The potential abuse of the non-profit sector lies in the fact that
just as with any other mechanism for collecting, moving and distributing funds...the basic model of a [non-profit organisation] is exposed to the risk of terrorist exploitation [or other criminal behaviour] through either the creation of an entirely bogus entity or the abuse of a legitimate organisation (Home Office & HM Treasury 2007a: 10).
Typologies of misuse generally encapsulate two modes of involvement (Weber 2008). First, NPOs may be used to raise funds and/or serve as channels to transfer funds within and between jurisdictions. NPOs can also provide cover, or direct logistical support for the movement of other resources (such as arms) and operatives (FATF 2008a, 2004b; Weber 2008). In addition, NPOs may play a part in the diversion and control of funds to ‘recruit members and foster support’ for a terrorist organisation and their ideology (US Department of the Treasury 2006a: 2).
Categories of misuse
Misuse of funding
Funds may be collected in the name of an established and legitimate NPO but disbursed for terrorist rather than altruistic means (FATF 2008a, 2004b). If funds collected by a reputable NPO are disbursed overseas (which, given the level and range of recent humanitarian crises, is likely) they could be diverted en route or in situ by terrorist organisations or their agents. Equally, wittingly or otherwise, an NPO may be used as a money laundering vehicle or as a means of transporting cash from one jurisdiction to another. Where an NPO’s financial controls are weak, the risk of such abuse may be heightened.
Misuse of assets
The physical attributes of NPOs, such as vehicles and premises, might be exploited to transport people, money or weapons and/or store such items, respectively. Members of a terrorist organisation might gain unfettered access to a country or region on the false basis that they work for an NPO known to that country or region. Taken to extreme, it might be possible to purport to be operating on behalf of an NPO in a jurisdiction within which terrorist training is being orchestrated. The essential communication links created and/or utilised and/or maintained by NPOs might be exploited by terrorist groups for the purposes of establishing and maintaining their own contact points (Charity Commission 2009a).
Misuse of the non-profit organisation’s name and status
An NPO may provide financial support to an organisation that provides humanitarian aid but that organisation may also provide succour to terrorist activities (Charity Commission 2009a). Alternatively, an NPO may raise funds for a particular cause but have those funds dispensed or support provided through a terrorist group (FATF 2008a). This is the perception held of a number of a charities operating in Palestine, for example, and their association with Hamas.
Misuse of an non-profit organisation internally
Members of an NPO may abuse it from within by, for example, ‘skimming’ money off donations received and disbursing those funds for terrorist activities (Charity Commission 2009a). Equally, those members may allow the NPO’s premises to be used for holding meetings or production of propaganda material. Trustees of the NPO may engage in pro-terrorist speeches or activities and/or may invite speakers or utilise volunteer workers whose views are likely to lead to the promotion of extremist views.
Misuse of the notion of non-profit organisation/charitable status
It is possible that a terrorist organisation may elect to establish a sham NPO, but one which is registered and engages in the requisite regulatory requirements. In this context, donations can be legitimately requested, processed and disbursed. It could, if managed effectively, employ a range of legitimate staff who may be unaware of the true nature of the source of donations or the ultimate terrorist-linked destination of the accrued funds (Charity Commission 2009a). This type of misuse may be achieved in the following ways:
- NPOs may be used to raise funds for terrorist organisations and transfer funds and other resources across borders using NPOs with a known international remit for this purpose;
- NPOs could be defrauded at branch level or via aid workers with budgetary responsibility and/or control; and
- funds can be leveraged so as to facilitate the recruitment of members from whom support for terrorist organisations and their ideologies can be garnered (US Department of the Treasury 2006a).
Risk indicators for terrorist abuse
When the sheer diversity in terms of size, income and activity within the NPO sector is taken into account, it can be seen that the nature of the risk varies across the sector and changes not only with size but also with objective and function. Thus, for example, an NPO that transfers funds globally to support aid in conflict zones may be at equal risk of abuse as a domestic organisation with limited assets but formalised links with groups driven by an extremist ideology. The risk of an NPO falling victim to terrorist exploitation may be greater for groups that:
- are closely aligned to particular religious or cultural movements;
- move funds or other resources frequently to areas of conflict;
- provide funds to other overseas-based organisations rather than deliver the funds directly;
- deal in cash or alternative remittance systems where no formal banking infrastructure exists; and/or
- have extremely complicated financial records in which suspicious transactions are less easy to identify (Home Office & HM Treasury 2007a).
An NPO with one or more of these characteristics does not predetermine involvement in money laundering or terrorist funding but rather increases the risk of abuse compared with an NPO not defined by such characteristics.
Evidence for misuse
The designation of NPOs as a possible source and conduit for money laundering or terrorism funding correspondingly fostered a number of government or sector-led reviews to ascertain overall risk to the sector. While the risk of an NPO falling victim to terrorist exploitation was deemed to be relatively low, at least in the United Kingdom, Canada and New Zealand (Charities Commission 2010a; Charity Commission 2009a; CRA 2010; Home Office & HM Treasury 2007b), the nature or components of the existing regulatory system and financial management practices were seen as contributing to the potential exploitation of the sector by terrorist and other criminal elements. The regulation of the non-profit sector and changes made to regulation to offset risk of fraud, money laundering and diversion of funds to terrorism, will be discussed in the next section.
