Australian Institute of Criminology

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Executive summary

The non-profit sector is characterised by the social purpose of its operations, its reliance on volunteers and the inherent trust placed in it by the larger community. The sector is also differentiated by traditionally having less in the way of regulatory control and a looser form of administrative and financial management. The latter is often a casualty of resource constraints and the need to fulfil commitments to the public to maximise the use of funds on charitable and other projects. It is these characteristics that purportedly make the sector particularly vulnerable to criminal and terrorist abuse.

The suspicion, followed by confirmation, that terrorist groups were using non-profit organisations (NPOs) to collect and distribute funds to finance terrorism spearheaded a range of counter-terrorism initiatives. Chief among these was the inclusion of NPOs in the Financial Action Task Force (FATF) series of Special Recommendations to combat terrorism financing, to be observed by governments alongside the revised 40 Recommendations around the prevention of money laundering (FATF 2004a, 2003a).

Special Recommendation VIII (SR VIII) advised countries to review their laws and regulations relating to NPOs in order to protect the sector from misuse:

  • by terrorist organisations posing as legitimate entities;
  • through the exploitation of legitimate entities as conduits for terrorism financing; and
  • by concealing or masking the clandestine diversion of funds intended for legitimate purposes to terrorist organisations (FATF 2004a).

A mutual evaluation of Australia’s anti-money laundering/counter-terrorism financing (AML/CTF) regime conducted in 2005 by FATF found that, with respect to NPOs, Australia had ‘taken some measures to ensure...entities [were] not used to facilitate the financing of terrorism’ but it had not introduced any additional measures to safeguard the sector from misuse (FATF 2005: 125). To better protect the sector, mechanisms such as more rigorous financial accounting, greater uptake of ‘know your customer’ (KYC) practices and broader regulatory oversight were suggested. Following the 2005 mutual evaluation, Australia implemented the Anti-Money Laundering and Counter-Terrorism Financing Act 2006 (Cth) (AML/CTF Act; under which the designated services of some NPOs now fall) and introduced guidelines and other educative initiatives to assist NPOs to undertake risk assessments and minimise exposure to money laundering/terrorism financing-related exploitation.

This report examines the risks to the Australian non-profit sector of money laundering and terrorism financing and describes the regulatory changes that could minimise risk. The report uses information derived from government, non-government and peer-reviewed literature, case law and regulator reports, and observations made by representatives from the non-profit sector, law enforcement and key regulatory agencies, and academia that were consulted for the study.

Typologies of risk

It has been proposed that the non-profit organisations at greatest risk of abuse are the charities. Charities are cash intensive, regularly transmit funds between jurisdictions (often to areas besieged by social unrest) and have historically operated under less formal regulatory scrutiny than for-profit entities. They are therefore seen an ideal vehicle in which to launder money or collect and transmit funds to finance terrorism activities.

Faith-based charities have been particularly targeted but all NPOs are potentially at risk. NPOs considered particularly vulnerable are:

  • charities, or any non-profit organisation, that are small in size and hence less likely to have the resources to implement basic financial controls, let alone AML/CTF measures;
  • organisations that sit outside conventional regulatory oversight; and/or
  • entities that mostly use informal methods of funds transfer.

The risk to the non-profit sector in countries such as Australia, the United Kingdom, United States, Canada and New Zealand is nonetheless categorised as low, with the caveat that impact is inevitably high. Published typologies or case studies from these countries (and from various European nations and Russia) of non-profit misuse for money laundering or terrorism financing purposes are relatively small in number. It was not possible with the available information to resolve whether this represents actual prevalence of money laundering or terrorism financing, an underestimate in prevalence due to low detection rates, or merely the general absence of publicly available material.

The majority of typologies/case studies have focused on the exploitation of charities for terrorism financing; there is little documentation on exploitation of NPOs for money laundering purposes. The prevailing trend in the available typologies is that NPO misuse has come in the form of criminal or terrorist groups posing as legitimate charities, although it is not unknown for abuse to occur without the knowledge of the trustees and senior management, or of donors. In many cases, the charity was registered or otherwise known to some sector regulator or tax authority. The charity had often transmitted funds using registered, and hence detectable, financial channels. Complex systems of funds deposit, withdrawals and transfers using multiple accounts, and multiple forms of funds transfer, were developed to conceal the terrorism financing trail.

Risks to the Australian non-profit sector

Comprised of an estimated 600,000 organisations (Productivity Commission 2010), the Australian non-profit sector is characteristically diverse. It is made up of a broad range of organisations with different legal forms, different regulatory responsibilities and different capacities for complying with administrative and financial management practices originally developed for the for-profit sector. Three-quarters of Australia’s NPOs are unincorporated; the rest consists of organisations incorporated under Commonwealth (ie Corporations Act 2001 (Cth)) or, more commonly, state and territory law. Around 190,000 NPOs are registered with the Australian Taxation Office (ATO) for tax relief (ATO 2009). Charitable organisations are registered with state and territory authorities to gain fundraising licences.

Australian NPOs deemed at elevated risk of abuse are not unlike those described above, that is, charities (particularly those formed around faith or community groups), small, unincorporated entities and organisations that use informal funds transfer systems. None of these vulnerabilities are mutually exclusive and NPOs outside this cluster are not impervious to abuse either. Even larger, recognised and otherwise professional organisations can also be exploited. The greatest risk for these entities, and again charities and other fundraising bodies in particular, is the nature of the partner organisations responsible for the distribution of charitable assistance and the reliability of information collected (if collected at all) on these partners.

