Transparency and Accountability of Civil Society in the Context of Terrorism

Transparency and Accountability of Civil Society in the Context of Terrorism

Hon. Rollin van Broekhoven

President, International Committee on Fundraising Organizations (ICFO)

Adri Kemps

Secretary General, International Committee on Fundraising Organizations

Executive Director, Centraal Bureau Fondsenwerving (CBF)

Background

            As stated in the September 2002 issue of International Journal of Not-For-Profit Law, in an article titled, Charities and Terrorism: The Charity Commission Response: “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 in ICFO in December 2001, following the Al-Qaeda attacks on the World Trade Center in New York and the Pentagon in Washington. The Bush Administration, as part of its War on Terrorism, declared legal and financial war on groups believed to have aided and supported sponsors of terrorism.  These initially included Islamic groups that reportedly raised funds that helped militants in the Palestinian territories, Iraq, Afghanistan, and other conflict areas in the Middle East.

            Then, the European Commission held a conference in mid-February 2009 addressing the European Center for Not-For Profit Law (ECNL) study on ‘Recent Public and Self-Regulatory Initiatives Improving Transparency and Accountability of Non-Profit Organizations in the European Union’.  The focus of this meeting at the EU headquarters in Brussels was to encourage discussions on the outcome of this study, its recommendations, and possible follow-up.

            Much of the agenda discussion during this conference arose out of the recommendations of the Financial Action Task Force on Money Laundering (FATF-GAFI), and specifically, out of Special Recommendation VIII (SR8).  Broadly stated, the FATF in SR8 recognized that non-profit organizations are particularly vulnerable to being abused for the financing of terrorism.  Whether or not this is true in much of the developed world may be subject to debate.  Nevertheless, countries were encouraged to review the adequacy of their laws and regulations to ensure that the sector was not misused by terrorist organizations posing as; (1) legitimate non-profit organizations; (2) by legitimate organizations that were exploited as conduits for terrorist financing; or (3)  were used for concealing and obscuring the clandestine diversion of funds that were donated for legitimate purposes to terrorist activities.  A document, dated 11 October 2002, entitled ‘Combating the Abuse of Non-Profit Organisations’, provided detailed recommendations or best practices for addressing SR8.

            In January 2009, the European Court of Justice issued its decision in Hein Persche v. Finanzampt Lüdenscheid, addressing the tax deductibility of a gift-in-kind given by a taxpayer in one country to a charity located in another country.  Briefly, the Court ruled that legislation of a Member State which precluded the deduction for tax purposes of gifts to bodies established and recognized as charitable in another Member State violated Article 56 EC. This limited the free movement of capital, which Articles 56 to 60 EC addressed.  This rule applied to claimed donations without regard to whether they were financial transactions or gifts-in-kind.  Although this decision was unrelated to any potential financing of terrorism, we believe that achieving the objectives of SR8 becomes more complicated when countries are not in a position to evaluate the legitimacy of charitable organizations in other Member States or determine whether the funds contributed for legitimate purposes are diverted to terrorist activities.

Know Your Donor; Know Your Beneficiary

            A number of examples have been provided to illustrate the reason for SR8 and the problem.  The 11 October 2002 document detailing best practices stated the problem as follows:

Unfortunately, numerous instances have come to light in which the mechanism of charitable fundraising – i.e., the collection of resources from donors and its redistribution for charitable purposes – has been used to provide a cover for the financing of terror. In certain cases, the organisation itself was a mere sham that existed simply to funnel money to terrorists. However, often the abuse of nonprofit organisations occurred without the knowledge of donors, or even of members of the management and staff of the organisation itself, due to malfeasance by employees and/or managers diverting funding on their own. Besides financial support, some non-profit organisations have also provided cover and logistical support for the movement of terrorists and illicit arms. Some examples of these kinds of activities were presented in the 2001-2002 FATF Report on Money Laundering Typologies; others are presented in the annex to this paper.

            Here is the situation: There is a relief and development charity based in Europe or North America. The charity is recognized as a tax exempt organization under the laws of the relevant country in which it is located, and may or may not be monitored by an independent, or self-regulatory, non-governmental monitoring or accrediting body, such as those which are members of ICFO. Through its child sponsorship funding and other 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.

            While the United States, Canada, the European Union, and other countries characterize Hamas as a terrorist organization, the United Nations, Russia, and other countries do not.  Nevertheless, Hamas, in addition to governing the Gaza Strip, may be responsible for operating these orphanages and may even take over ownership of the properties.  Much of the funding as a result of individual donations is directed to the humanitarian causes for which it is raised in North America and Europe.  However, as money is fungible, some of it may end up in the hands of Hamas and be used for the purchase of weapons and munitions, communications equipment, medicine, visas and so on. These appropriations could subsequently be utilized when fighting UN police forces, Israeli forces, and other allied groups.

