) obligations edge closer, it is essential that regulated businesses consider financing of proliferation of weapons of mass destruction (proliferation financing) together with money laundering (ML) and terrorism financing (TF) risks.
Prior to the Tranche 2 reforms, the Anti-Money Laundering and Counter-Terrorism Financing Act 2006 (AML/CTF Act) made no mention of proliferation financing. However, under the amended legislation, from 1 July 2026, regulated businesses are required to consider proliferation financing risks together with ML/TF risks as part of their risk assessments and incorporate counter proliferation financing (CPF) measures into their AML/CTF policies. This will be required of all regulated businesses unless it ‘reasonably assesses’ that the proliferation financing risk it may reasonably face is low. If a business assesses its proliferation financing risk as low, it is not required to adopt any CPF-specific measures or policies.
The purpose of this article is to provide legal professionals with an overview of proliferation financing and considerations to support their preparation for compliance with Tranche 2 obligations.
What is proliferation financing?
Proliferation financing is the financing of illegal activities intended to facilitate the creation and supply of weapons of mass destruction (WMD), whether the activities occur or are just attempted.
The international standards set out in the Financial Action Task Force’s (FATF) Recommendations require countries to address proliferation financing. However, this only includes the obligation to enforce proliferation-related targeted financial sanctions imposed by the UN Security Council, which are currently in place against North Korean and several Iranian-linked individuals and entities. Such sanctions involve asset freezes, travel bans, and restrictions on the provision of goods or services to listed entities or individuals associated with the proliferation of WMD, which includes nuclear, chemical and biological weapons.
In contrast, some experts and commentators prefer a broader approach to proliferation financing (best described as the ‘activity-based’ approach). The activity-based approach would require regulated businesses to consider the provision of funds or financial services used to support the development, acquisition or delivery of WMDs, even if such activities do not involve sanctioned parties. The activity-based approach enables states to fully implement UN Security Council resolutions that deal with proliferation threats, which goes beyond sanctions implementation. This was acknowledged in the FATF’s Guidance on Counter-Proliferation Financing Published in 2018. Notably, the 2022 National Risk Assessment of Proliferation Financing in Australia published by AUSTRAC viewed proliferation financing through a broad, activity-based lens.
Australia has long implemented UN targeted financial sanctions via the Charter of the United Nations Act 1945 (COTUNA). Therefore, even before the recent amendments to the AML/CTF legislation, Australia was arguably already compliant with the FATF Recommendations in relation to proliferation financing.
Now, for the first time as a result of the Tranche 2 reforms, regulated businesses will need to go beyond sanctions compliance in addressing proliferation financing. Specifically, they have to consider broader proliferation financing risks.
‘Proliferation financing’ as defined in the amended AML/CTF Act
The amended AML/CTF Act defines proliferation financing as:
- a violation of proliferation-related sanctions under the COTUNA;
- a violation of proliferation-related sanctions under the Autonomous Sanctions Act 2011 (Autonomous Sanctions Act), which enables Australia to impose sanctions independently of the UN; or
- ‘the provision of assets (including funds) or financial services, or other dealing with assets, in contravention of a law of the Commonwealth that (…) implements an international agreement, convention or treaty relating to the proliferation of WMD; and is prescribed by the regulations for [these] purposes’; or
- a violation of an analogous State or Territory law.
The definition is broad and, subject to Regulations, opens the door to an activity-based approach, with implications for risk assessment and compliance, as discussed below.
It is worth emphasising that, while the amended AML/CTF Act now includes a definition of proliferation financing, proliferation-related sanctions obligations under other legislation remain unchanged. It is, and has long been, an offence to make resources available to individuals or entities subject to Australian sanctions, whether under the COTUNA or the Autonomous Sanctions Act. Therefore, it is important that businesses continue to screen customers against the Australian Sanctions Office (ASO) Consolidated List.
Understanding the potential proliferation financing risks faced by lawyers
A challenge that many in the legal sector will face is understanding and identifying their potential exposure to proliferation financing. How, exactly, can an Australian legal practitioner be involved in facilitating the financing of proliferation of nuclear, chemical or biological weapons? To answer this question, lawyers should start to consider up-to-date sources of information about proliferation financing, such as:
- FATF’s recent report Complex Proliferation Financing and Sanctions Evasion Schemes,
- AUSTRAC’s Proliferation Financing in Australia – National Risk Assessment,
- reports by the Multilateral Sanctions Monitoring Team, an international group set up to track the implementation of sanctions against North Korea following the dissolution of the UN-run Panel of Experts on North Korea as a result of a Russian veto, and
- the proliferation financing risk documents prepared by the Royal United Services Institute (RUSI).
In general terms, proliferation financing risks are likely to be higher for law firms that facilitate transactions involving dual-use goods or counterparties in countries that have, or seek to acquire, nuclear, chemical or biological weapons. An area of particular practical difficulty is identifying and assessing risks of indirect exposure to sanctioned parties, e.g. dealing with an ostensibly legitimate company in an overseas jurisdiction that may be used as a front for a foreign state’s WMD-related efforts.
Conversely, suburban, regional or some boutique practices are less likely to face any significant proliferation financing risks. Still, it is essential to appropriately consider, assess and document any appropriate risks. One should note that the above-mentioned exemption from CPF-specific policies requires the reporting entity to be able to demonstrate the basis for its low-risk assessment and justify the exclusion if challenged by AUSTRAC.
Practical steps for legal practices
In preparing for obligations commencing on 1 July 2026, particularly in relation to undertaking a proliferation financing risk assessment, legal practices should start considering the:
- proliferation financing risks they may face, drawing on resources published by the FATF, AUSTRAC, RUSI, the Multilateral Sanctions Monitoring Team and, prior to that, the UN Panel of Experts,
- ASO Sanctions Compliance Toolkit and Sanctions Risk Assessment Tool. These guides assist regulated entities and legal professionals to “navigate the complexities of Australian sanctions laws” and “offer a structured approach to compliance”: Australia and sanctions | Australian Government Department of Foreign Affairs and Trade, and
- ASO’s Guidance Notes and Advisory Notes in relation to sanctions: Guidance notes | Australian Government Department of Foreign Affairs and Trade
NSW Law Society AML Resources
As set out in our previous article An AML update for practitioners – Law Society Journal, the Law Society AML/CTF hubcontains the latest information, as well as access to AML/CTF resources and information including a number of complimentary, self-paced, interactive e-learning resources which cover the effect of the Australian AML/CTF reforms on solicitors, provide an overview of AML/CTF obligations for solicitors and guidance on what legal practices can do now to prepare.
The Law Society’s Professional Support Unit (PSU) provides free and confidential guidance to all solicitors regarding their obligations under the Legal Profession Uniform Law in the areas of costs, ethics, regulatory compliance and AML. Enquiries regarding AML can be made to PSU by telephone, email, or in person. Please contact aml@lawsociety.com.au or (02) 9926 0249.