A UK survey of risk management within charities, in the context of the economic downturn, noted that in terms of a number of key risk management components, the charitable sector was opening itself up to potential abuse (PKF and the Charity Finance Directors’ Group 2009). This decline in the application of risk management standards was arguably exacerbated by a lack of knowledge of the external (including terrorist financing) environment (noted by 55% of respondents), a lack of rigour in the risk management process (47%) and a failure in risk mitigation (45%). The absence of even the basics of financial management—the development of fraud prevention and whistleblowing policies, execution of internal controls and regular monitoring—left many charities unnecessarily vulnerable to an increased threat of misuse (see Table 1). It was argued that the recipients of funds could misuse them if appropriate due diligence checks had been carried out ineffectively, or not at all, by the charity upon those recipients (PKF & the Charity Finance Directors’ Group 2009).
|No risk policy||30|
|No risk register showing controls||20|
|No business continuity plan||46|
|Do not test operation of their internal controls||51|
|Do not have a fraud policy||57|
|Do not have a whistleblowing policy||41|
Note: 466 charities were surveyed
Source: PKF & the Charity Finance Directors’ Group 2009
Another UK-based report, by the Charity Commission (2009b) of key themes that emerged during the course of compliance work, revealed evidence of abuse of charities, particularly in two areas where the potential for terrorist abuse exists. In terms of financial mismanagement, poor financial management and reporting were deemed to be significant problems as were a lack of financial controls, inadequate accounting and record keeping, and a failure to submit accounts. Fraud, theft and significant loss of funding were deemed to be common features of regulatory investigations undertaken (Charity Commission 2009b). Equally, in terms of trustees, cases were noted where individuals were not legally entitled to act as a trustee, or where there was inadequate management and oversight by trustees of the charities with which they were involved. There was also a failure in the performance of both individual trustees and of trustee boards to ensure that effective governance and proper control mechanisms were in place.
Inconsistent results concerning the abuse of charities arose from a 2008 OECD survey of charities in 19 (mostly European) countries (see Table 2). Abuse in this report referred to instances of tax fraud that were perpetrated by taxpayers, donors, or third parties; the latter cases involved persons or entities that had fraudulently posed as a charitable organisation or preparers of tax returns who had engaged in falsifying tax return statements. The abuse that was detected was considered to be organised rather than improvised and where the economic cost or level of tax evasion or money laundering could be estimated, the impact was described as substantial (OECD 2008).
|Argentina||No detected suspicious money laundering transactions involving charities|
|Austria||Since the scope of tax reducing donations is very restricted by Austrian tax law, no experiences of systematic tax evasion and money laundering have been gained yet|
|Belgium||Tax audits sometimes uncover instances of abuse. These cases mainly involved the issuance of tax receipts in no admissible situations or for funds that were not donations. A few registered organisations were the subject of legal investigations|
|Canada||Detected instances of tax evasion, tax crimes and money laundering involving charities|
|Chile||No relevant instances of tax evasion, tax crimes or money laundering involving the abuse of charitable contributions|
|Czech Republic||Regarding money laundering, around three to five suspicious transactions concerning subjects that come from the non-profit sector are identified by the Czech FIU (Financial Analytical Unit of the Ministry of Finance of the Czech Republic) yearly. No specific statistics on charities and tax evasion were available|
|Denmark||Only one case—but the charitable entity was acquitted in court|
|France||No cases of money laundering, tax evasion or tax crimes have been detected among NPOs through monitoring operations by the Direction Nationale des Enquêtes Fiscales [National tax investigations directorate]|
|Ireland||Instances of tax evasion/avoidance have occurred periodically in an ad hoc way. Occasionally, an audit/review has discovered an interpretation of the rules of the scheme that differed somewhat to the revenue‘s view and the terms and perhaps the conditions of the tax exemption have not been strictly adhered to. This activity would not constitute a crime or money laundering|
|Italy||Some instances of tax evasion have been identified involving non-commercial entities and ONLUS (Organizzazione Non Lucrativa di Utilita’ Sociale )|
|Netherlands||Only one case has been detected in which a charity was involved in tax crimes; however, the investigation was stopped. Another case was detected from a tax audit which revealed that employees and directors took money from the charity for personal use. Overall, not a lot of abuse of charities has been discovered|
|Norway||No indications of tax fraud related to the deduction of contributions to charities. The system has, in some cases, revealed crimes related to charities|
|Portugal||No situations of tax evasion or money laundering in connection with non-profit entities have been identified. Foundations may, on occasion, be used for assets acquisition or exempted commercial operations without respect to the underlying conditions, for example, the obligation to allocate part of the company‘s revenue to social aims|
|Spain||Certain people, related to charities, have accumulated great amounts of money that have been sent to tax haven territories. An investigation is looking to find the source of that money|
|Sweden||The Swedish Tax Agency has identified tax evasion and money laundering involving NPOs of different kinds. There are no specific suspicions of tax offences or money laundering in the NPOs taking care of charity donations. There are frauds, for example cheating the donors by stealing the donations, but there are very seldom tax implications|
|Turkey||MASAK (Financial Crimes Investigation Board) has not identified any money laundering offences involving charities in Turkey|
|United Kingdom||The UK tax authorities have identified instances of tax evasion and tax crimes involving charities. There is no firm evidence of money laundering although it is suspected|
|United States||The United States has identified instances of tax evasion, tax crimes and money laundering involving charities|
Source: OECD 2008
Australia has not conducted a similar examination of financial management in the non-profit sector, other than to produce guidelines that include best-practice approaches to mitigating risk of abuse (see Regulation of the non-profit sector). A 2010 survey of 291 NPOs on organisational risk management practices, however, found that 41 percent of respondents did not have a documented risk management policy, or were not aware if one existed for their organisation (PPB 2010). When assessing risk, 58 percent of respondents stated that their organisation factored in risk related to fraud and 46 percent considered the financial literacy of its staff.
