The propensity for the abuse of the non-profit sector by, or on behalf of, terrorist organisations or other criminal groups remains a threat and efforts are therefore deemed necessary on the part of government and the non-profit sector to mitigate the likelihood of exploitation. These efforts, however, must be counterbalanced with the available evidence that indicates the actual exploitation of NPOs for money laundering or terrorism financing purposes is arguably much lower than what has been alleged. To successfully mitigate the risk of abuse, the non-profit sector must remain mindful of the potential vulnerabilities and of the concomitant need to ensure that such vulnerabilities are identified and minimised. Equally, responses from outside the sector must be both appropriate and proportionate, and recognisant that exposure to risk is, for most of the sector, very low (Home Office & HM Treasury 2007b). Instituting a ‘one size fits all’ approach may have the adverse outcome of being both counterproductive in minimising overall risk and damaging to the sector as a whole (Home Office & HM Treasury 2007b).
In contrast with other FATF recommendations, SR VIII was less prescriptive in that it advised jurisdictions to analyse the level of risk of the non-profit sector to money laundering and terrorism, and to decide what changes to legislation, policy and regulatory practice were needed to counter this risk. SR VIII provided considerable interpretative scope for jurisdictions on which to modify approaches to monitor the non-profit sector. The 2005 FATF mutual evaluation of Australia’s AML/CTF regime had concluded more could be done to protect the Australian non-profit sector from misuse.
Critical to the proposal and development of appropriate response strategies is the careful evaluation of risk, both potential and actual. It is apparent there are quite different viewpoints regarding the non-profit sector’s real exposure to misuse and terrorist and money laundering abuse in particular. The governance and financial management weaknesses described as characteristic of some, but not all, NPOs have been used to support the conviction that the potential for misuse is quite high. Those organisations identified as most susceptible are charities, and in particular faith-based charities, and smaller entities that do not necessarily have the resources (or the inclination) to commit to due diligence and similarly recommended procedures. While the former ordinarily come under the notice of some form of regulatory scrutiny, be it from a specialist regulatory body or through monitoring of tax and fundraising arrangements, the latter often evade formal monitoring because they fall below stipulated reporting thresholds. Completely outside this sphere of scrutiny are the informal and unincorporated entities, which comprise almost three-quarters of NPOs operating in Australia. It is this group that has been identified as the most vulnerable component of the sector, partly because they are generally not formally monitored and are much less likely to have adopted (or become aware of) recommended best practices in governance and financial management.
Abuse of the non-profit sector is evidently occurring but the amount of publically available firm evidence indicates that the incidence of abuse (in the form of money laundering and terrorism financing) is only moderate, if not low. The OECD study on the misuse of charities in 19 mostly European and North American nations, described earlier in the report, found variable rates of abuse between the countries surveyed. Much of this misuse involved charities and comprised tax evasion schemes and other tax-related fraud, with some money laundering schemes detected. While terrorism financing was outside the scope of the survey, just three countries (the United States, Canada and Italy) reported terrorist organisations and supporters as ‘sectors and occupational groups involved in the abuse of charities’ (OECD 2008: 15). Other documented cases of non-profit abuse, with respect to money laundering and terrorism financing, are also small in number. Most cases (and typologies) involved corruption of legitimate charities, or the establishment of sham charities by terrorist groups and their sympathisers, but the predominance of this category of abuse, compared with incidents of money laundering, may reflect political focus rather than actual prevalence.
The potential for risk to the Australian non-profit sector, according to participants in AIC-held roundtables and consultations, is credible but the likelihood of exposure was still considered minimal. If basing an estimate of risk on actual cases detected (and identifiable in public source material) then the risk for Australia can only be concluded as low. There have been a handful of cases where it was reported that an NPO was suspected of having links with terrorism and just one case that proceeded to trial. Equally, there is slender evidence of the non-profit sector’s involvement in money laundering.
