Analysis: 2006 Treasury Dept. Voluntary Anti-Terrorist Financing Guidelines

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Date: 
May 21, 2009

On Sept. 29, 2006 the U.S. Department of the Treasury (Treasury) released updated Anti-Terrorist Financing Guidelines: Voluntary Best Practices for U.S.-Based Charities, its third version of recommendations for charities since 2002. The new Guidelines reflect Treasury consideration of public comments on a December 2005 revision of the original Guidelines, published in 2002. A new Annex provides an unconvincing explanation of Treasury's perception that terrorist abuse of charities is a substantial problem. The 2006 Guidelines place greater emphasis on their voluntary nature, saying charities should apply them to a degree commensurate with their risk of "abuse and exploitation" by terrorists. However, the fundamental problems that lead the nonprofit sector to call for withdrawal of the Guidelines remain unchanged.

Treasury's Sept. 29 2006 Press Release
Part I: Introduction
Part II: Fundamental Principles of Good Charitable Practice
Part III - V: Governance Accountability and Transparency, Financial Accountability and Transparency, and Program Verification
Part VI: Anti-Terrorist Financing Best Practices
Annex to Guidelines

Treasury's Sept. 29 2006 Press Release

The Treasury press release announcing the revised Guidelines notes that the revisions took public comments on the December 2005 version into consideration. It goes on to claim that the charitable sector requested extensive guidance, an exaggeration that ignores the sector's request that the Guidelines be withdrawn, or that Treasury desist from recommending "best practices" unrelated to terrorist financing. Treasury did issue a response to public comments that acknowledges the call for withdrawal. It explains Treasury's position that voluntary use of the Guidelines will not adversely impact the sector, and states Treasury feels it "is uniquely positioned to provide recommended measures to the charitable sector that are particularly relevant for combating the ongoing and pervasive terrorist abuse and exploitation of charities." This sweeping claim of "pervasive" abuse is not substantiated by any evidence.

The press release says the Guidelines are meant to safeguard the charitable sector "from the threat of abuse and exploitation by terrorist organizations." This is a significant expansion of Treasury's previously stated goal of preventing terrorists from using charities to raise funds. The press release goes on to note the "the multiple ways terrorist groups exploit" charitable work, creating an "ongoing threat to well-intentioned charitable works globally." Despite these unsubstantiated and sweeping claims, the press release emphasizess the need for ongoing dialog between the nonprofit sector and Treasury.

Part I: Introduction

A lengthy introductory footnote repeats Treasury's position that the Guidelines are meant to assist legitimate charities, and are not intended to address the problems raised by sham charities acting as fronts for terrorist organizations. It adds a sentence to the 2005 version requested by commentators: "Non-adherence these Guidelines, in and of itself, does not constitute a violation of existing U.S. law." However, the remaining language also makes it clear the total adherence to the Guidelines offers no legal protection from Treasury sanctions. This illustrates the need for legal reforms that would provide nonprofits acting in good faith with effective recourse against Treasury's power to seize and freeze organizational assets if it believes anyone "associated with" the nonprofit has in turn been "associated with" a terrorist organization.

The Introduction contains some improvements as well as some continuing problems. In addition to a clear statement that the Guidelines are voluntary, it does a better job of recognizing that a "one-size fits all approach is untenable and inappropriate due to the diversity of the charitable sector" so that the Guidelines "will not be applicable to every charity, charitable activity or circumstance." It also recognizes that many charities already have procedures in place that reduce the risk of diversion of charitable assets to terrorist financing or abuse, saying "Treasury does not want charities to abandon proven internal controls and practices." Instead, Treasury wants charities to adopt a "risk-based approach to guard against the threat of diversion…"

The continuing problem with Treasury's perception of the problem is reflected in language in the Introduction that addresses the need for the Guidelines. Nonprofits that commented on the 2005 version objected to the following sentence as unsupported by evidence: "Investigations have revealed terrorist abuse of charitable organizations, both in the United States and worldwide, often through the diversion of donations intended for humanitarian purposes but funneled instead to terrorists, their support networks, and their operations." In its response to public comments Treasury said they have revised the sentence and included an Annex that describes data indicating terrorist financing of charities. They refer readers to "open source media reports" and their website, which only provides general information. The Annex itself fails to provide any solid information, referring to news reports about front organizations rather than abuse of legitimate charities.

