(S/NF) G7 CONFERENCE ON WMD PROLIFERATION FINANCING

S E C R E T PARIS 007269 SIPDIS SIPDIS STATE FOR T, ISN/CPI, EUR/PGI, EUR/PRA, EUR/WE AND EB/ESC/TFS TREASURY FOR LEVEY, CCLARK, O,BRIEN, SZUBIN NSC FOR TOBEY, STEPHENS, HERRO E.O. 12958: DECL: 10/25/2016 TAGS: EFIN PARM PGOV FR SUBJECT: (S/NF) G7 CONFERENCE ON WMD PROLIFERATION FINANCING REF: A. PARIS 4443 (NOTAL) ¶B. PARIS 4441 (NOTAL) ¶C. PARIS 2662 (NOTAL) Classified By: Econ M/C Thomas J. White, Reasons 1.4 b and d ¶1. SUMMARY: (C/REL France, UK, Germany, Italy, Japan, Canada) France hosted an experts-level meeting on October 25 with G7 partners and the EU to discus how to implement the G8 Gleneagles commitment to develop financial measures to combat WMD proliferation. Participants exchanged information on their countries, respective national laws and programs related to WMD proliferation financing, and discussed progress on developing financial measures at the EU level. They agreed on the utility of targeted financial measures in combating WMD proliferation and the importance of further multilateral work in this area. The group agreed to reconvene in the near future to develop a more detailed G7 consensus prior to convening a higher-level meeting. It was also agreed that while a variety of international fora will be useful to raise international awareness of targeted financial sanctions in the context of WMD proliferation, detailed technical work on the subject should begin immediately within the Financial Action Task Force (FATF). for the France agreed to cosponsor a U.S.-drafted proposal on the issue that could be presented prior to the FATF plenary in February.. Richier noted he would circulate a Chairman,s Statement based on the results of the meeting. END SUMMARY. ¶2. (SBU) Participants: FRANCE Foreign Affairs: Francois Richier, Deputy Director for Strategic Affairs, Security and Disarmament Philippe Errera, DAS for Disarmament and Nuclear Non-Proliferation Patrick ALLARD, Policy Planning, David Bertolotti, Desk Officer, Disarmament and Nuclear Non-Proliferation Nicolas de Larusse, Economic Affairs Economic Ministry Ramon Fernandez, DAS for International Financial Affairs Stephanie Talbot, G7 Summit Preparation & International Monetary Affairs Marie-Pierre Padovani, Customs and Indirect Rights Roland Augustin, Customs Investigations Bernard Cukier, Customs Intelligence Defense Ministry Michel Miraillet, Director of International and Strategic Affairs, SGDN Herve Auffret, SGDN Francois Gudin, Ministry of Defense Interior Ministry Jean-Rene Chaux, Commissioner, DST USA Daniel Glaser, Treasury DAS Terrorist Financing and Financial Crimes Anthony Ruggiero, State ISN/CPI Defensive Measures Team Chief Otto Van Maerssen, TFCO, U.S. Embassy Jennifer Fowler, Terrorist Financing and Financial Crimes Policy Advisor CANADA Mark Gwozdecky, Director for Disarmament and Non-proliferation, MFA Michael Blackmore, Disarmament and Non-proliferation, MFA Shannon Grainger, Principal Financial Economist, Treasury Emi Furuya, Canadian Embassy, Paris ITALY Cristina COLLURA, Director for Terrorist Financing, Treasury Department Filippo FORMICA, Director for Disarmament and Non-Proliferation, MFA JAPAN Takuji Kinkyo, Director of International Financial Affairs, Finance Ministry Teppei Kanda, Deputy Director for non-proliferation, science and nuclear energy, MFA Ryuji Sakaue, Japanese Embassy GERMANY Dr. Ursina KRUMTHOLZ, Deputy Director for International Economic Law, Ministry of Economics and Technology Joachim HACKER, Econ Counselor, German Embassy UNITED KINGDOM Paul Arkwright, Department Chief for counter-proliferation, Foreign and Commonwealth Office Eleanor Petch, Counter-proiferation, FCO Kingsley Greene, Minstry of Defense Max Maxwell, Treasury Hamish COWELL, British Embassy EUROPEAN UNION Jean-Claude Brunet, Council SecGen, PESC High Rep Lars-Erik Lundin, Security Director, DG Relex, EC ¶3. (C/REL France, UK, Germany, Italy, Japan, Canada) France on October 25 in Paris hosted an experts-level multilateral meeting to discuss the development of financial measures to disrupt WMD proliferation. The agenda included presentations by some countries detailing national authorities and programs applicable to WMD proliferation financing, as well as discussion of strategies for multilateral efforts to address the issue. BILATERAL MEETINGS ¶4. (S/REL France) Before the G7 meeting, the USDEL met bilaterally with France. Richier stressed France,s desire to keep a lid on the meeting, citing worries that leaks might endanger discussions with Russia and China at the UN in New York on possible Iran sanctions. He also said France would be cautious about focusing the meeting discussions on the need to implement specific UNSC resolutions, such as UNSCR 1718 on North Korea, as it viewed resolution of the WMD finance issue as likely to move on a separate track. Instead, Richier preferred to focus the meeting on the longer-term effort to develop a more &generic8 authority for financial measures to target WMD proliferation. France has considered drafting a UNSC resolution to create this type of legal framework specific to WMD proliferation, but is also considering other forums. France continues to have reservations about including proliferation financing in the Proliferation Security Initiative, since it could give countries reservations about joining PSI. Moreover, neither France nor the UK have involved their Treasury Departments in PSI. Richier recommended using PSI as a forum to discuss proliferation financing, and not as a tool to take action against it. If the G7 is the key forum, the big question is how to move to the G8, that is, bring