The penetration of the financial system by those who wish to use it for illegal purposes such as money laundering or the raising of finance for terrorism has been a concern for some time. The events of 11 September 2001 magnified these concerns and sponsored an almost immediate US-driven, but subsequently globally executed, re-assessment of the capacities and capabilities of terrorist organisations. More specifically, the manner in which such organisations financed their activities became, and continues to be, a key policy focal point. Although the financing for the 11 September 2001 attacks was obtained via wire transfers, physical movement of cash or travellers’ cheques into the United States and the accessing of foreign based funds via debit and credit cards held in the United States (Roth, Greenberg & Wille 2004), the focus rapidly shifted to the original source(s) of those funds. The rationale and justification for focusing on the financial resources of terrorist organisations was deemed to be self-evident. As one US Government official noted just after the events of 11 September 2001:
[F]inancial records and audits provide blueprints to the architecture of terrorist organizations. By following the money trail through financial information sharing worldwide, we can save lives by unearthing terrorist cells and networks (Zarate 2004: 1).
In the ensuing period, NPOs (specifically charities) were isolated as potentially significant contributors to terrorism financing. This summation was based on the belief that public or private funds may have been flowing from Saudi Arabia and other Middle East countries to terrorist organisations where al Qaeda raised money directly from individuals and charities (National Commission on Terrorist Attacks upon the United States 2004). It also rested on the suite of vulnerabilities characteristic to the non-profit sector, including purpose of operations, fundraising capacity, global presence, less rigorous financial management and due diligence practices, and weak regulatory oversight, which left it open to criminal and terrorist abuse.
Much of the literature since reflects this belief in the role of charities and other NPOs in terrorist financing. One report released in 2002 argued that ‘for years, individuals and charities based in Saudi Arabia have been the most important sources of funds for al Qaeda’ (Greenberg, Wechsler & Wolosky 2002: 1). Another source argued that money was often sourced from legitimate non-government organisations and charities (Ehrenfeld 2003). More tellingly, given its leading role in global anti-money laundering and counter-terrorist financing efforts, the FATF noted that:
...community solicitation and fundraising appeals are a very effective means of raising funds to support terrorism. Often such fundraising is carried out in the name of organisations having the status of charitable or relief organisations, and it may be targeted at a particular community...Specific fundraising efforts might include: the collection of membership dues and/or subscriptions; sale of publications; speaking tours, cultural and social events; door-to-door solicitations within the community; appeals to wealthy members of the community; and donations of a portion of their personal earnings (FATF 2002a: 4).
The rapidly evolving nature of terrorist groups as learning organisations (Jackson et al. 2005) makes it likely that the sources and nature of their funding may evolve as rapidly to suit changing geopolitical contexts. The ability of terrorist organisations to continue to utilise NPOs has arguably been facilitated by the apparent inability of international governments and financial institutions to agree to, and adopt, a common set of counter-terrorist policies with concomitant regulatory frameworks, targeting packages and penalties. There may, in consequence, be a degree of activity displacement or ‘jurisdiction shopping’ by terrorists and their financial supporters. Equally, the lack of a universal and coherent counter-terrorist response may lead to terrorists structuring their finances so as to exploit jurisdictional-specific advantages, such as the network of Gulf charities in the Middle East and weak financial regulation in key states in Africa and southeast Asia (Looney 2006).
It has long been posited that the increasing effectiveness of international efforts against money laundering vectors through the adoption of FATF measures (see below) is likely to increase the use of NPOs as conduits for funding to terrorist organisations (Looney 2006). However, it is argued that, despite the best efforts of the global community to impact upon terrorist financing, there remain a number of weaknesses in terms of a lack of coordination between international organisations, difficulties with the implementation of international standards at the national level and the burden of undertaking a risk-based approach for various non-government organisations. Even the apparent effectiveness of the US authorities in identifying connections between Islamic charities in the United States and terrorist organisations does not necessarily prevent those organisations from receiving funding from the same charities based, for example, in the Middle East where regulatory oversight is far less developed and/or less rigorously applied (Looney 2006).
Aims of the research
This report forms part of a four year research project undertaken by the Australian Institute of Criminology (AIC) examining a number of aspects of Australia’s AML/CTF regime. The research presented in this report considers the risks posed to the Australian non-profit sector by activities such as money laundering and the financing of terrorism, and improvements that could be made to the regulatory response to minimise risk. To fulfil these aims, the research will examine the following questions:
- In what way can NPOs be used to facilitate money laundering and the financing of terrorism?
- Are specific types of NPOs (eg charities, unincorporated organisations) and forms of charitable giving (such as those based on cultural or religious systems of obligatory or voluntary charity) particularly vulnerable to misuse? What are the factors that make them more vulnerable to criminal or terrorist abuse?
