Brokering and Arms Diversion.

 As shown in the research consortium’s Diversion Analysis Framework (DAF), diversion can occur at any stage of the armstransfer chain and could be facilitated by unscrupulous brokers colluding with corruptofficials or by otherwise exploiting institutional weaknesses or failures. Brokers can therefore have a sense of impunity and can facilitate diversion in situations where the state in which they operate has grey areas or loopholes in its national legal framework. Through their market knowledge and network of contacts, brokers could exploit gaps and inconsistencies in national regulations. Unscrupulous arms brokers may employ a number of deceptive tactics and methods to divert arms, ammunition and related material, including in support of efforts to circumvent international sanction regimes and facilitate arms diversion to sanctioned governments, entities and individuals. 

The most notable brokering activities that may lead to diversion include: 

• Use of front and shell companies 
• Use of circuitous transport routes and exploitation of multiple jurisdictions 
• Falsifying transfer documentation 
• Use of “flags of convenience” 
• Misreporting of cargo 

The following five subsections explore each of these five ways in which brokers may facilitate diversion to unauthorized (end-) users and recipients, drawing primarily on case studies derived from CAR’s field investigations and the results of successful tracing of arms and ammunition in armed conflicts. The subsections also include case studies that show how brokers have facilitated diversion to evade United Nations arms embargoes. This is followed, by a description of brokering-related challenges to post-transfer diversion investigations.

2.1. Use of front and shell companies

 Unscrupulous arms brokers may use so-called front or shell companies to facilitate diversion. Front companies are corporate entities with minimal or no actual business operations of their own. They may also be called, variously, “international business”, “offshore”, “mailbox”, “letterbox” or “brass plate” companies. These companies are not necessarily involved in illicit activities, but do allow for the concealment or obfuscation of ownership and control, which in turn enables brokers to avoid regulatory scrutiny from the competent states authorities. Such companies have no physical presence in the jurisdiction in which they are domiciled and registered and often no employees and no commercial activity. Concealment of beneficial ownership is a common strategy among front companies and their networks involved in efforts to evade multilateral sanctions.

The diversion of arms is, of course, not necessarily the main or sole motive for these individuals’ or entities to set up front or shell companies. However, unscrupulous arms brokers are known to employ nominee directors and shareholders of such companies to act on their behalf, thus shielding the true owners and operators of the business. An example in which opaque registration practices obscured the identity of the beneficial owners of a brokering company is provided in Case Study 1. Complex ownership structures and layers of intermediary entities is another, related method of obscuring money flows and ownership. These make it difficult for national authorities to identify beneficiaries and to trace financial flows, which enables unscrupulous arms brokers to launder the proceeds from arms deals

Case Study 1. Opaque brokering ownership

 In June 2016, a CAR field investigation team documented small-calibre ammunition in the custody ofan NSAG allied with the armed forces of the Government of South Sudan, which at the time was subject to a European Union arms embargo. Tracing investigations identified that a brokering company, EBS Investments Corporation, registered and domiciled in the Seychelles, had been engaged to procure this ammunition in 2014 on behalf of the Ugandan Ministry of Defence and Veteran Affairs. Under Seychellois corporate law, the registry of companies does not record the beneficial owners or shareholders of offshore companies. At the time, it was not possible for a law enforcement agency of another state to request the Seychellois authorities to obtain company ownership information for administrative procedures such as an export licence assessment. Importantly, such practices make it difficult for licensing authorities to establish the beneficial owners of a brokering company, keeping them effectively anonymous and thus impeding pre-export risk assessment. In this particular case, CAR found no evidence that EBS Investments Corporation or its directors were responsiblefor diverting materiel to South Sudan. CAR did establish that a copy of the transfer documentation provided to the export licensing authorities had been redacted by the exporter to obscure the name of the brokering company, further frustrating efforts to assess potential diversion risks. Further investigations by CAR found that the co-owner of EBS Investments Corporation, of Egyptian nationality, had previously been linked to arms diversion. In 2001 the United Nations Panel of Experts (PoE) on Liberia reported that this individual had supplied more than 2,000 assault rifles through a different brokering company, called Culworth Investments Corporation, to Uganda. The Government of Uganda found that a consignment of these rifles did not correspond to the contract specifications and the Egyptian individual agreed to return them. Instead – without the awareness of the Ugandan authorities – the broker arranged to resell the rifles to a Guinean company, which the PoE on Liberia asserts was used in a range of illicit arms purchases by the embargoed Government of Liberia underCharles Taylor. The PoE also identified that the Egyptian individual resold the rifles to a Guinean company, using a Guinean end-user certificate that both Guinean authorities and the named Guinean company claimed was forged. Subsequently, the prominent Russian arms broker Viktor Bout transported the weapons by air from Entebbe, Uganda, to Liberia for use by Taylor’s embargoed regime.