Potential risk, however, ultimately determines response but as it has been claimed elsewhere, the potential for risk is not considered to be proportionate among the disparate entities that comprise the Australian non-profit sector. Risk primarily lies with that subset of entities that collected and dispersed donations, used informal methods of funds transfer and/or were unregulated. However, while there is concordance in the types of NPOs that are more likely to be abused and their generic points of vulnerability, the measurement of risk and the development of risk-based management strategies must incorporate what typologies involving Australian NPOs reveals about actual vulnerabilities.
Before discussing the nature of these vulnerabilities, it is worth repeating what reported typologies reveal about where the abuse is occurring. All involved charities, many of which were in fact incorporated or otherwise under some regulatory observation. Also of relevance was that involved charities had often used formal, rather than informal, means of funds transfer. Several of these findings are seemingly at odds with aforementioned opinions on where exposure to risk is likeliest. The general absence of unregistered or unregulated organisations in documented typologies and case studies could signify that detection is only possible with increased or formal scrutiny. It could also mean that registered entities are chosen to instil a veil of legitimacy (and lack of corruptibility) to their operation and provide opportunity for a larger fundraising base.
Vulnerabilities in the Australian non-profit sector
The Australian non-profit sector is no less immune to the suite of vulnerabilities that have been categorised for NPOs. Nonetheless, representatives from law enforcement, academia and the non-profit sector consulted for the report collectively maintained that while the risk exists and should be taken seriously, the size of the problem was comparatively low and ‘should not be inflated’ (Roundtable participant personal communication 2009). This assessment was based on the limited evidence for abuse of Australian NPOs and an understanding that many NPOs had established processes that adhered to peak body codes of conduct and government guidelines to both identify and guard against misconduct. Reputation is critical to the non-profit sector, especially for organisations that depend upon government grants and/or public donations, and many in the sector do take precautions to avert abuse. As one roundtable participant explained ‘the risk is probably small but any hint in the media and you’re dead’ (Roundtable participant personal communication 2009).
Organisations particularly exposed to the risk of misuse were the smaller, local, community-based NPOs that fell outside regulatory scrutiny and which did not necessarily have familiarity with AML/CTF issues nor the expertise or resources to recognise, address or mitigate issues related to money laundering and terrorism financing. Keeping abreast of legal requirements is difficult enough for regulated NPOs but smaller, unincorporated entities, which have irregular or little contact with regulators or peak bodies, are less likely to be aware of the full breadth of issues now delineated for the non-profit sector. A deficiency in sector outreach and education is seen as partially responsible for the lack of awareness.
Related to this concern about the vulnerability of smaller NPOs, especially the less formal charities formed around ethnic and faith-based communities, was the preferred or common use of informal methods for the collection and transfer of funds. The identity of donors may not necessarily be pursued by the charity for cultural or other reasons and funds are known to be relayed to overseas locations using remittance services or similar methods of informal funds transfer. Money service businesses such as ARS are
prone to ML/TF activity though the likelihood of individual businesses being targeted for ML/TF is moderated when sufficient programs and controls are in place (AUSTRAC 2010c: 13)
and ‘using ARS can disguise intentions’ (Roundtable participant personal communication 2010). The vulnerabilities of alternative remittance in Australia, as examined in a previous study by the AIC (Rees 2010a, 2010b), ‘often appear(ed) to relate more to a lack of knowledge than deliberate misconduct’ (Rees 2010b: 4). The study found variable knowledge among smaller providers about their obligations under the AML/CTF Act and some providers admitted to difficulties in adhering to AML/CTF regimes, primarily related to the time-consuming and complex nature of reporting requirements. The concerns referred to by some providers interviewed for the AIC study included the amount of paperwork required to achieve compliance, the frequency of reporting requirements and the subsequent time implications for the business (Rees 2010a).
