Thursday, August 6, 2009

Transparency and Accountability in the Age of Terrorism, Part 2, Illustrated

The September 2002 issue of the International Journal of Not-For-Profit Law, in an article titled "Charities and Terrorism: The Charity Commission Response," began: "It is difficult to imagine an issue that could undermine public faith in charity more than the suspicion of terrorist links."

The issue was brought to our attention when in December 2001, the Bush administration, as part of its war on terrorism, declared legal and financial war on groups that it believed aided and supported sponsors of terrorism. These initially included Islamic charities that reportedly raised funds that helped Islamic militants in the Palestinian territories, Iraq, Afghanistan, and other conflicts areas in the Middle East.

During the European Commission conference in mid-February 2009, addressing the ECNL study, Recent Public and Self-Regulatory Initiatives Improving Transparency and Accountability of Non-Profit Organisations in the European Union, one of the EC leaders illustrated the point of the importance of monitoring transparency and accountability in the charity sector.

Here is the situation: There is a relief and development charity based in the United States or in one of the European countries. The charity is recognized as a tax exempt charity under the laws of the relevant country, and may or may not be monitored by a monitoring or accrediting body such as those which are members of ICFO. Through its child sponsorship funding and other normal fundraising efforts, it supports a group of orphanage homes in the Gaza Strip. These homes may be owned and operated by that charity or a consortium of similar cooperating charities licensed in Palestine.

However, Hamas is responsible for operating these orphanages and may even take over the ownership of the properties. While much of this funding went to the humanitarian causes for which it was raised, some of it ended in the hands of Hamas and was used for purchase and movement of weapons and munitions. Some of it ended in the hands of Hamas for communications equipments, medicine, visas, etc., used in fighting UN police forces, Israeli forces, and other allied groups. So, there is a problem with tracking the charity funds and determining to what extent they may be used to fund terrorist activities and what extent they are used for legitimate humanitarian causes. For the purpose of this discussion, does it really make any difference if the funds are used for legitimate humanitarian causes if some of the funds are used in terrorist activities?

Or, as it was reported in a Times of London article, the Pakistani charity, Jamaat-ud-Dawa [JuD] was accused of its involvement in the attacks in Mumbai, India. Jamaat-ud-Dawa, was a front for the terrorist organization, Lashkar-e-Taiba, which was the parent organization of JuD, and which was established in Afghanistan. Notwithstanding the charges asserted by the U.S., India, and other Western countries against JuD, Pakistan has been dismissive of these claims. Indeed, thanks to the high-profile relief work, and especially in the aftermath of the 2005 earthquake in Kashmir, Pakistan was unwilling to shut down JuD offices and hundreds of "relief camps," despite growing evidence of its involvement in terrorism.

There are a number of issues in these examples with respect to transparency and accountability in the charity sector in connection with war on terrorism. One is simply the question of whether the charities in question are in compliance with law. As noted by John Pellowe in his response to an earlier post, many countries require that domestic charities legally control and operate the foreign entity to which it channels funds. In the United States, the tax authorities will disallow a tax deduction for contributions to domestic charities if the domestic charities are mere conduits for funds to foreign organizations. Of course, this is probably different from the rule in the countries in European Union as a result of the decision of the European Court of Justice in the Hein Persche v. Finanzampt Lüdenscheid case.

Secondly, there is simply the question of standards and monitoring to be performed on charities, and whether such monitoring is to be done by government agencies or by some form of independent or self-regulation monitoring. An issue arises with respect to government monitoring of charities to determine whether funds are being channeled to organizations that support terrorist activities. Are the sanctions to be applied criminal, civil, or some other form of sanction.

Prosecution is difficult in these cases because even if intelligence shows signs of terrorism support, it is difficult, if not impossible in many cases, to obtain the kind of unambiguous evidence that is admissible in court proceedings to prove that the money ended up in the hands of terrorists overseas. As a result, critics contend that the government keeps much of the relevent evidence of possible terrorist connections secret and resorts to prosecutions for tax and money-laundering violations.

When the focus of government sanctions is against Islamic charities, it depresses or can depress giving on the part of the donor public.

The U.S. Treasury Department has issued guidelines directed to charities under which charities could take measures to ensure proper board governance, accounting practices, and transparency to donors. What has troubled many charitable organizations that make foreign grants, provide disaster relief, and provide aid to third world nations has been the unclear, ambiguous, and opaque rules that came out of the Department of Treasury's Office of Foreign Asset Control (OFAC). It is a strict liability regime without a safe harbor for legitimate charities that inadvertently finance charity activity, notwithstanding undertaking the recommended due diligence. Thus, the example used above respect to a charity providing relief in Gaza to orphanages, presents exposure to the sanctions available under the OFAC regime.

The EC Directorate-General, Justice, Freedom and Security has not yet posted the Final version of the ECNL study, Recent Public and Self-Regulatory Initiatives Improving Transparency and Accountability of Non-Profit Organisations in the European Union.

1 comment:

  1. Might I comment on the reference to the rules on transfers of funds from indigenous charities to non-indigenous charities? In the UK, a charity may transfer its funds to a non-UK body provided it takes reasonable steps to ensure that those funds will be used by the recipient for purposes regarded as charitable in UK terms. This puts the onus to carry out due diligence on the paying (UK) charity and their are very expensive consequences in tax terms (not to mention potential issues in relation to breach of fiduciary duty - with the potential for the trustees to have to make good the loss if funds have been misused) if they do not.