De-Risking and the Effects on the World’s Neediest

A man walks into a bank…
Sounds like the opening line of a joke. However, there is no humor in this tale. The man tells the bank’s customer service representative that he is the executive director of a humanitarian aid organization that provides food and shelter to displaced persons (aka refugees) around the world. He would like to open an account.

The bank employee asks the man to join him in her office, where she asks him several questions about the type of work his organization does, whether it will need to make fund transfers and if so, how often, to which countries, and for what purposes. She then asks the man to wait and she steps out of her office. After conferring with her manager, the customer service representative tells the man that, unfortunately, his organization is “outside the bank’s risk appetite.”

Does this sound familiar? For a significant majority of U.S.-based nonprofit organizations (NPOs) working abroad, this scenario is extremely common. A report from Charity & Security Network (C&SN), Financial Access for U.S. Nonprofits,  found that the problem is widespread, affecting all types of charitable programs in all parts of the globe.

Major findings in C&SN’s survey include the following:

  • Two-thirds of all U.S. NPOs that work abroad are having financial access difficulties
  • Fifteen percent of NPOs report having these problems constantly or regularly
  • Delays in wire transfers, which can last up to several months, are the most common problem, affecting 37 percent of NPOs
  • More than 15 percent of NPOs have faced account closures or account refusals, some repeatedly
  • One-third of NPOs have experienced fee increases, and 26 percent have faced additional, unusual documentation requests
  • Transfers to all parts of the globe are impacted; the problem is not limited to conflict zones or fragile and failing states
  • When money cannot be transmitted in a timely manner, 42 percent of NPOs report that they carry cash1

While statistics paint a picture of the difficulties NPOs are facing, it is important to keep in mind that de-risking has real and harmful effects. Forty-five percent of all NPOs engage in humanitarian relief work. For these NPOs, the biggest impact of any financial access problem, from delayed wire transfers to account closures, is felt by program beneficiaries, people suffering from starvation, disease and war.

Ripple Effects, Lives Lost

NPOs must conduct international financial transactions in order to operate overseas, often in places where their work is needed most. Delays in the transfer of funds lasting days, weeks or even months impact time-sensitive programming.2 Often, recurring wires going to the same destination or recipients are questioned every time. Wire requests are often sent back with additional questions, but some are returned to the originating bank and denied with no explanation. Sometimes, they are denied because organizations, particularly Muslim charities, are confused with sanctioned persons or groups.3 It is not uncommon to find a nonprofit with a name similar to an entity on a U.S. terrorist list, as many of them are common names in the Arab world and elsewhere. As one charity’s director explained, “We had maddening conversations trying to prove who we weren’t.”

Requests for unusual, additional or duplicative documentation can also delay wire transfers as the necessary information is compiled, placing a burden on staff and resources. “There’s no internal communication within the banks. They request the same information and documentation over and over,” explained one charity’s director. The list of documents requested can be extensive, well beyond information normally supplied. If money is going to a vendor, some banks will ask for service contracts, receipts, invoices and confirmation that there is no relationship with any sanctioned entity, according to one NPO officer.4 At times the requests go beyond what is necessary for reasonable due diligence, raising privacy concerns. What constitutes standard due diligence by banks is the subject of much discussion, although some requests are clearly unreasonable. For example, one bank requested not only the passports of an NPO’s board members, but also those of the board members’ parents.

The number of account closures and refusals may seem relatively small, but “you have 30 days to move your money” is a daunting message to receive, particularly when no explanation or opportunity to correct perceived problems is offered. A forced closure can create shockwaves throughout an organization, regardless of its size, sending personnel frantically searching for new banking services. Once an organization has had an account closed, other banks may be reluctant to accept the NPO as a new customer.5

