Money Laundering and Its Consequences for Charities
Charities that work on a global scale face significant financial and reputational risks. Even unintentional participation in financial crime, regardless of a charity's good intentions, can result in substantial legal ramifications, irreversible reputational loss, regulatory penalties, donor funding withdrawal, and financial service disruption. All of this has an impact on a charity's ability to achieve its goal.
Financial crime includes bribery and corruption, terrorist financing, money laundering, and sanctions and export restrictions. As a result, all charities, as well as regulated financial organizations like banks, should be aware of regulations aimed at preventing financial crime, especially if they operate in sanctioned or high-risk countries.
Responsibilities of Banks
There is a growing trend for public/private collaborations in the fight against financial crime and its harmful impact on global society. The financial sector, charities, governments, and regulators all work together to prevent the banking system from being used for financial crime.
Due to the likelihood that criminals will use financial institutions to launder and transfer unlawful money and fund terrorism, financial institutions are subject to stronger regulatory regulations. Banks are obligated to conduct due diligence operations on its clients, including charities, in order to gather information such as:
- The places where they do business
- Who they collaborate with?
- Who owns them?
- Their source of money
Foundations that work around the world, including in high-risk or sanctioned nations, may be expected to conduct more thorough due diligence. This category may include requests to assess governance rules, processes, and training materials used to combat financial crime threats.
Anti-money laundering (AML), anti-bribery and corruption (ABC), counter-terrorism funding (CTF), sanctions, and export restrictions are all areas where charities should be aware with the regulatory framework and international recommendations.
All of this leads to Know Your Customer (KYC) requirements, which banks must comply with in order to prevent criminals and terrorists from gaining access to financial services.
Banks will require due diligence processes from their clients, including charities, to ensure that both the bank and the client are completing their regulatory obligations and, as a result, avoiding financial crime.
The Responsibility of Charities
As a result of their registration with the Charity Commission, charities are subject to duties as well as legal obligations as businesses, such as those imposed by the Companies Act 2006 and several financial crime statutes and laws. Financial crime legislation includes, but is not limited to:
- Corruption and bribery (Bribery Act 2010)
- Laundering of funds (Charities Act 2011 and charities should be conscious of the responsibilities of their banks under the Money Laundering Regulations 2017)
- Terrorism (under the Terrorism Act of 2000 and the Proceeds of Crime Act of 2002), and
- Penalties (various including UK, EU, UN, USA sanctions regulations).
Therefore, charities must have a comprehensive financial crime plan or set of rules in place to handle both the legislation and the operational risks they face.
The purpose of a policy is to define a predetermined plan of action and risk limits for the entire business.
It acts as a resource for well-known corporate strategy, goals, and operational guidelines.
The policy should be a substantial document that governs how a charity operates; it should be at the heart of the organization's operations.
Process (or operational frameworks) enable this interaction by providing the organization with clear and transparent plans of action for implementing the policy. Procedures distributed responsibilities and established clear decision-making and action-planning procedures. The method reflects the policy in terms of functioning.
While a policy outlines a charity's risk tolerance, goals, and operational standards and procedures outline how a policy is implemented and assigns responsibilities, personnel must be trained to ensure that they fully understand what they must do to comply.
A risk-based approach may be used to determine the specifics of the policy, the specifics of the method, and who receives what training—charity workers on the ground in sanctioned countries and conflict zones.
Due Diligence is Essential
Like a bank, a charity must conduct due diligence on the people and companies with which it conducts business. Due diligence is essential for preventing financial crime, and a bank will expect a charity to follow due diligence procedures. As a result, charities must adopt risk-based procedures to guarantee that they have enough information about donors, beneficiaries, employees, volunteers, affiliated organizations/member organizations, partners, and suppliers. A risk-based strategy suggests that the greater the risks, the more due diligence is required.
Charities, for example, should be aware of where contributions come from and why any restrictions are in place.
Charities should get to know the people and organizations with whom they work and be on the lookout for unusual circumstances.
Terrorists and other criminals have used charity in the past to transfer money to associated organizations.
All relevant sanctions and export control requirements must be followed by charities operating in sanctioned or otherwise high-risk countries.
If the organization is dealing with a "politically exposed person," there may be additional financial criminal risks, including corruption.