29 March 2021

Why do philanthropists need to worry about AMLCFT?

by Rupert G. Strachwitz

 

Introduction

Since 9/11, anti-money laundering and counter-terrorism financing (AMLCFT) measures in general, and funding non-state actors that engage in terrorism in particular, have become major concerns for governments worldwide. Money laundering has troubled them for longer still, and tax evasion for as long as taxes have been collected. Yet, even today, many philanthropists, foundations, other philanthropic endeavours, and indeed most civil society organisations still believe all this has nothing to do with them. They are wrong, and this paper will try and explain why it should be a major concern to them all, and in particular to philanthropic institutions.

 

Why should civil society be concerned?

The most obvious but by no means the most important reason is that both the European Union and virtually all national governments have repeatedly stepped-up their regulatory frameworks. The latest “Action Plan” issued by the European Commission dates from 7 May 2020. The latest EU Money Laundering Directive (AMLD 5), issued in 2018, imposes stringent obligations on national legislators to introduce ever-wider reporting requirements. Most member states have adopted the EU guidelines as national legislation and impose considerable fines on civil society organisations who fail to comply. Compliance regulation has been introduced at a scale that 20 years ago would have been seen as a major infringement on personal liberties. Indeed, non-compliance is considered to be a serious offence. Compliance with the fast-changing regulatory environment has become a concern in itself. Large NGOs have had to introduce professional compliance departments so as to be able to cope with the regulatory burden.

Compliance with the fast-changing regulatory environment has become a concern in itself. Large NGOs have had to introduce professional compliance departments so as to be able to cope with the regulatory burden.

One of the most contested provisions is for individuals described as beneficial owners to be made publicly known. In many member states, this has led to foundation board and advisory board members, grantees, and even recipients of scholarships to be classified as “beneficial owners”, the fact that they neither enjoy ownership rights nor in many cases receive any financial reward notwithstanding.

Furthermore, FATF, the intergovernmental agency charged with supervising the conduct and procedures in these matters of anybody in the public sphere, including non-governmental organisations of all types, has issued recommendations to be observed, and regularly visits and subsequently rates countries as to their performance in battling both money laundering and the funding of terrorism. One of these regulations (no. 8) is directed specifically at civil society organisations and reads as follows:

“Non-profit organisations

Countries should review the adequacy of laws and regulations that relate to non-profit organisations which the country has identified as being vulnerable to terrorist financing abuse. Countries should apply focused and proportionate measures, in line with the risk-based approach, to such non-profit organisations to protect them from terrorist financing abuse, including

  • by terrorist organisations posing as legitimate entities;
  • by exploiting legitimate entities conduits for terrorist financing, including for the purpose of escaping asset-freezing measures; and
  • by concealing or obscuring the clandestine diversion of funds intended for legitimate purposes to terrorist organisations.”

Given the fact that FATF recommendations are seen as binding regulations in approx. 180 countries, this clause has served those governments well who wish to enforce a tight system of regulation and control on philanthropies and other CSOs.

Given the fact that FATF recommendations are seen as binding regulations in approx. 180 countries, this clause has served those governments well who wish to enforce a tight system of regulation and control on philanthropies and other CSOs. One of the most unfortunate outcomes is that providers of financial services, who obviously find themselves at the very centre of government observation, refuse to open an account in the name of an NGO for fear they might get anything wrong and in view of the fact that NGOs do not usually bring them much profit. If this results in the account being opened in the name of the chairman and/or treasurer, no domestic donor – let alone an international one – will be able to use this for donations or grants.

It should also be pointed out that blacklists of non-compliant organisations exist in the U.S. and elsewhere, and any NGO might suddenly find itself included for reasons that are in no way apparent and will find it virtually impossible to have itself removed from this list.

 

The special position of philanthropies

While all philanthropists and philanthropic institutions will contend that philanthropy is by definition “a good thing”, they will have to admit that in some, albeit very rare cases, abuse of the framework offered to philanthropists does exist, and more so than in other forms of civil society action. This has not only to do with the considerable endowments that go with initiating such an institution, but also with the fact that the legal structures commonly offered to philanthropists – foundations with or without legal personality, trusts, etc. – are not usually restricted and may be in some cases used for perfectly legitimate non-philanthropic purposes as well. In some jurisdictions, the word trust has become a byword for businesses that have nothing to do with philanthropy and are sometims decidedly shady. It is in the serious foundations’ best interest to distance themselves from these practices.

The prestige traditionally accorded to philanthropies has rendered them vulnerable. In many countries, philanthropists belong to the local elites, are well connected and in a position to influence political and administrative procedures. This may result in corruption, and is often seen as according philanthropists a power wedge, especially if, as is occasionally the case, their philanthropies are exceedingly well-endowed.

Distancing becomes even more of a must when, as is usually the case, tax privileges are applied for and granted. Tax payers will always envy those who don’t pay taxes, and will always be troubled by the simple question: “Is it right that they don’t?” It is up to the tax-exempt bodies themselves to demonstrate that it is.

Traditionally, philanthropists have not been very good at or indeed keen on public relations. Not having to actually market their services, they have tended, more often than not for very honourable reasons, to be very quiet about their activities and have shunned away from public accountability and transparency, let alone a pro-active accountability policy.

