NPOs, corrupt activities and the Financial Action Task Force (FATF)

Source: BEST PRACTICES – COMBATING THE ABUSE OF NON-PROFIT ORGANISATIONS (RECOMMENDATION 8) – 2015 by the FATF

South Africa has an established and functioning system, including the establishment of a specialized interagency working group focusing on illicit financial flows but more remains to be done to combat tax crimes, illicit financial flows, money laundering, and terror financing. That includes efforts to improve data analysis and coordination, harmonizing laws and practices to cut back on red tape to promote the timeous exchange of accurate and reliable information, embedding the ongoing measurement of the maturity of inter-agency collaboration and inter-agency trust, and reviewing South Africa’s bilateral and multilateral treaties for fitness of purpose.

A workshop held in July 2022 with attendance by various local law enforcement agencies, together with the National Treasury, the South African Revenue Service, the Financial Intelligence Centre, Financial Sector Conduct Authority, and the South African Reserve Bank to collectively set the benchmark for inter-agency cooperation in combating illicit financial flows, money laundering, tax crimes, and corruption.

It was attended by 40 senior officials from National Treasury, SARS, SARB, the Financial Intelligence Centre, the Financial Sector Conduct Authority, the National Prosecuting Authority, the Hawks, and the Special Investigating Unit.

The Heads of entities agreed that to do so successfully requires that:

a. The overall national financial intelligence system that enables inter-agency cooperation must be further developed and strengthened.

b. The agencies involved work more closely together on a joint action plan.

c. They must collaborate actively on sharing information within the remit of the law and improve the use of data.

d. Agencies share best practices and measures to ensure effective implementation and swift action.

e. Enablers of state capture and corruption, such as some banks, auditing firms, estate agents, and lawyers, face the brunt of the law and are held accountable by their regulatory bodies.

The Heads of entities endorsed the outcomes of the workshop and the implementation of recommendations as a further step towards South Africa’s collective response to the FATF in January 2023.

The Financial Action Task Force (FATF) is an independent inter-governmental body that develops and promotes policies to protect the global financial system against money laundering, terrorist financing, and the financing of proliferation of weapons of mass destruction. The FATF Recommendations are recognized as the global anti-money laundering (AML) and counter-terrorist financing (CFT) standards.

FATF’s definition of a non-profit organization

A legal person or arrangement or organization that primarily engages in raising or disbursing funds for purposes such as charitable, religious, cultural, educational, social, or fraternal purposes, or for the carrying out of other types of “good works”.

The FATF recognizes the vital importance of the NPO community in providing charitable services around the world, as well as the difficulty of providing assistance to those in need, often in
remote regions, and applauds the efforts of the NPO community to meet such needs. One of the main objectives of this best practices paper is to facilitate NPO efforts and protect the integrity of the NPO sector by providing examples of additional ways that governments and the NPO sector can work towards protecting the global NPO sector from terrorist abuse.

Within the FATF definition of NPO, Recommendation 8 is intended to apply only to those NPOs that pose the greatest risk of terrorist financing abuse. In some jurisdictions, this may mean those NPOs that control a significant portion of the financial resources of the sector and those NPOs that have a substantial share of the sector’s international activities. In other jurisdictions, a domestic NPO sector review combined with an understanding of the TF risks in the sector may indicate that the risk of terrorist abuse is greater for NPOs with different characteristics. In some jurisdictions, the TF risk in the sector may be low based on the context of the country.

The FATF recognizes the vital importance of the NPO community in providing charitable services around the world, as well as the difficulty of providing assistance to those in need, often in remote regions, and applauds the efforts of the NPO community to meet such needs. One of the main objectives of this best practices paper is to facilitate NPO efforts and protect the integrity of the NPO sector by providing examples of additional ways that governments and the NPO sector can work towards protecting the global NPO sector from terrorist abuse.

Not all NPOs are high-risk, and some may represent little or no risk at all. It may be possible that existing measures are sufficient to address the current TF risk to the NPO sector identified in a country, although periodic reviews may identify new or evolved TF risks over time.