Since large alternative remittance providers were seen by users interviewed for the AIC study as being very expensive (Rees 2010a), smaller NPOs may opt to use the services of a smaller provider to keep costs down. Corrupted NPOs may also choose to deal or work with smaller providers to better conceal money laundering or funds diversion activities. AUSTRAC (2010c) has acknowledged that smaller or unaffiliated providers are difficult to formally monitor and the risk of misuse is therefore greatest for this group of remitters. Detected cases of remittance misuse in Australia, the United Kingdom and the United States have been mostly criminal in nature and none appear to have involved non-profits as victims or perpetrators (Rees 2010a). There is little evidence for a connection with terrorism financing, although Rees (2010a) did note that assessing the level of involvement was restricted by the scarcity of available information on terrorism investigations.
It may be unwise to assume, however, that larger Australian NPOs are inherently less vulnerable to misuse, particularly charities and other organisations that collect and distribute funds. For example, if a large NPO retains multiple offices in different countries that do not jointly adhere to uniform standards on performance and accountability, then their structure may make them more vulnerable than their size suggests. There are also limits to how much NPOs can realistically discover about the credentials of their overseas partners or influence their mode of operation. As one participant noted:
Many [Australian charities] have large numbers of partners and even if the [charity] has good standards there is no guarantee the partners do. You [often] can’t do anything about partner’s standards’ (Roundtable participant personal communication 2009).
Even among the well-established and commonly known NPOs who have implemented due diligence processes, such careful attention may have to be forfeited when, for example, coordinating disaster and other emergency relief.
The roundtable discussion also included references to Australia’s approach to regulating the non-profit sector and how this influenced risk. The inherent difficulty in monitoring and disrupting informal processes means that some illegal activity will inevitably go undetected but problems also lie with procedures used to examine registered bodies. It was concluded that regulation was not doing what it was supposed to do and for a number of observers, the sector suffered because there was ‘no strong cop on the beat’. The ATO, in particular, was seen as a ‘powerful instrument to make people do the right thing’ but it did not have enough knowledge of the non-profit sector and was not proactive enough in reviewing registered entities. ASIC was only ‘nominally involved’ and there were questions from a couple of participants about the thoroughness of the AusAID accreditation process.
State and territory regulation was described as ‘a mess’, inefficient and exacted significant administrative demands on organisations, which lessened confidence and increased the risk of failure. The primary risk, however, lay with the varied financial reporting requirements and exemptions specified for NPOs, and the absence of standardised accounting practices for presentation of financial records. Inconsistency provided the opportunity to distort or conceal the financial picture and potentially for criminal misconduct.
Regulatory reform and risk mitigation
It is clear that the Australian non-profit sector could be better regulated, either in a formal sense or in combination with self-regulation and sector outreach initiatives. It is also apparent from the available data, and notwithstanding the vulnerabilities outlined above, that the risk of NPOs being used to launder money or sponsor terrorism is low in Australia. An optimal scenario may be to introduce a system that simplifies the regulatory environment in which NPOs currently operate and creates a more streamlined approach by which the risk of mismanagement, misconduct or more serious abuse of NPOs is potentially minimised. Roundtable participants emphasised that the most pragmatic and effective approach should be based on the understanding that different tools were needed for different constituents, since the diversity and size of the sector made complete regulatory capture impossible.
The Australian non-profit sector has been the subject of numerous reviews, all with the intention of recommending regulatory reform (ACG 2005; CDI 2001; Productivity Commission 2010; Senate Standing Committee on Economics 2008; Woodward & Marshall 2004). While each of these reviews followed slightly different lines of inquiry, all recognised the unnecessary complexity of the current system, its lack of transparency and accountability, and the potential loss of confidence both with, and within, the sector. The reviews all recommended extensive reform, little of which has been implemented.
None of the aforementioned inquiries were commissioned to examine how the non-profit sector might be used for illegal means and the practical measures needed to circumvent such misuse. Nevertheless, some of the recommendations described below, which replicate recommendations published in the aforementioned reviews, represent options either adopted in overseas jurisdictions to assist in combating abuse, or are assessed in this study as potentially contributing to the mitigation of risk.
A single national regulator?