Treasury has revised the Introduction to now say that, "Investigations have revealed terrorist abuse of charitable organizations, both in the United States and worldwide, "to raise and move funds, provide logistical support, encourage terrorist recruitment or otherwise cultivate support for terrorist organizations and operations." It also states "The goal of these Guidelines is to facilitate legitimate charitable efforts and protect the integrity of the charitable sector and good faith donors by offering the sector ways to prevent terrorist organizations from exploiting charitable activities for their own benefit." (new language underlined) This significantly expands Treasury's goals beyond terrorist financing and compliance with existing sanctions programs to include vague and undefined goals of preventing "abuse" and "exploitation" or action that will "otherwise cultivate support" for terrorist operations. This appears to exceed Treasury's statutory authority, which is limited to preventing diversion of resources to designated entities and individuals.

Part II: Fundamental Principles of Good Charitable Practice

The 2005 Fundamental Principles statement is a short list of four very general principles: that charities should follow the law, exercise due care in performing their duties, maintain fiscal responsibility, and consider precautions that are above and beyond legal requirements. The Treasury Guideline Working Group comments asked Treasury to include two principles from its Principles of International Charity that were not in the 2005 version. These state that charities are independent of government, and must safeguard relationships with the communities served "in order to deliver effective programs." Treasury agreed with these two principles, and has therefore added the language to the first principle that states, "Charities are independent entities and are not part of the U.S. Government." The response explains that "we do not believe that charities become agents of the government by virtue of their obligation to abide by U.S. law, or by applying any of the best practices within the Guidelines." As a result, Treasury did not feel it is necessary to include the statement on safeguarding relationships with communities, since "our revision captures the meaning" of this principle.

Part III - V: Governance Accountability and Transparency, Financial Accountability and Transparency, and Program Verification

Treasury has reorganized Parts III — V and given them new titles. In general, these sections address governance and transparency and are outside the expertise of the Office of Foreign Assets Control, a division of the Treasury Department. They are not relevant to the goal of preventing diversion of funds to terrorists, and are likely to create confusion for nonprofits who already must comply with Internal Revenue Service (IRS), state and local regulations. This is one reason nonprofits called on Treasury to withdraw the Guidelines. Although they have not done so, some positive changes were made in these sections. These include:

  • Deletion of the recommendation regarding the number of board members. This is a positive step toward limiting the Guidelines' substance to address their intended purpose, and not overlap federal and state charity regulation.
  • Deletion of a requirement to turn over records to government without a subpoena or other legal process. The new language limits release of records to situations where subpoenas or other legal process has been served.
  • Changes the definition of key employees to be consistent with IRS definitions used for Form 990.
  • Defines subsidiaries and affiliates as "organizations that are subject to the general supervision or control of a parent or central organization." This is similar to the definition in IRS Form 990.

Continuing problems with these sections include:

  • Increased information collection, including Social Security numbers of board members
  • Maintained the recommendation of independent audits for organizations with budgets of $250,000 or more, mistakenly citing Independent Sector's Panel on the Nonprofit Sector recommendations.
  • Use of term "grantee" instead of "recipient" still fails to distinguish between an organization receiving a grant and an individual receiving a charitable service or benefit.
  • Suggests public reporting practices for fundraising that exceed or contradict state and local solicitation regulations.

 

Part VI: Anti-Terrorist Financing Best Practices

This section encourages charities to "apply a risk-based approach, particularly with respect to engagement with foreign grantees" but does not explain what factors indicate increased risk. In addition, it does not distinguish between foundation grants to charities and charitable aid provided to individuals. The preface continues to cover both financial and in-kind resources. It was expanded to include the following statement: "these suggested steps are voluntary. The purpose of these steps is to enable charities to better protect themselves from the risk of terrorist abuse and to facilitate compliance with U.S. laws, statutes, and regulations, with which all U.S. persons, including U.S. charities, must comply. Depending upon the risk profile of an individual charitable organization, adopting all of these steps may not be applicable or appropriate. When taking these steps, charities should apply a risk-based approach, particularly with respect to engagement with foreign grantees due to the increased risks associated with overseas charitable activity."

Despite this reference to the voluntary status of the Guidelines, this section makes frequent use of the word "should." In addition, the phrase "best practices" implies that other measures a charity might take to protect its assets from abuse would somehow fall short. This makes the Guidelines internally inconsistent, and will create confusion in the nonprofit sector over just how "voluntary" Treasury really intends the Guidelines to be.

