Third Dimension – Protecting Your Not-For-Profit Against Terrorism Financing

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By Vera Visevic, Partner

The Australian Transaction Reports and Analysis Centre (AUSTRAC) has identified not-for-profit organisations (NFPs) as one of the most significant terrorism financing channels in Australia.

The consequences of being either knowingly or unknowingly involved in terrorism financing are significant, both in terms of the NFP’s reputation and status, as well as the possibility of criminal penalties. As such, it is imperative that NFPs understand what constitutes terrorism financing, the risk factors, and how to manage such risk.

What constitutes terrorism financing?

In Australia, terrorism financing is any form of financial support of terrorism, or of those who plan, encourage or engage in terrorism. This financial support can include, but is not limited to, funding the direct costs of undertaking terrorist acts, and funding the maintenance of a terrorist network or organisation.

Under the Criminal Code Act 1995 (Cth), offences relating to funding terrorism include:

  1. directly or indirectly making funds available to another person; or
  2. directly or indirectly collecting funds for, or on behalf of, another person and being reckless as to whether the other person will use the funds to facilitate or engage in a terrorist act.

An offence is committed even if:

  1. a terrorist attack does not occur;
  2. the funds will not be used to facilitate or engage in a specific terrorist act; or
  3. the funds will be used to facilitate more than one terrorist act.

The criminal penalties for such offences include imprisonment for life.

How are NFPs being exploited?

AUSTRAC has reported that NFPs may be exploited for the purposes of terrorism financing in a number of ways, which include:

  1. NFPs being used to disguise international fund transfers to high-risk regions;
  2. funds raised for overseas humanitarian aid being commingled with funds raised specifically to finance terrorism; and
  3. funds sent overseas by charities with legitimate intentions, being intercepted when they reach their destination country and siphoned off for use by terrorist groups.

What are the key risk factors for NFPs?

There are numerous risk factors arising by way of the nature, operations and status of NFPs, which make NFPs susceptible to being misused by individuals or other organisations for the purposes of terrorism financing.

  1. NFPs often have the capacity to raise large sums of money, yet due to the public trust placed in these types of entities, NFPs face less strict regulation by government and less official internal scrutiny than that applied to the forprofit sector.
  2. Many NFPs also have complex financial operations in which there may be numerous donors, investments in various currencies, informal fund transfers and high volumes of small and/or one off transactions. Income and expenditure are often less predictable than in the for-profit sector, and as such, are not always accounted for properly. These types of financial operations make suspicious transactions particularly difficult to identify.
  3. The organisational structure of some NFPs also increases risk. For instance, some NFPs pass funds through intermediary organisations or individuals to deliver services in those areas most exposed to terrorism. A NFP organisation may also operate within a global framework, creating the opportunity for inconspicuous and often unreported financial transfers to regions in which there is no legitimate financial infrastructure, such as secure banks. Transactions of this kind are difficult to track and record.

How can NFPs protect themselves against risk?

Best practice dictates that NFPs undertake regular riskbased assessments and take responsive action to protect against the risks specific to their operations. There are, however, some initial precautions and risk management strategies that all NFPs should undertake.

Thorough due diligence processes must be undertaken to reduce the risk of terrorism financing. For registered charities, due diligence is also necessary in order to meet Governance Standard 1, which requires that a charity’s funds be used in furtherance of its charitable purposes. Some initial due diligence steps which will help to protect NFPs against the risk of terrorism financing, and help registered charities meet Governance Standard 1, are listed below:

  1. monitor, evaluate and prepare reports on any and all projects or activities that are being funded by your NFP. This includes monitoring any other parties who may be funding the same project or activity;
  2. confirm the identity and good standing of those individuals who have ultimate control over the project or activity that your NFP’s funds will be used for;
  3. if the party receiving funding is an organisation, confirm the jurisdiction in which the organisation is formed, any other names under which the organisation operates or has operated, and obtain copies of any available corporate documents, such as the organisation’s governing document;
  4. draw up strict agreements between your NFP and those individuals or organisations who or which will receive the funding, regarding what the funds are to be used for and how any remaining funds will be used upon completion of the project; and
  5. regularly cross reference the names of all individuals and organisations being funded by your NFP against the:
    1. Department of Foreign Affairs and Trade’s consolidated list of individuals and entities subject to financial sanctions by the United Nations and/or Australia; and
    2. Attorney General’s Department’s list of terrorist organisations, to ensure that funding is not being provided to known terrorists or terrorist organisations. Promoting transparency and accountability to members will also help NFPs reduce the risk of terrorism financing and will support registered charities in meeting Governance Standard 2. Governance Standard 2 requires registered charities to take reasonable steps to be accountable to their members and provide members with an opportunity to raise concerns over the charity’s governance. Some basic practices which ought to be undertaken to promote transparency and accountability are as follows:
  6. produce and make available to members and relevant authorities, an annual report outlining your NFP’s projects, activities and financial status;
  7. maintain detailed project budget records indicating how all funds have been spent;
  8. make available a list of all persons responsible for the control of your NFP’s assets and financial transactions;
  9. develop internal control measures to ensure that no one person has independent control of assets;
  10. conduct independent financial auditing;
  11. keep all funds in secure bank accounts, using secure financial channels to transfer funds wherever possible; and
  12. for registered charities, ensure that your charity submits an Annual Information Statement to the ACNC which includes details of      any overseas activities and/or any international financial transactions, as well as details of the beneficiaries that your charity directly or indirectly supports. All NFPs, whether sending funds overseas or domestically, will be open to some level of risk of  their funds being misused for the purposes of terrorism financing. It is crucial that organisations conduct risk assessments and undertake the above mentioned risk management steps, as a minimum standard, to protect against such risk.
For further information, please do not hesitate to contact us.

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