By Ashleigh Subramanian-Montgomery
On April 29, 2022, the European Center for Not-for-Profit Law released their Practical Guidance resource, Navigating access to financial services for CSOs: a practical guidance and accompanying video. The Practical Guidance highlights the ongoing challenges that civil society organizations (CSOs) experience in obtaining and sustaining access to financial services in financial institutions and banks. The identified drivers of access challenges include:
- “…a lack of regulatory support and guidance for financial institutions and CSOs, highlighting the absence of incentives to address the issue in a meaningful way;
- …lack of knowledge by financial institutions on how CSOs operate in practice and how this logic differs from private business operations.”
The Practical Guidance laid out the process financial institutions engage in when taking on a new customer:
- Customer Due Diligence (CDD);
- Collecting required documentation;
- Development of risk and activity profile.
Once this process is complete, banks and financial institutions begin monitoring and screening customers “for adverse media as well as targeted and financial sanctions”, in addition to conducting “transaction monitoring” throughout the entirety of the CSO – financial institution relationship.
Financial institutions and banks often perceive CSOs’ routine and imperative transactions as “red flags”, causing major challenges to CSOs carrying out their legitimate work, and increasing the likelihood of CSOs being de-risked. These “red flags” can range from “…transactions with new countries due to newly approved projects” and “less physical staff than expected”, to “receiving transactions with high-risk countries”, which many CSOs operate in to deliver humanitarian aid to populations most in need. To address this, financial institutions may decide to open an investigation into CSOs’ activities, creating a time and resource intensive process that both detracts and distracts from CSOs’ work. Following their investigation, financial institutions then make the final decision of proceeding with the customer relationship or ending it altogether. Meanwhile, the delays caused by the financial institution’s investigation often result in harmful unintended consequences, such as stopping or slowing life-saving humanitarian aid from reaching civilians and communities.
To address these issues, the Practical Guidance makes the following recommendations for CSOs:
- “Enhanc[ing] education and advocacy towards regulators and financial institutions”;
- Submitting comprehensive documentation during the onboarding process;
- Obtaining written guidance regarding what countries the financial institution deems “high risk” and what their approach is to monitoring CSO risk;
- Providing timely updates to financial institution partner on changes in activities or scope of work, on transactions in “high risk” areas, and on withdrawing or depositing large amounts;
- Documenting and providing strong justification for all transactions;
- Understanding the financial institution’s expectations based on your risk and activity profile, and jointly identifying what activities will raise “red flags.”
Finally, the Practical Guidance highlights communication as a key recommendation “to promote strategic dialogues between CSOs, banking associations, [and] authorities to jointly address these bank practices and find a common denominator of requirements that satisfy compliance with the supervision activities of banking entities, but that do not hinder the legitimate work of CSOs.”