Also for consideration is the level of adoption of fraud prevention and whistleblowing policies by Australian NPOs. Effective fraud prevention strategies, as prescribed in the Fraud and Corruption Control standards (AS8001–2008) devised by Standards Australia as part of its Corporate Governance Standards Set, are dependent on the implementation of policies and practices that incorporate:
- regular, comprehensive assessment of fraud risks to the entity in question;
- development of a fraud management plan that describes processes of identification, analysis, evaluation, treatment, implementation, communication, monitoring and reporting;
- fraud awareness and prevention training;
- establishment of clear reporting policies and procedures; and
- instigation of whistleblowing policies and other means to protect staff who report alleged incidents of fraud.
Fraud prevention policies are commonly applied in the public and private sector but less so among NPOs. A 2010 survey of 272 Australia NPOs found that 29 percent had implemented a fraud control policy, 13 percent a fraud control plan and 26 percent had undertaken fraud risk assessments (BDO Chartered Accountants and Advisors 2010). Similarly, just 40 percent of 1,123 UK charities surveyed as part of a study on fraud in the UK charitable sector reported having implemented one or more fraud prevention policies or practices (Fraud Advisory Panel 2009; the list included anti-fraud policy, anti-money laundering policy, whistleblowing policy, fidelity or crime protection insurance fraud awareness training programs, fraud response plan and a risk register). Those charities that were more likely to have some form of fraud prevention procedure in place were larger organisations and those that had experienced fraud in the past.
Whistleblowing policies are even less commonly taken up. Ideally, whistleblowing policies should aim not just to protect the identity of individuals who disclose information about perceived wrongdoings and to protect them from retribution but prescribe disclosure regimens which enable ‘thorough, timely and independent investigation of concerns and have adequate enforcement and follow-up’ (Transparency International 2009: np). Several jurisdictions in Australia have enacted stand-alone whistleblowing legislation, although these laws primarily provide protection for the public sector; private sector organisations have needed to develop their own ‘in-house’ protocols. It has been estimated that just under half of public and private sector agencies in Australia have implemented whistleblower policies or have established whistleblower services. Among NPOs, just 13 percent reported having a whistleblower policy and three percent a whistleblower service (BDO Chartered Accountants and Advisors 2010). This compares with the finding from the same survey that almost a fifth (18%) of fraud discoveries came from an employee tip-off and another 17 percent from tip-offs from other sources, including volunteers (5%) and anonymous tips (5%).
The number of available typologies regarding the criminal misuse of NPOs is relatively small but with a few exceptions, exclusively involved charities that had either raised or concealed the transfer of funds to support terrorist activities (APG 2009, 2008, 2005, 2004; AUSTRAC 2008b; FATF 2008a, 2004b, 2003b; see Table 3). Gurulé (2008) has suggested a generalised modus operandi that has been adopted by US-based (Islamic) charities found to have been siphoning funds to support terrorism, that is, the entity:
- incorporates under state law;
- applies for tax-exempt status as a charity or NPO;
- fundraises through personal correspondence, newsletters and via the organisation’s website;
- opens domestic bank account(s) into which proceeds and donations are deposited; and
- transfers funds to overseas branches, diverting some (or all) of these funds for terrorist activities.
|Exploitation of a ‘legitimate’ charity|
|Individual A attempted to deposit large amounts of cash into the account of a charity, with a direction that the cash be forwarded to a notary as an advance for purchasing real estate. An examination of financial transactions associated with the account revealed that payments into the account comprised both multiple cash deposits (which were assumed to be donations) and transfer of funds from Individual A’s personal account. Individual A’s personal account had also received multiple cash deposits which authorities determined to be donations from private individuals. Cash debited from the account was transferred to the charity or sent to Individual B who was based in another country. The investigation concluded that Individual A had links with persons (including Individual B) known to be associated with terrorist activity and that the charity had been used as a front to raise and transfer funds to Individual A’s associates|
|Establishment of a sham charity|
|An NPO was suspected of collating and distributing financial resources for a terrorist group based in another country. Over the course of five years, the NPO was found to have organised a substantial number of electronic funds transfers to overseas-based persons and entities, including another NPO thought to be a front for a terrorist organisation. During the same period, large sums of cash were deposited into, and multiple credits made to, the NPO’s accounts. The source of these funds was unknown, as was the identity of the remitter for the credits. The deposit of cash into the NPO’s accounts was frequently followed by the purchase of bank drafts or the transfer of funds overseas|
|Charity embedded in terrorist finance laundering network—1|
|Credit institutions generated suspicious transaction reports following the discovery of a discrepancy between the stated objectives of a charity (which had a poor compliance record for financial reporting) and their expenditure statements. Funds collated by the charity were found to have been transferred to a number of fictitious or shell companies before being withdrawn as cash for delivery to armed militants|
|Charity embedded in terrorist finance laundering network—2|
|A ‘small’ company was found to have received ‘significant’ number of cash deposits from a number of charities (purportedly for consultancy services rendered) and two separate individuals, both of whom were resident in regions where militant activity was entrenched. One of the two individuals received amounts of cash from an unknown source(s) that were below the reporting threshold before transferring accumulated funds in bulk to the company. The funds collected in the company’s account were then being transferred to a charity operating in the North Caucusus. Some of the cash was distributed to apparently legitimate charities working in the North Caucusus but other funds were directly transferred to a ‘welfare unit’ that was part of a recognised militant group. The latter was subsequently shut down by authorities|
|Use of charity to facilitate tax evasion|
|A family, who operated a number of successful businesses that were being used for criminal purposes, founded a charity with the purported objective of providing for members of the religious community the family were part of. The charity was registered with the Charity Commission and provided annual statement accounts to the regulator showing receipts of less than £10,000. Intelligence revealed that the family were using the charity to launder the proceeds of their tax evasion, which was then being used to fund their lifestyles. More than £2.5m was found in the bank accounts of the charity and family members acting as the charity’s trustees. The scheme was managed by the family operating multiple cash tills in each of the businesses but only declaring the income from one. Complicit family members were charged with cheating the public revenue with a confiscation order of around £5m plus £50,000 in costs|
Source: FATF 2008a; FINTRAC 2009; OECD 2008
In countries where at least some regulation of the non-profit sector exists, corrupted NPOs often gained charitable or tax exempt status and registered the entity with the appropriate authority. Misuse came in the form of exploitation of legitimate charities, where funds raised for charitable purposes were diverted to individuals or groups associated with terrorism, or more commonly, in the establishment of sham charities (APG 2009, 2008, 2005, 2004; AUSTRAC 2008b; FATF 2008a, 2004b, 2003b). In a number of cases, the NPO collected funds that were disbursed with the intention of providing humanitarian or welfare relief, but a percentage was knowingly diverted to finance militant groups.
