The substantial number and variation of organisations within the non-profit sector has necessitated or resulted in an historical and relatively high degree of self-regulation and, depending upon the jurisdiction concerned, with or without external oversight. Compared with for-profit entities who are obliged to produce financial reports compliant with international financial reporting standards, non-profits are exposed to ‘minimal’ regulation and ‘under-developed’ financial reporting requirements (Cordery & Baskerville 2007).
Nonetheless, there are already instances of recognised good practice in the regulation and monitoring of the non-profit sector in individual states. In more recent years, conventional regulatory supervision has been combined with a range of mitigation strategies developed specifically to cope with threats related to money laundering and terrorism financing. This ‘acceleration’ in the development of such tools is, according to Weber (2008: 24):
the most significant and far-reaching outcome of the discussion on the relationship between [non-profit] institutions, terrorism, and its financial networks...In the framework of the war on terrorism, the political need to regulate non-profit organizations reinforces whoever for a long time has stressed the lack of transparency and accountability of the sector.
This section first describes and contrasts the regulatory regimes for NPOs operating in Australia, the United Kingdom, the United States, Canada and New Zealand. All employ a mix of government and statutory oversight in conjunction with sector self-regulation. Charities tend to be the focus of regulatory control but scope varies between jurisdictions, as does the reporting requirements NPOs must comply with. The second part of the section summarises selected mitigation strategies developed for use by regulators and/or NPOs that aim to educate the sector on specific risks, recommend changes to governance and financial transparency procedures to minimise risk and provide regulators with guidelines in how to respond to suspicion of misuse.
Regulation in Australia
The current regulatory framework for the non-profit sector in Australia has been described as ‘unnecessarily complex, confused and costly’ (Productivity Commission 2010: 114), despite numerous reviews undertaken to examine options for streamlining the regime and legislative changes made to simplify processes. Central to this complexity are the different legal forms, reporting obligations, fundraising requirements and tax arrangements open to NPOs. These factors, combined with a lack of standardisation of laws across jurisdictions, have instituted a system that imposes a considerable compliance burden on NPOs without promoting the level of transparency and accountability that is important for a sector reliant on the confidence and trust of its stakeholders.
The majority of NPOs operating in Australia are unincorporated, in that they do not have a formal legal form that distinguishes them from their members (Productivity Commission 2010; see Table 5). NPOs that do have formal legal status are mostly associations incorporated under state and territory legislation or public companies limited by guarantee and registered under the Corporations Act 2001 (Cth). In addition to these are a smaller but diverse group of legally formalised entities, including cooperatives, charitable trusts, religious associations, Aboriginal corporations and organisations that have been established under Royal Charter or a special Act of Parliament (Productivity Commission 2010).
|Companies limited by guarantee||11,700|
|Incorporated associations (under state and territory legislation)||136,000|
|Incorporated by other methods||9,000|
Source: Adapted from Box 4.1, Productivity Commission 2010
Organisations that remain unincorporated are relieved of regulatory oversight, including the reporting requirements that come with incorporation. Incorporation, however, delivers benefits such as perpetual succession, a means to enter enforceable contracts and limited liability for members (ACG 2005; Productivity Commission 2010). Table 6 lists legislation relevant to incorporated entities, including co-operatives.
|Cth||Corporations Act 2001||Australian Securities and Investment Commission|
|Corporations (Aboriginal and Torres Strait Islander) Act 2006|
|NSW||Associations Incorporation Act 1984 No 143 a||Office of Fair Trading|
|Associations Incorporation Act 2009 a|
|Co-operatives Act 1992|
|Vic||Associations Incorporation Act 1981||Consumer Affairs Victoria|
|Co-operatives Act 1996|
|Qld||Associations Incorporation Act 1981 (as amended by the Associations Incorporation and Other Legislation Amendment Act 2007)||Office of Fair Trading|
|Cooperatives Act 1997|
|WA||Associations Incorporation Act 1987||Department of Commerce|
|Companies (Co-operative Act) 1943|
|Co-operative and Provident Societies Act 1903|
|SA||Associations Incorporation Act 1985||Office of Consumer and Business Affairs|
|Co-operatives Act 1997|
|Tas||Associations Incorporation Act 1964||Consumer Affairs and Fair Trading|
|Cooperatives Act 1999|
|ACT||Associations Incorporations Act 1991||Office of Regulatory Services|
|NT||Associations Act||Business Affairs and Agents Licensing (Department of Justice)|
a: The Associations Incorporation Act 2009 succeeded the Associations Incorporation Act 1984 in 2010
Organisations incorporated under state or territory law can only trade in that jurisdiction and thus, NPOs operating across state/territory borders must incorporate the organisation in every state they operate in. Apart from the inconvenience of having to register more than once are legislative inconsistencies around eligibility and disclosure requirements. This problem can be alleviated by migrating to a company limited by guarantee. However, incorporation under the Corporations Act 2001 (Cth) is accompanied by increased costs and greater administrative demands, and requires observance of laws that are not always applicable to the nature and undertakings of non-profit entities (ACG 2005; Productivity Commission 2010).
Some form of authority (usually in the form of a licence) is required in all states and territories, except the Northern Territory, if an NPO engages in the solicitation or receipt of money, goods or property for ‘charitable purposes’. Fundraising laws are prescribed in separate ‘charitable collection’ and ‘gaming’ legislation (see Table 7). The former regulates ‘conventional’ fundraising activities and the latter covers activities such as raffles, lotteries and bingo. What constitutes both a charitable purpose and fundraising differs between the jurisdictions, as do the rules prescribing who is eligible to conduct and participate in a fundraising appeal, how the fundraising should be carried out and the type of records that should be kept on how funds were received and allocated. NPOs must register as a charity before a fundraising authority can be issued.
|NSW||Charitable Fundraising Act 1991||Office of Liquor, Gaming and Racing|
|Lotteries and Art Unions Act 1901|
|Vic||Fundraising Appeals Act 1998||Consumer Affairs|
|Gambling Regulation Act 2003||Victorian Commission for Gambling Regulation|
|Qld||Collections Act 1966||Office of Fair Trading|
|Charitable and Non-Profit Gaming Act 1999||Office of Gaming Regulation|
|WA||Charitable Collections Act 1946||Department of Commerce|
|Gaming and Wagering Commission Act 1987||Office of Racing, Gaming and Liquor|
|SA||Collections for Charitable Purposes Act 1939
Collection for Charitable Purposes Act 1939—Code of Practice
|Office of Liquor and Gambling Commissioner|
|Lottery and Gaming Act 1936|
|Tas||Collections for Charities Act 2001||Consumer Affairs and Fair Trading|
|Gaming Control Act 1993||Tasmanian Gaming Commission|
|ACT||Charitable Collections Act 2003||Office of Regulatory Services|
|Lotteries Act 1964||ACT Gambling and Racing Commission|
|NT||Gaming Control Act||Racing, Gaming and Licensing Division, Department of Justice|
Fundraising authorities are granted by the relevant state and territory regulator and while application processes vary, they generally require information on the proposed beneficiary, the legal structure of the organisation, details of the registered auditor and the organisation’s financial details. Certain organisations are exempt from needing formal permission to fundraise and again, this varies between the states and territories. In New South Wales, for example, religious bodies are exempt, while in Tasmania incorporated associations do not need to obtain a licence to fundraise, unless they have been incorporated in another state. Victoria exempts NPOs that receive less than $10,000 gross from fundraising activities, do not get paid for conducting fundraising activities and/or use only unpaid volunteers.
NPOs are obligated to maintain and submit financial and other information depending on their legal structure, the stipulations associated with fundraising permissions and/or on receipt of acquittal of government funding or a government-funded service delivery contract. Among the frequently acknowledged problems with the existing regulatory regime is the absence of a ‘robust framework for reporting’ (ACG 2005: vi). Unincorporated associations do not need to disclose financial information, while incorporated associations and most entities engaged in fundraising often have multiple reporting requirements, with considerable duplication of effort. This is particularly valid for associations incorporated in different states.
