29 September 2021

Why the beneficial owner concept does not really work for the non-profit sector: FATF white paper on beneficial ownership policy and sector input

The Financial Action Task Force (FATF) is considering amending Recommendation 24 (R.24) on the transparency and beneficial ownership of legal entities, and to that end put out a call for a public consultation on the white paper. Philanthropy Advocacy co-drafted the Global NPO Coalition’s input to this call together with other core group members, which was submitted in August. The for-profit approach cannot be applied to the civil society sector that by definition benefits the general public. A much more nuanced and risk based policy and emphasis on proportionality is needed in order not to breach standards of freedom of associations and fundamental rights.

What are the specific concerns around the beneficial ownership concept and its application to the civil society and philanthropy sector?

The beneficial owner concept does not fit a sector that benefits the general public

The term “beneficial owner” intends to provide more transparency into complex for-profit company law structures, in particular with the aim of identifying those who receive financial benefits  from such structures. The concept of a beneficial owner as the one benefiting financially or directing within the context of entangled profit and private interest set-ups does not fit the non-profit and philanthropy sector, which explicitly does not benefit private interests but the general public. This is a crucial difference. A clarification is hence needed on whether and how this policy should be applied to the non-profit sector.

Need to take a risk-based approach – is the NPO sector at risk?

Based on its own standards, FATF policy has to be risk based, fit for purpose and proportionate and in line with fundamental rights.  FATF has been focusing on specific risks related to parts of the NPO sector (subset of NPOs covered by FATF recommendations) around the potential abuse for terrorism financing but it has not clearly assessed to what extent the NPO sector would be covered by the FATF policy on beneficial ownership and money laundering. FATF in its R.24 guidance in 2014, and the 2019 Best Practices paper, mentions that legal entities can include NPOs, but it is clearly not in line with the current risk-based approach to include all NPOs in the beneficial ownership policy. We consider that it is necessary, in the context of the revision of R.24, to carefully assess the different nature and risks related to different legal entities before agreeing on the policy revision.

If FATF considers the inclusion of all NPOs – those that have a legal personality/are legal entities – in its AML R.24 policy and rules around beneficial ownership and suggests a further tightening of the approach, a careful assessment has to be undertaken to review whether the revised approach with regards to NPOs regarding Money Laundering/Beneficial Ownership is actually risk based, proportionate and whether the measures proposed are fit for purpose. Security and privacy rights concerns around the level of detail and access to (public) beneficial ownership information were also mentioned.

A proportionate and effective approach is needed

Any measures put in place must be suitable and effective to address potential risks and they must be proportionate and enable public benefit work and transnational giving. Efforts should first be undertaken to provide more guidance to ensure consistent and appropriate implementation of existing policy. In addition, there may be appropriate measures that still need to be considered such as facilitation of cross-sectoral discussions (with NPOs, financial institutions, regulators and governments), so as to better identify and address potential risks and shortcomings.

There is no clear evidence that the construction of collecting information of NPOs beneficial owners/those that guide the organisations (which is in most countries already collected in association/foundation registers as a matter of company law) is an effective tool to mitigate potential money laundering or terrorism financing risks.  Efforts must be made to ensure that public benefit work and cross-border giving are enabled and not restricted. Furthermore, the special protected status of the NPO sector in international law requires specific safeguards and different approach. It cannot be the same approach as for the for profit sector, but much more nuanced and emphasis on proportionality is needed, not to breach standards on freedom of association, as indicated by the Venice Commission already.

Taking into account fundamental rights and the role NPOs play

NPOs perform an important role as watchdogs, among others, and measures that would restrict their operational space would hinder their ability to carry out this role. While considering different policy options, we recall that FATF should carefully assess and weigh in the fundamental rights component. It is important in this context to keep in mind international human rights obligations, the rights to the freedom of association, the freedom of peaceful assembly and the freedom of expression, as well as the right to privacy.

Adoption of legislative or administrative measures even if not meant to negatively affect NPOs, can have an undue impact on them and hence have a chilling effect. Particular attention should also be paid in this context to the protection of privacy, namely when it comes to beneficial ownership information and potential registers and what type of information is collected and made accessible to the public. It is important to clarify how the beneficial ownership information is collected and stored and how existing registers or storage of information could be used in this context to avoid unnecessary administrative burden.

In announcing his Call to Action at the UN Human Rights Council in February 2020, the Secretary-General António Guterres underscored “that even necessary efforts to combat terrorism must not compromise human rights. Otherwise, counter-terror actions will be counterproductive.” Any new FATF R.24 policy proposals should hence always take into consideration what rights and fundamental freedoms are at stake and balance them against the public interest while conducting a thorough impact assessment.

by Hanna Surmatz, Philanthropy Advocacy

Hanna Surmatz is an Enabling Environment Manager at the European Foundation Centre AISBL (EFC) in Brussels. As of 2019, she is co-directing Philanthropy Advocacy, a joint initiative of EFC and Dafne – Donors and Foundations Networks in Europe. Since 2017 she’s been a representative of the philanthropic sector in the Financial Action Task Force (FATF), Private Sector Consultative Forum (PSCF). In 2019, she joined the OECD Tax Business Advisory Group. She also served on the board of the European Center for Not for Profit Law (ECNL) for two terms. This year, she joined GECES, the European Commission expert group on Social Economy. Between 2001 and 2004 she worked on foundation law issues and international matters at the Association of German Foundations (Bundesverband Deutscher Stiftungen) in Berlin. She studied law at the Westfälische Wilhelms-University Münster, Germany and at the University of Poitiers, France and worked as assistant researcher at the University of Münster for several years.