Money laundering and terrorism financing risks in Non-Profit Organisations (NPO)

The FATF recommendation number 8 requires that countries review their laws and regulations to ensure that non-profit organisations are not misused for the financing of terrorism. The recommendation is directed toward eradicating terrorist funding in the non-profit sector. But the irony is that even after two decades, only 10 jurisdictions comply with the recommendations. This connection is inevitable and came to light after 9/ 11 when the role of a charitable organisation with terrorist organisations was unearthed.  

It is noteworthy that in the initial days, the FATF recommendations were not focused on non-profits. But after 9/ 11, the FATF extended its actions to the non-profits. The tricky part is to conduct financial surveillance without putting a question mark on the integrity of the charitable organisations.  

Over-regulation has become a concern, so the FATF introduced a risk-based approach and adopted tactfulness to deal with money laundering cases. FATF has recommended that such measures should be taken that should not disrupt charitable activities and should not discourage legit philanthropic activities.  

These measures are applicable in scenarios in which government services do not reach, and non-profit organisations first reach the people to offer financial assistance. So, they should not be unduly prevented from accessing resources so that they can carry out their legit charitable activities successfully.  

The complexity lies in dealing with the charitable organisations and identifying the intention and ignorance of the non-profits. There might be organisations involved in the money laundering crime, and there are also some organisations that have been subject to exploitation without their knowledge. 

There might be several reasons for this, such as depending on the goodwill of the donors, ignorance or oversight of the working of the concerned staff. The financial abuse might be the work of insiders for which increased governance and stringent financial control are required.  

If there’s the involvement of the outsiders, it is best to depend on the authorities and share relevant and complete information so that they can take the appropriate and timely actions. 

Charities can be based on cultural or religious beliefs, so some charities might receive huge donations in cash which might be a routine thing. But the authorities need to recognise the peculiarities. The non-profit sector is vulnerable, which is often considered a high risk as the terrorists can exploit that.  

Over-regulation to prevent the misuse of non-profits has become common, but it has led to a highly controlled environment for charities which they find hard to operate. They cannot access funds quickly and disperse them to provide humanitarian relief.  

Such over-regulation has had adverse effects on the working of charities. So, the FATF accepted that de-risking without considering the level of risk associated with the customers and taking risk mitigation measures for customers within a particular sector can increase the risk. It will reduce the transparency required in the global financial system, and it will prevent the authorities from efficiently combatting money laundering and terrorist financing.  

A risk-based approach helps thwart the challenges arising out of the vulnerabilities and the risk to which the non-profits are exposed. Charitable organisations need to focus on proper registration, sharing relevant information, and maintaining the correct records to help keep a tab on money laundering. They need to identify the beneficiaries and the sources of the distributed charitable funds.