2.2. Use of circuitous routes and exploitation of multiple jurisdictions 

As described in Section 1, the international nature of many brokering activities poses a regulatory challenge to states. Unscrupulous arms brokers exploit gaps in national legal and regulatory frameworks or weak enforcement mechanisms in certain jurisdictions to facilitate the diversion of arms without detection. In doing so, they may also deliberately pick circuitous routes via jurisdictions with inadequate administrative capacity and laws or poor enforcement mechanisms in order to supply arms to unauthorized end users, including NSAGs and sanctioned national government entities. Circuitous routing is a tactic used by unscrupulous arms brokers seeking to evade detection when engaged in illicit brokering activities. It allows them to bypass regulatory controls and arms transfer control measures in order to divert arms to unauthorized recipients (see Case Study 2). This may include trans-shipment through multiple countries and jurisdictions, changing shipping routes or taking longer, indirect routes and exploiting countries or regions with poor regulatory oversight and poor mechanisms for enforcement of arms transfer controls. These brokers may even combine the use of a chain of shell or front companies (see Subsection 2.1) or flags of convenience (see Subsection 2.4) with circuitous routing. This makes the detection of diversion by relevant authorities incrediblydifficult, particularly where administrative andlaw enforcement capacities are weak.

CASE STUDY 2. Alleged use of circuitous routing for illicit arms transfer.

In April 2024, United States authorities charged two people, both principals of an Iraq-based company called Black Shield Ltd, with attempting to illicitly export of arms and ammunition from the United States to Sudan and Iraq. The indictment described an international transaction involving multiple jurisdictions in different regions. In 2016, the two, together with other individuals, attempted to acquire 23-millimetre anti-aircraft ammunition, other ammunition, and different quantities and types of assault rifles illegally and illicitly in the United States. The total value of this materiel was 1.2 million US dollars. Allegedly, the deal was part of a larger scheme, with transactions planned to divert arms and ammunition worth a total of 4 million US dollars. Individuals of Indian and Belarusian nationality and emissaries of Black Shield Ltd travelled to the United States to inspect the ammunition. The US indictment states that the deal involved circuitous routing and was intended for trans-shipment to and from Guatemala to false (end-)users in Cyprus, before ultimately arriving in Sudan and Iraq. The described transaction and the alleged deal involved payments from a front company in Benin, and Israeli-American and Israeli-Romanian-Uzbeki brokers, who acted as middlemen between the supplier and the end users.