Financial reporting requirements for incorporated associations and companies limited by guarantee
NPOs limited by guarantee are required, under the Corporations Act 2001 (Cth), to report to Australian Securities and Investment Commission (ASIC) their financial position and all transactions that occurred in the preceding 12 month period. Entities are to prepare and lodge with ASIC documents similar to that expected of public companies—a copy of the annual financial and director’s report, a balance sheet, income and expenditure (profit/loss) and cash flow statements, and accompanying notes to financial statements.
Associations incorporated under state and territory legislation are also required to submit mostly similar financial information to the state regulator (see Table 8). This requirement is waived in Western Australia unless the entity is directed to provide financial records by the Commissioner. Exemptions are available in South Australia for non-prescribed associations (ie associations with gross receipts less than $500,000) and in Tasmania for entities with total annual revenue, or total assets, of less than $40,000.
|Jurisdiction||Association type||Financial reporting and auditing requirement|
|Cth||All||Lodgement of directors’ report and declaration, balance sheet, profit and loss statement, cash flow statement, statement of changes in equity and notes to the financial statement|
|Audited by registered company auditor|
|NSW||All||Lodgement of annual financial statement including statements regarding income and expenditure, assets and liabilities, mortgages, charges and other securities affecting property, and the activities of trusts controlled by the entity|
|No auditing required|
|Vic||All||Lodgement of annual financial statement including statements regarding income and expenditure, assets and liabilities, mortgages, charges and other securities affecting property, and the activities of trusts controlled by the entity|
|Prescribed Incorporated Associations (ie associations with an annual gross revenue of more than $200,000 or with assets in excess of $500,000)||Auditing to be conducted by registered company auditor, member of the CPA or the ICAA or any other person approved by the Registrar|
|Non-prescribed Incorporated Association||No auditing required|
|Qld||All||Lodgement of annual financial statement including statements regarding income and expenditure, assets and liabilities, mortgages, charges and other securities affecting property|
|Level 1 association—current assets of more than $100,000 or total revenue of more than $100,000||Audited by certified accountant or auditor|
|Level 1 association—required to be audited under the Collections Act 1966 and Gaming Machine Act 1991||Audited by certified accountant or auditor, or person approved by Commissioner for Fair Trading|
|Level 2 association—current assets of between $20,000–100,000 and/or revenue between $20,000–100,000||Verified by certified accountant or auditor, or person approved by Commissioner for Fair Trading|
|Level 3 association—current assets of <$20,000 and revenue of <$20,000||Verified by President or Treasurer of entity|
|WA||All||No requirement to submit annual financial statement or have accounts audited unless directed by the Commissioner|
|SA||Prescribed associations (ie gross receipts in excess of $500,000 or such greater amount that is prescribed by regulation)|
Lodgement of annual periodic return with copy of accounts
Audited by a registered company auditor, firm of registered company auditors, member of the CPA or the ICAA, or person approved by the Commissioner
|Non-prescribed associations||No requirement to submit annual periodic return or have accounts audited|
|Tas||All (unless exempt)|
Lodgement of annual return including an income and expenditure statement, a report on account record keeping and a statement verifying the adequacy of the accounts to explain financial transactions and financial position
Audited by registered company auditor or person approved by the Commissioner
|Exempt if total annual revenue is less than $40,000, three-quarters of members voted against lodging an annual return, or total assets are less than $40,000 (not including ‘real property’)|
|ACT||All||Lodgement of annual financial statement including statements regarding income and expenditure, assets and liabilities, mortgages, charges and other securities affecting property|
|Association with revenue more than $500,000||Audited by registered company auditor|
|Association with gross income or gross assets of more than $150,000 or more than 1000 members or holding a liquor licence||Audited by member of the ICAA, NIA or CPA|
|Other||Audited (but not required to be an accountant)|
|NT||All||Lodgement of annual financial statement including statements regarding income and expenditure, assets and liabilities, mortgages, charges and other securities affecting property, and the activities of trusts controlled by the entity|
|Tier 1 association—gross annual receipts of less than $25,000 and gross assets of less than $50,000||Audited by non-associated lay person|
|Tier 2 association—gross annual receipts of between $25,000–250,000, gross assets of between $50,000–500,000 or holds a gaming machine licence||Audited by a person who is a member of an accountants body or who holds a prescribed qualification|
|Tier 3 association—gross annual receipts of more than $250,000, gross assets of more than $500,000||Audited by a person who holds a public practice certificate issued by an accounting body or a person approved by the Commissioner|
Note: CPA=Australian Society of Certified Practising Accountants, ICAA=Institute of Chartered Accountants in Australia, NIA=National Institute of Accountants
Source: Adapted from The Treasury 2007
The level of auditing scrutiny stipulated also varies between jurisdictions (see Table 8). Associations incorporated under NSW law are not required to have their accounts audited, nor do non-prescribed associations incorporated in Victoria and South Australia (see Table 8 for definition of prescribed and non-prescribed associations). Organisations in Queensland with total revenue or current assets of less than $100,000 only need their financial records verified—by an accountant for a Level 2 association (ie an association with current assets or revenue of between $20,000–100,000) and the President or Treasurer for a Level 3 association (ie an association with current assets or revenue of less than $20,000). By contrast, those with total revenue or current assets exceeding $100,000 (Level 1 association) must be audited by a certified accountant or auditor. In every other case, an incorporated non-profit association in Australia must arrange to have their accounts audited, although the persons permitted to undertake the auditing generally depends on the size of the entity. The greater the assets or revenue, the more professionally trained the scrutineer must be.
Financial reporting requirements under fundraising legislation
All NPOs that undertake fundraising or fundraising appeals in Queensland, Western Australia and South Australia must submit audited financial records to the state regulator (see Table 9). Audited reports are mandatory in the Australian Capital Territory only for NPOs overseeing annual collections in excess of $50,000 and all incorporated associations operating in New South Wales, although records only need to be lodged in the latter case if directed to do so or when applying or renewing for a fundraising licence. NPOs fundraising in Victoria or Tasmania are expected to maintain records but there is no legal obligation to formally lodge them.
|Jurisdiction||Association type||Financial reporting and auditing requirement|
|NSW||Incorporated association||Statements only need be lodged when applying for a fundraising licence, renewing the licence or if directed to submit accounts by the Director of the Office of Liquor, Gaming and Racing |
Audited accounts must be prepared
|Unincorporated association if income from fundraising appeal exceeds $20,000||Lodge annual return on proceeds received from fundraising appeals|
|Vic||All||Not required to lodge an annual return. Must keep records sufficient to enable a true and fair view of the income and expenditure relating to the appeal |
Records must be audited only if directed to do so by the Director of Consumer Affairs Victoria
|Qld||All||Lodge an audited statement of income and expenditure, balance sheet and annual return |
Audited by person registered as an auditor under the Corporations Act or member of CPA Australia who is entitled to use the letters ‘CPA’ or ‘FCPA’ or member of ICAA in Australia who is entitled to use the letters ‘CA’ or ‘FCA’ or member of the NIA who is entitled to use the letters ‘MNIA’, ‘FNIA’, ‘PNA’ or ‘FPNA’ or person who the Commissioner of the Office of Fair Trading considers has appropriate qualifications
|WA||All||Lodge an audited statement of income and expenditure and balance sheet |
Audited by a member of ATMA, CA, NIA or CPA
|SA||All||Lodge audited accounts and fundraising income and expenditure statement |
Audited by a registered company auditor, or a firm of registered company auditors; or a person who is a member of CPA or ICAA; or a person approved by the Corporate Affairs Commission to audit the accounts under the Associations Incorporation Act 1985
|ACT||Collections less than $50,000 in 12 month period||Report including ‘all the required information for each collection to which the licence relates’ |
Audited by a registered company auditor under the Corporations Act; or an auditor approved in writing by the chief executive
|Collections exceeding $50,000 in a 12 month period||Audited report, as above|
Note: CPA=Australian Society of Certified Practising Accountants, ICAA=Institute of Chartered Accountants in Australia, NIA=National Institute of Accountants, ATMA=Association of Taxation and Management Accountants
At least two jurisdictions—New South Wales and Western Australia—have developed best practice guidelines or codes of practice for public fundraising. These guidelines include recommendations around the provision of financial information regarding both format and detail to ensure accountability (NSW Department of Gaming and Racing 2002; WA Department of Commerce 2007).