- What is the evidence for actual corruption of NPOs by criminal and terrorist groups and how have these groups used NPOs to launder money and/or divert funds for terrorist purposes?
- How are NPOs regulated in Australia compared with four other countries—the United Kingdom, the United States, Canada and New Zealand—and how effective are current regulatory measures in preventing the use of such bodies for money laundering and financing of terrorism?
- What legislative, regulatory, educational and other measures are needed to reduce risks of money laundering and financing of terrorism involving charities and foundations?
The non-profit sector
A variety of terms are used to denote the non-profit (or not-for-profit) sector. ‘Non-profit’ refers to any organisation that is ‘explicitly prohibited from distributing a profit and surplus assets when they are wound up’ (Lyons 2001: 9). NPOs, along with ‘cooperative enterprises’ (eg friendly societies, credit unions), form what is designated the ‘third sector’, distinguishable from both the public or government sector and the for-profit business sector. Lyons has defined the third sector as:
private organisations that are formed and sustained by groups of people acting voluntarily and without seeking personal profit to provide benefits for themselves or for others, that are democratically controlled and where any material benefit gained by a member is proportionate to their use of the organisation (Lyons 2001: 5).
The NPO component of the third sector comprises organisations that work in the broad areas of health, education, human services (such as women’s, children’s and disability groups), religion, arts and culture, sport and recreation, and philanthropy. It includes associations, charities, churches, clubs, foundations, societies and unions. The majority of these are what Lyons classified in an Australian Broadcasting Corporation Background Briefing report on the third sector as ‘mutual, member-serving, member-owned organisations’ (‘Inventing the third sector’ ABC 17 May 2009: np). Many NPOs operate within a local area, or within the one jurisdiction, and are run by local volunteers. However, the reach of other NPOs has expanded to operate either at the national level (often with local chapters) or to participate in overseas operations.
Size of the sector
The Australian third sector is estimated to encompass around 600,000 organisations (Productivity Commission 2010). Almost three-quarters (73%, n=440,000) of these organisations are small and unincorporated. Unincorporated organisations mostly function through voluntary contributions made by their members and are characterised by their small size, absence of employees and lack of legal status. Incorporated organisations make up the remaining quarter and comprise companies limited by guarantee, associations or cooperatives, or entities incorporated under specialised legislation (eg industrial legislation).
Estimates based on narrower classifications of the sector have been produced by the ATO and the Australian Bureau of Statistics (ABS). The ATO defines an NPO, for tax purposes, as:
one which is not operating for the profit or gain of its individual members, whether these gains would have been direct or indirect. This applies both while the organisation is operating and when it winds up (ATO 2007a: 1).
According to the ATO’s 2009–10 Compliance Program, there are around 190,000 NPOs registered with the ATO (ATO 2009). This group includes credit unions, building societies, multiple registrations and small non-employing organisations (Productivity Commission 2010).
The ABS employs the category of ‘economically significant organisation’, based on the International Classification of Non-Profit Organisations, to calculate the size of the sector. NPOs (or NPIs as the ABS labels them) are organisations that are:
- registered for an Australian Business Number (ABN);
- not-for profit and non-profit distributing;
- institutionally separate from the government;
- self-governing; and
- non-compulsory (ie membership or contributions of time or money are not enforced by law).
Applying this classification to ATO data, the ABS estimated there were 58,799 economically significant NPOs operating in Australia in 2006–07 (ABS 2009). This group excludes credit unions, building societies and body corporates included in the ATO categorisation, as well as those falling below the ABN turnover threshold of $150,000 or those which have chosen not to apply for an ABN (Productivity Commission 2010).
A suite of different measures have been published in estimating the economic contribution of Australia’s NPO sector. A report predicting the impact of the global economic downturn on NPOs described the sector as employing upwards of 880,000 people and generating an annual turnover of $76b (The Centre for Social Impact, Pricewaterhouse Coopers & Fundraising Institute Australia 2009). The consumer advocate group Choice estimated the sector to be worth five percent of Australia’s gross domestic product (Dooley 2008).
According to the ABS Non-Profit Institutions Satellite Account, economically significant NPOs operating in 2006–07 employed 889,900 persons and received volunteering services from 4.6 million people. This equated to an estimated economic value of $14.6b (ABS 2009). The gross value added (GVA) generated by the sector on a national accounts basis was calculated at $19.7b in 1999–2000, increasing to $41b by 2006–07. GVA is the ‘value of goods and services produced (or output), less the cost of goods and services used up in their processes of production’ (ABS 2009: 35). This represented a 7.8 percent increase per annum in this sector’s GVA.
