Charities and non-profit organisations (NPOs) play a vital role in society, providing aid and support to those in need. However, their trust-based nature and frequent cross-border operations make them susceptible to abuse by terrorist organisations. The Financial Action Task Force (FATF), the global standard-setter for anti-money laundering (AML) and counter-terrorist financing (CTF), has identified charities as particularly vulnerable.
In her session, AML: Identifying The Higher Risk Client, Lucy Brown explores the risks charities face in terms of terrorist financing and highlights the importance of robust Customer Due Diligence (CDD) measures to mitigate these threats.
The Vulnerability of Charities to Terrorist Financing
The primary reason charities are attractive to terrorist organisations is their ability to raise and move significant sums of money under the guise of humanitarian aid. With over 214,000 registered charities in the UK alone, handling more than £50 billion, the sheer volume of funds makes them a prime target for exploitation.
Charities operating in conflict sones or regions with limited regulatory oversight are especially at risk. These areas often lack proper banking infrastructure, increasing reliance on cash transactions, which are difficult to trace. Moreover, terrorist groups may infiltrate legitimate charities, diverting funds towards illicit activities, or establish sham charities solely for the purpose of financing terrorism.
Real-World Example of Terrorist Exploitation
A notable case from 2014 involved Adil Ulhaq, a 20-year-old who solicited charitable donations via Twitter, ostensibly to support humanitarian efforts in Syria. Between July 2013 and April 2014, he raised over £12,000, which was partly used to purchase suspicious items such as night vision scopes and a money wallet designed for smuggling cash. He was later convicted under the Terrorism Act and sentenced to five years in prison. This case underscores how charitable fundraising can be manipulated for nefarious purposes.
Methods of Abuse in the Charitable Sector
Terrorist organisations employ various methods to exploit charities, including:
Diversion of Funds - Legitimate charities may be unknowingly used to funnel money to terrorist entities at different stages of fund management.
Sham Charities - Fraudulent organisations pose as legitimate charities to collect donations intended for terrorist financing.
Charitable Fronts for Radicalisation - Some charities may serve as platforms for radicalisation and recruitment, using charitable activities as a cover.
Cash Couriers - Given the difficulty of using formal banking channels in conflict zones, terrorist groups often resort to cash couriering. In 2015, the UK Charity Commission warned against cash movements, highlighting that £4 million had been seized at UK ports in connection with terrorism and crime.
Money Laundering Schemes - Some charities may be offered large donations on the condition that part of the funds are transferred to another entity, which could be a scammer's personal account.
Implementing Effective Customer Due Diligence (CDD)
To mitigate these risks, charities and financial institutions must implement stringent CDD procedures. Key elements include:
1. Risk Assessment of the Charity
Size and Purpose: Understand the charity’s mission and operational scope.
Jurisdictional Risks: Evaluate if the charity operates in high-risk regions with known terrorist activity.
Governance Structure: Identify key personnel, including trustees and financial decision-makers.
2. Identifying and Verifying Key Individuals
Check the identities of trustees, executives, and significant donors against official registers such as Companies House and the Charity Commission.
Cross-reference trustee names with known terrorist watchlists and regulatory databases.
3. Monitoring Financial Transactions
Assess the volume and frequency of donations, ensuring they align with the charity’s stated activities.
Investigate anomalies such as large one-time donations or frequent refunds.
Verify payment methods, prioritising banking transactions over cash movements.
4. Evaluating Donor Base and Fund Transfers
Identify the sources of large donations and whether they originate from high-risk jurisdictions.
Scrutinise fund transfers to ensure they are not being redirected to terrorist entities.
Apply enhanced due diligence (EDD) where necessary, particularly when dealing with anonymous or unusual donors.
5. Compliance with Regulatory Guidelines
Follow guidance from the Charity Commission, FATF, and supervisory bodies overseeing AML and CTF compliance.
Maintain thorough records of due diligence processes to demonstrate compliance in case of audits or investigations.
While charities perform invaluable work, their financial flows and operational structures make them susceptible to abuse by terrorist organisations. By implementing robust CDD practices, charities and financial institutions can safeguard against illicit exploitation while maintaining transparency and trust. Proper due diligence not only ensures compliance with regulatory requirements but also helps preserve the integrity of charitable organisations, ensuring that donations reach their intended beneficiaries.
For the full session, please click here. Lucy Brown covers the following topics during this course:
- Introduction to high risk factors
- Charities - risk of terrorist financing
- Payroll - slave labour and ghost employees
- Trust and Company Service Provision - Shell companies
- How to put mitigating actions in place to protect your firm and the wider economy.
The contents of this article are meant as a guide only and are not a substitute for professional advice. The author/s accept no responsibility for any action taken, or refrained from, as a result of the material contained in this document. Specific advice should be obtained before acting or refraining from acting, in connection with the matters dealt with in this article. The information at the time of publishing was accurate and could be subject to final changes.
