Panama Papers – Second Marshmallow

This week, the world is reeling from two significant scandals in the space of five days, Mossack Fonseca in Panama and Unaoil in Monaco. They are both interesting cases, potentially offering fascinating insights into the shady world of illicit financial flows and their enablers. NGOs worldwide are lining up to challenge the global financial order afresh.

But as they do so, now might be a good time for them to reflect internally on the extent to which their own operations minimise the risk of involvement in the darker side of finance. One risk in particular is money-laundering – the process by which the proceeds of crime are given a veneer of legitimacy, obscuring their origin or ownership.

While there may be some examples of illegitimate NGOs being used as vehicles for money-laundering, there are also dangers that this risk can be over-emphasised and perhaps used unfairly to penalise local civil societies. A more common and credible risk, instead, might be that legitimate NGOs are abused by criminals during a money laundering phase known as ‘layering,’ in which multiple transactions are created, perhaps between entities, across borders and involving other fraudulent activities.

Indeed, depending on the jurisdiction, NGOs, nonprofits and charities may have explicit or implied legal obligations to minimise money-laundering risks. What all such organisations should do, however, is consider where there might be a risk of exposure and take steps to limit it.

This article suggests some common areas of particular risk. It does not, of course, advocate that NGOs avoid all these situations wholesale, nor that they are necessarily indicative of money-laundering. But, these could be situations of heightened risk and therefore our diligence in managing them should rise accordingly.

Funds from anonymous donors

Anonymous donors are a normal feature of fundraising. We’ve all popped a few coins into a collection bucket. But where NGOs receive unusual or significant funds, with no information on their provenance, a red light should flicker into life. Anonymous giving could be the starting point for a number of laundering methodologies, perhaps even involving insiders. NGOs need to take reasonable steps to identify the sources of such contributions.

Donors with restrictive demands

Major institutional donors are likely to meet our due diligence requirements – so that’s not necessarily who we mean here. We mean the rich, local businessman who approaches our NGO to execute a project entirely of his choosing – especially where it sits outside or at the fringes of our stated mission, or where it comes with unusual requirements.

An example might arise from the UK. In 2013, the Charity Commission published a warning that followed a Serious Organised Crime Agency (SOCA) alert. Some British charities had been approached by an individual who wanted to give them a large donation – but the charity had to pay some of it to a foreign charity of the individual’s choosing. Alas, the person was laundering the proceeds of fraudulently-obtained credit cards, and there was no foreign charity. It was the criminal’s own bank account, and a number of charities fell for this scam.

Requests to move funds between organisations

Let’s say you are running a social development enterprise. A company approaches you to purchase a quantity of your beautiful wooden products. You’re delighted – but then the company asks if a second company can settle the invoice on its behalf. They’ll settle up between themselves, later, it says. The red light should come on.

A second example might be what’s known as conduit funding, which is variously defined but broadly means that our NGO acts a funding intermediary without influence or control over what happens to the funds. The Canada Revenue Agency gives a good example of this here.

Requests from donors to return funds to them

Let’s say that our rich, local businessman approaches you with a proposition. He wishes to store some money in a savings account, but he doesn’t like banks. Maybe he says they’re greedy and corrupt, and he wants to help those who live out his own commitment to social justice. He suggests giving you his US$100,000 – which he will retrieve in six months, while you get to keep the interest. Red light.

Another example might be where a donor asks for a refund for some reason, perhaps stating that the donation was in error or quibbling over the extent to which the NGO delivered on its promises or stated purpose. Requests for refunds are not uncommon, and may present elevated money-laundering risk – particularly when amounts are substantial or unusual. A good defence is a clear and publicised policy on refunds.

Using Money Transfer Organisations (MTOs) in high-risk locations

A range of complex issues face NGOs that move funds into and around locations of elevated risk, such as conflict zones, fragile states and areas of significant terrorist activity. One of these is that we don’t know who else’s money an MTO is moving in or out of these places. If our NGO engages an unscrupulous, unregulated or badly-run MTO, there are real risks of breaching the principle of ‘do no harm’ and of reputational impact.

We need to do what we can to assure ourselves of the agent’s probity ahead of engagement. This is known as due diligence, and should include comprehensive checks on identity, legality and competence.

How can NGOs respond?

There is much that an NGO, charity or nonprofit can do to minimise the risk of abuse by money-launderers. Some of the cornerstones of a framework might include:

A clear organisational policy, together with an owner for the issue;
A system of regular and meticulous risk assessment that identifies what could happen and how best the NGO can minimise these risks;
Procedures that prevent, monitor and detect suspicious transactions, and meaningful due diligence of third parties (staff, volunteers, contractors, consultants, partners etc) – both informed by the risk assessment;
Good quality training and communication to staff and managers, prioritising the roles most likely to encounter the risk and that considers induction, reinforcement and performance management;
The embedding of the framework into the NGO’s governance systems and across all operations (including and especially programming), together with its ongoing monitoring and regular review.