Treasury Posts Risk Matrix for Charities

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Date: 
April 20, 2006

In March 2007, without public announcement or comment, the U.S. Department of the Treasury's Office of Foreign Assets Control (OFAC) published a Risk Matrix for the Charitable Sector on its website. The Introduction of the publication says the matrix is meant to help charities comply with U.S. sanctions programs that prohibit transactions with designated terrorists or certain countries.

In 2006, Treasury said it was working on a draft of the matrix, and in June 2006, a group of nonprofits wrote Treasury asking for a public comment period. Treasury did not respond. Despite the unannounced posting, representatives of the nonprofit sector are likely to comment on the matrix and suggest improvements.The Introduction to the matrix says the publication is needed because of "reports by international organizations and in the media have revealed the vulnerability of the charitable sector to abuse by terrorists." In the past, Treasury has urged charities and grantmakers to take a risk-based approach to avoiding violations of sanctions laws through its Voluntary Anti-Terrorist Financing Guidelines. The Introduction to the matrix also says it will be "particularly useful to charities that conduct overseas charitable activity due to the increased risks associated with international activities."

The Introduction notes that the matrix is not a comprehensive list, and in a footnote, says it is not mandatory. Instead, another footnote recognizes that "charities and their grantees differ from one another in size, products, and services, sources of funding, the geographic locations that they serve, and numerous other variables." However, the burden is on charities to determine the best approach, since Treasury has no safe harbors or specific measures that protect against sanctions, which include asset seizure. Instead, the footnote says Treasury "addresses every violation in context, taking into account the nature of a charity's business, the history of the group's enforcement record with OFAC, the sanctions harm that may have resulted from the transaction, and the charity's compliance procedures."

The matrix lists 11 factors according to whether they constitute a low, medium or high risk of diversion of funds to terrorists. The factors are:

  • specificity of stated purpose and expenditures
  • written grant agreement with safeguards
  • references
  • history of legitimate activities
  • due diligence by grantor, including on-site review and audits
  • documentation
  • size of fund disbursements
  • availability and use of a reliable banking system
  • suspension procedures, and
  • location of charity's work (U.S. only, international, conflict areas)

In footnote 4, Treasury notes that the matrix should be applied to sub-grantees "to the extent reasonably practicable."

Treasury cites the American Bar Association's (ABA) 2003 comments in IRS Announcement 1003-29 Regarding International Grant-Making and International Activities by Domestic 501(c)(3) Organizations as a resource in development of the matrix. However, the passage of time and subsequent experience may well have changed the ABA's views. In addition, nonprofits participating in the Treasury Guidelines working group, which published Principles of International Charity in 2005, are also likely to make suggestions.

Unlike Treasury, the European Union (EU) released a discussion draft of risk indicators for comment in July 2005. It lists six areas of governance that pose potential risks. However, the Introduction of the draft says, "An indicator should not in any case be regarded in isolation, but should be evaluated in the context of other indicators and the organizational and legislative environment in which the NPO operates."