De-risking is causing significant banking problems for two-thirds of US nonprofits

A rural bank in Ghana. Photo by: Jonathan Ernst / World Bank / CC BY-NC-ND

De-risking by banks is making it difficult for nonprofits working internationally to send and receive money, causing projects to be delayed and even canceled, a new report has found.

The report by the Charity & Security Network finds that two-thirds of U.S. NGOs working abroad have experienced banking difficulties as a result of precautions around anti-money laundering and terror financing regulations, with 37 percent saying their wire transfers have been delayed and 33 percent saying fees have gone up. In addition, 6 percent of NGOs surveyed said their accounts have been closed, while 10 percent reported that banks have refused to open accounts for them.

These difficulties in accessing finance can have negative impacts on program delivery. The report includes examples of programs being canceled or delayed due to slow wire transfers. For example, in 2015, a charity was unable to pay for the fuel to power a hospital in Syria due to lengthy delays in transmitting funds.

Furthermore, charities are resorting to carrying cash or using other payment providers in order to get money where it needs to go, exposing them to higher risks and reducing transparency, the report finds.

“Delays in financial transfers can mean life or death for some of the most vulnerable populations. This is a problem that is far more pervasive than previously anticipated… The scope and nature of financial access difficulties represents a serious and systemic challenge for American nonprofit organizations,” said Sue Eckert, co-author of the report. “And this comes at an all time high in terms of humanitarian assistance needed.”

International banks have become increasingly cautious when it comes to providing services to nonprofit organizations and banks in developing countries as a direct response to anti-money laundering and terror financing — also known as AML/CFT — regulations. These were introduced in developed countries after the 9/11 terrorist attacks on the U.S.

Under these regulations, the responsibility for assessing and mitigating money laundering and terrorist financing risks rests with the banks, which face fines and reputational damage for falling foul of the regulations. As a result, many large banks have taken conservative positions to insulate themselves from risk, including severing relationships with countries and sectors that are perceived to be higher risk, in a process known as de-risking. This often includes banks in developing countries and nonprofit organizations operating abroad.

In other cases, the process of moving money is delayed due to banks returning wire transfers with requests for additional information and recipient banks demanding excessive documentation from the beneficiary to access the funds, as part of their efforts to safeguard against risk, according to the report. This means that transfers from the U.S. and other countries can take weeks or even months to land in beneficiary accounts.

“When you're carrying out seasonal programs, when that money doesn’t go through, particularly in the case of smaller organizations that don’t have cash reserves, those programs just don’t happen,” according to Scott Paul, a senior humanitarian policy advisor at Oxfam America, who was speaking at the launch of the report at the Center for Strategic and International Studies in Washington, D.C.

Oxfam America has experienced the fallout from de-risking both through its own operations and through its partners in countries, including Syria and South Sudan, Paul said. In Syria local banks prefer to stop serving NGOs, or bombard them with paperwork, rather than risk their relationships with correspondent banks in the U.S., with whom they liaise to make international transfers, he explained.

Paul added that the de-risking trend could make it difficult to keep pledges to put 25 percent of emergency funding directly into the hands of local and national operators — a target agreed by donors and aid agencies at the World Humanitarian Summit in Turkey last May as part of the “Grand Bargain,” a package of reforms to humanitarian funding. Currently, only 0.4 percent goes directly to these organizations.

“This is going to be a problem when these organizations have the least ability to access the financial system,” Paul said.

Remittances — the money migrants send back to developing countries, totaling approximately $440 billion every year — are also negatively affected by de-risking. Many of the banking and non-banking channels through which remittances flow have come under fierce scrutiny as a result of AML/CFT regulations.

Emile van der Does de Willebois, lead for financial market integrity and asset recovery at the World Bank, explained that the bank has been working on the subject. “The idea that nothing is low risk has taken hold so we have a lot of work to do in raising awareness within countries… to tone down requirements and keep remittances going,” he said. “We are doing what we can to lower the temperature around the overly zealous applications of countering the financing of terrorism [regulations].”

Potential strategies to overcome access to finance challenges center on how to better identify, manage and share risk.

Oxfam’s Paul made a case for redistributing more risk away from NGOs. “It would be much better to equitably share the risk between nonprofits, financial institutions and government than to impose it all on the humanitarian organizations, which are already in the field and are already taking on a great deal of other kinds of risk to deliver this public good,” he said.

The Charity & Security Network report offers a number of recommendations aimed at restoring financial flows to NGOs, including convening “multi-stakeholder dialogue to work towards solutions,” and creating special banking procedures to ensure that funds can be transferred in a more timely manner to places experiencing humanitarian crises. The report also proposes identifying and vetting alternative payment channels, as well as virtual currencies such as Bitcoin, for NGOs to use if banking channels remain a challenge.

Adopting a “safe harbor” provision for financial institutions that bank NGOs — absolving them of responsibility if AML/CFT provisions are breached — is another policy that has been suggested to mitigate the risk involved in serving the nonprofit sector.

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About the author

  • Edwards sopie

    Sophie Edwards

    Sophie Edwards is a Reporter for Devex based in London covering global development news including global education, water and sanitation, innovative financing, the environment along with other topics. She has previously worked for NGOs, the World Bank and spent a number of years as a journalist for a regional newspaper in the U.K. She has an MA from the Institute of Development Studies and a BA from Cambridge University.

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