Proliferation financing: Why IPs need to stay alert to emerging risks

IPA Insolvency Practitioner newsletter, October 2025

A real-world example of Regulation 18A in action

Insolvency Practitioners (IPs) may consider proliferation financing risks to be remote from their day-to-day practice, but a recent newspaper report demonstrates why Regulation 18A requirements deserve careful attention as part of your overall AML risk assessment under Regulation 18.

The supply chain to Russia

Recent reporting by The i Paper (October 2025) revealed how UK-manufactured components, including Raspberry Pi computers originally designed to teach schoolchildren coding, have been found in Russian drones and missiles attacking Ukraine. Despite the most stringent sanctions ever imposed on a major economy, 34 types of UK-origin components have been identified in 15 different Russian weapons systems.

What makes this case particularly instructive is that none of the UK companies involved were knowingly supplying Russia. Instead, as the report outlines, sophisticated circumvention networks exploited legitimate supply chains:

• Components passed through “half a dozen customers and countries” before reaching Russia
• Front companies in China and Hong Kong acted as intermediaries
• Russia deployed 31 separate schemes to thwart sanctions
• The Kremlin reportedly paid up to six times the market rate for dual-use components
• Even companies with thorough compliance checks found themselves caught in this web

One executive quoted in the article described it as an “insurmountable challenge” – highlighting that even well-intentioned businesses with robust controls can be exploited by determined proliferation networks.

What this means for Insolvency Practitioners

As the IPA has previously outlined in its guidance on Regulation 18A – Proliferation Financing, IPs have specific obligations to assess and mitigate proliferation financing risks as part of their overall Regulation 18 and 18A risk assessment.

While the likelihood of encountering proliferation financing in typical insolvency appointments may be relatively small, practitioners and their firms need to remain alert to potential indicators, particularly when dealing with:

• Companies in manufacturing or technology sectors – Especially those producing dual-use goods (items with both civilian and military applications), electronic components, chemicals or precision engineering equipment.

• Complex international supply chains – Businesses with multiple layers of distributors, particularly involving high-risk jurisdictions such as China, Hong Kong, UAE or countries neighbouring sanctioned regimes.

• Trading relationships with red-flag characteristics
  • Customers reluctant to provide end-use information
  • Unusual payment patterns or premium pricing inconsistent with market norms
  • Frequent changes in shipping destinations or delivery instructions
  • Orders inconsistent with the customer’s apparent business profile
  • Complex ownership structures obscuring beneficial ownership

• Companies subject to export controls: Any business dealing with items on strategic export control lists, even if the actual exports were for legitimate civilian purposes.

Integrating Regulation 18A into your risk assessment

The MLR 2017 requires that proliferation financing risks form part of your firm-wide risk assessment under Regulation 18, not a separate standalone exercise. The key is proportionality:

1. Assess the inherent risk – Consider your client base and the sectors you typically work in. Are you more likely to encounter manufacturing, technology, or export businesses?
2. Identify relevant red flags – Ensure your staff can recognise warning signs in company records, customer lists, supplier relationships and transaction patterns.
3. Enhance due diligence where appropriate – If proliferation financing risks are identified, apply additional scrutiny to relevant transactions, counterparties and jurisdictions.
4. Document your assessment – Show that you’ve considered these risks, even if you conclude they’re low for your practice.
5. Provide training – Ensure your team understands what proliferation financing looks like in practice, using real-world examples like the case above.

The bottom line

The reported case demonstrates that proliferation financing networks are sophisticated, well-funded and capable of penetrating even vigilant businesses. While IPs may rarely encounter these risks directly, the potential consequences, both for international security and for a firm’s regulatory compliance, make it essential to include Regulation 18A considerations in all AML frameworks to ensure there is awareness of the risks in specific sectors.

The risks may be relatively small, but they are not theoretical. By staying informed and alert to warning signs, IPs can play their part by being aware of the potential risks.

Further resources

• IPA Guidance: Regulation 18A – Proliferation Financing
• HM Treasury: Proliferation Financing Risk Assessment Guidance
• FATF: Guidance on Proliferation Financing Risk Assessment

This article is intended for general guidance only and does not constitute legal or regulatory advice. IPA members should consult the full regulatory requirements and seek professional advice where appropriate.