Many of the implicated charities formed part of a complex financing network, involving the movement of funds between multiple accounts held by charities, other NPOs, companies (both legitimate and fictitious) and individuals (APG 2009, 2008, 2005, 2004; AUSTRAC 2008b; FATF 2008a, 2004b, 2003b). Multiple conduits were used in the country the funds were first raised in, and to transfer funds across different jurisdictions, before eventually being transmitted to the intended recipient(s). In such cases, funds were first deposited into the bank accounts of charities, or of individuals associated with the charity, before being transferred using cash deposits, wire transfers and remittance schemes. The deposit of large amounts of cash and/or the frequency of these deposits often served as flags from which financial institutions or regulators identified potential criminal behaviour (FATF 2008a, 2004b, 2003b).
AUSTRAC (2010a: 8) lists ‘financial contributions through formal charitable donations’ as one of the three most common methods by which terrorism funds are raised in Australia. There are few published examples, however, of the misuse of Australian NPOs for this purpose, or in connection with money laundering activities, precluding any comment on trends in misuse. Two cases reported by AUSTRAC are briefly described in Table 4.
|Case study 1|
|A large number of international fund transfer instructions were being issued to various overseas-based businesses alleged to be acting as fronts for an ‘identified’ terrorist organisation. It was determined that most of these funds were being raised from private, charitable donations and cash generated from legitimate businesses (eg groceries, restaurants and other hospitality establishments). The business-generated funds were funnelled to the ‘charity’ via real estate investments, bank deposits and person-to-person transfers|
|Direct debit was used to transfer the ‘charitable funds’ into a central bank account (which was being supplemented by funds via cash cheques and credit cards). These funds were then transferred using wire transfers to international bank accounts held by the front companies and distributed to different accounts within Australia using bank-to-bank transfers. Many of the wire transfers were for amounts under the $10,000 reporting threshold|
|Case study 2|
|A church fund was used to launder assets as part of a scheme to defraud a private company. The money originated from a company in which one of the complicit parties was employed and who held responsibility for the management of the company’s financial affairs. The funds were transferred from the company’s accounts through a series of private and third-party accounts; some of the funds were transferred internationally before being returned, via wire transfer, into a trust account held by the second complicit party. Around $350,000 was drawn from the trust account and transferred to a church fund. At the time of detection, the second complicit party was planning to move the church fund monies to overseas-based accounts|
Source: AUSTRAC 2010a, 2008a
It was reported in the 2010 typology report from the Asia-Pacific Group on Money Laundering that the most ‘significant’ cases of non-profit abuse for terrorism financing detected in Australia involved the collection of donations, often following a visit by an overseas speaker that was organised by local leaders (APG 2010). In these cases, the funds raised were wire transferred to overseas accounts but usually over a period of time in amounts of less than $10,000. These funds were generally sent to third parties who were suspected of having a connection with a terrorist organisation.
Some reports of NPO misuse have arisen in the Australian media. At least three NPOs have been identified by the media as having alleged links with known terrorist organisations (‘Claim money from Aust sent to organisations linked to terrorism’ The 7.30 Report 24 June 2003; Kerbaj 2008a, 2008b, 2007; Welch 2008). One charity was linked with both KOMPAK (an Indonesian charity thought to be associated with Jemaah Islamiyah) and Interpal, a proscribed organisation in Australia and the United States (see below for UK investigation of Interpal). The charity was reported to have raised $10,000 for KOMPAK in 2000 (to provide for an earthquake appeal) but stated that only half of that money was actually sent because KOMPAK had not delivered a report detailing how the first instalment of funds had been used (‘Claim money from Aust sent to organisations linked to terrorism’ The 7.30 Report 24 June 2003). In 2008, the same charity became the subject of another investigation, from the Australian Council for International Development (ACFID) and the NSW Office for Liquor, Gambling and Racing, after it was discovered it had advertised on its website an Interpal fundraising appeal (Kerbaj 2008a). Its offices were raided by the Australian Federal Police and NSW Police in July 2008 and computer files and financial records were seized (Kerbaj 2008b). An Australian Federal Police investigation was also launched against another Australian NPO when it was found unable to account for some of the $70,000 it had raised with other charities to support victims of the Israeli-Hezbollah war in Lebanon (Welch 2008). There is no publicly available information regarding the outcome for either of these NPOs, although the retention of the former on ACFID’s list of current members (who are signatories to their code of conduct) suggests no further action was needed or taken.