Size of giving to the sector
NPOs are reliant on the provision of money, goods and services, largely from business groups and the community. The most recent analysis of the dynamics of giving found that in 2004–05, giving amounted to $11b a year in Australia (excluding donations to the Asian Tsunami appeal; Prime Minister’s Community Business Partnership 2005). This total comprised:
- $7.7b from individuals ($5.7b from 13.4 million Australians plus $2b given by 10.5 million Australians through ‘charity gambling’ (eg fundraising from raffles, lotteries, art unions etc) or support for similar events); and
- $3.3b from 525,900 individual businesses (of which 68% came in the form of funds, 16% in goods and 16% in services).
Between 1997 and 2004–05, giving of money by individuals had increased in absolute terms by about 88 percent, or 12.5 percent per annum. In real terms, adjusted for inflation, giving rose by about 58 percent over this time period (Prime Minister’s Community Business Partnership 2005).
With the recent economic downturn came predictions that this increasing trend in giving would start to reverse. A June 2009 survey of 263 NPOs operating in Australia found that three-fifths of organisations had experienced a decrease in income in the six months prior to the survey, and of these, 31 percent reported a decrease of 10 percent or more (The Centre for Social Impact, Pricewaterhouse Coopers & Fundraising Institute Australia 2009). Two-thirds of respondents anticipated a further decline in income in the following six months. Much of the decline already experienced came in the form of investment funding—90 percent of NPOs reported a drop in funds from this source. Two-thirds of NPOs also saw a drop in funding derived from fundraising, which in this survey included direct mail, cash, regular giving, corporate funding, trust, major donors and event fundraising. Fundraising made up, on average, 35 percent of the surveyed NPOs income. Corporate funding was the main casualty but 92 percent of NPOs also experienced either a drop (35%) or stagnation (57%) in cash donations (The Centre for Social Impact, Pricewaterhouse Coopers & Fundraising Institute Australia 2009).
A 2008 survey undertaken by Choice around charitable giving found that 81 percent of respondents did not know what proportion of their donation reached their favoured charity’s beneficiaries, after fundraising costs and overheads were removed (Dooley 2008). Almost all of the respondents (94%) thought that it was important to have information about the proportion of those administrative and fundraising costs and 97 percent of respondents thought that it was ‘very’ or ‘somewhat’ important that they be provided with information about the effectiveness of charities’ work. The underlying message reported by Choice from the survey results was that people wanted to know that their contributions to non-profit organisations were making a difference and having the most impact possible.
The meaning of charities
Much of the literature describing the actual and potential involvement of non-profit organisations in terrorism financing has focused on the role of ‘charities’. However, as Lyons (2001) notes, charity is a ‘confusing term’ with its popular interpretation—‘an organisation that raises funds from the public to provide relief to people who are disadvantaged because of poverty, ill health, disability or natural disaster’ (Lyons 2001: 13)—encompassing only some of those organisations that the legal classification covers.
There is no statutory definition for charity in Australia, although the Australian Government recently announced its intention to introduce a statutory definition in consultation with the states and territories (Australian Government 2011). At present, its use in Commonwealth and state and territory legislation is based on the common law meaning or defining terms used in separate Acts (CDI 2001). The common law meaning derives from the Preamble to the Charitable Uses Act 1601 (or Statute of Elizabeth) which lists designated charitable purposes, combined with a subsequent, additional stipulation that the purpose must be for the public benefit.
An entity is legally classified a charity if its purposes fall within one of four heads or divisions of charity:
- relief of poverty;
- advancement of education;
- advancement of religion;
- other purposes beneficial to the community (following Income Tax Special Purposes Commissioners v Pemsel  All ER Rep 28 at 55;  AC 531)).
Having a charitable purpose (no matter what the legal body form) will allow access to various tax concessions, fundraising licences and charitable gaming permits. The main types of legal bodies that can be deemed to have charitable purposes are:
- charitable trusts;
- unincorporated associations;
- incorporated associations;
- companies limited by guarantee; and
- some rare forms of bodies that are often unique charitable organisations (McGregor-Lowndes 2004).
One of the few instances in Australia where a concise definition of a charity is applied is the ATO’s definition of charity for tax purposes. A charity endorsed by the ATO may be eligible for tax concessions or exemptions that are not available to other non-profit organisations. The ATO states that an organisation is a charity if:
- it is an entity that is also a trust fund or an institution that exists for the public benefit or the relief of poverty;
- its purposes are charitable within the legal sense of that term;
- it is non-profit; and
- its sole purpose is charitable.