The implementation of a single national regulator has been proposed as the best regulatory candidate to both reduce complexity and improve transparency and accountability (see Productivity Commission 2010 (Recommendation 6.5); Senate Standing Committee on Economics 2008 (Recommendations 3 & 4); Woodward & Marshall 2004 (Recommendation 1)). The structure and function of the regulator as conceived by the Productivity Commission (2010) would model that of the Charity Commission in England and Wales and have responsibility for:
- registration and regulation of NPOs (not just charities) incorporated under Commonwealth law;
- registration and endorsement of NPOs for tax concessional status; and
- registration of national fundraising entities and activities.
The regulator would additionally serve as a ‘single portal’ for all financial, tax endorsement, fundraising and other reporting commitments. In effect, the breadth of regulatory functions presently spread across different government departments, different levels of government and different jurisdictions would be merged into the one authority for all applicable entities. The outcome would be a reduction in duplication of effort currently experienced by many in the non-profit sector and the installation of a single overseer to examine governance and financial information. Similar entities would be subject to the same level of scrutiny and the consolidation of monitoring activities into the one body, in theory, would improve detection of wrongdoing.
Together with conventional regulatory functions, the Australian national regulator might assume investigatory and related powers similar to those of the Charity Commission, which permit active monitoring and the application of enforcement action(s) onto NPOs at significant risk of misconduct or mismanagement. For example, under s 19 of the Charities Act 2006 the Charity Commission has powers to suspend or remove trustees from charity membership; and following receipt of a warrant from a justice of the peace, s 26 of the Act grants the Commission with powers to enter premises and seize documents for investigatory purposes. These and related powers allow the Charity Commission to take remedial or protective action as warranted.
Ideally, the regulator would also host an online register similar to those compiled by the Charity Commission and the Charities Commission. Registers can be used to summarise information on the activities, location, financial history and compliance record of all registered organisations. Not all Australian NPOs make their annual reports or data on financial accounts available to the public, which limits the Australian public in their decision-making about which NPOs to donate to or otherwise support. Donor knowledge is a powerful instrument—‘the more donors are brought into organisations which have proper processes, the less you have to worry about’ (Academic roundtable participant personal communication 2010).The Australian Government announced in its August 2010 election campaign the proposal to establish an Office for the Non-Profit Sector in the Department of Prime Minister and Cabinet and the commencement of a study addressing the role and functions a ‘one-stop-shop’ regulator might take (Bowtell et al. 2010). In January 2011, the Australian Government released a consultation paper inviting comment on the possible roles and responsibilities of a national not-for-profit regulator (The Treasury 2011). Much of the paper’s content reiterates options outlined in previous reviews of the non-profit sector, including the form and scope of a national regulator, its functions with reference to the granting of tax concessions, compliance and education responsibilities, and administration of fundraising legislation, and the need for a statutory definition of charity.
The promotion of a single national regulator, in this context, suggests that the currently fragmented system of NPO regulation increases the sector’s risk to money laundering and terrorism financing. It could be contended that concentrating regulatory function into the one entity, and streamlining reporting procedures, reduces the opportunity for deception. Conversely, it may also be contended that a further tightening of regulation could act as a trigger for some entities to remove themselves from regulatory oversight, thus increasing the number of unregulated entities who are already perceived at greater risk of criminal or terrorist exploitation.
NPOs have argued that the diversity of the sector precludes a one-size-fits-all model of regulation and this presumably includes the consolidation of regulation by government. The abdication of some regulatory responsibility from government to other actors is embedded in the concept of regulatory pluralism, which advocates the use of a mix of regulatory instruments or regulatory partners in place of a single instrument approach (eg see Gunningham & Sinclair 1999). Regulatory pluralism has been applied to areas that have necessitated non-traditional models of regulatory action, such as environmental protection.
The Australian Government announced in the 2011–12 Federal Budget that it would provide $53.6m over the course of four years (2011–15) to establish the ACNC. The ACNC, which will commence operation on 1 July 2012, will have responsibility for determining charitable, public benevolent institution and other non-profit status; providing education and sector outreach to NPOs and developing a simplified reporting framework (Australian Government 2011). Consequently, the ATO will no longer be involved in determining the charitable status of NPOs applying for tax relief but will still be responsible for administering tax concessions. Alongside the establishment of the ACNC, the government will begin discussions with state and territory governments regarding the future implementation of a national regulator for the non-profit sector. It is not known at the time of writing what form this regulator might take but its purpose will be to ‘minimis(e) reporting and other regulatory requirements through coordinated national arrangements’ (Australian Government 2011: 322).
