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How can NGOs and banks work more effectively together on due diligence?
At our first treasury management seminar for INGOs in London, we heard from a leading bank about their plans to launch a risk management framework for handling Non-Profit Organisation (NPO) transactions. They, like many others, are under increasing pressure from regulators to prove that they are performing the necessary due diligence on international payments relating to NPO programmes. This is happening against a backdrop of increasing scrutiny due to heightened fears of money laundering and abuse of NGOs by terrorist organisations. For example, European banks are paying record fines (last year, the FCA fined two major banks a total of more than £500m for not having adequate risk management systems in place).
As a result, NPOs are facing tighter restrictions, with some even having their bank accounts suspended or closed altogether due to excessive ‘de-risking’ activities. These activities are being driven by recommendations issued by bodies such as the Financial Action Task Force (FATF) that are being translated into regulations such as the EU’s 4th Money Laundering Directive.
And it isn’t just the banking sector applying pressure. Despite the Financial Action Task Force (FATF) recommendation that governments must target their implementation of the recommendations, this is not always the case. There are numerous examples of governments using the guidance as an excuse to hamper the work of NGOs in the name of security.
Why are NPOs viewed as particularly vulnerable to terrorist abuse?
According to the FATF, ‘service NPOs’ (i.e. those who support services such as healthcare and education) are regarded as being particularly vulnerable to financial crime due to 3 key characteristics that make it easier for terrorists to intercept and exploit their resources:
- Extended logistical networks
- Large, transitory workforces (e.g. volunteers, foreign staff/partners)
- High operational capacity
According to FATF’s Recommendation 8 guidelines, good financial management and strong internal controls are cited as key to mitigating risk of abuse by terrorist networks. However, they also say that “proper due diligence is dependent upon the circumstances and context of each organisation and the environment in which it operates”. This was a key issue raised by seminar participants, all of whom work for international NGOs.
Contrary to common perceptions, due diligence is high on the NFP agenda – but banks and regulators need to understand complexities of NPO operations
The first clear message from seminar participants was that for some NPOs, due diligence is a much more complex issue than for others, as not all operations have the same risk profile. We need greater awareness from banks and regulators of the risks some NPOs might face if required to disclose programme details (some carry risk of death and even internal staff may not be privy to some details for their protection).
Following this was the shared view that NPOs can carry out the maximum due diligence but that ultimately, it is impossible to guarantee that cash and assets won’t be intercepted, or that goods purchased with NPO programme funds won’t eventually find their way into the wrong hands.
Financial management standards could simplify due diligence processes and increase trust
It was clear from the seminar discussions that due diligence processes vary widely, depending on the NGO, its risk profile, and donor requirements.
The GFGP standard that AAS is developing, with support from Mango, could alleviate some of the burden that INGOs currently carry by harmonising donor reporting and cutting out a lot of the duplication and management costs associated with partner due diligence. Introducing this standard would create trust between donors, national NGOs and INGO partners, and could reduce the pressure that is currently being passed from banks to NGOs in the form of tighter restrictions.
What do you think?
Perhaps your INGO is grappling with similar issues, or maybe you have some learning to share with other NGOs. Let us know.