Financial Action Task Force Special Recommendation VIII
FATF is an intergovernmental body formed in 1989 to prepare and promote policies and guidelines regarding the prevention of money laundering; in 1990, FATF issued 40 Recommendations on money laundering, which were revised in 1996.
The events of 11 September 2001 magnified concerns regarding both money laundering and the financing of terrorism. FATF consequently revised its 40 Recommendations (in 2003) and also issued Special Recommendations related to terrorist financing between 2001 and 2004. These Recommendations and Special Recommendations now form the internationally recognised standard for the prevention of money laundering and the financing of terrorism, and are used by FATF as a basis for their evaluation of the effectiveness of national regimes in addressing these issues.
With regard to the non-profit sector, the most relevant Special Recommendation is SR VIII. SR VIII advises 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 purpose to terrorist organisations (FATF 2004a).
The recommendation advocates increased transparency within the non-profit sector and improvements to public confidence with minimal disruption to legitimate charitable activity. NPOs are broadly defined by FATF as a:
legal entity 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 ‘good works’ (FATF 2004a: 21).
The recommendation goes on to state that an effective regulatory approach should include outreach to the sector, supervision or monitoring of the sector, effective investigation and information gathering, and effective mechanisms for international cooperation.
Subsumed within outreach activities is the recommendation that countries examine the application of identified best-practice methods to deal with risks and vulnerabilities of the non-profit sector to misuse by terrorism organisations. These best practices include:
- more rigorous financial accounting, including maintenance of full program budgets and use of independent auditing;
- establishment of registered bank accounts and use of formal or registered financial channels for transferring funds;
- verification of program specifics, such as transparent representation of solicitation for donations, audits of field and overseas operations, and general program oversight;
- routine documentation of administrative, managerial and policy control; and
- broadening the specified role or mix of oversight bodies (eg law enforcement, specialised regulatory bodies, and bank, taxation and financial regulatory authorities; FATF 2002b).
In 2005, FATF conducted a mutual evaluation of Australia’s AML/CTF regime (FATF 2005). Mutual evaluations involve a peer-review process of a selected country’s AML/CTF laws. This was the first evaluation that used the current 40 Recommendations and Special Recommendations as a basis for evaluation. This mutual evaluation highlighted a number of perceived deficiencies in Australia’s arrangements regarding the regulation of the non-profit sector. The mutual evaluation noted that Australia had a large non-profit sector which was subject to differing forms of regulation depending upon what sort of non-profit body was involved. It also noted that while Australia had reviewed the operations of the sector, it had not introduced any additional measures to further safeguard the Australian non-profit sector from misuse by terrorist groups, in particular ensuring against terrorist organisations being able to pose as legitimate entities, or funds and other assets being diverted to support terrorism (FATF 2005). The mutual evaluation suggested that Australia consider the possibility of introducing some of the best practice measures (listed above) FATF had proposed with regard to SR VIII. Following the 2005 mutual evaluation, Australia implemented the AML/CTF Act (under which the designated services of some non-profit organisations now fall) and introduced guidelines and other educative initiatives to assist non-profit organisations to undertake risk assessments and minimise exposure to money laundering/terrorism financing-related exploitation.
The anti-money laundering/counter-terrorism financing regulatory regime in Australia
Australia has a complex legislative regime relating to various aspects of money laundering, the recovery of proceeds of crime and the financing of terrorism. Much of this legislation is quite recent and aspects of it are still being revised and extended. Recent commentators have divided Australian legislation regarding money laundering into three categories (Deitz & Buttle 2008: 37–38):
- criminal offences relating to money laundering, which at the federal level are contained in the Criminal Code Act 1995 (Cth) (Criminal Code) and also in various state and territory Acts;
- proceeds of crime legislation, which is in place at the federal, state and territory level; and
- prevention and detection measures for money laundering (and now the prevention of terrorism), which were initiated in the Financial Transactions Reporting Act 1988 (Cth) (FTR Act) and which are now provided for (and in some areas extended) by the AML/CTF Act.
The AML/CTF Act came into force on 12 December 2006. The AML/CTF Act covers both industry sectors with obligations under the FTR Act, including the prudentially regulated financial sector and a range of other designated businesses. The sectors (and the designated entities within each regulated sector) currently regulated under the AML/CTF Act are as follows:
- banking (banks, building societies, credit unions, finance corporations, friendly societies, housing societies, merchant banks, SWIFT);
- alternative remittance (corporate remitters, remittance providers);
- securities/derivatives (futures brokers, mortgage and finance providers, securities dealers);
- managed funds/superannuation (investment companies, managed funds, principle or discretionary, traders, retailers, superannuation trusts, unit trusts);
- gambling (casinos, gambling houses, on course bookmakers, pubs and clubs, sports bookmakers, TABs);
- foreign exchange (foreign exchange providers, payment service providers, postal and courier service providers, travel agents, travellers cheques issuers); and
- financial services (factorers, forfeiters, hire purchase companies, lease companies, pastoral houses, public authorities).
