How Illicit Finance Controls Can Make It Harder for Nonprofits to Serve the World’s Neediest - and What to Do about It
Jim Woodsome and Michael Pisa
A recent article in the New York Times on the current situation in Gaza vividly illustrates what can happen when an entire community loses financial access. Because of Israel’s longstanding blockade of the territory and more recent decisions by Egypt and the Palestinian Authority to cut off financial support to Hamas, money no longer flows in Gaza. Without cash or credit to pay for critical supplies, the Gazan economy has seized up: unemployment is near 50 percent (and even higher for young people), electricity use is limited to 6 or 7 hours per day, and 95 percent of water is undrinkable. The dire situation has created a powder keg that many regional experts believe could lead to a new round of violent conflict with Israel.
The situation highlights the simple fact that goods only flow to the areas where they are needed when money is available to facilitate their purchase and transport. Gaza is not the only region suffering from loss of financial access: a growing number of humanitarian aid organizations operating in conflict zones are also having trouble finding banks willing to work with them. Notably, many humanitarian organizations working in Syria and Yemen report having difficult conducting payments.
On February 15, we attended an international stakeholder dialogue on ensuring financial services for nonprofit organizations (NPOs), co-organized by the Dutch Ministry of Finance, the Human Security Collective, and the World Bank. The meeting represented the continuation of an ongoing dialogue about NPOs initiated last year by the World Bank and the Association of Certified Anti-Money Laundering Specialists (ACAMS). During the day-long session, participants discussed the extent of the problem, its root causes, and what can be done about it. While the organizers will soon publish a more detailed report, we offer our preliminary thoughts here.
Nonprofits cut off from bank accounts and wire transfers
In recent years, many large international banks have either ended or restricted their relationships with certain countries and types of customers. This process, commonly referred to as “de-risking,” is driven by a host of changes to banks’ business and regulatory environment since the global financial crisis, including stricter enforcement of laws and regulations designed to counter money laundering, terrorist financing, and sanctions evasion. In some cases, banks have concluded that certain types of customers pose too great an illicit finance risk, or else are not worth the rising cost of compliance.
The nonprofit sector is among those affected by de-risking, with NPOs reporting a range of financial access problems. This is especially true with respect to Islamic charities, humanitarian organizations operating in high-risk countries, and small nonprofits with limited compliance capacity. In some cases, NPOs have been denied bank accounts or have had their existing accounts closed. More frequently, they have had their transaction delayed. These delays can last for weeks or even months, which in a crisis can be the difference between getting life-saving materials or services to a vulnerable population in time or not. Unable to rely on the formal banking system, some NPOs have resorted to transporting cash or turning to money transfer operators.
The roots of the problem
While banks might have any number of reasons for deciding to exit a particular relationship, concerns about the cost of compliance associated with illicit finance risks often loom large.
Banks’ aversion to working with such NPOs may stem from the fear of inadvertently facilitating illicit finance—particularly terrorist financing and sanctions violations—and of the resulting fines, regulatory scrutiny, and reputational damage. The risk of personal liability for compliance officers undoubtedly fosters even greater caution. In recent years, regulators have consistently emphasized that banks should follow a risk-based approach; however, it appears that many banks and NPOs remain concerned that under US law, terrorist financing and sanctions violations remain “strict liability” offenses. Banks also say they fear being second-guessed by their examiners.
Some banks and bank examiners mistakenly perceive NPOs to be uniformly high risk. This is partly a legacy of the September 11 attacks and their aftermath, during which time NPOs were labeled as “particularly vulnerable” to terrorist financing by the Financial Action Task Force (FATF), the global standard-setting body for anti-money laundering and countering the financing of terrorism (AML/CFT) regulations. Although FATF retracted this language in 2016, the perception that NPOs are especially risky endures. While it is true that some NPOs do need to strengthen their AML/CFT controls, the sector has made important strides in recent years—as recently recognized by the UK government.
Banks’ misperception of NPOs’ riskiness is often exacerbated by a mutual lack of communication and understanding between banks and NPOs. Bank officers may lack a firm grasp of how NPOs operate or how they manage their risk exposures. NPOs, in turn, may not always be cognizant of how banks perceive them or why banks might require certain information of them.
Tackling the problem: advice for policymakers, banks, and NPOs
Due to the multifaceted nature of the problem, tackling it will necessarily entail a coordinated effort on the part of policymakers, banks, and NPOs.
Policymakers should continue to work with banks and NPOs to ensure that regulatory guidance is properly understood and followed. To its credit, FATF now regularly consults with the private and nonprofit sectors. However, given banks’ enduring uncertainty regarding the proper treatment of NPOs, it is clear that more needs to be done to ensure that the risk-based approach is implemented correctly. In addition, policymakers should consider expanding the use of humanitarian exemptions, which can smooth the way for humanitarian organizations to operate in high-risk jurisdictions. Currently, only in Somalia are humanitarian organizations exempted from UN sanctions.
While banks must make decisions based on their bottom line, they can also take an expansive view that recognizes the reputational benefit that providing services to NPOs can provide. Indeed, some banks make a point of doing business with charities and humanitarian organizations for precisely this reason. In addition, banks may wish to consider adopting sector specializations, as Barclays has done, so that they have dedicated staff who understand how NPOs operate and can therefore manage these relationships—and their attendant risks—more effectively. Finally, we encourage banks to continue working with policymakers and NPOs to develop a standardized customer due diligence template tailored to NPOs. Such a template, which the World Bank and ACAMs are working to develop, would be useful for establishing mutual expectations about the baseline information NPOs should be ready to provide their banks.
For their part, NPOs should continue to strengthen their own AML/CFT risk controls and to be proactive in managing their relationships with their banks. In addition, large NPOs might consider how they can provide compliance or financial-management support to the smaller NPOs they often work with to provide last-mile services, often in the most volatile circumstances.
If all three sets of actors can’t find a way to solve the problem, more radical solutions may be necessary. These could include setting up alternate payment channels where humanitarian aid can flow outside of the traditional banking sector but with government oversight (similar to the UK’s Safe Corridor Pilot for remittances to Somalia which was designed but never implemented). NPOs are also exploring whether tracking aid transfers on a permissioned blockchain network would give banks greater confidence and lead to easier access to finance.
The international stakeholder dialogue successfully brought together policymakers, banks, and NPOs to develop a common understanding of the problem and a shared purpose for addressing it. The priority now will be to maintain momentum and close cooperation moving forward.