Russia into the discussion. He suggested Germany might wish to play a part with its G8 presidency. He added he would act as Chair, and Errera would speak for France. ¶5. (S/REL Japan) The USDEL also met bilaterally with Japan before the G7 meeting, which proved useful given the limited intervention from the Japanese delegation during the meeting. Kinkyo said Japan was looking to brainstorm, and discuss how to make information-sharing with the private sector easier. Japan hopes to create better incentives for the private sector (legal, economic, or moral),and is open to involving credit rating agencies in the process of defining a higher cost of doing business with proliferators. Working with a smaller group might be preferable, or academics, to reach a G7 consensus on next steps. Kanda noted that the concept of proliferation finance needs to be clarified, and the world has two test cases with the DPRK and Iran. Japan is a bit cautious about the UNSC, since UN delegates do not have enough information about proliferators and their networks. Japan also has doubts about broadening the scope of the PSI framework, since PSI has not yet acquired an adequate level of participation, especially in Asia. MULTILATERAL MEETING ¶6. (C/REL France, UK, Germany, Italy, Japan, Canada) After making a bid to maintain the confidentiality of the meeting and suggesting a Chairman,s summary be prepared, the Chair was interrupted by Canada, which questioned the purpose, origin, and G7 format of the meeting. In Canada,s view, after US Treasury Under Secretary Levey had briefed the G8 Political Directors in New York in September, there had been no consensus on follow-up activities. After a confused back-and-forth, the Chair made clear that the mandate for the meeting arose from G7 declarations and the G7 meeting held at the US Embassy in Moscow (without Russia) earlier in the year. Subsequent events in Iran and North Korea have served to lend greater urgency to the non-proliferation effort. PARTICIPANT PRESENTATIONS ¶7. (S/REL France, UK, Germany, Italy, Japan, Canada) The USDEL presented its analysis of the effectiveness and impact of using financial measures to target WMD support networks, followed by the UK and France, who provided overviews of proliferation-related financial operations and transactions. For the UK, Kingsley Greene from the MOD discussed how proliferation networks usually procure dual-use goods on the open market. The networks generally go to great lengths to make the transaction appear as innocent as possible, and use banks all over the world. The difficulty of targeting specific transactions suggests countries should move away from transaction-based controls to entity-based controls. ¶8. (S/REL France, UK, Germany, Italy, Japan, Canada) Chaux said the French Interior Ministry intelligence service (DST) has mostly observed transactions to Iran, Pakistan, and Syria, which have followed a lawful and classical commercial pattern with Banks Saderat, Sepah, etc. It has been easy to identify the origin of goods, not so easy to follow their destination. Operations usually try to conceal the description of the goods, not disguise the payments. Most transactions go through front companies, many of which are in Dubai, UAE. DST,s mission is to prevent the delivery of the goods, which is hard to do before the financial settlement unless there is a down payment. He outlined a transaction for UAVs for ballistic programs, initiated by Iran through a Dubai front company with payments from Bank Saderat to a Swiss bank on a previously-agreed timeline. Augustin discussed three cases investigated by the French Customs authorities, tracing payments through a Pakistan buyer, a UAE front company, a US supplier, via Dutch, Spanish, French and US banks. ¶9. (C/REL France, UK, Germany, Italy, Japan, Canada) Delegates had many questions and comments on the presentations. Canada asked for the criteria countries use to identify front companies, noting the importance of understanding the beneficial ownership of front companies. Both Germany and Canada demonstrated confusion over &entity-based8 approach of targeted financial sanctions, which differs from the &transaction-based8 approach of export control. For example, Canada noted that not all proliferation-related transactions are illegal, and that countries are not prohibited from pursuing missile programs or civilian nuclear programs. (The Canadian delegate also went on to express his personal view that the USG action on the Macau bank contributed to the paranoia that led the DPRK to test a nuclear device. He noted, however, that this did not represent the position of Canada. The Chair reminded the Canadian delegate that this meeting was not the place to discuss politics and the matter was not discussed again.) To attempt to clarify the &transaction8 vs. &entity8 confusion, the U.S. analogized to terrorism-related targeted financial sanctions, emphasizing that these sanctions are preventive measures aimed at cutting the targeted entity off from the international financial system, and that any access to the international financial could be restored only after the entity had been rehabilitated. The U.S. used charities as an example, noting that many designated charities do in fact provide real charitable services but are nevertheless cut off from the international financial system due to involvement in terrorist financing. For its part, Italy reaffirmed the point made in all of the formal presentations that an effective approach to targeted financial sanctions must be multilateral solutions. This was uniformly agreed. Canada noted that it has trade