The Australian Government is currently examining the need to extend the application of the AML/CTF Act to specified services provided by a number of other business and professional sectors. The sectors that are likely to be regulated in this second tranche of legislative reforms in Australia include lawyers, accountants, real estate agents, dealers in precious metals, trust and company service providers. Until the second tranche of legislative reforms is enacted, it cannot be determined with accuracy which professionals and which of their services will be regulated and to what extent. For further description of the AML/CTF regime in Australia, see Walters et al. (2011) and Smith et al. (forthcoming). The majority of NPOs do not provide services prescribed as a designated service under the AML/CTF Act.
Methods and report outline
The findings presented in this report combines information drawn from:
- a review of peer-reviewed, government and non-government literature;
- an examination of case-law, regulator reports and other sources of information on investigated cases;
- roundtables with representatives from Australian law enforcement and regulatory bodies, academia and the non-profit sector; and
- consultations conducted in the United Kingdom with regulators, academics and representatives of peak non-profit bodies.
The project was approved by the AIC Human Research Ethics Committee on 19 August 2009.
The next section of the report examines the proposed role of NPOs in money laundering and terrorism financing, the vulnerabilities specific to the non-profit sector and the apparent targeting of charities, particularly Islamic charities. The following section categorises methods of misuse before describing the evidence available for actual exploitation of NPOs. Examples are drawn from suspected and confirmed cases, and published typologies, investigated in the United States, United Kingdom, Canada, Europe and Australia.
Models of non-profit regulation and the effect of AML/CTF policy on regulation are discussed in the penultimate section, to illustrate the varying approaches taken to regulate and monitor the sector and demonstrate the inherent difficulty in coordinating whole sector capture. The section also addresses self-regulation (the preferred regulatory model among the sector) and summarises sector misgivings around proposed and already executed changes to regulation that were influenced by AML/CTF policies.
The final section discusses the importance of quantifying risk when developing preventative or mitigation strategies and outlines where the Australian non-profit sector is potentially exposed. In concluding the report, consideration is given to the suite of options that might be adopted in Australia to both improve current regulatory shortfalls and deliver a proportionate response to the variable money laundering/terrorism financing risk experienced among Australian NPOs.
The role of non-profit organisations in money laundering and terrorism financing
The utilisation and exploitation of the non-profit (and specifically charitable sector) by terrorist groups is understood to have been a long-held strategic position (Winer 2008), although little, if anything, has been said about the connection between NPOs and money laundering. For this reason, much of the following focuses on the exploitation of NPOs for the financing of terrorism. al Qaeda (and its predecessor Mekhtab al Khidemat), for example, had been particularly successful in exploiting Islamic charities and other NPOs (Kohlmann 2006; National Commission on Terrorist Attacks upon the United States 2004). The IRA too has had a long history of funding its paramilitary activities with charitable support, sourced from private donations and funds collected in local pubs and clubs and contributions raised overseas by so-called ‘support’ groups such as the Irish-American NORAID (the Northern Aid Committee) and FOSF (Friends of Sinn Fein). Other notorious groups associated with exploiting charitable relief include Hamas, Hezbollah, the Liberation Tigers of Tamil Eelam (LTTE) and Jemaah Islamiyah (Abuza 2009, 2003; Croissant & Barlow 2007; Flanigan 2008; Ghandour cited in Ly 2007; Gunning 2008; Levitt 2006, 2005). Recently, with the devastating 2010 floods in Pakistan, there were accusations that charitable relief was being controlled and distributed by a ‘hardline Islamist charity’ called Jamaat-ud-Dawa, linked to the terrorist attacks on Mumbai in 2008 (Crilly 2010; Sara 2010).
In the significant activity focused on understanding how the terrorist attacks of 11 September 2001 were executed, however, the already acknowledged relationship between NPOs and terrorism financing was given greater credence. During that period, a range of NPOs including:
charities, humanitarian organizations, social justice movements and international solidarity groups [were] seen as particularly suspicious in terms of concealing or providing terrorist financing and [were] therefore targeted by the combating of financing of terrorism measures (McCulloch & Pickering 2005: 472).