Aruran Vinayagamoorthy, Sivarajah Yathavan and Armugan Rajeevan
In December 2009, Aruran Vinayagamoorthy, Sivarajah Yathavan and Arumugan Rajeevan pleaded guilty to offences under the Charter of the United Nations Act 1945 (Cth) for making assets (either directly or indirectly) available to an entity (the LTTE) proscribed for the purposes of that Act. It was the prosecution’s case that the defendants, as members of the Tamil Coordinating Committee, had played a role in the collection and transfer of $1,030,259 in donations to the LTTE between the 13 December 2002 and 12 October 2004. Mr Vinayagamoorthy had also been indicted for making an estimated $97,000 worth of electronic components available to the LTTE over a period of about two years.
At sentencing, Justice Coghlan noted that it was more than probable the defendants were aware that the LTTE not only had been declared a terrorist organisation but also that it had been formally designated as such in other countries. He stated that the ‘complex structuring...used to transmit (the) funds’ implied the defendants understood the LTTE to be a proscribed entity (Transcript of proceedings, R v Vinayagamoorthy & Ors, Supreme Court of Victoria, Coghlan J, 31 Mar 2010: 13). While it was not possible to say precisely how much money was eventually made available to the LTTE, Justice Coghlan considered that they were large amounts (no less than $700,000). However, the court accepted that the defendants were motivated partly by a desire to assist the Tamil community and the funds were ‘not purposely (collected) to assist terrorist activity (Transcript of proceedings, R v Vinayagamoorthy & Ors, Supreme Court of Victoria, Coghlan J, 31 Mar 2010: 31).
Yathavan and Rajeevan were each sentenced to a term of imprisonment of one year, but released on three year good behaviour bonds. Vinayagamoorthy was sentenced to an effective term of two years, but released on a four year good behaviour bond (R v Vinayagamoorthy & Ors  VSC 148, 31 March 2010).
The Goldberg case differs from all but one of the cases presented in this section in that it did not involve an alleged misuse of an NPO to support terrorism. Instead, it represents how a fictitious charity was nominated to enable money to be laundered out of Australia. Between 1990 and 1997, Nachum Goldberg and members of his immediate family operated a money laundering scheme through which at least $48m was transferred from Australia to Israel. The scheme centred on the use of an internal bank management account that was opened in the name of United Charity, to give the appearance the deposited money was being used for genuine charitable purposes (CDPP 2001). The charity did not legally exist nor had it been registered as either a charity or company. Funds from the account were transferred to four banks in Jerusalem and Tel Aviv, one of which was managed by Goldberg’s brother.
The money that was being laundered was the cash proceeds from Australian business activity that had not been disclosed to the ATO (CDPP 2001). The original manifestation of the scheme simply involved Goldberg and his family making regular cash deposits into the account. Many of these deposits consisted of considerable sums of money—up to 154 deposits were of at least $100,000 and 12 deposits of $200,000 (CDPP 2001). The scheme subsequently evolved into using ‘bogus’ cheques, whereby complicit businessmen wrote cheques for Jewish ‘charities’ that were then purchased for cash. The enterprise allowed the businessmen to claim a tax deduction on what was perceived to be a charitable donation and Goldberg to bolster the appearance the account was being used to hold and transfer funds for charitable relief (DPP (Cth) v Goldberg  VCSA 107; (2001) 184 ALR 387).
One of the primary factors that assisted Goldberg from initially escaping suspicion was the type of account (an internal bank management account) he used to transfer the money. This type of account would have been unlikely to attract official scrutiny from regulators, despite the vast amounts of cash that were deposited each week, as they are generally used for normal inter- or intra-bank commercial transactions and the names of account holders are not listed with AUSTRAC (DPP (Cth) v Goldberg  VCSA 107; (2001) 184 ALR 387). According to one of the appeal judges, the use of such a bank account was ‘unlikely to have been unintended’ and suggested that Goldberg had extensive knowledge of bank procedures, some degree of cooperation from within the bank and a level of comprehension of AUSTRAC processes and operations (Transcript of proceedings, DPP (Cth) v Goldberg, Supreme Court of Victoria—Court of Appeal, Vincent JA, 27 Jul 2001: 20). The laundering was only detected in 1995 with the appointment of a new manager at the branch who removed the United Charity’s manager account status. This opened the account to AUSTRAC scrutiny, who for the first time became aware of the large number of transactions associated with the account and began investigations.
Goldberg, his wife and one of his sons pleaded guilty on 14 March 2000 to one count of conspiring to defraud the Commonwealth (between 1 January 1990 and 14 September 1995), contrary to s 86A of the Crimes Act 1914 (Cth) and one count of conspiring to defraud the Commonwealth (between 15 September 1995 and 19 June 1997), contrary to s 86 of the same Act. His other son pleaded guilty to the first count. As the principal actor in the operation, Goldberg was originally sentenced in June 2000 to an effective term of five years imprisonment and directed to, with the other defendants, to make reparations to the Commonwealth of $15m. The Commonwealth Director of Public Prosecutions (CDPP) appealed the leniency of the sentence to the Victorian Court of Criminal Appeal, which upheld the appeal and sentenced Goldberg to seven years imprisonment, with a non-parole period of four and a half years (DPP (C’th) v Goldberg  VCSA 107; (2001) 184 ALR 387).