The operation of a single national regulator does not discount the usefulness or the role of other regulatory contributors. Its primary function is to streamline regulatory reporting and improve transparency, a function described by participants in the AIC roundtables as vital in reducing non-profit misuse. However, the nature of the sector and the reality that not all entities will come under observation demands regulatory pragmatism and the involvement at some level of the sector itself.
How these arrangements work in practice requires further exploration and dialogue between the regulatory partners and the non-profit sector. Nevertheless, the non-profit sector has shown general support for a co-regulatory arrangement. In a 2010 survey of 1,536 NPOs, 93 percent stated their support for a national regulator (Pro Bono Australia 2010) and submissions to the Senate Standing Committee on Economics (2008) and Productivity Commission (2010) reviews suggested that the majority of the sector were in favour. Nonetheless, despite the support for a national regulator, the non-profit sector still has underlying reservations about government assuming greater or full regulatory control since many members saw self-regulation as the ideal option. Sixty-nine percent (n=973) of organisations participating in the aforementioned surveyed preferred co-regulation (ie an ‘appropriate balance’ of government and self-regulation) compared with 23 percent who stated that government should be solely responsible for regulation.
Harmonising existing laws and consolidation of legal forms
There is never-ending change and making sure that you know what you need to know is a challenge. Getting across all this stuff is hard and expensive and you have to get it right (Non-profit sector participant personal communication 2010).
Given the size and variety of the non-profit sector, not all NPOs will be captured (by eligibility or by choice) in a national regulator. To ease what has been described as complicated and duplicative administrative obligations, Commonwealth, and state and territory governments should also attempt to obtain greater harmonisation of existing laws and/or adoption of model legislation (ACG 2005 (Recommendation 7.4); Productivity Commission 2010 (Recommendation 6.2)). Legislative harmonisation and mutual recognition of registration across jurisdictions brings its own costs and how this might be achieved alongside support for a single national legal form requires further exploration (Productivity Commission 2010). It would, however, reduce compliance burden and at the same time help to eliminate jurisdiction-shopping and minimise inconsistent (and potentially fraudulent) reporting.
To facilitate the establishment of a national regulator a single national legal form is preferable, if not essential (Senate Standing Committee on Economics 2008 (Recommendation 7); Woodward & Marshall 2004: Recommendation 5), as is a procedure that allows organisations that choose to come under the national regulator to do so at minimal cost. If such a form were applied, disclosure regimes are likely to be adjusted to a tiered system of reporting, such as that used by other Charity Commission-like bodies. In this scheme, NPOs falling under a specified annual revenue threshold would be relieved from submitting annual financial statements.
The adoption of a single national legal form may not suit some categories of NPOs, which at present are accommodated (if somewhat imperfectly) by the range of legal forms available. Further, despite assurances around costs minimisation, migration to new legal forms would still be difficult for some NPOs, particularly smaller associations. It was recommended by the Productivity Commission (2010) that it be made simpler for non-profit bodies to adopt new legal forms as circumstances require. Relaxing the compliance and monetary costs associated with converting to, and operating as a company limited by guarantee, for example, has the potential to encourage more NPOs to transfer to the proposed Commonwealth legal form. It would also add to the number of associations falling under the aegis of the national regulator.
Non-profit organisations and providers of designated services
The activities of the majority of Australian NPOs do not fall within the AML/CTF Act’s definition of a designated service. However, financial transaction activity involving an NPO should, in principle, be identified by the providers of designated services the NPO uses to deposit and transfer funds, unless it regularly makes use of unregistered, informal services. For example, when an NPO deposits cash over $10,000 into a bank account, or when they remit any amount overseas either through a bank or a remitter, both of these transactions should be reported to AUSTRAC by the bank or remitter as threshold transactions and international funds transfer instructions respectively. This would also apply to transactions that originated from other parties to NPOs as the beneficiary. Further, obligations to report suspicious transactions combined with FATF Recommendations and AUSTRAC guidance on AML/CTF risks to NPOs, should see reporting entities apply a higher level of due diligence when providing services to NPOs.
