In an update to its National Strategy for Combating Terrorist and Other Illicit Financing, the U.S. Treasury Department cites the important role of charities in countering terrorism, emphasizes the use of the risk-based approach, and notes that most charities are not high-risk.
“U.S.-based tax-exempt charitable organizations play an important role in delivering aid to communities worldwide and in countering terrorist propaganda and recruitment,” the report states. It continues, “Treasury and interagency partners will continue to engage with charitable organizations and financial institutions to evaluate and communicate the actual risk that these organizations may be misused to support terrorism and that financial institutions apply the risk-based approach to the opening and maintenance of charity accounts, as the vast majority of U.S.-based tax exempt charitable organizations are not high risk for terrorist financing.”
This language represents the significant shift in the perception of charities as conduits for terror financing over the past decade, a change that began with revision of the Financial Action Task Force’s (FATF) Best Practices Paper for its Recommendation 8 (R8) on nonprofits in June 2015, followed by an update to both R8 and its Interpretive Note the following year. In late 2018, Treasury’s updated National Risk Assessment noted that “the vast majority of charities fully comply with the law and properly support only charitable and humanitarian causes.” As a result, it states, the U.S. “does not view the charitable sector as a whole as presenting a uniform or unacceptably high risk be being used or exploited for money laundering, terrorist financing, or sanctions violations.”
Unfortunately, the perception of charities as uniformly high-risk within the financial services industry remains. As such, an update to the Federal Financial Institutions Examination Council (FFIEC) BSA/AML Examination Manual will be critical in bringing banks and other financial services into line with more recent statements from Treasury and FATF.
Emphasis on Risk-Based Approach
The new National Strategy places a heavy emphasis on the use of a risk-based approach (RBA) in countering terrorist financing, echoing pronouncements from FATF, and states that the RBA is central to the Strategy and the U.S. AML/CFT framework. “In the context of AML/CFT, the risk-based approach means allocating resources and implementing measures to prevent or mitigate illicit finance that takes into account identified and well understood risks,” the Strategy states.
It further notes that the foundation for an effective AML/CFT regime includes “a private sector that understands and effectively mitigates its risks in accordance with the risk-based approach, robust risk-focused supervision in line with those risks, and well-resourced and coordinated operational authorities to prevent, detect, and disrupt illicit finance.” To do this, Treasury aims to identify and prioritize illicit finance risks, prevent illicit finance and protect the financial system, and disrupt and dismantle illicit finance networks. The Strategy goes on to explain that it will do this by focusing on several sectors, including real estate and digital currency, as well as by requiring the collection of beneficial ownership information and extending AML requirements to financial institutions and intermediaries currently outside the scope of the Bank Secrecy Act.