NPOs may be eligible for a range of tax concessions from the Australian Government, including income tax, fringe benefit tax (FBT) and goods and services tax (GST), and deductible gift recipient (DGR) status. Eligibility for any of these concessions depends on the type of NPO, categorised by the ATO as:
- charities (ie public benevolent institutions, health promotion charities, charitable institutions and charitable funds);
- income tax exempt funds (ITEF); or
- other non-profit organisations (see Table 10 for ATO definitions).
|Category||Definition||Concessions eligible for|
|Charities||An entity that is also a trust fund or an institution, exists for the public benefit or the relief of poverty, its purposes are charitable within the legal sense of the term, it is non-profit and its sole purpose is charitable||See below|
|Public benevolent institution||An entity that is set up for needs that require benevolent relief, relieves those needs by directly providing services to people suffering them, is carried on for the public benefit, is non-profit, is an institution and has as its dominant purpose the provision of benevolent relief||All|
|Health promotion charity||A non-profit charitable institution whose principal activity is promoting the prevention or control of diseases in human beings||All|
|Charitable institution||An institution that is established and run solely to advance or promote a charitable purpose. It may be an organisation established by will or instrument of trust; it may also have the legal structure of an unincorporated association or a corporation||Income tax exemption |
|Charitable fund||A fund established under an instrument of trust or a will for a charitable purpose. Charitable funds mainly manage trust property and/or hold trust property to make distributions to other entities or people||Income tax exemption |
|ITEF||An income tax exempt fund is a non-charitable fund that is endorsed by the ATO to access income tax exemption. It applies to non-charitable funds established under a will or instrument of trust solely for the purpose of providing money, property or benefits to income tax exempt DGRs, or the establishment of DGRs||Income tax exemption |
|Other NPO||Other non-profit organisations are non-profit organisations that are not charities, or income tax exempt funds. They include sports clubs, community service groups and recreational clubs||Allc|
a: GST concessions for charities and gift deductible entities and NPOs
b: GST concession for gift deductible entities only
c: For certain types of NPOs only
Source: ATO 2007a
The ATO has had responsibility for determining charitable status but this role will be assumed by the soon-to-be-established ACNC (see next section).
Organisations seeking tax exemption/concession or DGR status do so on a voluntary basis. They must first register with the ATO and may need to obtain an ABN and place the organisation on the Australian Business Register as well. An approximate 190,000 non-profit organisations are registered for tax purposes with the ATO (ATO 2009).
NPOs designated either a charity or ITEF can gain an income tax exemption if they have an ABN and have received endorsement from the ATO to obtain that exemption (ATO 2007a). If an NPO is registered to pay income tax, endorsement reduces the amount of tax payable. NPOs that are not charities or ITEFs do not have to be endorsed to access a tax exemption; instead they need to self-assess their entitlement against a standard set of tests and rules (ATO 2007a).
Other tax concessions, such as GST and FBT concessions, are available for some NPOs and follow similar procedures of endorsement. Any NPO with an annual turnover of less than $100,000 does not need to register for the GST (unless they choose to do so) and those that do have to register can apply for a concession (ATO 2007a). FBT concessions include exemptions and rebates, but are restricted to a smaller group of NPOs. For example, only public benevolent institutions, health promotion charities and some categories of ‘other’ NPOs are eligible for an FBT exemption.
Entities engaged in fundraising may additionally apply for DGR status that entitles the organisation to receive income tax deductible gifts. Endorsement for DGR status is a different procedure to that approving access to a tax concession and is dependent on several factors including the objectives of the organisation, its legal and internal structure and its financial accountability. DGRs listed by name (ie listed in income tax law following an amendment to the law by parliament) do not require endorsement. Participation in the Overseas Aid Gift Deduction Scheme, which enables donations collected for overseas aid activities to be tax deductible, is also voluntary and dependent on AusAID accreditation of the organisation, as well as its verification by the Australian Government Department of Treasury and the Department of Foreign Affairs and Trade.
The ATO’s regulation of NPOs is conducted through the submission of annual tax returns and reviews of tax concessions and DGR entitlements. NPOs with an annual taxable income of $416 or less (or those with ITEF status) do not have to file an income tax return. Other taxes are reported using a personalised activity statement, which the ATO generates for individual organisations (ATO 2007a). Entitlements are examined each year as part of the ATO’s compliance program. The ATO’s 2010–11 compliance program will look at issues such as the ‘deliberate’ misuse of tax concessions, the undertaking of activities not consistent with endorsed exemptions and reviewing the stated charitable purpose of selected charities (ATO 2010). Around 613 NPOs were reviewed between 1 July 2006 and 30 June 2010 to verify if current entitlements to concessions should be continued. The reviews saw the revocation of 132 DGR and tax concession entitlements (ATO 2009, 2008, 2007b). In 2007–08, the ATO also undertook a self-review of 410 entities registered as a charity, of which 21 had their charitable status revoked. No information was provided on these cases.
In addition to the tax concessions available at the Commonwealth level are exemptions granted by state and territory governments with respect to land and payroll tax, and stamp duty. These exemptions too have to be endorsed. For cross-jurisdiction NPOs, this entails having to apply multiple times to gain the same type of exemption in different states.
To some extent, all Australian NPOs engage in self-regulation in that they rely on internal processes guided by material developed by peak bodies and relevant government agencies. Two peak bodies have been active in establishing codes of practice from which NPOs can ‘demonstrate to funders, stakeholders and the public that they are upholding the highest standard of practice’ (Productivity Commission 2010: 146). ACFID, the national representative body for non-government organisations engaged in international aid and development work, has developed a voluntary, self-regulatory code of conduct for non-government development organisations. The code contains provisions regarding organisational integrity, governance, communication with the public and finances (ACFID 2010, 2009). The code, which was amended in 2009, includes requirements that NPOs have procedures in place to ensure:
- funds and other resources will only be used for aid and development;
- funds and resources will be disbursed in accordance with laws relating to AML/CTF legislation;
- recipients are using funds and resources in accordance with the instructions provided by the NPO; and
- a minimal risk of misappropriation or improper use of funds and resources once they have been disbursed to a third party.
Signatories to the code are also expected to publish audited summary or full financial reports in their corporate publications. A Code of Conduct Committee monitors compliance with the code by examining annual reports, investigating complaints and overseeing investigation of inquiry into the practices of specified organisations.
The Fundraising Institute Australia (FIA) has produced a set of Principles and Standards of Fundraising Practice. The Principles are overarching codes that apply to all fundraisers relating to ethics, professional conduct, acceptance and refusal of donations, disclosure of information to donors and complaints processes (FIA 2007). The Standards address issues for specific fundraising activities, such as the Standard for Overseas Aid Fundraising Practice which lists measures to be taken to:
- check the credentials of overseas-based partners;
- organise the transfer of donations overseas; and
- manage and record finances.
Members of the FIA are obliged to abide by these standards but no overt compliance work is undertaken by the body.
Relationship with anti-money laundering/counter-terrorism financing laws
SR VIII advised countries to review laws and regulations relevant to the non-profit sector with the purpose of reducing any future opportunity or risk for terrorist or other criminal misuse. Unlike other recommendations, though, SR VIII refrained from endorsing any particular regulatory model for the sector; rather, it specified elements that comprise an effective regulatory response. However, in their 2005 mutual evaluation of Australia’s AML/CTF laws, FATF concluded Australia had not, despite numerous reviews, instituted any new measures to diminish potential exploitation of the sector (FATF 2005).
The AML/CTF Act compels ‘reporting entities’ that provide a ‘designated service’ to implement customer identification procedures, put in place AML/CTF programs, report to AUSTRAC annually regarding their compliance with the AML/CTF Act and undertake ongoing customer due diligence. Designated services, elected as part of the first tranche of AML/CTF reforms, are broadly categorised as financial services, bullion, gambling services and prescribed services. The second tranche of reforms will further capture professionals and business entities such as lawyers, accountants, real estate agents and trust and company service providers.