Standardising annual and financial reporting
There is no uniform accounting or reporting standard for the Australian non-profit sector. The content and standard of financial reporting depends on the NPO’s legal form, its size (usually based on annual revenue or assets) and the jurisdiction(s) the organisation is incorporated or fundraises in. An Institute of Chartered Accountants Australia (ICAA) review of non-profit financial reporting found ‘considerable variation in key reporting practices’ (ACG 2005: 23), resulting in a scarcity in ‘relevant’ financial information on the sector and reduced accountability and transparency (ACG 2005). Woodward and Marshall (2004) also commented on the lack of standardisation in data collection and reporting and recommended the introduction of an NPO-specific accounting standard (see Recommendation 7).
ICAA, in their submission to the Productivity Commission’s review of the non-profit sector, argued that recent developments in standards of accounting and corporate governance have yet to be incorporated into legislation relevant to the sector, contributing to the variability in financial reporting produced by the non-profit sector (Productivity Commission 2010). Adding to the problem is the ‘little guidance’ the sector has received as to how financial reporting standards that were primarily designed for the for-profit sector should be applied to non-profit reporting (ACG 2005: vi).
One initiative to achieve standardisation in reporting is being undertaken by the Australian Accounting Standards Board, which is assessing changes that could be made to disclosure regimes used by private sector NPOs to improve transparency and comparability (AASB 2010). The project will consider information that is incorporated into and currently outside of conventional disclosure regimes, to ascertain disclosure items that should be included, those that could be dropped and items that need some remodelling to better meet the needs of the sector. ICAA has also been active in this area, focusing on improving transparency through enhanced annual reporting. NPOs were recommended to pay particular attention to introducing more detail on mission and objectives and governance arrangements, clearer narrative on revenue and expenditure data, and using standardised measures of efficiency (or KPIs; ICAA 2007, 2006).
Regulating the unregulated
Largely excluded from the discussion on regulatory reform are the entities that comprise the largest proportion of the non-profit sector—the small, informal, unincorporated association. This is the group that is considered at greatest risk of exploitation but where less can be practically achieved in eradicating misuse. It has been suggested that Australia could begin to address this problem by introducing a minimal legal entity by which unincorporated associations would gain some of the benefits of incorporation but without the more taxing compliance requirements normally associated with registration (Productivity Commission 2010). It would also offer some recourse to regulatory oversight. The risk in introducing a minimal legal entity, according to a Victorian Government submission to the Productivity Commission review, is for already incorporated smaller associations to switch to the new form in order to avoid more overt regulatory oversight (Productivity Commission 2010). The easiest option it seems is to retain the status quo but to encourage higher rates of incorporation through the aforementioned simplification of migration between different legal forms.
The non-profit sector is quite a separate body compared with the other entities and services covered by FATF recommendations regarding the suppression of terrorism financing and money laundering. For this reason, its regulatory treatment should take a separate form. NPOs exposure to money laundering and terrorism financing has been described for Australia and overseas jurisdictions such as the United Kingdom and Canada as low risk/high impact—the great majority of NPOs will never be exposed to criminal or terrorist misuse but the outcome if only a handful of NPOs are abused has the potential to be extremely harmful. Consequently, government and non-government stakeholders have asserted that recommended changes to the method by which NPOs are monitored must be proportionate to risk, although the approaches adopted have not received the same assessment.
There is little evidence the Australian non-profit sector is being abused for money laundering and terrorism financing, and the overseas evidence is not substantial either. The largest number of cases of NPO abuse has been detected in the United States, with a smaller group uncovered in the United Kingdom, Canada, Russia and Europe. There have been just two prosecuted cases in Australia—one involving charges related to money laundering and the second to the provision of assets to an entity proscribed under the purposes of the Charter of the United Nations Act 1945 (Cth). It is hinted in parts of the literature that the problem is larger than what the published material suggests and it may well be that the lack of publicly available information on terrorism investigations, combined with possibly low detection rates, are contributory factors to the apparent dearth of substantive facts.