While all NPOs were potentially under observation, the charitable sector became the raison d’être of counter terrorism activity. This was because there was (and is) a seemingly logical connection between fundraising and exploitation of those funds for illegitimate purposes. In announcing the adoption of executive order 13224—which froze assets of individuals and entities suspected of being linked to terrorism—the then President Bush asserted that ‘international terrorist networks make frequent use of charitable or humanitarian organizations to obtain clandestine financial and other support for their activities’ (US Government Printing Office 2001: 1363). In 2002, HM Treasury noted that evidence was available to show that charities had indeed been involved in the financing of terrorism (HM Treasury 2002) and more recently, the UK government argued that:
while the scale of terrorist links to charitable activity is extremely small in comparison to the size of the charitable sector, the risk of exploitation of charities is a significant aspect of the terrorist finance threat (Home Office & HM Treasury 2007a: 52).
The Australian Government has also acknowledged the generation of terrorism funds through charitable fundraising (O’Connor 2009).
While there is widespread acceptance of the role of NPOs in terrorist financing (and presumably money laundering; eg see Amador 2008; Croissant & Barlow 2007; Ehrenfeld 2003; Greenberg, Wechsler & Wolosky 2002; Lee 2002; Levitt 2006, 2005; Looney 2006; Winer 2008), some commentators, while not disputing the link, have cautioned against overstatement. Benthall (2008, 2007a, 2007b) has been particularly critical of the possible (if not probable) misinterpretation of the evidence, which he considers to be the product of the use of questionable sources, less than rigorous assessment of available intelligence and observer bias. Others have argued that the confusion and distress over the series of terrorist attacks in the early to mid 2000s would inevitably lead to the axiom of ‘when you are caught in the headlights, all oncoming vehicles tend to look like juggernauts’ (Briggs, Fieschi & Lownsbrough 2006: 13). In the subsequent approach to counter-terrorism financing, the potential for abuse has come to outweigh the volume and logistics of actual abuse.
Vulnerability to misuse
Proving the equation that NPOs are almost bound to be abused seems relatively straight forward. Their vulnerability is related to a broad range of factors related to sector reputation, the areas in which they work and the nature of their organisational structure, governance arrangements and methods of financial management (Charity Commission 2009a; Cooper 2009; FATF 2004a, 2004b). Some of the vulnerabilities pertinent to the non-profit sector are that NPOs:
- engender high levels of public trust, are relatively easy to establish and highly diverse in nature. The sector has traditionally attracted less suspicion due to the altruistic nature of its work;
- may have a global presence, are often situated or operate within areas of conflict and regularly depend on intermediary partners or local branches to deliver funds and services, sometimes without direct supervision or control;
- are usually cash intensive and might be constituted by complex global financial operations involving multiple donors and currencies;
- sometimes use processes for collecting and transferring funds that are highly informal, not always regulated and facilitated through personal networks;
- tend to minimise spending on internal administration and management due to limited financial resources and to maximise funds for their or charitable projects;
- invest less in regulatory compliance practices and obligations relating to due diligence, often because resources prevent implementation or adherence to strict financial controls. On occasion in some organisations, there may be poor management of accounts and verification of legitimacy and legality of recipient organisations and their use of donated funds may be overlooked; and
- are subject to quite different levels of regulatory control depending on the region they operate in, affecting reporting requirements and the type and level of scrutiny given to them.
The interchangeable nature of charitable donations
Charities, in particular, are thought to provide terrorists with the ideal vehicle with which to both generate support for their activities and propagate their particular ideologies. Charities, through their ability to attract large numbers of donors and increase public advocacy and support, are veritable wellsprings for raising funds (Winer 2008). Since fundraising can take in a variety of forms, such as
the collection of membership dues and/or subscriptions; sale of publications; speaking tours, cultural and social events; door-to-door solicitations within the community; appeals to wealthy members of the community; and donations of a portion of...personal earnings (FATF 2002b: 4)
the potential for gathering large sums of money is increased. It has been suggested that
there exist many examples of organizations which, in addition to their violent activities, devote significant time and resources to take care of the poor in a more or less institutionalized way (Ly 2007: 180).
So-called ‘asset substitution’, where funds are interchanged between legitimate and illegitimate uses, is seen as a particular issue and is carried out by groups such as Hamas, Hezbollah and the LTTE. These groups are recognised as sponsoring a combination of humanitarian and terrorist activities. Hamas plays a critical role in the provision of health, educational and other social welfare services in the West Bank and the Gaza Strip, distributing up to 95 percent of their funds to NPOs working in the Palestinian territories (Ghandour cited in Ly 2007). Hezbollah is responsible for a wide network of charities and other NPOs and the LTTE is well known for its investment in NPO activities (Flanigan 2008). Donations made to these and similar groups may be done with the assurance, if not the conviction, that the funds will not be diverted to support acts of violence. Nonetheless, there exists the charge that even where an NPO is conceded to be providing humanitarian aid, financial support for the NPO still supports terrorism because the NPO is freed up from having to meet costs and can therefore use donated funds for military purposes. It is such donations that have featured heavily in the international counter-terrorist response because it cannot easily be demonstrated that money collected ostensibly for charitable or aid purposes in one state is not re-routed to terrorist endeavours against another.