2.3. Falsifying transfer documentation

Falsifying Arms transfer documentation is a deceptive practice used by unscrupulous arms brokers to supply, without detection, arms to unauthorized (end-) users or states or entities subject to an arms embargo. These brokers might forge or falsify end use or end user documentation, for example, by misrepresenting the intended end use or end user to enable the diversion of arms to prohibited buyers or destinations. In 1996, the International Commission of Inquiry on Rwanda identified two forms of falsification as key factors in the diversion of arms: “the free use of fake end-user certificates”; and filing false flight plans and making clandestine night take-offs and landings in order to evade customs and other airport controls. For example, in 1994, a South African broker facilitated attempts made by representatives of the newly embargoed Rwandan regime to purchase arms, travelling with a senior figure in the Rwandan Ministry of Defence to the Seychelles to negotiate the sale of arms and ammunition – including more than 6,000 mortars and 5,600 rifles – ostensibly on behalf of the Government of Zaire (now the Democratic Republic of the Congo). The shipment was transported to Zaire with assistance from Zairean state officials, who provided a false end-user certificate indicating the national military as the end user. Similarly, in the widely reported Otterloo case in 1999, arms dealers deceived the Nicaraguan Government by posing as brokers for the Panamanian National Police. Using false end-user certificates and purchase orders, they diverted a large shipment of assault rifles and ammunition to a Colombian NSAG, the Autodefensas Unidas de Colombia (AUC), onboard the ship Otterloo without stopping in Panama. Unscrupulous brokers may also falsify shipping documents, such as bills-of-lading or customs declarations, in order to divert arms. This can involve mislabelling cargo or providing forged documentation indicating the recipient as (or in) State A, while the actual destination is State B (see Case Study 3). As noted above, falsification of documentation is sometimes accompanied by collusion with state officials, whereby brokers may be able to persuade corrupt officials to provide authentic (yet inaccurate) documents to legitimize a transfer even if the shipment never passes through the issuing country en route to the undeclared recipient.

CASE STUDY 3. Falsified transfer documentation.

Between June and August 2002, 200 tons of surplus SALW and ammunition were transferred and transported from Belgrade (Federal Republic of Yugoslavia) to Monrovia (Liberia) in six separate flights, in violation of a moratorium on SALW transfers to the West African region, and Security Council sanctions on Liberia due to the civil war. The Yugoslav authorities had authorized the transfer based on documentation identifying the Nigerian Ministry of Defence as the end user. However, subsequent investigations by the PoE on Liberia revealed that the documents (including airport stamps, end-user certificates and documentation, and cargo manifests) were all falsified. The Nigerian Government confirmed the forgeries to the PoE on Liberia. The operation was orchestrated and executed by different brokers (companies), registered in at least three different countries (the Federal Republic of Yugoslavia, Nigeria, Liberia, and Liechtenstein). A second set of documents compiled for the transport agent correctly identified Liberia as the final destination, but misdeclared the items as “mine drilling equipment”.

2.4. Use of flags of convenience

Unscrupulous arms brokers involved in illicit brokering activities may attempt to disguise their efforts to divert arms transfers involving shipping vessels through the use of so-called “flags of convenience”. A flag of convenience refers to the practice whereby a ship’s owner registers a ship sailing under the flag of a state other than the one in which the ship’s owner is based, especially where that state is perceived or known to impose fewer, or less rigorously enforced, maritime safety and security regulations including restrictions on the vessel and its activities. Brokers can seek to exploit less strict jurisdictions to arrange for shipment of illicit arms transfers via the use of flags of convenience, or may use such structures to help to hide beneficial ownership. While there are legitimate reasons for vessels to fly a third country flag, the 2001 report of the GGE on small arms stated that “most ships used in illegal arms shipments operate under flags of convenience”.