Parts A and B list information charities "should" collect from grantees. Treasury disagreed with comments that "the information-collection procedure are burdensome and of little utility." As a result, the provisions in the 2005 draft Guidelines are mostly the same. Although the definition of grantee remains vague, Treasury's response to comments says use of the word "is intended to clarify the information-collection recommendations by explaining what charities should do for immediate grantees versus downstream grantees. 'Grantee' is defined as an immediate grantee of charitable resources or services." However, Treasury encourages charities to apply safeguards in downstream sub-grantees "to the extent reasonably applicable", and cautions charities against working with grantees if there is doubt about their ability to "ensure safe delivery of charitable resources." The practicality of these suggestions is questionable, since even the federal government itself does not have this information about subrecipients of its financial assistance.

Information Treasury suggests be collected on "grantees" includes:

  • The grantee’s name in English and language of origin and any acronyms. A footnote indicates that charities investigate when there is reason to believe an organization has changed its name and "uncover any such prior identity or name."
  • A list of the jurisdictions where the grantee has a physical presence
  • All reasonably available historical information relating to the grantee's identity and integrity, including copies of governing instruments, information on the founders and operating history
  • A statement of purpose and report on projects and goals
  • Names, addresses, email and web addresses of each place of business, all subcontracting organizations and individuals, entities and groups that receive funds, services or material support from the grantee, to the extent possible
  • Copies of public filings with pertinent government regulators, and
  • Sources of income.

Vetting procedures suggested for screening grantees continues to expand information collection in a manner that puts charities in the position of doing the investigative work of government. The suggestions include:

  • A reasonable search of public information to see if a grantee or their board members, key employees or senior management are suspected of terrorist activity. (Treasury deleted a reference to Internet searches, which can be a source of false or unverified information.) New language goes on to say that "Charities should not enter into a relationship with a grantee where any terrorist-related suspicions exist."
  • Assurance that grantees and their board members, key employees and senior management at all business locations do not appear on the Specially Designated Nationals (SDN) terrorist watch list. Footnotes encourage checking other lists, including those of other countries. This could raise problems in countries that use terrorist watch lists to suppress dissent.
  • Require recipients to certify that they do not employ or deal with groups or people listed or are known to support terrorism.
  • Require U.S. grantees to sign certifications that they are in compliance with all U.S. anti-terrorist laws and foreign grantees to certify that they do not deal with people or entities on the OFAC SDN list, or "other persons known to the foreign grantee to support terrorism or to have violated OFAC sanctions."

Lengthy footnotes describe the government's various lists of designated terrorists or their supporters. Treasury reveals its view of charities as government investigators in Part C, which suggests charities search public information about their key employees to "determine whether any of its key employees is suspected of activity relating to terrorism. It goes to say a charity should not employ someone "where any terrorist-related suspicions exist." This judges employees as guilty based on mere suspicion. Part D goes on to suggest that charities report board members or key employees to OFAC if they find "any suspicious activity relating to terrorism, including terrorist financing or other support, which does not directly involve an OFAC [list] match…"

Annex to Guidelines

Treasury responded to criticism that it failed to document its claims of widespread use of charities as conduits for terrorism by including a two page Annex at the end of the Guidelines. The Annex does nothing to support Treasury's claims. However, it does clarify Treasury's view of its mission by saying the risk of terrorist abuse "cannot be measured from the important but relatively narrow perspective of terrorist diversion of charitable funds…" Instead, Treasury is also concerned about "exploitation of charitable services and activities to radicalize vulnerable populations and cultivate support for terrorist organizations and networks."

It then goes on to cite examples of exactly the type of organizations it says the Guidelines are not meant to address: front organizations, primarily operating overseas. In support of its position Treasury includes a lengthy footnote citing news reports about front organizations or the role of terrorist networks in areas affected by natural disasters. This use of secondary sources, rather than its own hard evidence, implies that Treasury does not have hard evidence of terrorist abuse of charities.

The Annex goes on to justify Treasury's emphasis on charities by noting that 43 charities are on the SDN list. It does not note that only 6 of these are U.S.-based organizations, out of over 1 million charities recognized by the IRS. Treasury then adds in 29 individuals associated with these 43 charities, to get a total of 72 charity-related designations on the SDN list, comprising 15 percent of the total. However, Treasury does not provide dollar figures associated with this 15 percent of designations. Since the 9/11 Commission found that other types of enterprises provide the vast bulk of financing for terrorist organizations, the percent of actual dollars represented by charity related designations is likely to be much smaller than 15 percent.