AML/CTF and the not-for-profit sector

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1 Anti Money Laundering and Counter- Terrorism Financing Conference Sydney 1 st and 2 nd April 2009 AML/CTF and the not-for-profit sector Phil Cooper, Programme Manager, Charity Commission International Programme

2 Some facts and figures There are in excess of 40,000 NGOs that operate internationally There are estimated to be 25 million national NGOs Global income is huge and an accurate figure is not possible to calculate but in the UK it is in excess of 40 billion Many NGOs spend government money- for example MSF gets at least 40% of its funding from government Charitable giving continues to grow- the UK Charities Aid Foundation estimates global growth at 4-5% per year.

3 Vulnerabilities The not for profit sector is uniquely vulnerable to abuse by terrorists due to a number of factors including: Diversity; Lack of professionalism; Credulity; Cash dealings; Resource limitations; and The areas in which they work

4 A Diverse sector The not for profit sector covers many types of organisation In the UK 13 categories of not for profit organisations are regulated by the Charity Commission and that does not include the whole of the not for profit sector Often regulation is fragmented due to the variety of organisations Terrorists know this and can exploit loopholes

5 Different types of NPOs Medical Educational

6 Religion Emergency relief

7 Sport and recreation Community Facilities

8 Women s groups Children s groups

9 Lack of professionalism People running NPOs often do so for conviction reasons; They might be skilled in fields such as education, medicine or agriculture but not be aware of the challenges of running a business; There is also often a reluctance to spend resources on professional help

10 Resource limitations Putting in place elaborate financial controls limits an organisations flexibility; Getting two people to check each payment costs more resource; The vast majority of NPOs are very small and struggle to survive;

11 The areas in which they work War zones; Disaster areas; Slums; In remote areas; Away from advanced infrastructure; Where the need is greatest; and Often where terrorists also operate

12 Credulity Don t look a gift horse in the mouth Even if there are terms and conditions attached!!

13 Cash Many NGOs still deal almost exclusively with cash The amounts can be small and difficult to trace Cash economies make this a more practical way of doing business Many NGO projects rely on the arrival of a cash courier NGOs see this as a way of avoiding corrupt institutions

14 Evidence of Money Laundering Financial crimes involving NGOs have been reported by: Argentina, Belgium, Canada, Italy, Norway, Spain. Uk and US (source OECD) This from a sample of 19 countries This abuse is often organised and focussed on the voluntary sector Much of the abuse has links outside the countries where the abuse takes place

15 Case Study- 1 Foundation A acted as a charity, while its primary purpose was to support Terrorist Group H. In 2000, Foundation A raised US$13 million. The US Government shut down four of its offices in the US in Foundation A supported the activities of Terrorist Group H through direct fund transfers to its offices in the West Bank and Gaza that were affiliated with the group and transfers of funds to Islamic charity committees and other charitable organizations that were part of the group or controlled by group members. Foundation A was established in California in 1989 as a tax-exempt charity, not a religious organization. It relocated to Richardson, Texas. It had offices in California, New Jersey, and Illinois, and individual representatives scattered throughout the United States, the West Bank, and Gaza. Person B, a political leader of Terrorist Group H, provided substantial funds to Foundation A. In 1994, Person B (who was named a Specially Designated Terrorist by the US Department of the Treasury in 1995) designated Foundation A as the primary fund-raising entity for Terrorist Group H in the United States. In July 2004, the US charged Foundation A and seven of its officers with criminally conspiring to provide millions of dollars to Terrorist Group H and the families of suicide bombers. The criminal charges included conspiring to provide and providing material support to a foreign terrorist organization, tax evasion and money laundering.

16 Case Study-2 A family in the North England owned a number of businesses. The family members were all very closely knit and each member of the family played a significant role in the running of the businesses. The businesses whilst successful were also being used for criminal purposes ranging from the suppression of stock and takings to evade taxes, as well as the payment of undeclared tax free wages to employees, all working off record. The family, very early on in the frauds, also established a charity that was said to operate for the benefit of the wider Islamic community. The charity was controlled by the family members, as trustees and they submitted accounts to the UK Charity Commissioners showing receipts of less than The family members however were using the Charity as a cover to launder the proceeds of their tax evasion. HMRC were alerted through intelligence that the charity was being used by the family for uncharitable purposes i.e. to fund their own expensive lifestyles. The Investigation into the various bank accounts in the charity name and managed by the family members showed that in excess of 2.5 million had been deposited. All funded through undisclosed income of the businesses directly diverted in the banks. Several of the bank accounts were held offshore in the charity name. The cash diversion had been effected simply by the business operating two or more cash tills within the business whilst only declaring the income from one. A search and seizure operation was mounted by investigators from HMRC and significant records were seized leading to the offshore structures. The search also established that some businesses had been franchised and the franchisees were operating the same diversion scheme suspected to have been introduced to them by the franchisors (the family). The Patriarch was aged and unfit to charge. However the other family members were each charged with cheating the public revenue and the franchisees were also charged with conspiracy to cheat the public revenue. A further person who assisted with the preparation of the books was also charged. A confiscation of some 5 million plus in costs has been agreed in respect of the family. The others prosecuted are also subject to a confiscation in excess of 1 million.