The majority of NPOs do not provide services prescribed as a designated service under the AML/CTF Act. However, AUSTRAC (2008a) has interpreted the possible applicability of AML/CTF laws to parts of the non-profit sector. This interpretation is based on AUSTRAC’s reading of non-profit activities and how these might be considered as falling within the AML/CTF Act’s definition of what constitutes a business, that is, ‘a venture or concern in trade or commerce, whether or not conducted on a regular, repetitive or continuous basis’ (s 5).
Limitations on information-sharing can restrict the content and value of intelligence and other forms of information that can be disseminated. This is evidently the case where central or key regulatory partners are restricted by legislative provisions and related legal tools blocking the provision of information to equally key regulatory entities, either within or outside its jurisdictional field. While an analysis of information-sharing arrangements and its impact on the transmission of information is outside the scope of this study, Australia has enacted protocols to improve the flow of information.
As Australia’s AML/CTF regulator, AUSTRAC has implemented financial transaction information-sharing arrangements (as prescribed in the AML/CTF Act) with an extensive group of Australian, state and territory agencies as well as established exchange instruments with almost 60 international financial intelligence units (AUSTRAC 2010b). Through these arrangements, AUSTRAC can undertake further checks related to suspicious behaviour and transaction reports or refer results to partner agencies and FIUs for further investigative action. In addition, AUSTRAC receives all reports of suspicious behaviour and transaction reports from reporting entities. To this end, AUSTRAC will be alerted to suspicious transactions undertaken by NPOs which use designated financial channels to transmit funds.
The information-sharing arrangements involving other contributory actors in the regulation of NPOs includes data matching programs maintained by the ATO and assistance agencies (as prescribed in the Data Matching Program (Assistance and Tax) Act 1990), although these would not be relevant to the non-profit sector and any information-sharing protocols observed by incorporated association and state/territory fundraising and gaming regulators.
Comparison with other non-profit regulatory regimes
Depending on the country of interest, formal regulation of the non-profit sector spans the virtually non-existent to regimes that, according to FATF specifications, are well adapted to minimising exploitation of at least the more vulnerable components (eg charities) of the sector. None, however, cover the whole of the sector and, like Australia, different levels of scrutiny are applied based on the legal form and activities of the organisation in question. Regulatory approaches adopted in the United Kingdom, the United States, Canada and New Zealand are described here to illustrate some of this variation and showcase regulatory models (or elements of these models) that have been suggested as improving regulatory oversight of the Australian non-profit sector.
The non-profit sector in the United Kingdom is dominated by charities, in both value and profile, and hence non-profit regulation in the UK centres on this type of NPO (FATF 2007). An independent charity regulator has been established for England and Wales (the Charity Commission) and Scotland (the Office of the Scottish Charities Regulator) and is in the process of being established in Northern Ireland (the Charity Commission for Northern Ireland).
England and Wales
The Charity Commission registers and regulates charities operating in England and Wales. The Commission is governed by the Charities Act 2006 and its key role is to facilitate and achieve compliance on the part of charities with the provisions of that legislation. Charities with an annual income of over £5,000 are required to register with the Charity Commission; those with an annual income of £5,000 or less are not obliged to register but are still subject to charity law. As of 30 September 2010, there were 162,440 registered charities in England and Wales (Charity Commission 2010e).
All charities are expected to submit an annual return to the Commission but the content of the return depends on the charities’ annual income. Charities with an annual income of over £10,000 are required to submit a copy of their accounts with the annual return and charities with an annual income of over £500,000 must additionally submit detailed financial information on incoming resources, resources expended, assets and liabilities and other recognised gains and losses (Charity Commission 2009c). Independent assessment of accounts is mandatory for charities with an annual income of over £25,000 but an actual audit is obligatory only for those charities when their gross income is greater than £500,000 (Charity Commission 2009d). Charities with an income of more than £250,000 and with total assets greater than £3.26m are also expected to have their accounts audited.
Regulation of charities is achieved via a range of mechanisms including compliance monitoring and assessment (including examination of accounts and other financial information submitted in annual returns), the reporting of serious incidents, whistleblowing and disclosures from auditors. For serious concerns, the Commission can open a statutory inquiry under s 8 of the Charities Act 1993 (as amended by the Charities Act 2006), which provides the Commission with a broader range of investigatory and remedy powers conferred under ss 18(1)(2) of the Charities Act 1993. The findings from the majority of these investigations are made available as inquiry reports. The Commission also publishes regulatory case reports on what it terms ‘non-inquiry work’, which are cases ‘where there is significant public interest in the issues involved and the outcome, and where there are lessons that other charities can learn from them’ (Charity Commission 2010f: 1).
A review of how the charitable sector might best be protected recommended that charities be encouraged to take a risk-based approach to the risk of terrorist exploitation (Home Office & HM Treasury 2007b). The approach would be premised on the provision by the Charity Commission of practical guidance on evaluating risk and taking appropriate and proportionate measures to mitigate abuse, along with ongoing feedback to the sector on global charity related terrorist threats. This strategy is described in more detail later in the section (see Mitigation strategies).
Pursuant to that recommendation, the Charity Commission created a risk proportionality framework that recognises the impossibility and/or impracticality of averting or controlling all prospective risks to the charitable sector (Charity Commission 2008a). Its approach utilises a ‘traffic light’ model that will elucidate how issues of concern arising within a charity should be handled and determine the level of response required from the Commission. Risks according to the model are categorised as:
- green or low risk, or ‘routine matters that require less concentrated and/or immediate attention and support’;
- amber or medium risk, or ‘more complex issues that require more resources and support to resolve difficulties’; or
- red or high risk, or ‘major and complex issues that present serious risk to the charity and its beneficiaries’ (Charity Commission 2008b: 5).
The Commission has identified a number of the most serious issues and areas of greatest risk for charities (Charity Commission 2008b). When deciding when and how to respond to an issue, the Commission will use the risk and proportionality framework to determine the level of priority, attention and resources to be applied to it. Those serious issues are:
- significant financial loss to the charity;
- serious harm to beneficiaries;
- threats to national security, specifically terrorism;
- criminality and/or illegal activity within or involving a charity;
- sham charities set up for an illegal or improper purpose;
- charities deliberately being used for significant private advantage;
- situations in which a charity’s independence is seriously called into question;
- issues that could damage the reputation of an individual charity or class of charities or the wider charity sector; and
- issues that could damage public trust and confidence in charities or in the Commission as an effective regulator.
The decisions will in turn be premised on the nature and scale of the problem and if any of a set of pre-determined ‘zero tolerance’ issues is involved, such as:
- charity links to or support for terrorism, financial or otherwise;
- connections to proscribed organisations;
- misuse of charity to foster criminal extremism;
- fraud and money laundering;
- abuse of vulnerably beneficiaries;
- lack of adequate measures in place to protect vulnerable beneficiaries;
- sham charities; and
- failure to take significant remedial action by trustees as required by the Commission.
Under the risk and proportionality framework, the Commission’s response to the issue will consider a number of ‘modifying factors’ which may lead, for example, to an originally designated ‘low’ risk issue being re-classified as ‘high’ risk. Modifying factors include the public profile of the charity, the risk to the charity’s reputation and risk of further harm to beneficiaries.
The Office of the Scottish Charity Regulator (OSCR) serves a similar function to the Charity Commission. The regulator was established in 2003 under the Charities and Trustee Investment (Scotland) Act 2005, following recommendations from the McFadden Commission report that there be a single national regulator for charities operating in Scotland.
Charities must apply to OSCR to obtain formal recognition of their charitable status, which then enables them to apply elsewhere for charitable tax relief, grants and a reduction in business rates. Once registered, all charities are required to submit to OSCR an annual return and a signed copy of the annual accounts. Charities with a gross income exceeding £25,000 must also provide supplementary information on the charity and its finances (OSCR 2008).
The OSCR’s anti-fraud strategy is described as ‘risk-based (and) intelligence led’ and employs principles of prevention, intelligence, intervention and improvement (OCSR 2010: np). The onus of detecting and reporting fraud is shared between trustees, auditors and other independent examiners, the public and OSCR. Suspected cases of fraudulent behaviour are assessed with reference to OSCR’s Enquiry and Intervention Policy and available intelligence.