Faith-based giving and the targeting of Islamic charities
Notwithstanding the wider assumption that all NPOs are at potential risk of abuse by terrorist groups, faith-based charities and notably Islamic charities, have come under particular scrutiny. Part of the rationale for this individualised attention is that within some religions, regular charitable giving to the poor and disadvantaged is a fundamental obligation of the faith—an obligation perceived as being open to exploitation. The figure of how much is given differs between faiths; however, it is generally calculated on a fixed rate of the individual’s annual income or annual savings. Systems of transferring funds for this purpose can be highly informal. Many donors rely on their community network to both nominate a cause and transmit funds on their behalf. While this process allows for individuals to save on bank transfer fees by sending their contributions together in the one transaction, the process is highly unregulated and allows for minimal transparency and accountability.
Faith-based giving is not unique to any one religion, but in most the practice is encouraged rather than one of obligation. The obligation to give is most clearly articulated in the practices of tzedakah, zakat and sadaqah.
Tzedakah is one of the three acts that allow Jews to gain forgiveness from their sins. According to Jewish law, one-tenth of an individual’s annual income must be given to the poor. This is generally interpreted as one-tenth of net income after payment of taxes. The obligation to perform tzedakah can be fulfilled by giving money to the poor, to health care institutions, to synagogues or to educational institutions. It can also be fulfilled by supporting your children beyond the age when you are legally required to, or supporting your parents in their old age. The obligation includes giving to both Jews and gentiles (ie those not of the Jewish faith).
Zakat and sadaqah
In Islam are the practices of zakat and sadaqah. Zakat is one of the five pillars of Islam, that is, one of the five obligatory duties bestowed on each Muslim. Zakat means ‘purity’ or ‘purification’ and refers to the system that organises the transfer of wealth to the poor; it requires individuals to annually tithe at least two and a half percent of their wealth to the needy. The Qur’an notes (9:60) that eight categories of people are entitled to receive zakat including the poor, the needy and the wayfarer. The value of zakat generated worldwide is estimated to be in excess of $200b (Crimm 2008). Sadaqah is the practice of voluntary charitable giving but unlike zakat, non-Muslims may also be recipients of this form of charity. Both zakat and sadaqah are to be given anonymously to ensure that the act remain virtuous.
In addition to zakat and sadaqah are a variety of compulsory and voluntary mechanisms through which charitable donations are made at specific times of the year. Thus, there is Zakat el Fitr (requiring donations at the end of Ramadan—the month of fasting), Wakf (the giving of continuous alms) and Kafaara (easing of sin), which allows a Muslim who has committed particular sins to mitigate them through the performance of a charitable act (Ndiaye 2007). In essence:
the flow of funds by means of zakat and sadaqah contributions…is an essential building block for Muslim civil societies. Thus, the various mechanisms by which, or through which, such assets are channelled are core to, and a critical part of, those civil societies. There is much evidence that these philanthropic and charitable structures perform not only an economically integral function in Muslim civil societies, but that they also are socially, culturally, and politically institutionalized (Crimm 2008: 587).
The susceptibility of Islamic charities
When the cultural and religious drivers of zakat and other funding mechanisms and the ideology behind many of the terrorist attacks of the last two decades are factored in, the targeting of Islamic charities was perhaps inevitable, even if not always justified. Indeed, it seemed such an obvious conduit that to suggest that such might not be the case could be construed by some as counterintuitive. It has been suggested that the obligatory charitable donations of zakat represent the largest single source of [charitable] revenue diverted to terrorist groups (Rudner 2006).
Alongside the predicted precursor of cultural obligation are factors around transparency and accountability that are purported to reinforce the risk posed by Islamic charities. These factors relate to the differential structure of the collection units or agencies, the manner in which the funds are disseminated and the general absence of government oversight. Historically, zakat funds operated at a local level but more recently, national and international zakat funds have been established that distribute funds directly to individuals and non-governmental social welfare organisations (Crimm 2008). Funds were traditionally channelled through Islamic charities, mosques and other agents but in order to meet their various charitable obligations, Muslims have elected to create institutions tasked with the collection, administration and distribution of charitable donations. The best known of these are zakat committees but other vehicles include waqf (an endowed perpetual trust fund) which comprises two main types, namely, family (created to protect family assets) and charitable (created to meet broadly defined charitable aims including the building of mosques, madrassas, roads, hospitals and orphanages; Crimm 2008). Awqafs are still present in India, Iran, Bangladesh and Pakistan and are exempt from secular taxation.
