Recent South African Publication on Non-Profit Organizations and Financial Crimes
South Africa’s Financial Intelligence Centre (FIC) recently issued a public compliance communication on anti-money laundering and combating the financing of terrorism relating to non-profit organizations (NPOs). The publication aimed to create “awareness within the NPO sector around the vulnerabilities that NPOs face,” and sets out Financial Action Task Force (FATF) principles relating to NPOs.
FATF has previously recognized NPOs as “entities that are vulnerable to abuse by criminals for terrorist financing and money laundering” due to their structure, income generation, and payment methods. FIC’s publication encourages NPOs to notify FIC, via voluntary disclosure reports, if they suspect they are being used for terrorist financing or money laundering purposes. Later language in the publication, however, indicates a mandate to report: if an NPO is aware or has a suspicion that it is being abused for purposes of terrorist financing, it “must report this to the South African Police Services.” Finally, the publication states that third parties dealing with NPOs should follow a risk-based approach in their transactions.
While FIC does not view all NPOs as inherently high-risk entities, it does provide information on why certain NPOs can pose a higher risk from a terrorist financing and money laundering perspective. For example, some NPOs operate with high volumes of cash, which “creates a level of anonymity.” NPOs can also misrepresent how it will use donations. According to FIC, “[d]onations stem from a sense of empathy; criminals are aware of this and can manipulate others based on emotions in order to solicit funding.” Nor does South African law require NPOs to register with certain South African regulators, which results in NPOs “who operate without any regulatory oversight.”
How NPOs Can Manage Their Risks
The publication provides multiple recommendations for NPOs, including:
NPOs should register with relevant regulating authorities.
NPOs should document the control structure of the NPO, including its founders and members.
NPOs should obtain and review major donor and beneficiary information, including the ability of the beneficiary to use the funds for the stated objectives, the financial capability of the donor to provide the donation, and the donor’s source of funds.
NPOs should maintain transaction records, and adequately document fundraising processes.
NPOs should conduct inspections of beneficiaries to determine whether funding has been used for intended purposes.
What Third Parties Should Consider When Dealing with NPOs
The publication also provides helpful guidance to third parties that have relationships with NPOs, including:
Establishing business relationships or conducting transactions using a risk-based approach.
Confirming the NPO’s registration, and, if the NPO is not registered, gathering information from the public domain in order to understand the operations of the NPO.
Requesting adequate information from NPOs regarding its founders, trustees, members, employees, authorized representation, and beneficiaries.
Section 9.4 of the publication discusses various risk factors that third parties can reference when making a risk determination. These factors relate to the NPO’s structure, location, the goods and services provided, its beneficiaries, and the type and volume of transactions.
Guidance from Other Organizations
Many of the materials in the publication echo FATF recommendations and best practices, as well as material published by the U.S. Department of the Treasury. In particular, NPOs should review the risk matrix for charities disbursing funds or resources to grantees drafted by the Department of the Treasury’s Office of Foreign Assets Control, as well as the Department of the Treasury’s voluntary best practices for U.S.-based charities.