Rightly or wrongly, the perception that charitable organizations pose unmanageable compliance problems persists within the global banking industry despite mounting efforts to keep the vital nonprofit sector plugged-in to the global financial system.
U.S. regulators, global advocacy groups and anti-money laundering professionals have issued statements and launched a number of initiatives in recent years to increase banks’ trust in charities and other nonprofit organizations, and ensure they supply their lenders with better due-diligence data on persons depositing, transferring or receiving funds on their behalf.
Despite those efforts, two-thirds of the nearly 9,000 U.S.-based charities with overseas operations saw their ability to move funds curtailed or terminated as recently as 2016, largely as a result of banks’ fears that the groups pose tempting targets for money launderers and terrorist financiers, the Charity and Security Network reported in February 2017.
New illicit schemes involving charities continue to appear.
An East Coast-based compliance officer interviewed by ACAMS moneylaundering.com said criminals recently sought to open an account at his institution by posing as associates of a legitimate charity and providing fraudulent records that reference detailed, publicly available information.
Records charities must make public under federal rules include annual statements, bylaws, articles of incorporation and applications for tax-exempt status. Nonprofits often publish those documents on their website or make them available upon request.
Some of the records list the names and roles of a charity’s senior officers, and may even include copies of their signatures. Criminals can use the data to create a fraudulent “incumbency certificate,” a legal document many banks require to verify that a person attempting to open an account is authorized to represent the charity in question.
The compliance officer said he managed to spot the scheme because the perpetrators tried to open the account in the name of a small charity based in a distant region of the country, and with no apparent business purpose. “But what if someone takes a small, little-known legitimate charity in our area?” the compliance officer noted.
Charities, which provide vital humanitarian services to some of the world’s most vulnerable individuals—many of which reside in or near warzones and areas controlled by nonstate groups—became primary targets of U.S. officials and prosecutors in the wake of the Sept. 11 attacks.
Several have been accused of helping al-Qaida and other U.S.-blacklisted groups raise and move funds.
“We do know that the mechanism of charitable giving has been used to provide a cover for the financing of terror, and that it has been a significant source of funds,” then-U.S. Treasury Deputy Secretary Kenneth Dam told the Senate Banking Committee in August 2002.
Other charities have been accused of more indirect forms of assistance.
In April, Norwegian People’s Aid agreed to pay U.S. authorities $2 million for providing political training and support to Iran, Hamas and other designated Palestinian organizations while receiving USAID funds from 2012 to 2016.
But recent years have seen terrorist financing progress more towards the Islamic State’s model of raising low-value donations from individuals around the world, and towards Hezbollah’s system of taxing and tolling drug traffickers. Jabhat Fatah al-Sham, al-Qaida’s affiliate in Syria, has raked in tens of millions of dollars from kidnapping-for-ransom schemes.
The apparent shift in fundraising has prompted a broader reassessment of the threat presented by charities, including by the Financial Action Task Force, which in 2015 revised its recommendations and guidance to steer financial institutions away from wholesale de-risking of the nonprofit sector.
FATF now recommends a risk-based approach that precludes account closures for charities except in cases where the organization’s compliance risks “cannot be mitigated.”
Charity advocates, government officials, regulators and AML professionals are now working with the World Bank and ACAMS on guidance to put “as much sunlight as possible” on how nonprofits work and how banks can serve them safely, according to John Byrne, a former vice president of ACAMS who remains involved in the project.
“The last thing we need is to be hyperbolic about additional challenges from charities,” Byrne, now vice chairman of Cleveland-based consultancy AMLRightSource, said.
Charities still regularly arouse suspicion from compliance departments.
In another emerging scheme, criminals may attempt to conceal profits by comingling them with legitimate donations to donor-advised funds, according to Yigal Rechtman, a partner with New York-based forensic accountancy RSZ Forensic Associates.
DAFs function as a sort of clearinghouse, or “unregulated bank,” for disbursing charitable contributions to other nonprofits, Rechtman said. Donors to DAFs receive a tax deduction and over time advise the organization on where to move the funds.
“If I want to launder, I can set up a donor-advised fund I control and make donations, then direct those donations to a nonprofit that I also control—so I then control the beginning, middle and end of the transaction and I just cleaned money,” Rechtman said. “I can also go through a donor-advised fund I don’t control, as long as the donations ultimately go to a charity I do control.”
In both cases, the DAF either knowingly or unknowingly mixes illicit funds with legitimate donations, he said.
|Anti-money laundering , Counterterrorist Financing
|December 14, 2018