Cases of UK-registered NPOs suspected of supporting terrorism have invariably involved investigation by the Charity Commission. Between 1 July 2008 and 30 June 2010 the Commission completed 18 inquiries into charities where there were allegations of links to terrorism (Charity Commission 2010a, 2009b). In most cases, the charity was examined because of the actions of a trustee, or the trustees’ suspected association with a known terrorist group. Where the outcome of the inquiry was documented, trustees of concern were removed and directions given regarding improvements to governance and financial reporting arrangements (Charity Commission 2010a, 2010b, 2010c, 2010d, 2009b, 2008a).
Significant action, such as freezing a charity’s assets, or de-registering or shutting down the charity, has been relatively uncommon. In 2006, for example, the charity Crescent Relief had its assets (temporarily) frozen after media reports suggested that persons involved in an alleged plot to bring down transatlantic passenger aircraft were connected to the charity (Kennedy, O’Shea & Devlin 2006). Another case involved the charity Iqra, which was registered with the Charity Commission in 2003 but had never submitted obligatory annual financial accounts (Jump 2009). Two of the charity’s former trustees—Mohammed Sidique Khan and Shehzad Tanweer—were involved in the 7 July London terrorist attacks. The Commission launched a statutory inquiry into the charity in May 2009, following the acquittal of another of the charity’s trustees of involvement in the July attacks. Both investigations appear to be continuing.
Interpal (or the Palestinians Relief and Development Fund) represents an interesting case as the UK‘s response to this charity has differed to that of the US (Sidel 2010). Interpal, designated by the US Government as a terrorist organisation, was investigated three times by the Charity Commission on suspicion of providing funds to Hamas for use in militant activities, but each inquiry found no evidence for the allegation. In its final inquiry, the Commission stated that Interpal had maintained appropriate audit trails in its delivery of financial aid but recommended the charity engage in improved due diligence and monitoring activities with respect to partner organisations (Charity Commission 2009b).
Tamils Rehabilitation Organisation
The Tamils Rehabilitation Organisation (TRO) was a London-based charity that was investigated by the Charity Commission for diverting funds, via TRO Sri Lanka, to LTTE. LTTE is a proscribed organisation under the UK’s Terrorism Act 2000. It was alleged that the TRO, and three other charities, were being used by the LTTE for fundraising and propaganda purposes and their registration as a charity in the United Kingdom had enabled them to move funds to Sri Lanka without paying tax (Charity Commission 2005).
When the TRO refused to comply with a request to provide financial information, the Commission enacted s 18 of the Charities Act 1993 to restrict transfer of funds out of the charities’ accounts. Documents seized from a raid on the TRO’s offices revealed inadequate financial controls, lack of operational transparency and evidence of mismanagement (Sidel 2010). Of particular concern was the finding that the TRO’s trustees could not account for the use of funds transferred to Sri Lanka, nor the origin of funds sent to the London agency from chapters based in the United States and Canada (Charity Commission 2005).
The Charity Commission removed the TRO’s trustees and brought in an interim manager to oversee the charity and assist in ascertaining whether the charity could still fulfil its objective of providing charitable relief and observe its legal obligations (Charity Commission 2005). Evidence that TRO Sri Lanka had mediated with LTTE regarding the distribution of funds suggested it could not and a new charity (the Tamil Support Foundation) was formed in its place to absorb the remaining TRO-held funds. In the end, the funds were sent to the Indian Ocean tsunami appeal, and TRO was subsequently deregistered and ceased to exist as an operating entity.
North London Central Mosque
The case involving the North London Central Mosque (or Finsbury Park Mosque) departs from other examples of charity misuse in that the ensuing investigation(s) were not initiated because of evidence for misappropriation of funds (collected by the mosque’s zakat committee) but due to public statements, considered to be of ‘an extreme and political’ nature (Charity Commission 2003, in Sidel 2010: 166), made by the mosque’s imam, Abu Hamza. The inference was that the mosque’s trustees, of which Hamza was one, were fomenting terrorist sympathies and encouraging terrorist engagement (Sidel 2010).
In April 2002, the Charity Commission, which can act if it considers a charity is being used for political purposes, stipulated that Hamza be suspended from his role as one of the mosque’s trustees. Following Hamza’s refusal to relinquish the position, the Commission acted to freeze all accounts linked to Hamza, closed down certain activities run by the mosque, and in February 2003, Hamza was permanently excluded from all positions he had held at the mosque (Dodd 2003). A new board of trustees was also established to remove any individuals still sympathetic to Hamza.
The largest number, and arguably the more high-profile cases of NPO exploitation by terrorist groups, come from the United States. In its 2006 update of the anti-terrorist financing guidelines, the Department of Treasury stated that the charities and individuals so far designated on the Specially Designated Nationals (SDN) list represented
fifteen percent of all US-designated terrorist supporters or financiers, indicating the primary importance of charities as a critical means of support for terrorist organizations and activities (US Department of the Treasury 2006a: 15).
The SDN List classifies prescribed organisations and individuals that US citizens are prohibited from dealing with (see Regulation of the non-profit sector).
The US legal and policy response to terrorism financing has ‘favored a prosecution-driven approach, often based on strict or negligence liability as opposed to specific intent’ (Sidel 2010: 185). Between November 2001 and March 2008, there were 76 cases where action was taken against individuals associated with charities and 18 cases against the charity (The Center on Law and Security 2008). Of these, 26 involved charges in relation to one or more of the four terrorism statutes, including 17 USC 2339A (Material Support to Terrorists), 18 USC 2339B (Material Support to a Terrorist Organization) and 50 USC 1705 (Financial Support to a Foreign Terrorist Organization). The majority of cases prosecuted or currently being heard in the United States involve(d) al Qaeda- or Hamas-related charitable fundraising.
