When members of the Financial Action Task Force (FATF), the intergovernmental policy making body that sets the money laundering / terrorist financing (ML/TF) standards in nearly 180 countries, gather in Paris for its October plenary, they will have an opportunity to take the first steps toward dealing with unintended consequences of their programs.
First, FATF can respond to the use of its reccomendations by governments around the world to clamp down on domestic civil society, documented in the February 2012 report from Statewatch and the Transnational Institute. For example, in the last decade FATF found Paraguay to be non-compliant with its standards. Paraguay’s response was to pass the Anti-Terrorist Law of 2010 which “did not clearly define what constitutes terrorism and included acts such as ‘dangerous interventions or obstacles on public roadways’, ‘noise pollution’ and other actions which ‘intimidate Paraguayan citizens’.” With sentences up to 15 years for some offenses, the law is widely seen as a mechanism to suppress protest and limit the capacity of nonprofits.
Secondly, FATF’s upcoming review of its typologies, best practices and the process used to assess countries’ compliance with FATF standards is a chance to produce more targeted, proportional and effective approaches to dealing with the charitable sector that do a better job of recognizing the benefits of international charity and the humanitarian norms that both charities and governments must respect.
The “best practices” and “typologies” reports the FATF has produced since 2001 have been widely criticized by the financial and nonprofit sectors as flawed and unhelpful. For example, John J. Byrne, director of the Center for Regulatory Compliance of the American Bankers Association, testified at a Congressional hearing:
“The FATF “warning indicators” in this area do not, in our opinion, offer any real insight as to what types of activities are inherent to risky charities as opposed to risks in any other entities.”
The problems raised by Byrne in 2005 have yet to be addressed. In its latest “typologies” document from 2008, the FATF offers little, if any, meaningful guidance on how best to identify and stop any real threats of ML/TF. Meanwhile, FATF continues to make sweeping allegations against the entire nonprofit sector, saying it is “a crucial weak point in the global struggle” to curb the financing of terrorism.
For years FATF has described the nonprofit sector as “vulnerable to misuse for terrorist financing,” but has offered little evidence in support of this claim or put it in perspective. Describing the nonprofit sector generally as “compromised or complicit” with terrorists is grossly misguided and inaccurate. Separate studies conducted by the European Commission, the UK Charity Commission and the World Bank, an official FATF partner, have found a “limited abuse of foundations”, “actual instances of abuse have proved very rare,” and “rarity of instances of terrorism financing by NPOs,” respectively.
A 2009 study undertaken by the Australian Institute of Criminology examined the risk of money laundering and terror finance perceived by the individuals and organizations that have reporting obligations under the country’s AML/CTF laws, including corporations, government agencies, and charities. It found that individuals, domestic and foreign companies, “politically exposed persons”, and foreign government agencies are all considered a higher risk for terrorism financing than charities.
The exaggerated depiction of charities as facilitators of terrorism has serious and harmful consequences on aid programs. Because the FATF emphasizes a “risk-based approach” for detecting ML/TF in countries complying with its standards, some nonprofits deemed too risky based on the false assumptions presented in the FATF typologies report have been denied access to essential financial services, jeopardizing critical humanitarian programs at home and overseas.
The FATF president, Bjørn S. Aamo of Norway, described the purpose of the “risk-based” model at a conference on August 31:
“to allow a more efficient allocation of resources to combating money laundering and terrorist financing, both by governments and financial institutions. It should mean more effective implementation overall, by focusing resources and attention on the highest risk sectors and activities.” (emphasis added)
While many applaud the FATF’s acknowledgment that a one-size-fits-all strategy cannot nor should not be proscribed across the board for jurisdictions as diverse as the United States and the Isle of Man, others are rightly concerned that an emphasis on risk opens the door for banks to cut off nonprofits.
Richard K. Gordon, a law professor at Case Western University and an expert who has examined the regulation of financial institutions for over twenty years, says banks will undoubtedly try to reduce their liability by cutting off or denying services to charities they deem “high-risk.” If banks believe “having fewer charity clients will result in less of a chance that sanctions will be applied to them,” Gordon wrote in a 2011 academic journal , “financial institutions …may be less likely to accept them as clients, particularly if they are low-profit clients.”
For most charities, especially ones sponsoring international humanitarian programs, dependable banking services are an essential lifeline. If these services are no longer protected, the people hurt by these policies most will be the millions affected or displaced by armed conflict and natural disaster who depend on these programs and services for their survival.
Despite having a presence in most of the major global financial districts around the world, the FATF remains an opaque and insular organization. Its upcoming October meeting is not open to the public, but it would be well served to publish a statement on the problem of abuse of its process by repressive governments, and to invite civil society into a dialog on ways to update and improve its typologies, best practice documents and assessment procedures. That way, the important goals of stopping terror finance and protecting vulnerable people can be better achieved.