A new report from the Human Security Collective and the International Center for Not-for-Profit Law examines the drivers of the global trend known as “derisking” as it relates to nonprofit organizations (NPOs).
Inordinate delays in cash transfers, onerous due diligence requirements, inability to open bank accounts and arbitrary closure of bank accounts are all components of derisking. The report, At the Intersection of Security and Regulation: Understanding the Drivers of “Derisking” and the Impact on Civil Society Organizations, examines these practices an looks at how regulations on money laundering and terrorist financing “permeate policymaking, influencing institutions (perversely, at times) and negatively impacting humanitarian and development work.”
It delves into the practices of stakeholders, including NPOs, financial institutions, governments, regulators and international organizations, to unpack the mechanisms of governance and accountability “involved in and through the chain of decision-making, underscoring the policy incoherence that is manifest along the way.” Three country contexts were chosen to illustrate the research – Brazil, Mexico and Ireland. Ongoing measures aimed at remediating NPOs’ financial exclusion are discussed.
As the authors note, derisking undermines several international policy goals, including economic development, financial inclusion, human rights protection, and the creation of an enabling environment for civil society. Nonprofits bear a heavy burden in this arena, although they are not aware of the drivers of banks’ decisionmaking. Smaller organizations are disproportionately affected, and these groups are unable to meet banks’ extended due diligence requirements and have no recourse to remedy when derisking hits them head-on. Financial institutions fear reputational damage and huge fines, and have limited understanding of NPO operations. Making matters worse, central banks offer little in the way of regulatory guidance.
By interviewing stakeholders from all sides of the derisking debate, the researchers concluded that it is the “intersection of frameworks for security and regulation that has created the problem.” They add, “long-standing political concerns about financial crime and terrorism have collided with the demand for increased banking regulation to create legal, political and operational imperatives that result in derisking, and the derisking of non-profit organizations in particular.”
The report offers a number of recommendations, including:
multistakeholder dialogue in search of solutions, much like those already ongoing
mechanisms for NPOs seeking redress and even paths to litigation
financial and regulatory technology
donors supporting smaller NPOs
- bridging the financial inclusion agenda
clarification on the Financial Action Task Force’s revised view of NPOs
an interrelated discussion on the impact of AML/CFT rules, UN Security Council resolutions, and EU sanctions