Benevolence International Foundation
The Benevolence International Foundation USA (BIF-USA) was an Illinois-based tax-exempt NPO that conducted humanitarian relief projects in countries and regions such as Bosnia, Pakistan, Central Asia and the Caucusus. The US office formed part of a trio of incorporated entities— the other two were based in Canada and Bosnia—which collectively oversaw a network of branch offices. According to Internal Revenue Service (IRS) tax returns, the charity had raised in excess of US$15m between 1995 and 2000, although the Federal Bureau of Investigation estimated its takings were much higher, averaging US$40,000–60,000 dollars a week (Roth, Greenberg & Wille 2004).
Enaam Arnaout, the executive officer of BIF-USA, was considered by the US Government as having jihadist sympathies and connections with Osama bin Laden. Raids on BIF-USA’s Bosnian and US offices found copies of correspondence between Arnaout and bin Laden which, along with intelligence indicating that BIF-USA had undertaken financial transactions for al Qaeda, was used as substantiation to freeze BIF-USA’s accounts (in December 2001). The charity was designated in November 2002 (Roth, Greenberg & Wille 2004). Enaam Arnaout was subsequently charged with racketeering, conspiracy to provide and actual provision of material support to terrorists, money laundering and wire and mail fraud. In August 2003, Arnaout pleaded guilty to fraudulently obtaining charitable donations and using them to provide financial assistance to individuals engaged in violence and was sentenced to 11 years in federal prison.
Global Relief Foundation
The Global Relief Foundation (GRF) also operated as a tax-exempt NPO in Illinois. Its mission was to provide humanitarian and charitable relief to Muslim peoples living in conflict zones. The GRF was equally successful in raising considerable sums of money (around US$5m in 1991) through donations, of which a significant percentage (up to 90%) was sent overseas (Roth, Greenberg & Wille 2004).
The US Government long believed the GRF was affiliated with terrorism but were unable to establish the ultimate destination of transferred funds. However, intelligence revealed that the GRF had provided and received funding from individuals associated with al Qaeda, received funds from another designated charity, the Holy Land Foundation for Relief and Development (HLF; see below), distributed material that championed ‘martyrdom through jihad’ and requested donations to supply the mujahedeen with ammunition, food and transport (Roth, Greenberg & Wille 2004; US Department of the Treasury 2002). GRF’s assets were frozen in December 2001 and it was designated by the Department of Treasury in October 2002.
Unlike the two previous cases, no criminal charges were ever filed against GRF or its associates. Rabih Haddad, the chairman of the GRF, was arrested the same day GRF’s assets were frozen and after 18 months in detention, was deported to his birth country of Lebanon for a visa irregularity (Swarns 2003). Haddad had applied for political asylum in the United States the previous year but was found ineligible due to being found a risk to national security (Comstock 2002).
Holy Land Foundation for Relief and Development
Founded in California in 1989 before moving its offices to Texas, HLF was the largest Muslim charity in the United States, established to provide humanitarian assistance to Palestinians living in Gaza and the West Bank. HLF was shut down, had its assets frozen and designated an SDN in December 2001 after it was alleged that the charity provided financial support to Hamas through the transfer of funds to HLF offices in the West Bank and Gaza and zakat committees controlled by Hamas (US Department of the Treasury 2001).
HLF and its officers—Shukri Abu Baker (Secretary and Chief Executive Officer), Mohammed El-Mezain (Director of Endowments), Ghassan Elashi (Chairman of the Board), Haitham Maghawri (Executive Director), Akram Mishal (Projects and Grants Director), Mufid Abdulqater (fundraiser) and Abdulraham Odeh (HLF New Jersey representative)—were first indicted in July 2004, accused of funnelling US$12.4m to individuals and groups linked to Hamas (US Department of Justice 2004). It was alleged that some of this money was used by Hamas to support suicide bombers and their families. Charges listed in the indictment included money laundering and conspiracy to provide and actual provision of material support to a foreign terrorist organisation. The jury in the first trial were unable to reach a unanimous decision on most counts against the accused and the judge declared a mistrial.
In the subsequent trial, however, a federal jury convicted HLF and five of the defendants of all conspiracy charges. HLF and two of its founders (Shukri Abu Baker and Ghassan Elashi) were additionally convicted on the substantive charges related to the provision of material support and resources to a foreign terrorist organisation, provision of funds, goods and services to an SDN, and money laundering (US Department of Justice 2008a). On 27 May 2009, the convicted received sentences ranging from 15 to 65 years imprisonment (US Department of Justice 2009).
Islamic American Relief Agency
The Islamic American Relief Agency (IARA) was the US-based branch of the Sudanese-founded Islamic Africa Relief Agency. IARA was incorporated in 1985 under Missouri law as a tax-exempt charity and sought donations from Muslim expatriates living in the United States to provide humanitarian relief and fund development projects. The charity was known to have raised between $1–3m each year between 1991 and 2003.
The IARA network was designated by the US Department of Treasury in October 2004 for providing direct financial support to Maktab Al-Khidamat (the precursor to al Qaeda) and Osama bin Laden, as well as to Hamas (US Department of the Treasury 2004). The US-branch of IARA tried twice to have it assets reinstated but the Federal Court and the US Court of Appeals both held that the charity’s claims were without merit and dismissed the case.