By definition, humanitarian relief efforts provide life-saving aid in areas of conflict and natural disaster. They operate under strict principles of humanity, impartiality, neutrality and independence—part of international humanitarian law that is meant to protect access to civilians in need of aid. “We work with refugees, gender-based violence, psycho-social care to deal with trauma, nutrition programs, maternal health care, all the things we take for granted here,” explained one NPO’s treasurer. One NPO was prevented from sending immediate relief to the persecuted Rohingya minority in Myanmar in the midst of a dire humanitarian crisis. Timely transmittal of those funds might have saved lives, the charity’s director explained.6

National Security Takes a Hit

De-risking also can pose significant consequences for U.S. and international security objectives. When traditional banking avenues become unavailable, money is driven into riskier channels. Underground banking that is unmonitored or unregulated, and where legitimate money may freely mix with illicit funds before making its way back into the regulated financial system, is contrary to the transparency and traceability objectives of anti-money laundering/counter-terrorist financing (AML/CTF) policies.7

As revealed in C&SN’s report, a significant number of NPOs resort to carrying cash as a last recourse when traditional banking channels become unavailable. It entails significant risk for all parties, especially for those operating in conflict zones. NPOs are aware of these dangers, including the physical risk to NPO staff and beneficiaries as well as the associated liabilities of cash, and prefer not to use this practice. “We hate it, but the problems made it necessary,” said the director of one NPO.

How did we get here?

The Financial Action Task Force (FATF), a global standard-setting body for AML/CTF laws, attributes de-risking to a complex set of drivers: profitability, reputational risk, the cost of implementing AML/ CTF measures, sanctions and other regulatory requirements. To address the problem, FATF issued a statement in 2015 reiterating that regulators and supervisors should use a risk-based approach (RBA) in supervising financial institutions’ compliance with AML/CTF measures. It notes that when failures are detected, governments should take appropriate and proportionate action, stating that the RBA is not a “zero tolerance” approach.8

In the U.S., counterterrorism laws use U.S. financial institutions as the first line of defense against money laundering and terrorist financing. As banks know well, they are expected to act as monitoring and enforcement arms of government to identify, track and stop illicit money flows. This has increased banks’ compliance costs substantially. In addition, aggressive enforcement of the Bank Secrecy Act and other AML/CTF laws compounds the de-risking problem. Several major banks have received substantial fines for their role in terrorist financing and money laundering, which has had a chilling effect on other banks.9

According to banks, federal examiners, armed with a woefully outdated manual that sets out the framework for the intense review of bank practices, second-guess financial institutions’ risk decisions. Examiners push banks to conduct extensive due diligence on NPOs, which can cost substantial time and resources. In the past, statements from regulatory authorities have classified NPOs as being “particularly vulnerable” to terrorist abuse, while such abuse is extremely rare. Although FATF eliminated such language from its recommended anti-terrorist financing policy for NPOs in June 2016, this outdated view persists in the U.S. Bank Examination Manual  and elsewhere.10

So what do regulators really want?

Both banks and NPOs have repeatedly asked regulators to provide greater clarity through updated guidance. Although that has yet to materialize, U.S. government officials have made policy statements regarding what is and is not expected on the part of banks. In a November 2015 speech, former U.S. Treasury Under Secretary for International Affairs Nathan Sheets said, “This does not imply a zero failure approach, and our standard is not zero tolerance.”11 His remarks were echoed that same month by former U.S. Acting Under Secretary for Terrorism and Financial Intelligence Adam Szubin, who said, “None of this means zero tolerance, zero failure, or zero risk.”12

In response to an early 2016 letter from NPOs, the U.S. Departments of Treasury and State stated the following in May of 2016, “It is important to emphasize the Treasury Department’s view that the charitable sector as a whole does not present a uniform or unacceptably high risk of money laundering, terrorist financing or sanctions violations.” The letter adds that banks should take an RBA to conducting due diligence on nonprofit customers but that “Treasury expects banks to apply their due diligence obligations reasonably—not that they be infallible in doing so….”13

What can be done?

