• Ashwin Nazareth

Enhanced Due Diligence: Whats the Big Deal with Charities?

Updated: Nov 5, 2021

When it comes to the payments industry, one of the most contentious sub-sectors to serve is charities. But aren't charities generally set up as a force for good? Is there really any risk? Well, the tricky parts aren't so hard to imagine when you realize that a central pillar of operations in charities is accessing monetary resources and redistributing them - this means grants, donations, and sponsorships. This is where enhanced due diligence comes in.


We've already covered setting up a merchant account to receive card payments in an earlier video on The DiCoRm Forum, and charities are no different. Some even need access to recurring payments, a higher-risk form of card acceptance. But payment risk is just one angle, the bigger part of the equation is reviewing how a charity can be used by criminals to engage in money laundering or terrorist financing. It's important to take a moment to address the fact that you shouldn't be wary of charities just because of what they are, but consider the amount of harm they could do in the wrong hands if you weren't paying attention.


So when compared with a regular business, why do charities need to provide so much extra documentation when signing up for a new account? Let's dive into some of the things to look into when a fincrime analyst reviews a charity's account.


The owners

If one day, a terrorist wanted to raise funds for their cause. The first thing they would need to get their hands on is money and it’s not like they’re giving out loans to fund regime takeovers at your local small business loans outfit. So what do they do?


Let’s remember how easy it is to crowdsource support for a ‘good cause’ if you can get people emotionally invested. Think of donations towards food banks, PPE sponsorships for Frontline workers in 2020. If a criminal with nefarious goals were to capitalize on this type of sentiment, they could use a very legitimate cause, but then at the end of it, just funnel the money towards their regime. This is why it's important, and in some cases required by law, to do enhanced due diligence not just on the direct owners & ultimate beneficial owners (which are people who own entities through a proxy) but also to include reviews on management and trustee arrangements in your reviews.


The beneficiaries

This section deals with where the money is supposed to benefit or help. This can range from underprivileged children, the homeless, refugees, animal welfare shelters, or education sponsorship initiatives. These are some real questions to be asking:

  • How does the charity plan to get the funds there?

  • Are they going to just cash out the money and provide direct cash incentives?

  • Do they purchase aid in the form of goods & services, if so, what kind and how frequently?

  • How do they plan to transport and document the handover to make sure that none of the aid goes missing along the way?

  • Is there any oversight in the form of government or third parties, trustee arrangements, and an independent board of directors?


Someone could set up a perfectly legitimate shell charity that does good work in front of the media and then skims off the top for a money-laundering operation as well. They would essentially be giving cents on the dollar via legitimate aid cheques or in the form of stored value products like prepaid cards, transferrable vouchers, or tradable commodities. There’s also the possibility that criminals may just register another shell charity in a second country held by a terrorist organization and funnel the aid directly there with no questions asked, especially if the second country has weak AMLCFT controls.


The location

When reviewing a charity in a country with weak controls against money laundering or a higher risk of terrorist financing, or an active military conflict, you would always need to check if there’s a geographical risk before allowing them access to financial instruments, especially those with cross border transfer capabilities. It’s easy to overlook such things on the basis that ‘aid is legitimately needed’ because it usually is. The concern isn't with the necessity of the application, it's on the integrity of the application. Are the operators of this particular charity on the straight and narrow?


Criminals will get away with whatever you don’t scrutinize. It’s always within these pseudo-legitimate areas, not completely black or white that AMLCFT chooses to blossom. Because it can do so in these geographic areas and it is easy to overlook, fincrime analysts need to be extra careful with charities.


Too complex? Need help?

Think that this is complex, wait till you have to review a charity backed by a trustee arrangement and operated by a group of politically exposed persons (PEPs). With a hundred complexities and loopholes, you'll need an ironclad standard operating procedure to fall back on. Give us a shout if you'd like to have a conversation with us about how to structure your account review process. We offer comprehensive guidance on all matters related to setting up processes, documentation, and authoring of risk and compliance approval policies.


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