Evidence for the misuse of Australian NPOs for money laundering and terrorism financing is limited. Of the two prosecuted cases where it was known a charity (or charitable giving) was misused, one involved the fabrication of a charity to launder business-generated cash and the other the collection and disbursement of funds to a group engaged in both humanitarian and militant activities. The latter case represents a challenge in the targeting of NPOs, as some proscribed groups genuinely provide health and welfare services as well as supporting terrorism. This, and cases in the United States, have considered whether apparently humanitarian intentions discounts guilt or charges of complicity in the support of terrorism.

Improving regulation

Another potential factor for NPOs and their exposure to criminal or terrorist abuse is how well the laws and regulations governing the non-profit sector are working to protect them from misuse. Australia’s non-profit regulation has received three official reviews or inquiries between 2001 and 2010 (CDI 2001; Productivity Commission 2010; Senate Standing Committee on Economics 2008) and as many more informal appraisals (eg ACG 2005; Woodward & Marshall 2004). All have described the regulation of the non-profit sector as an overly complex system for entities and authorities alike and all prescribed reform. At present, NPOs may incorporate at the Commonwealth or at the state/territory level, receive tax concessions primarily from the ATO (but in some instances are eligible for tax relief through state tax laws) and require multiple licences if wanting to fundraise in different states and territories. Consequently, many NPOs are required to report multiple times to different authorities over the course of the financial year.

The absence of a more unified system of regulatory oversight, coupled with a lack of standardisation in financial reporting and accounting, not only burdens registered organisations with copious compliance obligations but potentially exposes the sector to misuse. Self-regulation, most recently in the form of codes of conduct, has worked alongside conventional regulation to ensure the sector is adhering to basic operating and risk management principles. One peak body has established a code of conduct with which applicable non-profit bodies can register and are monitored for conduct compliance. Nonetheless, it has been recommended in numerous reviews that Australia reform the regulation of the non-profit sector so as to streamline process, reduce the burden on the regulated component of the sector and minimise risk.

Of the options proposed in these reviews with which to improve regulation, the preferred approach is the establishment of a national regulator (Productivity Commission 2010; Senate Standing Committee on Economics 2008) to oversee some of functions currently dispersed across Commonwealth and state/territory authorities, in combination with self-regulatory functions currently performed by entities that have adhered to codes of conduct such as that prepared by the Australian Council for International Development. The government regulator, based on the Charity Commission of England and Wales and its replicates in the rest of the United Kingdom and New Zealand, would provide a one-stop shop for registration, fundraising approvals and endorsement for tax exemption status. If truly modelled on the Charity Commission, it would also be given statutory powers to investigate and deal with entities suspected of misconduct and work alongside law enforcement agencies in cases of more serious criminal abuse. NPOs with an annual income or assets over a set amount would be obligated to provide financial information to the regulator, parts of which would subsequently be made available to the public through an online register. NPOs would continue to be responsible for overseeing their operations as advised through codes of conduct and act to improve their adoption of risk and financial management strategies and, where relevant, AML/CTF measures.

The Australian Government released a consultation paper in January 2011 inviting comment on the form, scope and functions a national regulator might feasibly take (The Treasury 2011). It subsequently announced in the 2011–12 Federal Budget the establishment of the Australian Charities and Not-for-profits Commission (ACNC) which will have responsibility for determining charitable, public benevolent institution and other non-profit status, providing education and sector outreach and developing a simplified reporting framework (Australian Government 2011). Alongside the establishment of the ACNC, which will begin operating on the 1 July 2012, the government proposes to hold discussions with state and territory governments regarding the implementation of a national regulator for the non-profit sector.

NPOs have been advised through guidelines prepared by government (eg the Attorney-General’s Department) and peak bodies on what measures they should be following to minimise the risk of money laundering and terrorism financing occurring. The actual extent of adoption of such measures is unknown. Different stakeholders consulted for this report aired different views as to the proportion of NPOs that were aware of (or understood) money laundering/terrorism financing risks, or had done anything to minimise the potential for abuse to occur.

At present, the majority of NPOs do not undertake activities prescribed as a designated service under the AML/CTF Act and are hence not obliged to undertake AML/CTF risk assessments, implement due diligence procedures or report to Australian Transaction Reports and Analysis Centre (AUSTRAC) detection of certain transactions (eg suspicious transactions, transactions over specified thresholds and international funds transfer instructions). However, some protection against abuse is guaranteed by the fact that financial transaction activity involving an NPO should, in principle, be identified by the providers of other designated services the NPO uses to deposit and transfer funds. For example, banks may report suspicious transactions involving NPOs to AUSTRAC in appropriate circumstances.

Developing a response proportional to risk has been paramount in deliberations on how to best deal with the abuse of NPOs for money laundering and terrorism financing. Risk does exist for Australian NPOs, although the limited available public source evidence suggests that there has been little targeting of Australian entities and/or opportunity to establish sham operations. In recommending next-step responses, the apparent low risk of abuse must be evaluated against the contended weaknesses in the sector’s administrative and financial management, the complexity of the regulatory system and the peripheral mechanisms that potentially promote misuse. Three areas of further research that would address these information gaps includes an analysis of non-compliance data to better identify weaknesses in non-profit financial operation and potential areas for exploitation, an evaluation of sector outreach/education strategies and the adoption of mitigation strategies and an examination of the use of informal funds transfer systems by at-risk entities.