            Or, for another example, during the 2010 summer floods in Pakistan, relief aid flowed to NGOs involved in alleviating the devastation of the flooding.  Demands for food, water purification tablets, shelter, medicine, hygiene kits, and medical teams to help save the lives of flood victims poured into government offices and NGOs.  Requests for aid also addressed the added need for transportation of these supplies and medical teams by raft, boat, or donkey.  While militant groups in Pakistan previously had limited success in providing aid to refugees, the flood disaster, as well as anger and mistrust of the Pakistani government, had certainly given militant groups offering services and disaster relief some credibility.  Jamaat-ud-Dawa (JuD), under the name of Falah-e-Insaniyat Foundation Pakistan, had set up approximately 29 relief camps in a number of flooded areas.  According to one report by the Times of India, JuD had set up camps in its own name until police started demanding extortion money.  JuD claimed to have provided food to 50,000 flood survivors in all four provinces every day and was in the process of reaching out to 100,000 survivors.  Additionally, it claimed to be distributing packets of food, hygiene items, and other items to 8,000 families.

            There are a number of issues in these examples with respect to transparency and accountability in the charity sector in connection with SR8.  One is simply the question of whether the charities in question are in compliance with national laws.  In the case of the European and US charities providing aid to the Gaza Strip, most of them were completely legitimate and operating in full compliance and respect to their fundraising and humanitarian activities.  Moreover, many were accountable to the public regarding their operations, to ensure they function in accordance with the laws of the US or of a European country in which they were located. 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.  In Europe, a different result would probably be obtained as a result of the European Court of Justice Decision in Hein Persche v. Finanzampt Lüdenscheid.

The situation with respect to the disaster aid in Pakistan might be different, although there was no indication that JuD was operating outside the limits of Pakistani law.  However, there were reports in the international press that JuD was involved in the attacks in Mumbai, India, and was a front for a terrorist organization, Lashkar-e-Taiba.  As a result, there may have been questions about the ultimate use of funds donated.

            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 some form of independent or self-regulation monitoring regime.  In the case of government monitoring, what sort of sanctions should be applied; criminal, civil, or some other form of sanction?  Prosecution is challenging in these cases because even if intelligence shows signs of terrorism support, it is difficult, if not impossible in many cases, to obtain the unambiguous evidence that is admissible in court proceedings to prove that the money ended up in the hands of terrorists overseas and that the charity knew that to be the case, or understood its probability.  This is often further complicated by the security classification of the intelligence gathering methods.

            So, what is the solution?  We are not persuaded that reliance on governmental regulation and charity monitoring are always the answer.  Indeed, it is in the context of increased cross-border fundraising that independent self-regulation and charity monitoring mechanisms may actually foster, from a national perspective, an international response to money laundering and terrorist financing and the misuse of funds donated by individuals to charities that is better than a response by individual states through active regulation and monitoring of the sector.

ICFO, as an international umbrella body of national monitoring organizations, has led coordinated efforts to contribute to the cause of transparency and accountability on billions of funds raised from private donors and spent for the public benefit.  It is, we believe, noteworthy that the FATF in its Special Recommendation VIII specifically recommended that the third sector, or NGO sector, take action on Anti-Money Laundering/Counter-Terrorism Financing (AML/CTF).  ICFO is building a network on the concept of donor’s trust instead of promoting specific measures on AML/CFT.  The question naturally arises as to what ICFO and its members are doing in this regard, and how they are doing it.

Most members of the ICFO use the model of awarding seals to trusted charities as a component of accreditation schemes. This can be referred to as innovative oversight in addition to legislation or obligatory measures on AML/CFT. ICFO takes an alternative way of oversight based on independently articulated standards and assessments to protect donors trust.  The effectiveness of this model is that it relies, in part, on existing structures.  These include existing laws and regulations, auditing services, and the availability of news media.  The authors argue that the concept of “know your donors and know your beneficiaries”  can be of added value to good governance by charities and will help NGOs strengthen trust in public fundraising as long as the concept is not used by authorities to take control over the NGOs and their policies to pursue their objectives.

