Protecting against terrorism and money laundering
Charities are at risk of being misused by individuals or other organisations to finance or support terrorism or assist money laundering. It is wise to be aware of the risks, and to take appropriate precautions.
The following information is designed to:
- outline the nature of the risk
- provide some ways a charity can help reduce this risk
- assist charities to understand and comply with legal requirements in relation to terrorism financing.
Although the risk of terrorism is assessed as low, all charities need to ensure that their funds are not being used for financing criminal activities, including terrorism. This means taking practical steps to reduce risk, especially if they are dealing with cash and/or sending funds overseas.
How are charities used by organisations and people involved in terrorism and money laundering?
Terrorism activity requires financial support, concealment or opportunities for recruitment, whereas money launderers aim to make money made from illegal activities seem legitimate.
Some of the common techniques used may include:
- raising funds in the name of the charity or charitable purposes and then redirecting the funding with or without the knowledge of the charity
- using the charity as a legitimate front for transporting cash or other financial support from one place to another
- using a charity’s transport or premises to move or hide people, cash, weapons or terrorism propaganda
- using a charity partner who distributes aid or relief as a front to hide other illegal activities or as a recruitment for terrorism
- offering charities the opportunity to earn and keep the interest earned from a large loan given in cash or foreign currency, conditional on the principal being returned in New Zealand dollars.
Less common techniques
Some less common techniques include:
- those within the charity "skimming" off money from legitimate collections for terrorism purposes
- the establishment of a sham charity.
Why is this issue important to charities and what are the consequences?
The consequences of becoming involved in terrorist financing or money laundering are significant, and can include the loss of reputation, status, registration under the Charities Act 2005 and donor confidence.
Also, individuals or organisations, including charities, may face criminal charges if they facilitate the funding of, or provide financial support to a terrorist individual, organisation or act or if they engage in money laundering.
Section 13(5) of the Charities Act 2005 (external link) states that an entity does not qualify for registration as a charitable entity if -
- the entity is a designated terrorist entity as defined in section 4(1) of the Terrorism Suppression Act 2002
- the entity has been convicted of any offence under sections 6A to 13E of the Terrorism Suppression Act 2002.
Section 32(1)(e) of the Charities Act 2005 (external link) states that Charities Services may remove an entity from the register if the entity has engaged in serious wrongdoing or any person has engaged in serious wrongdoing in connection with the entity.
Section 4(1) of the Charities Act 2005 (external link)defines serious wrongdoing as including:
- an unlawful or a corrupt use of the funds or resources of the entity
- an act, omission, or course of conduct that constitutes a serious risk to the public interest in the orderly and appropriate conduct of the affairs of the entity
- an act, omission, or course of conduct that constitutes an offence
- an act, omission, or course of conduct by a person that is oppressive, improperly discriminatory, or grossly negligent, or that constitutes gross mismanagement.
Section 8 of the Terrorism Suppression Act 2002 (external link)states that a person could face up to 14 years’ imprisonment if they provide funds to an entity known to carry out terrorist acts.
Section 243 of the Crimes Act 1961 (external link)states that a person could face up to 7 years’ imprisonment for engaging in a money laundering transaction.
Why do organisations involved in terrorism or money laundering target charities?
Charities may be the target of money launderers and organisations or people involved in terrorism because they:
- enjoy high levels of public confidence
- are diverse in nature, providing a broad range of activities and reaching all parts of society
- may depend on one or two individuals who play a key, and often unsupervised role, particularly with smaller charities
- may have an international presence that provides the structure for national and international operations and financial transactions
- often have complex financial operations including multiple donors, investments and currencies, often receive and use cash transactions, have to account for a high volume of small transactions and use informal money transfers
- may regularly work within or near those areas that are most exposed to terrorism activity
- may have complex programmes of operation and pass funds through ‘middle man’ partner organisations to deliver their services
- may have unpredictable and unusual income and expenditure, so suspicious transactions may be harder to identify.
How should we assess the risk to our organisation from criminal activity?
We recommend all charities, whether small or large, carry out a regular risk assessment of their potential use for criminal activity. This should involve:
- Looking how finances are managed (e.g. Are there two people who have to sign off on transactions? Who has access to finances?)
- Examining how grants are tracked (e.g. How do you check the authenticity of recipients? Do you check that grant money is being used for the purpose it is provided for?)
- Monitoring and evaluating projects and programmes (e.g. Do you know who has control over the projects your charity contributes to? Do you have written contracts with agents and other partners that lay out how the project will be monitored and accounted for? Do you regularly review the capability of any partner organisations you work with?)
- Being careful with loans (e.g. Is the loan for a legitimate purpose?)
Based on the outcome of the risk assessment, charities should form an opinion on the overall level of risk their organisation may be subject to (e.g. High, medium or low).
The risks will increase in situations where charities:
- use alternative remittance services or pay for goods or services in cash rather than using formal financial means (such as electronic funds transfers)
- engage other individuals or organisations to deliver aid without conducting screening processes
- do not have direct control over programmes or projects.
When charities operate overseas, they have increased risk when they:
- conduct or contribute to aid programmes or projects overseas
- donate funds to other charities, NGOs or projects overseas
- work with, or provide funding to, other charities that conduct programmes or projects overseas.
This is because it is harder for the charity to monitor its funds and ensure they are being used for the purposes they were intended for.
The risk to the charity increases further if they conduct or contribute to aid programmes or other non-profit organisations or charities in known high risk countries.
The Financial Action Task Force (FATF) publishes a list of high risk jurisdictions(external link), which it updates regularly.
It is important that charities regularly conduct risk assessments, particularly when there are significant changes to the focus or scope of their activities.
What should charities do if they identify they are high risk?
Some charities who operate in high risk countries, or who rely largely on cash transactions, may decide that they are at risk of criminal activity. This means they should take practical steps to mitigate the risk.
This can involve the following steps:
- To check that organisations and individuals the charity works with here and overseas are legitimate. This might mean doing police checking or checking with local regulators or established charities in the areas.
- To only use formal financial systems such as banks or approved companies to transfer funds here or overseas.
- If you can’t provide direct oversight, put processes in place to verify money is used for the intended purpose. This might mean asking for regular reporting on outcomes of funding or requesting a local audit from a reputable accounting firm.
- Report any unusual donations, particularly where the donor makes large contributions which appear disproportionate to the donor’s known background or income.
- If anything looks or seems suspicious, report it using our complaints form. We can make referrals if there are issues that sit outside registered New Zealand charities.
If you have any questions, we are happy to provide support. Contact us at email@example.com.
For further information in regards to the prevention of money laundering and terrorist financing please see the Department of Internal Affairs – Anti-Money Laundering and Counter Financing of Terrorism website (external link)which contains additional useful links on the subject.