Nonetheless, NPOs are seen as vulnerable to criminal and terrorist abuse because of their purpose, where and how they operate, and the greater degree of self-regulation afforded to them. In minimising abuse, the sector’s financial management and due diligence arrangements came under particular scrutiny based on the perception that many at-risk organisations operated without appropriate governance and financial controls. Sector surveys in the United Kingdom revealed inadequate uptake of risk and financial management strategies, which threatened funds misuse if due diligence checks were similarly deficient (Charity Commission 2009b; PKF and the Charity Finance Directors’ Group 2009). It can be assumed the situation might also apply to parts of the Australian non-profit sector, although sector representatives consulted for the report insist appropriate arrangements are observed, at the very least, among larger organisations that undertake work in overseas locations.
If members of the Australian non-profit sector that are perceived at greater risk of exploitation can be isolated, then that group would comprise charities and other fundraisers (specifically those that transmit funds out of Australia and to regions which have poorer regulatory oversight), small unregulated organisations and organisations that predominantly use informal (possibly unregulated) methods of funds transfer. Added to this group would probably be NPOs that collect and distribute funds and are connected with cultural or faith-based groups. It is important to stress here that risk does not equal likelihood, particularly given sensitivities around past targeting of sector constituents, most prominently the Islamic charities. The group cited here are simply characterised by one (or more) of the factors that is accepted at promoting susceptibility.
Comparing the group nominated at greatest risk of abuse with actual cases of abuse produces a somewhat inconsistent match. Charities are the dominant, if not sole form of NPO found involved in money laundering or terrorism financing. A number of these were seemingly small and informal bodies although larger, more formal charities, particularly in the United States, were also misused. There did not appear to be any overt reliance on ARS or similar informal methods of funds transfer, or at least not from the country of origin, but complex methods of funds transfers were developed to move donations (or purported donations) around. Most notable is that almost all incidents of NPO abuse involved the use of a registered organisation that was either a sham charity or a charity that (knowingly) disbursed funds to a group that supported humanitarian endeavours alongside terrorist activities. The abuse of an unsuspecting charitable organisation does not appear to be the preferred modus operandi.
Numerous reviews have examined non-profit regulation and recommended how the present overly complex system can be rationalised to simplify processes and reduce administrative burden. Regulatory reform also has the potential to shape an improved approach to limiting NPO abuse. Law enforcement, academic and NPO representatives consulted for this report were in agreement that the size and nature of the sector excludes universal capture and that some at-risk or corrupted groups will inevitably escape detection. They also agreed that regulation did not need to become more stringent nor deviate too radically from the methods already used. Views diverged on what fundamental changes might be made but a system that united regulatory oversight (if that was what was required), promoted transparency and permitted flexibility was the preferred direction to take.
The establishment of a national regulator for NPOs, based on the functions of the Charity Commission for England and Wales, would serve at least two of these functions if it acted as a public register and together with standard compliance monitoring functions, was responsible for registering and endorsing tax relief and fundraising licences. The outcome would be a reduction in duplication of effort currently experienced by many in the non-profit sector and the installation of a single overseer to monitor governance and financial management. Similar entities would be subject to the same level of scrutiny and the consolidation of monitoring activities into the one body, in theory, would improve detection of, and the ability to act on, wrongdoing. A public register would complement these functions by providing the public with a list of legitimate NPOs and information on their activities and financial accountability from which decisions around organisation support can be based. As one participant to the AIC roundtables commented ‘the more donors are brought into organisations which have proper processes in place, the less you have to worry about’ (Roundtable participant personal communication 2009).