No specific guidance has been prepared by OSCR on preventing abuse of charities by terrorist groups. In its submission to the Home Office review, OSCR observed there had been no known terrorist activity involving Scottish charities but stressed its interest in developing guidelines with other regulators in the United Kingdom, albeit those that incorporated assessment and approaches that were proportional to the actual (ie low) risk of terrorist abuse (OCSR 2007).
Northern Ireland is currently setting up a similar institution—the Charity Commission for Northern Ireland—under the Charities Act (NI) 2008. The Commission will be responsible for determining the charitable status of an organisation through the application of a public benefit test; maintaining a register of charities operating in Northern Ireland and performing educative and compliance functions, including identifying and investigating misconduct or mismanagement. It will be compulsory for all charities to register with the Commission and all will be legally obliged to submit an annual statement of accounts (Charities Act (NI) 2008, s 64). The Commission will assume an additional role of regulating ‘public charitable collections’ (ie any charitable appeal made in a public place (Charities Act (NI) 2008, s 131(2a)) and issuing permits to conduct such collections.
Based on statistics provided by the US IRS to the FATF, the non-profit sector in the United States (in 2006) comprised more than one million charities and private foundations, with an additional 350,000 religion-affiliated or smaller charities exempt from having to register with the IRS (FATF 2006). Oversight of the non-profit sector in the United States combines federal and state government regulation, self-regulatory practices and the application of certification schemes. The FATF evaluation found the United States’ AML/CTF regime to be fully compliant with SR VIII (FATF 2006).
NPOs that are suspected of being involved with terrorism financing may be designated by either Presidential Order (under Executive Orders 13224 and 12947) or by the Secretary of the Treasury. Once an entity is so designated, its assets are frozen and all future transactions blocked, and US citizens are prohibited from dealing with them. These entities are listed on the SDN and Blocked Nationals List which is maintained by the US Department of the Treasury’s Office of Foreign Assets Control (OFAC).
Federal-level regulation sits primarily with the IRS Tax Exempt and Government Entities Division (IRS-TEGE). IRS-TEGE approves applications from non-profit entities seeking federal income tax exemption status, in accordance with s 501(c)(3) of the Internal Revenue Code. Entities must demonstrate they are being operated and organised for ‘exempt purposes’, which includes charitable, religious, educational, scientific, literary, testing for public safety, fostering national or international amateur sports competition and preventing cruelty to children or animals objectives (IRS 2009). Churches and equivalent bodies are automatically exempt from taxation. If an organisation chooses not to claim tax exemption they are monitored by the IRS as a tax-paying body. Compliance monitoring of tax exempt NPOs is achieved through examination of annual returns submitted to the IRS-TEGE and audits to determine whether entities are operating according to tax laws (FATF 2006). Part of the compliance monitoring involves cross-referencing names of applicants, directors and officers of NPOs with those on the SDN List.
State governments are responsible for regulating fundraising practices. In 2006, 39 US states required charities to register with the relevant government regulator if they planned to fundraise in that state (FATF 2006). Similar to Australia, fundraising laws and reporting requirements differ between the states and streamlining of processes is being considered. Self-regulation is supervised by a number of private bodies that act as an umbrella or watch-dog organisation for the non-profit (specifically charitable) sector (FATF 2006).
Outreach to the sector has been largely achieved through the release and updating of guidelines outlining voluntary best practices for entities operating as charities (US Department of the Treasury 2006b). The guidelines describe fundamentals for operation, such as governance and financial accountability and transparency, as well as procedures that should be followed in upholding fiscal responsibility in the supply of resources and services. The guidelines further include best practices to minimise the risk of funds diversion such as collecting detailed information and vetting all potential grantees, vetting staff and reporting any suspicious persons or activities to the appropriate authority.
The Canadian non-profit sector mostly consists of charities and other incorporated entities. In 2008, there were 825,000 registered charities in Canada and another 63,000 incorporated organisations (FATF 2008b). Charities accounted for 68 percent of all NPO revenue.
Three reviews of the Canadian non-profit sector identified charities, compared with other non-profit entities, as most at risk of abuse from terrorist organisations (FATF 2008b). The regulation of charities in particular was subsequently tightened but FATF noted that a large proportion of the NPO sector still remained outside regulatory coverage. FATF analysis of data from FINTRAC, Canada’s Financial Intelligence Unit, revealed that more than a third of FINTRAC disclosures related to suspected terrorism financing were associated with NPOs (FATF 2008b). Suspect transactions largely involved the use of multiple accounts, the use of personal accounts by persons connected with NPOs and the movement of funds to areas of conflict.
While Canada’s provincial governments have powers to make laws regarding the regulation of charities, charitable donations and charitable property, in reality only some have acted to introduce such legislation and then solely related to the regulation of fundraising. Ontario is the one province that has enacted legislation—the Charities Accounting Act 1990—for the purpose of regulating charities based in the province (Commission of Inquiry into the Investigation of the Bombing of Air India Flight 182 2010). These circumstances have meant that the federal government, in the form of the Canada Revenue Agency (CRA), has in effect become the ‘de facto’ regulator of Canadian-operated charities, through its powers prescribed in the Income Tax Act 1985 (Monahan & Roth cited in Commission of Inquiry into the Investigation of the Bombing of Air India Flight 182 2010). Charities, unlike other NPOs, must register with the Charities Directorate of CRA. Registration is successful if the charity can demonstrate its activities meet the definition of a charity as defined in common law (ie meeting the public benefit test) and once registered, charities are immediately granted tax exemption status under s 149(1)(f) of the Income Tax Act 1985. All applications to the Charities Directorate are evaluated regarding their potential risk in being involved or exploited for terrorism financing purposes (Commission of Inquiry into the Investigation of the Bombing of Air India Flight 182 2010).
All charities are stipulated to submit to CRA an annual information return and financial statement (CRA 2009). Most of the information provided in the annual information return can then be made available to the public; CRA administers an online register documenting annual return information. In addition, CRA undertakes monitoring work whereby charities are selected at random or targeted for risk-based auditing processes.
CRA provides guidelines to charities in the form of a ‘Terrorism checklist’, outlining the type of checks charities should make to safeguard their organisation from terrorist abuse (CRA 2010). These checks broadly include:
- having familiarity with persons and entities listed as being associated with terrorism under the United Nations Act and the Criminal Code;
- knowing the background and affiliations of board members, partners, employees, contractors, fundraisers and volunteers;
- maintaining strict financial and other oversight over the collection, handling, depositing and transfer of funds;
- keeping appropriate financial records;
- ensuring funds are transferred, where possible, using normal banking mechanisms; and
- knowing the source and destination of funds.
Under the Charities Registration (Security Information) Act 2001, the Canadian Government can deny or relinquish registration of charities suspected of diverting resources to a listed entity as defined in subsection 83.01(1) of the Criminal Code. Since 2005, the CRA have also been able to apply intermediate measures to non-compliant charities, such as issuance of monetary penalties, but the agency still lacks powers related to the suspension or removal of trustees as available to the Charity Commission.
Non-charitable NPOs do not need to register with the CRA, other than that required to observe federal tax laws. Some NPOs can obtain tax exemption status under s 149(1)(l) of the Income Tax Act 1985 and need only file an income tax return if the organisation is incorporated, required to pay tax on property income or capital gains tax, or are directed to do so by the Minister. Unlike charities, annual information returns are mandatory for only a subset of NPOs, that is, those with total assets of more than Can$200,000 or organisations in receipt of taxable dividends, interests, rentals or royalties greater than Can$10,000 (CRA 2001).
Incorporated NPOs (or corporations without share capital) are also subject to regulation under the Canada Corporations Act 1970 (Part II). This entails providing Corporations Canada (which sits within Industry Canada) an annual summary, as well as making available for inspection audited accounting and financial statements if requested.
CRA operates alongside FINTRAC and law enforcement agencies such as the Royal Canadian Mounted Police in the detection of charity-related suspicious behaviour. However, prior to the passing of Bill C-25 (An Act to amend the Proceeds of Crime (Money Laundering) and Terrorist Financing Act and the Income Tax Act and to make a consequential amendment to another Act, SC 2006), CRA (like many tax agencies) were observant of very strict rules around information disclosure (Commission of Inquiry into the Investigation of the Bombing of Air India Flight 182 2010). Bill C-25 introduced provisions to improve the dissemination of ‘classes of information’ between agencies involved in counter-terrorism financing activity.