It is clear, as with a number of secular charities, that not all Islamic charities are constituted by the same or even similar structural and organisational characteristics. Thus, some charities are local branches of international NPOs and others are local groups or Islamic centres or foundations attached to, or associated with, a specific local mosque. Consequently, the manner in which respective charities operate in terms of the activities and programs in which they engage, the financial procedures they employ and the methodologies utilised to distribute funding may differ significantly. This divergence naturally renders it difficult to trace and monitor the nature, volume and distribution of funds (Ndiaye 2007).
The systems of collection listed above continue to be used by Muslim communities in addition to informal value transfer systems such as hawalas. A hawala acts as an alternative remittance scheme and has been a focus of concern because of its suspected and known role in transferring terrorism funds (Croissant & Barlow 2007; Roth, Greenberg & Wille 2004). At the most basic level of hawala, the remittance process involves four participants— a sender, a beneficiary and two intermediaries. The sender approaches an alternative remittance service (ARS) agent in their jurisdiction and advises how much they want sent, to whom and in which jurisdiction the recipient resides. The ARS agent then contacts another agent in the recipient’s jurisdiction and requests that they pay them the requisite sum. Reflecting more current banking practices, no money changes hands. Following the transaction, the first ARS agent is indebted to the second ARS agent. However, it is likely that an ARS agent would be involved in a number of transactions at any given time and have links with many other ARS agents, therefore having multiple debts.
The informality, efficiency and anonymity of hawala (and other versions of alternative remittance schemes) makes it susceptible to misuse and being largely unregulated, does not produce the paper trail needed to detect suspect transfers of cash. The amount of money that is transferred through hawala is not known, although some estimates suggest it is in the billions or tens of billions of US dollars (US Department of the Treasury 2002). The AIC examined the nature and use of community-based alternative remittance in Australia, in a broader study on characteristics of alternative remittance businesses in Australia, the risks they posed and some of the current responses to those risks (see Rees 2010a, 2010b and final section of this report).
An additional risk factor to Islamic charitable giving is the typical anonymity of the donor and the sanctioned recipient of such giving. The Qur’an considers those who bestow zakat and sadaqah contributions anonymously to be especially pious. In that context, tracing the volume and source of such donations is bound to be problematic. The Qur’an also stipulates that ‘charity shall go to the poor who are suffering in the cause of God…’ (2: 273). Thus, the recipients of charity are broadly drawn and subject to a degree of interpretation which has impacted perhaps negatively upon the manner in which charitable donations have been directed and which may have exacerbated the perception that Islamic charities provide succour to terrorist organisations (Ndiaye 2007).
Finally, the religious driver behind zakat and sadaqah has meant there has been little or no official government oversight of the process. Given the transparency requirement placed upon charitable giving per se, religious donations are inevitably going to come into conflict with this increasingly prevalent norm of accountability (Looney 2006). It is argued that zakat is often provided in cash to prominent community leaders who disperse it to persons and charities they deem worthy of receiving it.
The picture is rendered more complicated by the fact that in a number of countries that lack an established and functioning income tax system (such as Saudi Arabia and the United Arab Emirates) zakat donations might comprise the principal funding source for a range of religious, social and humanitarian organisations (Looney 2006). The apparent reluctance on the part of a number of jurisdictions to subject charitable organisations to rigorous scrutiny has led, it is suggested, to a proportionate increase in the attractiveness of such organisations to terrorist groups.
The vulnerability of the non-profit sector is a product of factors related to organisational structure, method of operation, fund distribution networks and financial management practices. However, its ultimate vulnerability lies with its social role and the inherent trust it holds with the larger community. Embedding operations into the activities of an organisation that commands responsibility and trustworthiness is the ideal cover for criminal activities.
Among the sector, it is the charities that have been judged at greatest risk. Charities not only provide a means of generating funds but also of concealing its diversion. Donors that are both witting and unwitting, supply a steady stream of funds that may be bequeathed anonymously due to cultural or faith-based reasons. Verification inquiries around the destination and use of donations are moderated by community confidence in the charities intentions. Funds collected on the pretext of charitable use can then be re-routed to the intended recipients, or divided between charitable and terrorist support. The latter course can act to reinforce terrorist operations, by cultivating sympathies and developing recruitment grounds for the next cohort of militants.
Charities or similar organisations present similar opportunities for money laundering. Illegally obtained money can be concealed as donations and cleansed by the legitimacy and credibility of the organisation it is being passed through. If the charity is operating in an environment devoid of regulatory control, or manages its activities so that they fall outside scrutiny, both realistic scenarios, the deception is made all the more easier.