The installation of a national regulator, however, is not perceived as a cure-all for minimising non-profit misuse. Indeed, the research indicates that entities themselves could do more to implement the types of strategies that would alert them to suspected misuse and mitigate actual exploitation. Australia has taken the approach of publishing government-sponsored guidelines, performing sector outreach and relying upon peak body instructed codes of conduct to educate the sector on the risks and impacts of money laundering and terrorism financing, and advise on the importance of risk assessments, due diligence and strict financial controls. In the absence of targeted surveys, it is not possible to state to what extent these initiatives have been successful in the wider uptake of AML/CTF strategies, although more generalised sector surveys have shown that many NPOs, if not the majority, have not committed to implementing basic risk management strategies.
The current regime does not have an overt emphasis on AML/CTF issues, which may be interpreted as a flaw based on the findings of the FATF 2005 mutual evaluation. It may also be interpreted as a flaw if there was an elevated risk of NPO abuse in Australia; however, the available evidence suggests there is not. Further work is required to estimate the uptake of AML/CTF strategies by the non-profit sector and the factors affecting an organisation’s decision-making around the adoption or disregard for such strategies.
Sector-expressed concerns about the cost of AML/CTF strategies aside, the addition of another layer of regulatory scrutiny to the current system may be of limited value. Suspect donations and remitted funds involving unregistered remittance services would remain undetected but other ‘funds traffic’ should, by and large, be brought to AUSTRAC’s attention by providers of designated services prescribed in the AML/CTF Act. Given the acknowledged difficulty in capturing a sector as large and diverse as the non-profit sector, mitigation rather than prevention of terrorist abuse may prove to be the key approach. To that end, the non-profit sector needs to develop and engage fully with appropriate risk-based management strategies and governments, and (where operational) regulatory bodies need to provide timely and actionable advice based on specific intelligence, rather than generic points of vulnerability, as to the nature and parameters of the risks to be guarded against. As has been noted:
increasing regulatory scrutiny could both diminish charities’ role in terrorist finance and allow legitimate funding of projects to proceed, which are the principal points at issue (Lee 2002: 25).
The previous discussion describes options that could be implemented to minimise misuse of Australian NPOs. To inform the operationalisation of the proposed actions identified above, research is required to address a number of information gaps. Areas for potential future research are described below.
Alternative estimates of risk
There are few published typologies of Australian non-profit misuse which affects the ability to pinpoint where specific (as opposed to generic) vulnerabilities lie. Analysis of non-compliance data, along with other relevant forms of unpublished information, may be used as a proxy to reveal:
- specifics around non-compliant behaviour and more serious forms of misuse;
- the extent to which cases of misuse relate to deliberate fraudulent or deceptive behaviours or judged a consequence of oversight or poor financial management practices;
- the manner in which more serious forms of misuse are handled and information communicated to other relevant regulatory partners; and
- the prevalence of misuse by charities compared with other constituents of the non-profit sector.
The role of alternative remittance services
The use of ARS is deemed a risk factor in NPO misuse but to what extent do NPOs actually depend on ARS to transmit funds? Additional enquiries could include:
- Is there a reliance on ARS by specific sections of the non-profit sectors?
- What forms of ARS (such as size of provider) are used?
- Why is ARS favoured over other forms of funds transmission?
- Are NPOs aware of money laundering and terrorism financing risks posed by ARS and what sort of background check, if any, do NPOs make when considering using a provider?
- What evidence is there for ARS misuse connected with NPOs?
The non-profit sector has stressed its preference to retain at least some elements of self-regulation but there are disparate observations as to the sector’s adoption of practices recommended to prevent and detect incidents of misuse. An in-depth survey of risk and financial management practices, modelled on those undertaken in the United Kingdom and in Australia, would provide a more detailed stocktake of the actual uptake of preventative and mitigation strategies and how these have been used to detect cases of misuse versus regulatory exposure. Ideally, there would be a focus on charities, with the sample comparing larger, more established organisations with those smaller charities considered at greatest risk of misuse. A related study would evaluate how effective current sector and education programs’ have been in improving the sector’s understanding of risks and methods to minimise risk and encouraging adoption of appropriate strategies.