On Sep. 26-27, the Charity and Security Network (C&SN) attended The Future of FATF Recommendation 8: for Financial Integrity and for Civil Society global conference in Bonn, Germany that convened 150 participants including nonprofit organizations (NPOs), the Financial Action Task Force (FATF), FATF-Style Regional Bodies (FSRBs), financial intelligence units (FIUs), government regulators, anti-money laundering/countering the financing of terrorism (AML/CFT) supervisors, and banks. The Global NPO Coalition on FATF – which C&SN co-chairs – Deutsche Gesellschaft für Internationale Zusammenarbeit (GIZ) GmbH Global Program ‘Combating Illicit Financial Flows’, and the European Union (EU) AML/CFT Global Facility organized the event. During the conference, C&SN moderated the “Update on recent studies pertaining to Recommendation 8 and the larger questions around its implementation” research panel.  

Over the course of two days, conference attendees from Africa, Asia, the Caribbean, Europe, Latin America, and the Middle East/North Africa (MENA) discussed the future of FATF Recommendation 8 (R8) and how to maintain compliance with FATF regulations without diminishing capacity for civic space. Key takeaways included: 

  • Despite revisions to R8, financial institutions (FIs) continue to “de-risk” NPOs rather than manage risk.
  • In some country contexts, governments continue to weaponize FATF Recommendations to shrink civic space.
  • Multi-stakeholder collaboration between the FATF, government regulators, FIs, and civil society is key to protecting NPO financial access while combating financial crime.
  • There must be a cohesive messaging and training strategy around the upcoming changes to R8 in order to ensure that the recommendation does not continue to create obstacles for civil society.

 

FATF: The “most powerful agency you’ve never heard of”

The Financial Action Task Force (FATF) is an intergovernmental policy-making body that sets standards for countering the financing of terrorism (CFT) and anti-money laundering (AML). Formed in 1989, FATF consists of 39 member states and nine regional associate members and official observer bodies, such as the World Bank and UN agencies. 

FATF standards are used to assess the adequacy of laws and regulations in nearly every country in the world. Because FATF is not treaty-based and has no real legal authority, there is little transparency or public accountability. Although its recommendations do not create binding international obligations, its significant power and influence stem from its “soft law” norms, namely its evaluation program, which assesses 180 countries for compliance with its standards. A negative rating by FATF can affect a nation’s international credit rating and ability to attract investors. 

What is FATF R8? How does it impact civil society? 

Since 9/11, FATF has increased its focus on regulation of financial services for NPOs, which led to the development of R8, the recommendation that focuses specifically on NPOs. Unfortunately, the original version of R8 mischaracterized nonprofits as vulnerable to terrorist finance, which created a chilling effect in the financial sector – negatively impacting nonprofit operations and their access to financial resources. Overapplication of R8 within the financial sector impeded many life-saving civil society programs operating in conflict zones with terrorist presence.

With years of sustained advocacy and significant input from the nonprofit sector, FATF revised R8 in 2016 to no longer characterize nonprofits as “particularly vulnerable” to terrorist abuse. This was a critical revision, as the nonprofit sector has never been “particularly vulnerable” to abuse`and instances of terrorist financing through nonprofits are extremely rare. 

Before its revision, for years this incorrect characterization fueled heavy regulation and “de-risking” by banks of the nonprofit sector, especially NPOs working in conflict zones where terrorist-designated entities operate. Despite the 2016 revision, the lasting legacy of R8 persists as NPOs continue to be overregulated by FIs, rather than these FIs taking the risk-based approach (RBA) the FATF standards call for. More needs to be done to reverse the long-standing impact of R8 on civil society and to ensure terrorist financing laws cut the flow of money to terrorists, not to NPOs. 

Additionally, some governments have abused FATF recommendations to deliberately repress NPOs in their country. Many NPOs pay close attention to the workings of FATF and its implementation in individual countries in order to raise alarm or prevent new regulations that are designed to impede their work. For example, in Sep. 2023, Amnesty International released their India: Government weaponizing terrorism financing watchdog recommendations against civil society report.

What is the Global NPO Coalition on FATF?

The Global NPO Coalition on FATF was created to “ensure that civil society is effectively engaged in the debate on anti-money-laundering and combatting terrorism financing.” Since 2012, the Coalition has raised civil society’s voice with FATF at the international level, fighting to protect nonprofit rights within the FATF framework. In addition to fostering a strong workingrelationship with the FATF Secretariat and various FSRBs, the Coalition has: 

Recently, the Coalition submitted input to the FATF Public Consultation on Revisions to R8 and its Interpretive Note, and for the Best Practice Paper on the implementation of R8.

What challenges exist in Rec. 8 implementation?

