Due Diligence framework for handling Non-Profit Organisation (NPO) transactions

By Bachir El Nakib, Founder Compliance Alert, SARL


Risk Management Framework for Non-Profit Organisation (NPO) transactions is 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:

Ø  Extended logistical networks

Ø  Large, transitory workforces (e.g. volunteers, foreign staff/partners)

Ø  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 clear message for NGOs and 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 at a seminar I have delivered recently in Beirut that NGOs and 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-NGO programme funds won’t eventually find their way into the wrong hands.

Financial management standards could simplify due diligence processes and increase trust that due diligence processes vary widely, depending on the NGO, its risk profile, and donor requirements.

A Non-Governmental Organisations (NGOs) and charities by nature have slowly evolved, under the radar, to become significant channels for laundering money.  The veneer of decency used to hide mischief.


Charities alone in the US received 320 billion dollars. About two per cent to three per cent of US GDP.

NGOs are also a predictable source of fraud and chicanery.  The misuse of charities falls into four overbroad categories. 


Phony Charities - that provide no real service to a community

Terrorism Funding Charities –used to fund terrorism.

Tax Dodge Charity – a set up primarily to use as a tax management device.

Blocker Charity – a charity used to obscure owner or management of entity(ies)


Phony Charities

For example, there are over 100 NGOs in Palestine.  There are only 6,000 square miles – that is one NGO for every 60 square miles.  That would be 58,000 NGO’s in the US if the same density were to be applied in the US.  That would mean there would be nearly four NGO’s for every one Starbucks outlet in the US!


Having worked in many countries, I can assure you I have heard this statement in many languages.   “Want to make a few quick bucks? Set up an NGO.”  Also both charities and NGO’s provide a channel for funneling bribes and laundering money that is unsuspected and unchecked by service providers.


There are also many of these around the world NGOs or charities that are just used to get donations from guilty thick wallets operated by thins minds.  Everything from helping the disabled, to car donations, etc… are used to fund a business whose sole purpose is to live off the donated funds.


Terrorism Funding

The Holy Land Foundation (HLF) raised over 26 million dollars and remitted approximately 12.5 million to charities in the West Bank controlled by Hamas.  It was claimed that the HLF was the largest terrorist finance network ever disrupted in the US. What is funny is even Hamas was miffed when they saw the delta between what was raised and what was remitted.


The Tamil Relief Organization (TRO)  was set up supposed as relief for the Tamils in Sri Lanka but in reality it was a major funding mechanism for the LTTE (Tamil Tigers).  The TRO had substantial donations sent in from Canada, The United States, The United Kingdom and Singapore. The funds remitted came from the world’s successful Tamil diaspora as well as from well meaning foundations.


Tax Dodge Charity

There is no real deep thought on how a charity is used as a tax dodge.   Mr Gotrocks makes a donation to the World Alliance for Non-Keratotic Epithelial Regeneration Trust and on the backside the Trust, a sub-entity of the trust, makes an investment in anything Mr Gotrocks so desires.   It is a pass through with a tax deduction.  The CUP Foundation seems to be similar to this as well as many other charitable schemes we have seen.  Some dodges are not even arms length.  Often a charity is controlled by the primary grantor. This is not a problem if the charity is actually doing with it claims to be doing.


Blocking Charity

The purpose of the charity may include many other proposes, but its primary purpose is to block the attribution of control or beneficial ownership.  One blocking charity had invested in several nice buildings in South Florida.  The buildings were run as a business. Some spaces were rented at commercial rates and some spaces were rented out at US$100 per month to some local charities.  What one had to take note of is that each of these commercial building had a residential penthouse and each of the penthouses were rented for US$100 per month to a charity.   All of the penthouses were rented to a fraudster and or his relatives.  The asset recovery team was able to get several of them evicted as they had failed to even pay their US$100 per month.  Stupid fraudsters are fun.


For the most part, when we look at Charities and NGO’s we shrug our shoulders.   “Just more do-gooders”, we think to ourselves.   And while the world does need more do-gooders, we also need fewer using the ‘do-gooder’ laws and networks to set- up for chicanery.


All financial institutions and responsible representatives, such as agents, accountants, and attorneys need to perform a reasonable amount of due diligence so that they can say, without any guess work, “yes, we know our clients”.


For charities, at least in the US, there is a statement of work and purpose that has to be filed with the US Taxing authorities. It is the IRS that has the power to grant charitable status or withhold that status. As charities are for the public good these filings are a part of the public records.  It’s your right to ask to see those filings as well as the approval letter from the IRS. Check to see that the charity has continued to operate in a manner that is relatively consistent with the request for and the granting of their charitable status.  If the charity’s purpose was to save river otters and now they are saving llamas – this may be acceptable.  If the charity was chartered to help with education of children but is now sponsoring medical missions to fix cleft pallets – there may be an issue of mission creep.   If the charity was sponsored to help elephants in South East Asia and is now involved in unrelated religious activities, you may have a reason to question the organisation’s actions.


All charities in the US must file with the IRS a Form 990 at the end of each fiscal year and if you as a donor, service provider, financial intermediary, etc… do not have a copy of the 990, you have been seriously negligent.  You can request them from the charity, or you can often get a copy from GuideStar


The same is true of NGO’s but often with flair.  Some NGO’s are not charities, they just spend all of their grant money.   Not non-profit or charitable by designation but non-profit by activities. Please look at an NGO’s charter, its funding sources and the congruence of current activity with original chartered purpose


NGOs can range from large regional, national, or international charities to community-based self-help groups. NGOs also include research institutes, churches, professional associations, and lobby groups. NGOs typically depend, in whole or in part, on charitable donations and voluntary service for support.

Risk Factors

Because NGOs can be used to obtain funds for charitable organizations, the flow of funds both into and out of the NGO can be complex, making them susceptible to abuse by money launderers and terrorists. The U.S. Treasury issued guidelines to assist charities in adopting practices to reduce the risk of terrorist financing or abuse.292

Risk Mitigation

To assess the risk of NGO customers, a bank should conduct adequate due diligence on the organization. In addition to required CIP information, due diligence for NGOs should focus on other aspects of the organization, such as the following:

  • Purpose and objectives of their stated activities.
  • Geographic locations served (including headquarters and operational areas).
  • Organizational structure.
  • Donor and volunteer base.
  • Funding and disbursement criteria (including basic beneficiary information).
  • Recordkeeping requirements.
  • Its affiliation with other NGOs, governments, or groups.
  • Internal controls and audits.

For accounts that bank management considers to be higher risk, stringent documentation, verification, and transaction monitoring procedures should be established. NGO accounts that are at higher risk for BSA/AML concerns include those operating or providing services internationally, conducting unusual or suspicious activities, or lacking proper documentation. EDD for these accounts should include:

  • Evaluating the principals.
  • Obtaining and reviewing the financial statements and audits.
  • Verifying the source and use of funds.
  • Evaluating large contributors or grantors of the NGO.
  • Conducting reference checks.



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