In New Zealand, the non-profit sector primarily comprises four types of entities—charitable trusts and societies, incorporated societies, industrial and provident societies, friendly societies, benevolent societies and working men’s clubs (FATF 2009). Each of these entities is subject to separate legislative provisions.
Charities in New Zealand are regulated by the Charities Commission, which was established under the Charities Act 2005 in response to the recommendation from a 2001 examination of tax law reform for an improvement in the regulation of the charitable sector. The role of the Charities Commission is to register charities and monitor their activities with respect to eligibility for registration. At 31 March 2010, there were 28,814 registered charities in New Zealand and based on annual returns from 17,868 of these organisations, gained NZ$9.37b in total gross income in the previous financial year (Charities Commission 2010b).
Registration is voluntary but organisations must register with the Commission as a ‘tax charity’ if they wish to seek tax exemption (Charities Commission & Inland Revenue 2010). Charities must then apply to the Inland Revenue Department for income, FBT and/or resident withholding tax benefits under the Income Tax Act 2007 or gift duty exemptions under the Estate and Gift Duties Tax Act 1968.
Other NPOs incorporated or registered under the Charitable Trusts Act 1957, Incorporated Societies Act 1908, Industrial and Provident Societies Act 1908, Friendly Societies and Credit Unions Act 1982 or the Companies Act 1993 are to register with the New Zealand Companies Office. Any such entity may also be registered with the Charities Commission if the organisation was established and is maintained for charitable purposes as defined in s 5(1) of the Charities Act 2005. Financial reporting obligations largely depend on the legal form of the NPO. These are as follows:
- Registered charities must submit to the Charities Commission an annual return, which includes the charity’s financial accounts and a statement of its financial performance. There is no obligation to provide audited accounts:
- Entities registered under the Charitable Trusts Act 1957 must provide the Registrar of Incorporated Societies (which sits within the Companies Office) with details on changes to trust deeds and rules but do not have to submit financial information.
- Non-profits incorporated under the Incorporated Societies Act 1908 are legally required by s 23(1) of the Act to file a certified copy of their annual financial statement with the Registrar. Statements lodged with the Registrar do not need to be audited. Incorporated societies registered with the Charities Commission, however, only need to submit returns with the Commission as per their reporting requirements.
- Industrial and provident societies, unless subject to the reporting obligations of the Financial Reporting Act 1993 (see below), are compelled under s 8 of the Industrial and Provident Societies Act 1908 to file a statement of their financial position and an auditors’ report.
- Friendly and benevolent societies must provide, as per s 61 of the Friendly Societies and Credit Unions Act 1982, the Registrar of the Friendly Societies and Credit Union an annual return and a copy of its financial statements. Accounts do not need to be audited if the receipts and payments of the society, or the value of its assets, did not exceed $20,000 in the previous financial year (Friendly Societies and Credit Unions Act 1982 s 62(2)).
The Financial Reporting Act 1993 stipulates financial reporting standards for companies and issuers categorised in the Act as either ‘reporting entities’ or ‘exempt companies’. Reporting entities include issuers, overseas or subsidiary companies, companies that have one or more subsidiaries and companies with assets valued at more than NZ$450,000 or annual turnover greater than NZ$1m. While the reporting requirements stipulated in the Financial Reporting Act 1993 do not currently apply to most charities, they do for some NPOs, such as industrial and provident societies that act as issuers. Financial statements must be prepared in accordance with Part II of the Act and in most cases must be audited; however, only a subgroup of reporting entities is expected to register financial statements with the Companies Office.
The New Zealand Government passed the Anti-Money Laundering and Countering Financing of Terrorism Act 2009 in October 2009. The Act is in the process of implementation and will apply to casinos and financial institutions that perform financial activities as defined in s 4 of the Act. Some NPOs, albeit the minority, may be covered by the Act and will be required to undertake an AML/CTF risk assessment and design, and then following the assessment, a program to detect, manage and mitigate risk of money laundering and terrorism financing (NZ Ministry of Justice 2010).
In its mutual evaluation report for New Zealand, FATF stated that New Zealand had not conducted a comprehensive review of the non-profit sector’s risk of terrorist abuse, nor did any of the current monitoring arrangements focus on identifying or dealing with suspected abuse (FATF 2009). Of particular concern to FATF was the absence of a risk-based monitoring program. The Charities Commission, in their guide for charities on terrorism and money laundering (Charities Commission 2010a), described the risk of exposure to terrorist abuse for NZ charities as being ‘small’ but outlined principles of good practice in circumventing any misuse occurring. The guide also refers to obligations under s 43 of the Terrorism Suppression Act 2002 whereby all entities must forward a Suspicious Property Report to the New Zealand Police’s Financial Intelligence Unit if ‘they deal with property that is suspected to be owned or controlled by a designated terrorist entity’ (Charities Commission 2010a: 3).
At the core of government and non-government approaches to mitigate NPO abuse are broad frameworks of indicative good practice comprising governance and financial transparency procedures and suggesting the attaining of sound knowledge of donors and of beneficiary charities. Many of these frameworks are shaped by regulatory pragmatism in that the onus on responding to risk must inevitably lie with the entity that is being targeted. Suggested strategies combine checklists of risk factors and recommended procedures to minimise misuse, with the expectation that NPOs will use these frameworks to understand the threat, self-assess its exposure to risks and adopt the necessary responses. Table 11 illustrates basic principles in risk mitigation, as incorporated into the anti-terrorist financing framework produced by the Hong Kong Narcotics Division, Security Bureau in conjunction with the Hong Kong Social Welfare Department.
|Good governance and financial transparency|
|Maintain information on the purpose and objectives of their stated activities and the identity of the person(s) who own, control or direct their activities, including senior officers, board members and trustees|
|Publish annual financial statements that provide detailed breakdowns of incomes and expenditures|
|Have appropriate controls in place to ensure that all funds are fully accounted for and are spent in a manner that is consistent with the purpose and objectives of its stated activities|
|Maintain, for a period of at least five years (and make available to appropriate authorities) records of domestic and international transactions that are sufficiently detailed to verify that funds have been spent in a manner consistent with the purpose and objectives of the organisation|
|Conduct transactions via regulated financial channels wherever feasible, keeping in mind the varying capacities of financial sectors in different countries and in different areas of urgent charitable and humanitarian concerns|
|Consider, with a risk-based approach, making reference to publicly available information, to determine whether any of their own employees are suspected of being involved in activities relating to terrorism, including terrorist financing|
|Know your donor and beneficiary charities|
|Undertake best efforts to document the identity of significant donors with due regard to donors request for anonymity and/or confidentiality of identity|
|Inform the donors of how and where their donations are going to be expended|
|Make best efforts to confirm the identity, credentials and good standing of their beneficiary charities|
|Conduct, with a risk-based approach, a reasonable search of public information, including information available on the Internet, to determine whether the donor/beneficiary charities or their key employees, board members or other senior managerial staff are suspected of being involved in activities relating to terrorism, including terrorist financing|
Source: Adapted from Hong Kong Narcotics Division 2007
Alongside the codes of practice developed by peak bodies, the Australian Government has provided additional guidance to NPOs, specifically as to how they can reduce risks with respect to abuse by terrorist organisations. The Safeguarding Your Organisation Against Terrorism: A Guidance for Non-profit Organisations guidelines (AGD 2009) sets out best practice principles for NPOs which in line with the FATF recommendations include:
- undertaking risk assessments of the organisation’s activities;
- applying due diligence procedures with both beneficiaries and third parties;
- being aware of legal obligations; and
- ensuring internal processes of transparency and accountability are maintained.
The guidelines also advise NPOs to regularly check that beneficiaries and third parties are not listed individuals or organisations on either the ‘Consolidated List’ (ie persons and entities subject to a targeted financial sanction imposed by a resolution of the United Nations Security Council) or the ‘List of Terrorist Organisations’ (ie organisations proscribed by the Australian Government as terrorist organisations under Division 102 of the Criminal Code Act 1995 (Cth)). The former list is maintained by the Department of Foreign Affairs and Trade and the second by the Attorney-General’s Department.