CASE STUDY 4. Use of flags of convenience in sanctions evasion 

On 11 August 2016, Egyptian authorities interdicted the cargo ship Jie Shun on its way from the Democratic People’s Republic of Korea (DPRK) towards the Suez Canal in Egypt. The ship was carrying 24,384 disassembled PG-7 rocket-propelled grenades, concealed in crates of iron ore – itself a commodity subject to United Nations Security Council sanctions relating to the DPRK (resolution 1874). The 2017 report of the PoE on the DPRK called this “the largest seizure of ammunition in the history of sanctions against the DPRK, and showed the country’s use of concealment techniques”, as well as highlighting “an emerging nexus between entities trading in arms and minerals”. The Jie Shun sailed under a Cambodian flag of convenience, but was crewed and captained by DPRK nationals. The PoE’s investigations identified several individuals who helped to broker the shipment, including one who had “served at least three functions for the Jie Shun: he was its emergency contact; he arranged the protection and indemnity insurance; and, through his company, Bene Star Shipping Ltd., he registered the vessel’s operator, K-Brothers, in the Marshall Islands”. These individuals identified themselves only as “consultants” for the Jie Shun. Further investigations discovered thatthe Jie Shun was owned and managed by Chinese entities and nationals and that the company that was the de facto owner of the vessel shared a physical address linked to several other DPRK-affiliated shipping companies.

2.5. Misreporting of cargo

The misreporting of cargo is indicative of a range of deceptive methods and tactics that unscrupulous arms brokers have been documented as undertaking during an arms transfer. It can be used when conducting covert shipments of illicit weapons, or to create conditions to enable redirecting of part or all of the transferred items (see Case Study 5). Several such techniques have been highlighted by investigations and reports by United Nations Panels or Groups of Experts assisting Security Council Committees in monitoring the implementation of sanctions, including arms embargo regimes. These techniques include, for instance, the use of fraudulent registration numbers on aircraft, false flight plans and routings, and efforts to evade detection by air or sea, including by switching off the transponder systems that allow the real-time tracking of aircraft or ships in space and time by competent national authorities. The Jie Shun case (Case Study 4 above) is an example of attempts to disguise an entirely covert shipment of ammunition, already disguised as a transfer of minerals. The bill-of lading stated that the items being transferred by ship were “assembly parts of the underwater pump” and the address of the stated shipper was, in fact, that of a hotel. The contents of the shipment were further disguised by physically covering identifying markings, including the nailing of large canvas patches to the crates themselves. Such mislabelling or misreporting is carried out in order to deceive customs or law enforcement authorities and officials in their efforts to detect and prevent illicit shipments entering a country

CASE STUDY 5. Letfallah II 

On 12 April 2012, Lebanese authorities intercepted a cargo ship, the Letfallah II, in the port of Tripoli, Lebanon. The vessel, sailing under the flag of Sierra Leone, was carrying a large shipment of weapons and ammunition of various ages and origins, which were reportedly destined for Syrian opposition forces. Investigators from CAR and from the PoE assisting the United Nations Security Council 1970 Committee on Libya documented the seized material and traced weapons produced in Belgium, Italy and Romania to legal exports to the Libyan Government between the 1960s and 1980s.46 The weapons and ammunition had been loaded onto the Letfallah II in Misrata in Libya. The ship then stopped in ports in Türkiye and Egypt, before reaching Lebanon. The shipment appears to have been brokered by a network of individuals based in Saudi Arabia, Lebanon and Libya. The ship owner – in interviews with United Nations investigators and with journalists – stated that they had been contacted by a Libya-based shipping agent, who put them in touch with a Lebanese broker who wanted to ship 12 sealed containers from Misrata (the final shipment consisted of three containers). The PoE subsequently established that Syrian citizens based in Saudi Arabia had initiated and financed theoperation. The PoE interviewed a Lebanese national who worked as a port agent, who confirmed that he had travelled to Saudi Arabia to meet with the Syrian citizens who brokered the arrangement. The contents of this shipment were falsely declared on multiple occasions. Egypt and Türkiye confirmed to the PoE that the cargo was misreported to its customs authorities as “construction material” or “combustible engines”. The owner of the ship also initially stated that they had been informed that the vessel would be carrying engine oil. Among the recovered material, CAR investigators documented a large quantity of 40-mm PG rocket-propelled grenades, manufactured in the DPRK, that were inside wooden crates labelled “PARTS OF ROCK DRILL”.