Traditionally, philanthropists have not been very good at or indeed keen on public relations. Not having to actually market their services, they have tended, more often than not for very honourable reasons, to be very quiet about their activities and have shunned away from public accountability and transparency, let alone a pro-active accountability policy. In many countries, they are not under any obligation to publish information concerning their assets, their activities, or their governance. In recent years however, due to a very general and growing lack of trust in institutions, and unfortunately to a number of bad cases, public demand for more accountability has been heard loudly and decidedly. This is no small matter. There have been many examples in history of governments clamping down on foundations even to the extent of withdrawing their licence to operate. There is no reason why a modern government in a populist vein might not react to popular discontent and for whatever reason shouldn’t feel inclined to follow that example.

 

The special case of “financing terrorism”

Definitions present another very intricate problem. While tax evasion is fairly easily definable, and money laundering usually suggests the involvement of activities easily recognizable as illegal and deplorable (e.g. drug trafficking), defining terrorism is in fact anything but easy, and carries a track record of misapprehension and abuse for narrow political ends. In short: Anybody a certain political system does not approve of may quickly be stuck with the label “terrorist”. Quite often, as time goes on, “terrorists” come to be accepted as partners after all, and receive embassies from the same governments that had accused them. The Palestinian Authority is a case in point, most of the IRA another.

In 2019, in issuing International Standards on Combating Money Laundering and The Financing of Terrorism & Proliferation, FATF offered this definition:

“Terrorist Organisation: The term terrorist organisation refers to any group of terrorists that:

  • commits, or attempts to commit, terrorist acts by any means, directly or indirectly, unlawfully and wilfully;
  • participates as an accomplice in terrorist acts;
  • organises or directs others to commit terrorist acts; or
  • contributes to the commission of terrorist acts by a group of persons acting with a common purpose where the contribution is made intentionally and with the aim of furthering the terrorist act or with the knowledge of the intention of the group to commit a terrorist act.”

This of course is a classic case of circular reasoning and does not clarify the situation in the slightest. What terrorism is and is not, remains a highly disputed matter.

 

Civil Society and the Changing World Order

The history of any of the three problems mentioned being considered obnoxious is comparatively short. For a very long time in history, this was not so, one reason being that a monopoly for the use of force or collecting taxes did not exist. The snag is that even today, in some parts of the world, war-lords and other opponents operating against their government, are in some cases regarded as more respectable or closer to our hearts than the state they are active in. For many, the Kurds in Iraq, Syria, and Turkey deserve to be able to unite in one national state, and their ongoing fight against the three national governments involved is absolutely acceptable, while all three invoke terrorism in describing the Kurdish struggle. The same goes for Tibet, and for a number of ongoing uprisings in Africa.

Finally, the notion of a nation-state that demands its citizens’ prime loyalty, is not as is sometimes supposed, an anthropological constant, and a nation’s leaders are not sacrosanct. As we may observe in the United Kingdom at the moment, it is the Scots, the Welsh, the Irish, and the English, who are rather suddenly being called nations, and as allegiances and systems change, so do loyalties. What may seem illegitimate or illegal today, may easily be legitimate and perfectly legal tomorrow.

All this said, there certainly exists a fundamental dilemma that all civil society organisations, and philanthropies in particular face, given they are, by their very existence, fundamentally independent organisms: On one hand, by their very nature and in their own self-interest, they most commonly recognize a need to be accepted in society as good, law-abiding corporate citizens who will go a long way to earn their co-citizens’ trust. This certainly implies accepting ever-more stringent public demands on accountability and even a degree of increasingly cumbersome legal and administrative measures. Furthermore, in accepting the principle of democracy, the rule of law, and the priority of human and civil rights, even the most powerful philanthropy is under an obligation to accept where the civic space and the rights of the individual end and the powers vested exclusively in the officers of state begin.

On the other hand, they should not and cannot accept or be dictated to by governments in power in regard to what and whom they consider legitimate. The state has an agenda of self-preservation and more often than not of accumulating power, and cases of governments attempting to shrink the civic space and crowd civil society out, are mushrooming, not only under blatantly authoritarian conditions, but also in stable, liberal democracies, and for very narrow political reasons. By the principles of civil society, CSOs are thus required to preserve their distance and independence from the state. How could we judge active civil societies in Belarus, China, Russia, Turkey and elsewhere if our only yardstick was to succumb to the government? How would we be able to join forces to promote social change at home, if obedience to the state was the only principle to follow?

The state has an agenda of self-preservation and more often than not of accumulating power, and cases of governments attempting to shrink the civic space and crowd civil society out, are mushrooming, not only under blatantly authoritarian conditions, but also in stable, liberal democracies, and for very narrow political reasons.

 

Conclusion

Two things have, I hope, become clear.

  • Foundations and other CSOs do need to worry about the issues of tax evasion, money laundering, and financing terrorism.
  • Finding one’s way and developing a position is not as easy as public administrators would like one to think, especially since in a fast-changing political order, civil society is called upon to be in the avant-garde, not the rear guard in moving the issues that need to be moved.

Furthermore, with a critical eye, the ever-tighter regulatory measures may well be linked to the obsession of some governments with controlling the activities of all civil society organisations under their jurisdiction. The liberal ideal of an independent civil society including an independent philanthropic sector that aspires to contribute to the public good by developing, funding, cherishing and experimenting with alternative ideas and courses of action is under threat deliberately imposed by state systems that would rather be rid of the critical voices and non-subservient players in the public space. Therefore, positioning any single philanthropy, the philanthropic community, and indeed wider civil society remains an ongoing challenge that necessitates an ongoing debate, not just an interpretation of the law.

Rupert G. Strachwitz, a political scientist, is the CEO of the Maecenata Foundation, a civil society think tank that focuses on philanthropy and civil society.