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Understanding the risks facing non-profit organisations and criminal abuse

30 July 2020 FIC

In South Africa and across the world, non-profit organisations (NPOs) play a fundamental role in providing health, nutritional and other support to the under-privileged and under-resourced. Sometimes, however, these NPOs are vulnerable to being targeted by criminals for purposes of money laundering and/or terrorist financing.

The Financial Action Task Force (FATF), the global body for setting standards on combating money laundering and terrorist financing has identified the NPO sector as being vulnerable to money laundering and/or terrorist financing. 

The FATF requires countries to ensure that NPOs cannot be misused:

(a)       By terrorist organisations posing as legitimate entities
(b)       To exploit legitimate entities as conduits for terrorist financing, including for the purpose of escaping asset freezing measures
(c)       To conceal or obscure the clandestine diversion of funds intended for legitimate purposes to terrorist organisations. 

South Africa is a member of the FATF, and as such, are required to meet the standards and Recommendations as set by the FATF. 

The FATF defines NPOs as: “A legal person or arrangement or organisation that primarily engages in raising or disbursing funds for purposes such as charitable, religious, cultural, educational, social or fraternal purposes, or for the carrying out of other types of ‘good works’.”

In South Africa these organisations exist in the form of non-profit organisations and non-profit trusts. The FIC has published Public Compliance Communications (PCC) 41 on its website which elaborates on these structures and recommendations aimed at mitigating the money laundering and terrorist financing risks within the NPO sector. 

The NPO sector has been highlighted by the FATF as being vulnerable to financial crimes such as phishing schemes, malicious or fraudulent cybercrimes, fundraising for fake charities, and various medical scams targeting innocent victims during the coronavirus (COVID-19) pandemic. 

NPOs and third party relationships 

NPOs can be established easily in South Africa as registration is voluntary. This means that even unregistered NPOs can be fully functional. This lends itself to abuse as the founders of NPOs in certain instances may have unlawful intentions such as funding terrorism and/or laundering the money they accumulate under the name of the NPO. 

It is therefore important for third parties, such as financial service providers, to understand the risk of terrorist financing and money laundering associated in dealing with NPOs. Where a third party is an accountable institution as identified in the FIC Act, such as financial service providers, they are required to fulfil all compliance obligations. This includes registration with the FIC, submitting regulatory reports and the development and implementation of their risk management and compliance programme, amongst others. 

Accountable institutions should not provide services to any persons and/or entities that seek to abuse the accountable institution for terrorist financing and/or money laundering purposes. Accountable institutions are therefore advised to exercise care to determine whether the NPO is operating lawfully.             

When determining the level of risk that an NPO poses from a terrorist financing and/or money laundering perspective, accountable institutions should consider each NPO individually. 

Relevant factors, including those listed below, may be considered when determining the risk of terrorist financing and money laundering for a NPO:  

  • The structure of the NPO
  • Where the NPO is located
  • The goods and services the NPO provides
  • Beneficiaries of the NPO’s services
  • The nature of the transactions undertaken by the NPO. 

All businesses, whether accountable institutions or not, are required to report suspicious and unusual transactions/activities to the FIC. 

For further guidance and information on the money laundering and terrorist financing risks associated with NPOs as well as suspicious and unusual transaction reporting, please visit the FIC’s website on  www.fic.gov.za.

 

 

 

 

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