When applying measures to mitigate the risks that have been identified in their domestic NPO sector, it is important for countries to take into account the objectives of Recommendation 8 which are set out in paragraph 3 of its Interpretive Note as follows:

The objective of Recommendation 8 is to ensure that NPOs are not misused by terrorist organizations: (i) to pose as legitimate entities; (ii) to exploit legitimate entities as conduits for terrorist financing, including for the purpose of escaping asset freezing measures; or (iii) to conceal or obscure the clandestine diversion of funds intended for legitimate purposes, but diverted for terrorist purposes. In this Interpretive Note, the approach taken to achieve this objective is based on the following general principles:

a) Past and ongoing abuse of the NPO sector by terrorists and terrorist organizations requires countries to adopt measures both:

(i) to protect the sector against such abuse, and (ii) to identify and take effective action against those NPOs that either are exploited by, or actively support, terrorists or terrorist organizations.

b) Measures adopted by countries to protect the NPO sector from terrorist abuse should not disrupt or discourage legitimate charitable activities. Rather, such measures should promote transparency and engender greater confidence in the sector, across the donor community, and with the general public, that charitable funds and services reach intended legitimate beneficiaries. Systems that promote achieving a high degree of transparency, integrity, and public confidence in the management and functioning of all NPOs are integral to ensuring the sector cannot be misused for terrorist financing.

c) Measures adopted by countries to identify and take effective action against NPOs that either are exploited by, or actively support, terrorists or terrorist organizations should aim to prevent and prosecute, as appropriate, terrorist financing and other forms of terrorist support. Where NPOs suspected of or implicated in, terrorist financing or other forms of terrorist support are identified, the first priority of countries must be to investigate and halt such terrorist financing or support. Actions taken for this purpose should, to the extent reasonably possible, avoid a negative impact on innocent and legitimate beneficiaries of charitable activity. However, this interest cannot excuse the need to undertake immediate and effective actions to advance the immediate interest of halting terrorist financing or other forms of terrorist support provided by NPOs.

d) Developing cooperative relationships among the public, private, and NPO sectors are critical to raising awareness and fostering capabilities to combat terrorist abuse within the sector. Countries should encourage the development of academic research on, and information sharing in, the NPO sector to address terrorist financing-related issues.

e) A targeted approach in dealing with the terrorist threat to the NPO sector is essential given the diversity within individual national sectors, the differing degrees to which parts of each sector may be vulnerable to misuse by terrorists, the need for legitimate charitable activity to continue to flourish, and the limited resources and authorities available to combat terrorist financing in each country.

f) Flexibility in developing a national response to terrorist financing in the NPO sector is also essential, in order to allow it to evolve over time as it faces the changing nature of the terrorist financing threat.

There is no “one size fits all” approach to mitigating the terrorist financing risks faced by NPOs. On the contrary, Recommendation 8 expressly acknowledges that there is a diverse range of
approaches to identifying, preventing, and combating terrorist misuse of NPOs. The Interpretive Note to Recommendation 8 states that a successful approach in identifying, preventing, and
combating terrorist abuse in the NPO sector involves a flexible, multi-faceted four-pronged approach.

The FATF has conducted its own research into the terrorist financing risks facing NPOs. In June 2014, the FATF published a typologies report on the Risk of Terrorist Abuse in Non-Profit Organizations that analyzed 102 case studies submitted by 14 countries from across the globe.

The typologies report found that more than a decade after the abuse of NPOs by terrorist entities was formally recognized as a concern, the threat remains. While the abuse of the NPO sector by terrorist entities is, in the context of the global NPO sector, a low-probability risk, the impact of such abuse on the NPO sector goes beyond the narrow consideration of monetary value. Donors trust that resources provided to NPOs, either financial or material, will be used for good works; this trust is the foundation for the NPO sector. The diversion of these resources to benefit entities whose principal goal is to harm undermines the public’s trust in the NPO sector, which will have a disproportionate impact on NPO operations.

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