In January 2008, a federal grand jury returned a 42 count superseding indictment that charged IARA, five of its officers and associates, and a former US congressmen, with the illegal transfer of funds to Iraq, terrorist financing, money laundering, theft of federal funds and obstruction of federal tax laws (US Department of Justice 2008b). Among the charges, IARA and some of its officers—Mubarek Hamed (former director), Ali Mohamed Bagegni (former member of IARA’s board of directors), Ahmad Mustafa (former fund-raiser) and Khalid Al-Sudanee (regional director of Middle East office)—were alleged to have laundered funds in excess of US$1.4m to Iraq, in violation of the International Emergency Economic Powers Act (IEEA) and the Iraqi Sanctions Regulations. The funds, which were raised from donations to support individuals and organisations based in Iraq, were deposited in bank accounts in Jordan held by IARA.
Mubarek Hamed pleaded guilty in June 2010 to conspiracy to violate the IEEA (18 USC s 371), one count of violating the IEEA (50 USC ss 1701–1706) and one count of obstructing administration of internal revenue laws (Phillips 2010a). These counts related to Hamed illegally wiring funds, with the assistance of an SDN-listed person living in Jordan, of almost US$500,000 to IARA bank accounts in Jordan (Phillips 2010a). Hamed’s co-defendant Mustafa pleaded guilty in December 2009 to illegally transferring funds to Iraq in violation of IEEA (Whitworth 2009) and Bagegni pleaded guilty in April 2010 to conspiracy to violate the IEEA (Phillips 2010b).
Inadvertent support of terrorism through donation to charities
The US case of Boim v Holy Land Foundation for Relief and Development et al. 2008 considered whether persons or charities with a known or suspected association with a proscribed group can be found legally responsible for a criminal or terrorist act committed by this group. In this case, three US-based NPOs, which were known to have raised funds for Hamas, an SDN-listed group, were found liable for the death of David Boim, a US citizen who was killed in Israel by two alleged Hamas militants. In the leading judgement from the original finding, Judge Posner noted that
Hamas is...engaged not only in terrorism but also in providing health, educational and other social welfare services. The defendants...directed their support exclusively to those services (Transcript of proceedings, Boim v Holy Land Foundation for Relief and Development et al. 2008, US 7th Circuit Court of Appeals (Chicago), Posner R, 3 Dec 2008: 36).
However, he noted in addition that
...if you give money to an organization that you know to be engaged in terrorism, the fact that you earmark it for the organization’s non-terrorist activities does not get off the liability hook (Transcript of proceedings, Boim v Holy Land Foundation for Relief and Development et al. 2008, US 7th Circuit Court of Appeals (Chicago), Posner R, 3 December 2008: 36).
In a dissenting judgement, Judge Rovner noted that
the majority’s approach treats all financial support provided to a terrorist organization and its affiliates as support for terrorism, regardless of whether the money is given to the terrorist organization itself, to a charitable entity controlled by that organization, or to an intermediary organization, and regardless of what the money is actually used to do (Transcript of proceedings, Boim v Holy Land Foundation for Relief and Development et al. 2008, US 7th Circuit Court of Appeals (Chicago), Rover I, 3 Dec 2008: 60).
An en banc review had previously argued that the requirement to prove causation was relaxed in cases involving terrorist organisations. Liability, however, was reinstated with Judge Posner reiterating that irrespective of the defendant’s alleged charitable intentions, donating money to an entity that is known to commit terrorist act supposes that ‘one knows there is substantial probability that the organization engages in terrorism but one does not care’ (Transcript of proceedings, Boim v Holy Land Foundation for Relief and Development et al. 2008, US 7th Circuit Court of Appeals (Chicago), Posner R, 3 Dec 2008: 20).
The ruling in this case arguably renders it difficult to donate to an NPO’s humanitarian endeavours without fear of prosecution should that NPO also support the terrorist endeavours of the same organisation. To a degree, it would seem difficult in practice to make the crucial distinction in terms of funding decisions.
The typologies and case studies reproduced here show that known cases of non-profit exploitation mostly came in the form of:
- establishing a sham charity, often registered and acting according to regulatory requirements but primarily engaged in laundering or collecting funds for illicit or terrorist purposes; or
- administering an ostensibly legitimate charity that delivered funds to a sister organisation which provided humanitarian relief but also engaged in criminal or terrorist activities.
It was difficult to identify from the detail given in the available typologies and case studies the dominant method(s) by which the funds were transferred and to what extent the schemes depended on formal versus informal modes of funds transfer. It was clear, though, that most schemes had used a complex system of accounts held by different individuals or entities, and based in multiple jurisdictions, to funnel and hence obscure funds transactions.
The pattern, albeit based on a handful of cases, indicates that the abuse of NPOs is predominantly for the purpose of financing terrorism rather than for laundering funds. It is unclear whether this pattern reflects reality or political focus. What is evident from these case studies is that legitimate NPOs are apparently not the target of misuse. This is not to say that involuntary misuse does not occur since fraud, which is outside this scope’s report, is almost certainly being committed at times without the complicity of the organisation and is probably facilitated by inadequate financial oversight. However, in most detected cases of money laundering and terrorism financing, collusion has generally existed among persons controlling the NPO, who chose to create an organisation to suit their purposes rather than infiltrate and corrupt an existing entity.
Sector surveys have shown that NPOs need to do more to improve their financial management and controls, and to increase their uptake of risk management strategies. Without these in place, the risk of misuse is markedly greater. The non-profit sector has argued that there is no evidence for sustained money laundering/terrorism financing-related misuse having occurred because of a lack of financial oversight. The available evidence suggests this is so but its limited nature excludes any firmer inference.
With respect to terrorism financing, the greatest risk for legitimate charities appears to be what happens to funds once outside the organisation’s immediate administrative jurisdiction. Due diligence and similar measures are promoted as curtailing this risk but even among organisations that have the capacity to invest in such measures, circumstances sometimes mean these guards have to be dropped.