with Iran of around 400 million dollars in imports, and only 162 million in exports. It asked for all countries around the table to inform them of their domestic evidentiary standard for implementing targeted financial sanctions. INFORMATION-SHARING ¶10. (C/REL France, UK, Germany, Italy, Japan, Canada) The Chair opened discussion on how to enhance intelligence sharing. France raised three points: even though most transactions go through banks in G7 countries, what kind of outreach is needed for third countries should national points of contact be established on this matter; and third, whether existing institutions, such as Financial Investigatory Units (FIUs) could be used for proliferation finance-related information sharing. Canada suggested using Egmont Group for this type of information exchange, though this suggestion was not supported by other countries. The U.S. noted the difficulty involved using FIUs to engage in classified information exchange, and emphasized that intelligence liaison and embassies would likely have to be used for those purposes. .As a more general matter, France and Japan noted that proliferation finance is a cross-cutting issue, and that to this point non-proliferation experts have had a good grasp on the flow of goods, but not financial flows. This point was widely accepted, and Italy noted repeatedly that it would therefore be appropriate to focus on this issue within the multidisciplinary Financial Action Task Force (FATF). The UK thought it might be useful to do a paper on how the financial sector might get involved. The USDEL agreed the private sector should be involved, pointing to US efforts have banks WMD proliferation concerns into their risk-based analyses. ¶11. (C/REL France, UK, Germany, Italy, Japan, Canada) Japan noted that North Korea presents a clear and imminent threat to international peace, requiring mobilization of all means to respond. Japan has banned all transactions with North Korean entities. In September it introduced measures to prevent transactions with designated individuals, and found it very helpful that Australia and the USG had made designations. Japan has legislation that can target any country, since its foreign exchange law allows its Council of Ministers to act to comply with the UNSC, international law, or as needed for international peace and security. NO NATIONAL AUTHORITY ¶12. (C/REL France, UK, Germany, Italy, Japan, Canada) The European countries and Canada noted that at this time they lack sufficient authority to set up and implement a targeted financial sanctions regime related to WMD proliferation outside the context of a Chapter VII UN Security Council Resolution. They did acknowledge, however, that they had some flexibility with respect to less powerful financial tools. The UK and Canada, for example, noted that they could issue bank advisories. Likewise, the French DST reported it engages in conferences for the main French financial institutions regarding WMD proliferation, and has raised the issue with the French Central Bank and the Banking Commission. In 2005, DST gave around 750 such lectures, which helps companies with their threat assessments. The financial industry is keen to engage in self-regulation. Ramon Fernandez said for the French Treasury, the lack of a legal framework is a problem, but the Treasury has increased its outreach to banks and plans to invite representatives of French banks, including compliance officers, to meet with them by the end of the year to discuss the issue of proliferation financing. France hoped to learn from compliance officers, experiences and suggested that those discussions might support an effort to develop proliferation finance-related typologies. ¶13. (C/REL France, UK, Germany, Italy, Japan, Canada) The EU Council representative reported that work has begun in CONOP to assess the need for a supplementary legal instrument on WMD finance. Its work began in 2003, but had not gotten far. North Korea has helped provide an impetus. In addition, the EU is preparing a draft common position to be supplemented by draft legislation pursuant to EC competencies to implement UNSC 1718 - a Council regulation is needed for anything that would restrict trade, and any procedure needs to be able to survive judicial scrutiny. The EU Commission representative said that the EU is considering what legal mechanism could be used with respect to proliferation financing and that the EU is keen to find best practices in this regard. The representative commented that industry had positive reactions to efforts to be vigilant about proliferation in the context of global business. NEXT STEPS ¶14. (C/REL France, UK, Germany, Italy, Japan, Canada) All delegations agreed that FATF was the appropriate forum for further technical work in this area, and that the G7 should drive that effort. The USDEL offered to prepare a paper to present to the FATF policy group and to circulate it to the G7 beforehand. France offered to cosponsor such a paper. To ensure strong G7 coordination, it was also agreed that a further meeting of this group should be held in the near future. It was also agreed that other fora ) such as the Bush-Putin Global Initiative to Combat Nuclear Terrorism and the PSI -- should be used for awareness-raising. The USDEL pressed for a more vigorous role for the PSI, but other delegations felt that it was premature for PSI to take on more than an awareness raising role in this area. Richier committed to circulate a Chairman,s Statement based on the results of the meeting. Please visit Paris' Classified Website at: http://www.state.sgov.gov/p/eur/paris/index.c fm STAPLETON