17 Case Study 3-Interpal Interpal works in the Occupied Palestinian Territories, where there is considerable instability and where organisations designated as terrorist by the UK government operate. As a result the trustees face particular challenges and should operate robust procedures proportionate to the risks and practical difficulties involved. The inquiry was opened following a number of allegations made in a BBC Panorama programme.i The Commission s Inquiry looked at four key issues: whether particular local partners funded by the charity were promoting the ideology or the activities of terrorist organisation(s) and therefore would be inappropriate partners for the charity; whether the charity s membership of the Union for Goodii was appropriate; whether one of the trustees had any links to terrorist organisations or undertook activities which might make him unsuitable to be a trustee of the charity, and whether the trustees were fulfilling their legal duties and responsibilities, in particular by ensuring that the charity and its assets were protected from any association with terrorist or inappropriate political activities. The Commission s inquiry acknowledged that charities providing humanitarian aid in highrisk situations, such as armed or civil conflict and other complex emergencies, make a vital contribution to the communities affected and support people in desperate need. The Commission s inquiry confirmed that Interpal did maintain clear financial audit trails in their delivery of aid for humanitarian purposes. The Commission concluded that it could not verify that the material it examined suggesting certain partner organisations funded by the charity may be promoting terrorist ideology or activities, so the material was of insufficient evidential value to support these allegations.

18 Case Study 3-Interpal, continued However, the Inquiry concluded that the charity trustees: had not taken sufficiently rigorous steps to investigate allegations about some of their partner organisations, had not put in place adequate due diligence and monitoring procedures to be satisfied that these organisations were not promoting terrorist ideologies or activities. Where procedures were in place, they were not sufficient nor fully implemented. had not adequately managed the charity s relationship with the organisation the Union for Good. The Inquiry concluded that the charity s continued membership of the Union for Good was not appropriate for a number of reasons set out in the report, including the involvement of designated entities in projects co-ordinated through the Union for Good, that designated entities had been amongst the Union for Good s membership, and that one of the charity s trustees was closely linked to the organisation. As a result of the inquiry, the Commission has used its statutory powers to direct Interpal s trustees to review their due diligence and monitoring procedures relating to their partner organisations, end the charity s relationship with the Union for Good and ensure that no trustee holds office or has a role within the Union for Good. The Commission will be reviewing with the trustees the implementation of these requirements.

19 Action being taken by regulators Charity Commission compliance and enforcement teams have specialists in AML and CTF Formal links and information sharing takes place with NTFIU (including staff secondment) SOCA and others concerned with AML and CFT Guidance materials prepared to assist Charities to avoid potential problems Specialist Counter terrorism units-the CC has received additional resources of 1 million pounds over 2 years to fund this work There is more global regulatory co-operation and information sharing

20 Action being taken by not for profit organisations Some of the larger Charities have developed AML policies, eg Oxfam and the Red Cross NCVO and other bodies have produced good practice guidance materials There is no clear evidence of attempts to avoid AML and CFT requirements by Charities- but onerous requirements might be resisted on the grounds of lack of capacity NGOs have worked in other jurisdictions with the FIU s etc to avoid complications-for example in Bangladesh.

21 Weakness that are current NGOs still work in difficult areas Many jurisdictions do not have procedures that account for the different way NGOs operate More regulation is a double edged sword and may not be the key Promoting good practice is taking place but this takes time Growth in solid financial institutions that can report suspicious transactions is happening but the Credit crisis will not help!

22 Still vulnerable? The number of successful prosecutions of NGOs for issues relating to terrorism financing and AML is tiny compared to the size of the sector But abuse has taken place and the nature of this sector exposes NGOs to more risks than other institutions NGOs generally do not want to be abused or lose money to criminal elements- this does mean that they will take action to protect themselves, but Their relative lack of resources means that states and international bodies need to offer support- not burdens!

23 Thank you Phil Cooper