Misuse of the Non-Profit Sector for Money Laundering and Terrorism Financing
Bricknell, Samantha, Trends & Issues in Crime and Criminal Justice
Non-profit organisations (NPOs) are defined by their purpose, their reliance on contributions from supporters and the trust placed in them by the wider community. They often process large amounts of cash and regularly transmit funds between jurisdictions. NPOs have also traditionally operated under less formal regulatory control and generally, a less rigorous form of administrative and financial management. It is argued that the combination of these factors exposes the sector to an elevated risk of criminal and terrorist abuse (Charity Commission 2009a; FATF 2004a, 2004b).
The misuse of NPOs by terrorist entities, and in particular charities, has been a long-held practice (Winer 2008), exemplified by the fundraising activities of the Irish Republican Army (commonly referred to as the IRA) to help finance paramilitary activities and the known or suspected exploitation of charitable giving by groups such as Hamas, Hezbollah and the Liberation Tigers of Tamil Eelam (LTTE; Flanigan 2008; Ghandour cited in Ly 2007; Levitt 2006). However, it was not until the terrorist attacks of 1 1 September 2001 that NPOs were deemed as 'particularly suspicious in terms of concealing or providing terrorist financing' (McCulloch & Pickering 2005: 472) and became a focus of counter- terrorism financing responses.
Chief among these responses was the inclusion of NPOs in the Financial Action Task Force (FATF) series of special recommendations to combat terrorism financing, to be observed by governments alongside the revised Forty Recommendations on the prevention of money laundering. Special Recommendation VIII (SR VIII) advises countries to review their laws and regulations regarding NPOs to protect the sector from misuse:
* by terrorist organisations posing as legitimate entities;
* through the exploitation of legitimate entities as conduits for terrorism financing; and
* by concealing or masking the clandestine diversion of funds intended for legitimate purposes to terrorist organisations (FATF 2004a).
FATF recommends there be increased transparency within the non-profit sector and the implementation of a regulatory scheme that includes sector outreach, sector monitoring, effective intelligence and information gathering, and the establishment or strengthening of cooperative relationships between relevant regulatory and law enforcement agencies. In addition, states were advised to encourage the non-profit sector to:
* adopt methods of best practice with respect to financial accounting, verification of program specifics, and development and documentation of administrative, and other forms of control;
* use formal financial systems to transfer funds; and
* perform due diligence and auditing functions of partners and field and overseas operations respectively.
A 2005 mutual evaluation of Australia's anti-money laundering/counter- terrorism financing regime by FATF cautioned against the potential inefficiency of the current regulatory system and the lack of additional measures Australia had introduced to further safeguard the non-profit sector from misuse. Following the 2005 mutual evaluation, Australia implemented the Anti-Money Laundering and Counter-Terrorism Financing Act 2006 (Cth) (AML/CTF Act) and while only some services provided by NPOs fall within the Act's definition of a designated service, other services that NPOs use (eg financial services) are obliged to undertake AML/CTF risk assessments, perform due diligence and report specified transactions to AUSTRAC. The government has also introduced guidelines and other educative initiatives to assist NPOs to undertake risk assessments and minimise exposure to money laundering/terrorism financing (ML/TF)-related exploitation.
In this paper, an examination is provided of the risks to the non-profit sector more broadly and those that apply specifically to Australian NPOs. Regulatory responses are explored in greater detail in Bricknell et al. …