On November 19, 2020, the Financial Crimes Enforcement Network (FinCEN) and the bank regulatory agencies (the Federal Reserve Board, the Office of the Comptroller of the Currency, the Federal Deposit Insurance Corporation and the National Credit Union Administration) issued a joint fact sheet on Bank Secrecy Act Due Diligence Requirements for Charities and Non-Profit Organizations. The fact sheet is applicable to domestic depository institutions and U.S. branches and agencies of foreign banking organizations.
FinCEN’s press release announcing the fact sheet indicates that its intent is to ensure that “legitimate charities have access to financial services and can transmit funds through legitimate and transparent channels, especially during the current COVID-19 pandemic.” This sentiment is echoed in the fact sheet.
Sadly, as we have seen throughout this crisis, the pandemic has brought out the best and worst in people. The same can be said of so many tragedies as noted in this article, titled Top 9 Charity Scams of All Time. A June 2020 Forbes article also tells of a one-man outfit operating as the Black Lives Matter Foundation that raised millions of dollars this spring despite the fact that his charity is not connected to the Black Lives Matter movement. So, following the plethora of warnings issued by FinCEN and other agencies in recent months about increased fraud activity in the current environment, another read on the fact sheet and its timing might be that it is aimed at assisting the banks in identifying activity conducted by fraudulent charities and non-profit organizations (NPOs)
FinCEN’s press release cites the Financial Action Task Force (FATF) standards and several U.S. Treasury sources in concluding that the charitable sector does not present uniform or unacceptably high risk to the banking sector. This will be welcome news to banking organizations that have believed they needed to rate charities and NPOs as high risk, given reported instances of their use for the financing of terrorism. The fact sheet supports a risk-based approach to banking charities and NPOs, consistent with existing risk-based customer due diligence (CDD) requirements. In that respect, according to FinCEN, the fact sheet neither alters any existing requirements, nor establishes any new supervisory expectations.
The fact sheet states that the money laundering (ML) and terrorist financing (TF) risks posed by a charity or NPO depend on the operations, activities, leadership and affiliations of these organizations. A U.S. charity that provides funds solely to domestic recipients might be considered low risk, while a U.S. charity that operates abroad and provides funding to or has affiliates in conflict regions, presents higher risk.
The fact sheet suggests that collecting the following information may be useful to determining the risk of a charity or NPO and developing a customer profile:
- Purpose and nature of the NPO, including mission(s), its stated objectives, programs, activities, and services.
- Geographic locations served, particularly any higher-risk areas where terrorist groups are most active.
- Organizational structure, including key principals, management, and internal controls of the NPO.
- Beneficial ownership, if applicable.
- State incorporation, registration, and tax-exempt status by the IRS and required reports with regulatory authorities, such as the IRS Form 990 filed annually by a charity.
- For NPOs, understanding whether the NPO voluntarily participates in self-regulatory programs to enhance governance, management, and operational practice.
- Financial statements, audits, and any self-assessment evaluations.
- General information about the donor base, funding sources, and fundraising methods, and for public charities, level of support from the general public.
- General information about beneficiaries of the charity’s or NPO’s funds and criteria for disbursement of funds, including guidelines/standards for qualifying beneficiaries and any intermediaries that may be involved.
- Affiliation with other NPOs, governments, or groups.
To the list above, we would also add negative news screening, review of the Better Business Bureau and/or state consumer protection websites and of the sites of organizations that specifically report on charities, such as the Charity Navigator or The Chronicle of Philanthropy.
The fact sheet also directs banks to a Treasury Department resource center, Protecting Charitable Organizations, for additional information, and reminds banks that ongoing monitoring of customer activity is necessary, both to identify potentially suspicious activity and to confirm the customer profile or determine when it should be updated. The fact sheet clearly states that banks do not need to maintain discrete CDD programs for charities and NPOs. Notwithstanding, it wouldn’t be surprising if examiners begin comparing a bank’s CDD of charities and NPOs to the suggestions in the fact sheet and banks, for their own part, would be foolhardy not to adopt these suggestions.
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