On February 15th, 2018, the Ministry of Finance of the Netherlands, the Human Security Collective and the World Bank hosted an international stakeholder meeting with on derisking of nonprofit organizations (NPOs) in The Hague. New research on the impact of derisking of NPOs was presented and 75 representatives from NPOs, governments, international organizations, financial institutions and academia shared their knowledge and insights during three roundtable sessions, which took place under Chatham House Rules. Discussions included the impact of financial access challenges for NPOs, banks’ concerns about regulatory actions and costs of compliance, and policy implementation and coordination
In the realm of new research, a recent study by the London School of Economics found that in some cases aid organizations and other NPOs will “cease to provide assistance” because of refusal from banks to take on the risk. When sending international wire transfers, banks may demand extra information such as detailed lists of beneficiaries. This not only delays the transfers, but also endangers local contacts in conflict areas because of the degree of transparency it entails. While Significant Well-Established Entities (SWEEs), or larger NGOs, are better able to mitigate the requirements of an increased due diligence threshold, smaller NPOs often lack the resources and operational framework to do so. Raising mutual awareness among NPOs (via roundtable initiatives) is important to bolster engagement. Also, pooling resources within the broader NPO sector, coupled with a continuous exchange of information, could be beneficial.
Nonetheless, financial institutions must still work to make due diligence requirements clearer and tailor their questions to actual risk. A Wolfsberg-type questionnaire, drafted by both NPOs and banks, was suggested as a way to strike a balance between banks’ due diligence obligations and NPOs’ mission to provide timely humanitarian assistance.
Sanctions regimes were discussed as a driver of derisking. Except in the case of Somalia, UN sanction regimes very rarely include exemptions for humanitarian assistance. It is strongly recommended that future sanction regimes contain safeguards for humanitarian assistance, especially because “there has never been a case” in which funds were inadvertently diverted when due diligence and other internal controls were in place. However, banks still report strong concern over the risk of inadvertent breaches, citing potential reputational liability. In fact, most banks “have limited knowledge of the NPO sector” and they, especially smaller banks, have little incentive to tailor their levels of customer service. Awareness and NPO-specific guidance is key. The large discrepancy between official policy statements from bank regulators the practices in bank supervision must be addressed, and the implementation of a risk-based approach is vital.
To further mitigate the costs of compliance for banks, possible technological solutions such as “KYC utilities, machine learning, blockchain, and legal entity identifier (LEI)” were discussed, as they could improve transaction monitoring and increase the efficiency of the due diligence procedures.
For cases in which NPOs are critical for supplying humanitarian aid and international wire transfers are susceptible to bank-regulated delays, alternatives such as corresponding with public entities (i.e. central banks or international development banks) are possible solutions. Another suggestion is the creation of a charity-specific bank that would be tailored to fit needs of small and medium NPOs alike.
Derisking can force organizations to pursue informal payment channels, which eliminates transparency and can lead to corruption, money laundering and even terrorist financing. It is recommended that government agencies cooperate and coordinate counter-terrorism objectives among themselves for greater consistency. Ongoing dialogue between donors and NPOs (especially when the donor is the government) is important in ensuring that the rigid programming does not prevent access to financial services.