No one “solution” is likely to solve the problem. It will take concerted effort on the part of all stakeholders and a multi-pronged approach. C&SN’s report made concrete recommendations to address these problems, including a multi-stakeholder dialogue to forge solutions. The World Bank and the Association of Certified Anti-Money Laundering Specialists (ACAMS) launched such a dialogue, with banks, NPOs and government officials, in early 2017. To date, work that grew out of that meeting includes:

  • Revising the Bank Examination Manual  section on nonprofits (pending)
  • Standardizing information collection for banks’ due diligence on NPO customers
  • Using technology to streamline the process, and
  • Establishing alternative financial channels for humanitarian crises when the traditional banking system is unable to provide the needed services14

In the meantime, it is up to banks and their NPO customers to learn more about each other, and the way they each operate. NPOs should be able to respond to requests for information, but not those that are duplicative or outside the bounds of reasonable due diligence. As one NPO representative said, “We are interested in working with banks to alleviate whatever fears they may have.” Banks should strive to understand the distinct ways in which NPOs are formed, operate and are extensively regulated, as well as the due diligence they perform on their own operations and partners.

It is up to banks and their NPO customers to learn more about each other, and the way they each operate

However, in the end it is about meeting the needs of those who will otherwise do without if they are lucky, or if not, they will perish. One NPO officer explained that banks need to have an understanding that “this money helps beneficiaries facing real hardships on the ground,” and as another NPO officer said, “We are in the business of charity.”

Andrea Hall, policy counsel, Charity & Security Network, Washington, DC, USA, ahall@charityandsecurity.org

  1. Sue E. Eckert, Kay Guinane and Andrea Hall, “Financial Access for U.S. Nonprofits,” Charity and Security Network, February 2017, https://www.charityandsecurity.org/system/files/FinancialAccessFullReport_2.21%20(2).pdf
  2. Ibid.
  3. Ibid.
  4. Ibid.
  5. Ibid.
  6. “Section Two: Data Results and Analysis,” Charity & Security Network, https://www.charityandsecurity.org/system/files/Chapter+4+pdf.pdf
  7. Rob Barry and Rachel Louis Ensign, “Losing Count: U.S. Terror Rules Drive Money Underground,” The Wall Street Journal, March 30, 2016, http://www.wsj.com/articles/losing-count-u-s-terror-rules-drive-money-underground-1459349211.
  8. “Guidance for a Risk-Based Approach: The Banking Sector,” Financial Action Task Force, October 2014, http://www.fatf-gafi.org/media/fatf/documents/reports/Risk-Based-Approach-Banking-Sector.pdf
  9. Andrea Hall, “Restrictions on Financial Access for U.S. Non Profit Organizations,” Charity & Security Network, December 7, 2017, https://www.charityandsecurity.org/system/files/Revised+11-22-Final+ALH+submission+in+support+of+IACHR+testimony.pdf
  10. Ibid.
  11. Nathan Sheets, “Remarks By Under Nathan Sheets At The Center for Global Development,” U.S. Department of the Treasury, November 12, 2015, https://www.treasury.gov/press-center/press-releases/Pages/jl0264.aspx
  12. Adam Szubin, “Remarks By Acting Under Secretary Adam Szubin At The ABA/ABA Money Laundering Enforcement Conference,” U.S. Department of the Treasury, November 16, 2015, https://www.treasury.gov/press-center/press-releases/Pages/jl0275.aspx
  13. Letter to Kay Guinane, Charity & Security Network, from Jennifer Fowler, Deputy Assistant Secretary, Department of Treasury, and Andrew Keller, Deputy Assistant Secretary, Department of State, May 13, 2016, https://www.charityandsecurity.org/system/files/Joint%20Response%20letter%20to%20NPO%20on%20reduced%20access%20to%20financial%20services%20May%202016%20signed.pdf
  14. “Financial Access and De-Risking: Moving Toward Solutions for Nonprofit Organizations,” Charity & Security Network, October 2017, https://www.charityandsecurity.org/system/files/2017%20Fin%20Access%20Issue%20Briefdocx_0.pdf

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