NPOs, however, should not rely exclusively on these lists but continue to avoid engaging with any organisation they suspect of being a terrorist group. Under Division 102 of the Criminal Code, a court can deem an organisation a terrorist organisation
if the prosecution can prove beyond reasonable doubt that the organisation is directly or indirectly engaged in, preparing, planning, assisting in or fostering the doing of a terrorist act (regardless of whether or not a terrorist act occurs) (AGD 2009: 11).
England and Wales
The Charity Commissions’ counter-terrorism strategy emphasises the application of strong governance arrangements, financial management and partner management as critical to minimising terrorist abuse of charities (Charity Commission 2008c). Beyond that general injunction, the Charity Commission has created a four-stranded approach based on awareness, oversight, cooperation and intervention to guide its role in identifying and minimising the risk of terrorist exploitation of charities (see Table 12).
|Awareness||The awareness component of the strategy involves the analysis of potential risk factors and the production of periodic bulletins outlining the current and evolving threat vectors. Furthermore, a toolkit, developed in partnership with the sector, seeks to provide advice to charity trustees on undertaking effective risk assessment|
|Oversight and supervision||The oversight and supervision segment of the strategy sees the Charity Commission, through its Proactive Monitoring Unit, taking a more proactive approach to the analysis of trends and to the profiling of risks and vulnerabilities in relation to terrorism within the sector. Thereafter, the Charity Commission monitors what it considers high-risk areas of the sector in order to identify threats at an early enough stage that remedial action might be taken|
|In order to enhance the risk profile, hopefully achieved through awareness, oversight and supervision, via the cooperation strand of the strategy, the Charity Commission liaises through formalised and stronger operational arrangements with a range of government regulators and law enforcement agencies|
|Cooperation||Cooperation with law enforcement and other government regulators is enhanced by formalisation of protocols between agencies, provision of support falling under the remit of the Charity’s functions and promoting reciprocal awareness education to assist other agencies if investigating abuse within the sector|
|Intervention||Through the intervention part of the strategy, the Charity Commission draws upon its gathered intelligence in order to disrupt the activities of those seeking to abuse charities for terrorist ends and seeks to build a counter-terrorism expertise within the sector|
Source: Charity Commission 2008c
OFAC has created a matrix of risk factors concerning the disbursement of funds to grantees (US Department of the Treasury 2007; see Table 13). The matrix is not supposed to be comprehensive in ambit and OFAC recognises for some charities, some of the risks highlighted could constitute normal business operations for those working in particular geographical and other contexts.
|Low risk||Medium risk||High risk|
|The grantee has explicit charitable purposes and discloses how funds are used with specificity||The grantee has general charitable purposes and discloses how funds are used with specificity||The grantee has general charitable purposes and does not disclose how funds are used|
|The charity and the grantee have a written grant agreement that contains effective safeguards. For example, provisions addressing proper use of funds by the grantee, delineation of appropriate oversight and programmatic verification||The charity and the grantee have a written grant agreement with limited safeguards||The charity and the grantee do not have a written grant agreement|
|The grantee has an existing relationship with the charity||The grantee has existing relationships with other known charities but not with this charity||The grantee has no prior history with any charities|
|The grantee can provide references from trusted sources||The grantee’s references are from source with which the charity is unfamiliar||The grantee can provide no references or sources to corroborate references provided|
|The grantee has a history of legitimate charitable activities||The grantee is newly or recently formed, but its leadership has a history of legitimate charitable activities||The grantee has little or no history of legitimate charitable activities|
|Charity performs onsite grantee due diligence through regular audits and reporting||Charity performs remote grantee due diligence through regular audits and reporting||Charity performs no grantee due diligence, or due diligence is random and inconsistent|
|Grantee provides documentation of the used of funds in the form of video, receipts, photographs, testimonies and written records||Grantee provides documentation of the use of funds. Documentation may only include receipts and written records||Grantee provides no documentation of use of funds|
|The charity disburses funds in small increments as needed for specific projects or expenditures||The charity authorises grantee discretion engaged within specified limits||The charity disburses funds in one large payment to be invested and spent over time or for unspecified projects selected by the grantee|
|Reliable banking systems or other regulated financial channels for transferring funds are available and used by the grantee, subjecting such transfers to the safeguards of regulated financial systems consistent with international standards||Reliable banking systems or other regulated financial channels for transferring funds are not reasonably available for the grantee’s relevant activity, but the charity and the grantee agree on alternative methods that they reasonably believe to be reliable, trustworthy and protected against diversion||The grantee does not use regulated financial channels or take steps to develop alternative methods that the charity and grantee reasonably believe to be reliable, trustworthy and protected against diversion|
|Detailed procedures and processes for the suspension of grantee funds are included within the written agreement and enforceable both in the United States and at the grantee’s locale||Detailed procedures and processes for the suspension of grantee funds are included within the written agreement but may not be enforceable at the grantee’s locale due to instability or other issues||There exist no procedures or processes for suspension of grantee funds in the event there is a breach of the written agreement|
|The charity engages exclusively in charitable work in the United States or in foreign countries/regions where terrorist organisations are not known to be active||The charity engages in some work in foreign countries/regions where terrorist organisations may be active||The charity primarily engages in work in conflict zones or in countries/regions known to have a concentration of terrorist activity|
Source: US Department of the Treasury 2007
USAID employs a certification and vetting system to ensure that USAID funds and USAID-funded activities are not inadvertently being used to support terrorism. The certification process—the Anti-Terrorism Certification—requires any USAID grantee (both US and non-US non-government organisations) to certify that it will take all reasonable steps to ensure that they do not provide funds or support to any person or organisation involved in terrorism. Initially, a number of NPOs voiced their concern with the language used in the ATC. The US Government responded by revising the definition of ‘terrorist act’ in line with United Nations conventions and adding information on the type of measures NPOs should adopt to fulfil the requirements of certification (USAID 2005).
USAID also runs the Partner Vetting System (PVS), which vets individuals, directors, officers or other principal employees of NPOs who apply for USAID contracts, grants, cooperative agreements or other funding and of NPOs that apply for registration with USAID as private and voluntary organisations. The vetting process is designed to produce information that will then be used to ensure that USAID funds and USAID-funded activities are not inadvertently used to support terrorism. A number of the organisations invited to comment upon the PVS suggested that there was no evidence to suggest that USAID funds were being directed to terrorist organisations and that on that basis, the PVS was unnecessary. Despite these protests, USAID is intending to proceed with the PVS, arguing that the new system will not just improve due diligence and hence reduce the risk of USAID funds being diverted for terrorist purposes, but speed up the aid process (NARA 2009).
In 2005, the European Commission developed a code of conduct for member states in their oversight of the non-profit sector (Commission of the European Communities 2005). The framework for the code of conduct encompasses all potential actors in the prevention and mitigation of NPO abuse based on four pivotal functions of oversight, promotion of compliance, outreach and risk assessment, and coordinated investigation of abuse (Table 14).
|Oversight||Ways to ensure national cooperation|
|Encourage compliance||Offer tax relief, fundraising status and/or access to public sector grants to NPOs that fulfil registration requirements and comply with transparency and accountability measures|
|Encourage peak bodies to establish ‘seals of approval’ for NPOs compliant with code of conduct|
|Outreach and risk assessment||Encourage NPOs to self-assess existing practices and make improvement to reduce risk of criminal or terrorist abuse|
|Initiate awareness programs for NPOs on sector-specific risks and vulnerabilities|
|Provide guidance to financial institutions, accountants, auditors and lawyers on methods of identifying suspicious financial transactions|
|Investigation of abuse||Coordinate both national and EU level cooperation and information exchange between relevant authorities|
Source: Commission of the European Communities 2005
An interesting development in the monitoring of charitable organisations is the International Committee on Fundraising Organizations, a global forum for national charity monitoring agencies which aims, through its members’ auditing activities, to relay reliable and objective information concerning the effectiveness and efficiency of the charities under review. The original and driving rationale for the International Committee on Fundraising Organizations, and to a large degree of its current membership organisations, was the countering of fraud by, or within, charities through the pursuit of transparency (Guet 2002). There seems no reason in principle, however, that auditing be recalibrated so as to include counter-terrorist financing in terms, for example, of the volume, flow, source and destination of charitable funding.
