We have written before about the risks posed to Canadian charities from the international movement of financial institutions towards “de-risking”. De-risking is the response of these institutions to the movement by the Financial Action Task Force (“FATF”) and its related partner entities to force financial institutions to aid in the fight against money laundering and the financing of terrorism. Because of the additional costs involved for the banks in monitoring risky accounts – and the potential fines in unwittingly allowing prohibited activity – the banks have engaged in a practice of refusing bank accounts to people and organizations that they perceive as risky. Unfortunately, many innocent charitable organizations are caught in the crossfire.
The fundamental problem for charity and not-for-profits is that they often operate in areas which are, geographically at least, a more likely arena for terrorist activity. It is also unfortunate that, from time to time, it is true that charitable organizations are found to have either served willingly or unwillingly as a conduit of funds for illicit terrorist or money laundering purposes and indeed, some charitable organizations are probably set up on purpose to be the conduit for such funds.
This factual element is underpinned by FATF sentiment that the charitable sector was a severe threat to the fight against money laundering and the financing of terrorism. While this has recently been ‘walked back’ the recommendations informed by this opinion are little changed. This impression was adopted by governments, implicitly or explicitly, leaving the entire charitable sector vulnerable to the penalties imposed by governments on financial institutions that bank all charities regardless of the level of their actual risk. And fundamentally it is very difficult for these institutions to distinguish the few bad actors from the good so that on a practical level they are forced to apply their risk analysis measures to all actors in the sector.
The Association of Certified Anti-Money Laundering Specialists (“ACAMS”) is effectively a private group of professionals that work mostly for financial institutions that deal specifically with these issues. They along with a number of other financial institutions, charities and other groups form the consortium for financial access. The consortium is designed to investigate the impact of de-risking on charities and similar worldwide actors. While the consortium is primarily based in the United States the issues recognized by them are suffered by charities worldwide.
This past summer the consortium published their report which discusses banking non-profit organizations. For those in the sector, the report will seem rather simplistic. For example, the report notes that not all charities are bad, in fact, most of them are fairly benign in terms of their banking risk. Similarly, the report discusses that financial institutions should be advised of changes to operations of the charity and anything that may seem risky so that banks can understand the environment in which the charity is operating this is particularly true when the charity is operating in dangerous areas.
Indeed, perhaps the most important element that comes out of the report is the idea that not-for-profit organizations should be involved in the due diligence aspect of the work done by the banking institutions. If the NPO sector generally understood the ills being fought by members of the consortium it is likely that the overall impression by the banking sector of these types of organizations would be improved and the impact of de-risking minimized. Unfortunately, it seems that all Canadians and not just the NPO sector are in the dark about the FATF recommendations and their pervasive and growing impact on our laws.
It is also important that the sector be alive to the issue to fight the impulse by governments to use these regimes inappropriately. It is a truism that money laundering and tax evasion go hand in hand and so the mechanisms put in place to fight money laundering in the financing of terrorism are now being used to fight tax evasion as well. As charities and not-for-profits are primarily governed by the Income Tax Act it is only a matter of time before these same provisions are being expanded by CRA as an audit tool to investigate the compliance of charities with the provisions of the Act. If this is the way we want to go, then fine, however, as the consortium report recognizes that not all NPOs are bad actors then perhaps we should consider the predictable impact of making our charitable sector the victims of yet another set of onerous administrative rules.
 We, in fact, have had several clients that have been refused banking services by banks around the world. This has an unfortunate impact on the charities ability to exercise control and direction over the spending of their funds abroad.
Author: Adam Aptowitzer
Adam Aptowitzer is the managing partner at Drache Aptowitzer LLP. He practices in the area of Charity Law and Tax Litigation. He can be reached at firstname.lastname@example.org.