The Bonn conference kicked off with a panel discussion on the evolution of FATF R8 and its impact on civil society, which highlighted the long-lasting impacts of originally labeling NPOs as “particularly vulnerable” to terrorist abuse.

During the conference, panelists identified the need for a greater understanding of FATF standards across country-specific contexts, as well as greater transparency and accountability in the process of implementing the standards into domestic laws. There was a collective call for a deeper understanding of what constitutes AML/CFT “risk” in the NPO sector. For example, in the banking sector, understanding that an informal economy may not equate to high risk or criminality; banks should adapt to these more informal economies where regulations may be impossible to comply with due to the context. 

FSRB representatives also emphasized particular challenges in the implementation of R8, including the process of identifying NPOs potentially at risk of terrorist financing abuse through risk assessments (RAs). FSRB speakers noted that measures currently in place  should be regularly reevaluated in order to proportionately mitigate risk and effectively allocate resources. This includes repealing any measures that are not risk-based. Government representatives also identified RAs as a challenge to effective R8 implementation and noted that resources should not be wasted on terrorist financing measures if terrorist financing abuse is not a concern in the country to begin with. 

During the conference, C&SN moderated a panel titled, “Update on recent studies pertaining to Recommendation 8 and the larger questions around its implementation.” The panel presented two research reports, one now finalized and one forthcoming, that examined the effectiveness and challenges of RAs and R8 overall. This research demonstrated that the current FATF standards in place lead to more technical compliance than actual effectiveness, i.e., that countries are more willing to approach requirements as a “box-ticking” exercise in order to receive a better FATF rating. The research also presented larger questions on the FATF framework and its methodology as a whole, and whether the entire removal of R8 would alleviate the negative consequences on civil society. The panel examined how stakeholders, including civil society, can move forward to improve governance, accountability, transparency, and funding based on these findings. 

How do we mitigate the consequences of Rec. 8 to civil society?

Several panels underscored multi-stakeholder collaboration as an effective way to preserve financial integrity without hampering civil society. Examples of this type of multi-stakeholder collaboration include the various tri-sector groups that have arisen in the U.S., the U.K., the Netherlands, France, and elsewhere, which create spaces for engagement between government, civil society, and FIs on NPO issues arising from AML/CFT measures. In the case of the Netherlands, the tri-sector dialogue has led the Dutch Banking Association (NVB) to publish sector baselines for NPOs, as well as the development of a nonprofit portal by ABN AMRO Bank NV (ABM AMRO) for NPO onboarding, access, and transfer issues. The European Banking Authority (EBA) has also published additional guidance and a factsheet on NPOs and de-risking. These results demonstrate the positive improvements that can occur when all stakeholders come to the table to address financial access issues. 

Panelists and participants also stressed the positive change that can occur when high-level figures and institutions in the international financial regulation arena embrace and recognize the consequences of FATF R8 and other AML/CFT regulations on civil society, and actively take steps to mitigate these consequences. Many organizations complimented FATF and how it has worked diligently with NPOs to address the consequences to civil society through repeated dialogues, public consultations, and making civil society an integral part of developing and changing policies. =

What’s next for Recommendation 8?

The event concluded with forward-looking panels and discussions on what the future holds for R8 and civil society actors. The Oct. 2023 FATF Plenary is currently underway, and FATF is holding a Plenary Discussion to consider the proposed revisions to R8, its Interpretive Note, and the Best Practices Paper. 

Ideally, these changes will address the misapplication of FATF regulations and ensure that countries and FIs require and implement the RBA when conducting due diligence around NPO transactions – i.e., if NPOs are at low risk of terrorist financing abuse, they should be treated accordingly. Along the same lines, if a country as a whole has a low risk of terrorist financing abuse, NPOs, who already have stringent due diligence measures in place, should not be exceptionalized and singled out as “high risk”. 

Panelists and participants also hope the list of “bad practices” is included in the final version of the Best Practices Paper, which would for the first time instruct countries and regulators what not to do under the FATF regulations. These revisions and changes should be accompanied by appropriate outreach and training for government regulators, country assessors, and FIs so that they are reflected in practice, with the goal of ensuring civil society can continue to operate without inhibitions created by over-compliance with FATF R8.

Finally, participants identified recommendations for additional stakeholders such as banks, governments, and NPOs: 

  • Banks must be proactive about training and knowledge on the NPO sector through dedicated staff to cultivate understanding, trust, and sustained communication between NPOs and banks. 
  • Governments should include and be transparent with civil society actors when developing AML/CFT policies and laws to comply with FATF standards. 
  • NPOs should continue to demand access to spaces where these policies and standards are developed and continue to document abuses carried out under the guise of CFT. 

C&SN applauds the Global NPO Coalition for its dedicated work in bringing civil society to the table for these discussions. We look forward to continuing these crucial conversations so that NPOs may operate in the settings where they are needed most without being hindered by financial regulations.