It has been suggested that rather than enhancing the ability of NPOs to mitigate the risks deemed to exist in relation to money laundering and terrorist financing, proposed measures to stem misuse not only place an undue burden on the sector ‘without effectively tackling the terrorist threat’ (Quigley & Pratten 2007: 11) but stigmatises and consequently disrupts non-profit activity (ACLU 2009; Cortright et al. 2008; Crimm 2008; Quigly & Pratten 2007). The discourse around finding appropriate solutions to mitigate NPO misuse emphasises the difficulty in balancing risk with impact; however, among some of the sector’s constituents and its commentators, there is a view that this balance, in practice, has gone awry.
The most immediate impact of changes brought in under the auspices of AML/CTF activities is the exposure of many more organisations to ‘substantial, and inefficient, administrative burdens’ (ACLU 2009: 35). Despite acknowledgement that a single regulatory model is inappropriate for a sector as diverse as the non-profit one, the practicalities of application has meant such a model has been retained or eventuated. The outcome for the sector has been one of ‘over-regulation’, or the potential for such (UK NPO peak body personal communication 2009). Smaller organisations have been identified as particularly disadvantaged as they possess fewer resources to deal with increasing regulatory costs. More stringent controls have also resulted in organisations, large and small, needing to divert more money away from the organisations activities to fulfil compliance requirements. Interviews with representatives from British oversight bodies such as the National Council for Voluntary Organisations and British Overseas NGO’s for Development emphasised the need for more contact between regulators and the non-profit sector. Of particular importance was for regulators to revisit current definitions of risk to more clearly delineate levels of risk. Redefining risk would ideally be done with input from the non-profit sector and assessment should be evidence-based.
Perspectives on Australian regulation
Representatives from Australian NPOs participating in the AIC roundtable were strongly in favour of self-regulation. The current system, where each state and territory has a different regulatory system relating to non-profit activities, placed a considerable burden on NPOs and simplification of this situation was seen as a priority. In their view, self-regulation best enabled organisations to adapt to the rapidly changing nature of the sector. There was support for initiatives such as the guidelines prepared by AGD because they provided the sector with a summary of the relevant issues but left it to individual entities to determine how best to address these issues in detail. Similarly, there was endorsement for the codes of conduct developed by peak bodies. It was envisaged that such government initiatives would be complemented by an increased role for peak bodies in both disseminating current information regarding threats and providing more education to the sector as a whole.
There was consensus from NPO representatives that AML/CTF measures were expensive to both implement and monitor, although no details were given on how expensive such measures have proven to be. There were concerns that AML/CTF measures could also alienate potential donors who would not wish to see their donations being spent on internal administration and regulation. Reputation, it was suggested, was a crucial factor in ensuring that NPOs were sensitive to AML/CTF issues and adhered to tightening related operational processes—any media indication that charitable funds had been misused would destroy the donation base of any NPOS and would also put at risk its DGR status, without which it could not operate. Representatives suggested that the Australian Government had made a substantial investment in the non-profit sector through the granting of DGR status and that the government should protect that investment by providing financial assistance to NPOs with regard to activities such as training staff in AML/CTF issues.
One representative commented that the AusAID accreditation process was a useful regulatory process because it compelled NPOs to focus on governance issues. Australian NPOs accredited by AusAID are subject to regular spot checks and are investigated for any reported breaches. The ATO was seen as not being as proactive as it could be and lacked sufficient sector knowledge to make good decisions regarding what constitutes charitable activity.
The academic roundtable suggested that activities such as money laundering and terrorism financing may be quite different, but that events had led to them being addressed by the same regulatory regime and ideas, which may distort how both issues are handled. With regard to how effective the non-profit sector was in addressing these issues, one participant commented on the difficulty of obtaining information regarding the financial arrangements of NPOs operating in Australia and contrasted the situation unfavourably with that in the United States.
Academic participants saw it as a role of government to educate the donor community and increase the level of involvement in where money is actually going. There was some concern that existing laws relating to the non-profit sector were not being enforced with sufficient robustness, with the suggestion that the ATO should be more proactive in assessing whether NPOs should be granted and/or retain their tax-exempt status. Perspectives from the law enforcement sector were slightly different again. A number of participants believed that NPOs, on the whole, knew little about the risks of money laundering or terrorism financing and how best to mitigate such risks. Without more sustained regulation, such as a national regulator similar to the Charity Commission (see below), any supervision was considered to be ‘second hand’. Of particular concern was the practice of informal giving. Bringing informal giving into the regulatory fold might mitigate some of the risk associated with the non-profit sector but successfully disrupting or regulating an informal process was viewed as extremely difficult, if not impossible.
There was general support from the three sectors for the idea of a national regulator such as a Charity Commission in Australia (see next section). All were in agreement that the current regulatory system was not particularly effective in identifying non-compliant or criminal behaviour and a Charity Commission, if modelled on the UK version, would provide the proactive response to compliance monitoring that is generally missing in Australia. However, the NPO sector was the least enthused about the concept. While an independent Charity Commission-like body could provide much needed training and assistance in capacity building and risk mitigation, it would constitute yet another layer of regulation and would not address the issue of conflicting state/territory requirements.
Regulation of the non-profit sector has traditionally relied upon self-regulation for the majority, combined with formal government oversight directed at specific group of constituents (eg fundraisers). The Australian regulatory regime is multi-layered, divided between the Commonwealth and the states and territories, and comprising laws around incorporation, fundraising and the granting of tax exemption status. With this breadth of laws and regulators comes a variety of reporting obligations, which even for the same NPO can prescribe or waive compliance requirements depending on the jurisdiction(s) it operates in. Many Australian NPOs, though, sit outside the regulatory system. Self-regulatory codes of practice are available for regulated and unregulated bodies alike and include recommendations around financial management and disbursement of funds. Regimes adopted in the United States, United Kingdom, Canada and New Zealand are different again. Non-profit regulation in the United States and Canada is dominated by the federal tax authority and in the United Kingdom by a specialist charity commission. In New Zealand, it is spread across a charities registrar, tax authority and companies regulator. Self-regulation plays an important subsidiary role, as it does in Australia.
Among Australian stakeholders consulted for the report, regulation in its present model was described as flawed—it was unnecessarily cumbersome, too disconnected and devoid of appropriate sector outreach and education. Comprehensive knowledge of AML/CTF was generally missing and there was little financial or other support to enable organisations to get across policy and assist them in strengthening governance and financial management issues. The solution proposed was not to ‘take regulation any further’ (ie draw even more entities underneath the regulatory umbrella) but to refine current approaches or introduce models that have worked overseas (eg the UK Charity Commission) to assemble a select group of organisations—based on proportional representation, total revenue and/or at greatest risk of misuse—for monitoring purposes. No regulatory model can capture every entity and the result, if all entities were captured, would be impossible to manage and potentially introduce more opportunity for misconduct.
Changes in policy, regulation and legislation have acted to bring a larger segment of the non-profit sector under more sustained scrutiny. In the wake of SR VIII, charities have perceptibly been the target of regulatory amendment and subjected to greater scrutiny. For some in the sector, this has been interpreted as a move in the direction of over-regulation, typified by the induction of substantial reporting requirements and directions to implement costly AML/CTF strategies in-house. Just as critical to the charitable sector is the perceived drop in confidence the often very public scrutiny has produced. At its most detrimental, policy changes (or at least those developed in the United States) may have inadvertently ‘weakened mainstream, ‘controllable’ [charities], while building up informal, unchecked, and potentially dangerous charitable and donor networks’ (Warde 2007: 147). The politicisation of the issue of terrorist financing by NPOs renders the mitigation of potential abuse all the more difficult (Centre for Civil Society 2007). Civil society is driven by humanitarian desire. Regulation of NPOs is driven and maintained by trust. Arguably, trust in regulatory terms cannot be sustained in the event of perceived or actual exhaustive regulation.