Civil Society and AML/CFT

Historically, the concept of civil society can pose a bit of a problem with respect to addressing AML/CFT and government or state regulation and monitoring.  Civil society has been generally understood as being historically one of the three legs of a democratic and open society.  As such, civil society is understood to refer to the un-coerced collective action around shared interests, purposes, and values. Its institutional forms are distinct from the state, family, and market.  Therefore, the sector is set apart from government and the market, and does not distribute profits.  It is self-governing, and is a mediating organization, or group of organizations, voluntary in nature, between the state and individuals.

The problem occurs when much of the activity of the civil society organization (CSO), such as a charitable organization, is funded by government largesse, meeting a need which the government deems to be important, and perhaps even part of the government’s own sense of governmental responsibility. The work of the charitable organization is accordingly regulated by the government because of the nexus between government funding and the activities of the charity.  It is clear, it seems to us, that if funds from the state treasury are to be used to accomplish some public or humanitarian purpose, which the government asserts to be part of its responsibility to be a good steward of the money entrusted to it through taxes, the government acts appropriately in requiring the CSO to account for the expenditure and use of that money.  Such accounting would naturally cover some form of regulation and reporting, through audits and the submission of information concerning the work of that charity.

However, it would seem that some form of legislative or regulatory regime would also be proper in the case of the government’s obligations with respect to the flow of funds through NGOs on the same basis as its obligations to protect its citizens and satisfy its obligations under the FATF-GAFI Special Recommendations on Terrorist Financing.  For example, Special Recommendation No. I provided that countries were responsible for implementing UN resolutions regarding the prevention and suppression of financing of terrorist acts, including UN Security Council Resolution 1373.  Similarly, Recommendations II, III, IV addressed the criminalization of terrorist financing and associated money laundering, freezing of terrorists’ assets, and the reporting of suspicious transactions relating to the financing of terrorism.  Recommendations V, VI, and VII addressed the requirement for international cooperation between nations, and the regulation of the transfer of funds, including wire transfers.  All of these seem appropriate functions of government, both with respect to AML/CFT, as well as to the prevention of fraud on the private donor sector.  While none of these recommendations specifically addressed the regulation of non-profit organizations, the actual handling of monies was implicated, and to that extent, had relevance to the activities of non-profit organizations.

We have seen no evidence that a regulatory scheme imposed by the government, instead of regulation schemes of independent watchdogs, increased the level of transparency and accountability of NGOs. and that to the extent it did, that it increased the level of trust between donor and NGO, thereby increasing the level of giving.  The charitable impulses of the giving public are based on more than simply whether the civil society sector is regulated by the government, and whether the monitoring by the government both ensured compliance with the regulations, and was consistent with the freedom and effectiveness of organizations to fully serve their role in civil society.  We sometimes forget that giving to charity is more than simply a financial transaction.

Informed Trust as Basis for Credibility of Charitable Work

A national registration system for non-governmental charitable organizations is widely required by law in countries around the world, particularly where there is some tax exemption to the organization or tax consequences applicable to the donor.  In most countries, this registration requirement insures that the non-governmental charitable entity is established for a public benefit purpose and is in compliance with minimal legal requirements for registration.  True standards of accountability and ethics and monitoring standards are seldom associated with the requirement.

The issue of establishing standards promoting transparency and integrity and monitoring non-governmental charitable organizations through an accreditation process is a different matter.  For example, the ICFO standards cover five key areas of the activities of international NGOs, or not-for-profit, public benefit, private organizations.  These include membership and responsibility of the governing body, fulfilment of public benefit goals, fiscal control and management, fundraising practices, and provision of public information, such as disclosure of audited financial statements.  Important to the satisfaction of these standards is the goal of ensuring that the public, donors and recipients of the public benefits, have ready access to sufficient and adequate information to enable them to make informed decisions about the organization, their relationship to the organization, and the accountability of funds raised by the organization.  Standards, without monitoring, provide little assurance to the donor regarding the transparency, integrity, and governance of charities and other public benefit non-governmental entities.

However, it is equally important that the monitoring body, responsible for setting standards and monitoring charities to insure their compliance with those standards, have insight into the charity sector and the trust of the organizations which are to be subject to the standards and monitoring.  Implicit in this model is the idea of a relationship between the NPO and the monitoring organization based on the establishment of standards of accountability and monitoring to ensure compliance with those standards.  This requires maintaining currency with fundraising techniques and activities, particularly in a fast moving technological age, worldwide monitoring practices, and the free exchange of information with other monitoring or accrediting bodies external to a particular country.

Governmental versus non-governmental monitoring is a matter of considerable interest to the ICFO, and has been the subject of frequent debate in many countries, particularly those with an active charity sector.  Much of the public benefit work around the world is done by charities, the Church, or religious communities.  As the readers may well appreciate, non-governmental organizations have become an important social counterpart of the economic and political forces in society.  Private donations are widely regarded as an important factor for the independence of the charity sector.

One concern is that this independence could be compromised when there is substantial funding by the government, particularly when those funds are targeted to government objectives.  While it is important to protect the rights of donors, donors are also generally assumed to be aware that they are not always adequately protected by the state from fraudulent fundraising appeals, and indeed, that they are ultimately responsible for their contributions to the charitable causes. This is why private and semi-private monitoring and advisory boards, such as various forms of self-regulation and accreditation bodies, have been established in many countries, including those countries represented by the ICFO.  These monitoring and accrediting non-governmental bodies are building bridges of trust between reliable NGOs and the donor public.

One of our concerns is that a statutory regulatory scheme, with governmental monitoring, together with the potential reporting of suspected fraud or similar irregularities to police, and the denial of registrations or criminal prosecution, tend to increase the administrative costs.  Specifically, such schemes generally require accounting and legal services beyond those normally required for the responsible administration of the charity.  The experience in the United States, and no doubt in many countries, suggests that, as a result of governmental regulatory requirements and governmental monitoring, there is an increased requirement for additional accounting and legal services beyond that normally required to meet the general transparency, integrity, and other operational interests of the charity, to insure that all the requirements of such laws are met.  There is also experience and some data that tend to support the conclusion that such requirements do little to assure the public that the finances and operations of the charity are in accordance with the requirements of such laws.  This is particularly true since many donors do not understand the requirements of the law, and give to those charities with which they are familiar and which perform public benefit services they support and for which they have personal commitment.  While many large charities can bear these added costs with little effect to their administrative cost ratios to total donated funds, most smaller charities cannot continue to operate and perform the public benefit functions for which they were established, with the added burden of governmental regulation and monitoring, plus the costs of the accounting and legal services that would not otherwise be warranted.

Conclusion

Traditional independent monitoring by an independent organization or self-regulation scheme to promote trust of donors has been focused on good governance of NPOs and their policies on fundraising and the transparent reporting of the income and spending of the funds.  The question is how we in the general public and donor pool are to have some sense that particular NPOs are well-governed and whether their policies and practices on the raising of funds and the use and disbursement of funds are disclosed to the public and to donors on request.  In other words, is it possible to improve trust between donors and the NPO sector, and is it possible to formulate clearly understood standards applicable to good governance, transparency and accountability, and to specific techniques of fundraising?  And if so, is it possible to monitor the activities of NPOs against such standards to enhance the level of trust between donor and NPO?  We think so.

Standards promoted by the ICFO and its members can help charities protect themselves from becoming involved in fraud, money laundering or the financing of illegal activities.  The bridges of trust will be stronger if the charities are willing to submit to accreditation schemes and be monitored by independent or self-regulatory monitoring bodies, such as the members of the ICFO.

In these days of globalization, extended social media, and increased cross-border fundraising within the European Union, bridges of trust can be eroded by permitting “open areas” without national monitoring systems in the European Union.  Independent monitoring should honour the national laws, history, values, traditions, and circumstances, but will be more effective when charities based in one of the countries of the European Union, will be in all cases subject to standards of substantial monitoring procedures.

Civil engagement, supported by donations for public benefit purposes, can flourish and strengthen open societies as long as trust between charity and donor, and the donor public, is maintained.  In the new era of upcoming social media, personal connections and relationships are often replaced by Internet connections.  It will be a challenge for charities to make use, for example, of new platforms of social networks to keep donors and beneficiaries recognised as persons with real identities and not with faked identities.  Charities who know their donors and beneficiaries will be able to build and strengthen relationships in a changing world.

The authors recommend that countries that do not have self-initiated models that include standards and methods of monitoring for promoting transparency and accountability, consider adopting such models, such as those employed by the members of the ICFO, to strengthen donor trust in civil society and reduce the probability of the misuse of funds.

This post was submitted by the authors to, and published by the Office of the Secretary General, Organization for Security and Cooperation in Europe (OSCE) in the CTN Electronic Journal, June 2011, on Preventing the  Abuse of Non-Profit Organizations for Terrorist Financing.  This edition of the Electronic Journal, in its entirety, may be found at http://www.osce.org/atu/78912.   All CTN Electronic Journals may be found at http://www.osce.org/atu/76931.  The authors and the Board of the International Committee on Fundraising Organizations (ICFO) express here our thanks to Mehdi Knani,  Editor or the Journal and an officer in the Action against Terrorism Unit (ATU) of the the OSCE for his kind assistance, not only with the editing of this paper, but also for addressing this important topic in this issue.