Sending money to fragile and sanctioned states: A guide for NGOs

Counterterrorism legislation has added another thread to an already complex tapestry of challenges facing nongovernmental organizations seeking to send money to fragile and sanctioned states. While a small number of NGOs have seen their bank accounts closed over the past year, many have had individual transactions delayed and even barred. Since the United States introduced counterterrorism legislation in the aftermath of the 9/11 attacks, many countries have followed suit. This applies to countries where not only many international charities are based, but also where the majority of NGO beneficiaries live. Cambodia, for example, vowed this month to push ahead with a draft law that aims to prevent NGOs from acting as a funnel of funding for terrorist groups in the country and that will force NGOs to register and file accounts with the government. Kenya has also cracked down on money transfer providers and this month accused the U.S., the U.K., Norway, Germany and Finland of funding organizations that it claims are linked to al-Shabab. As the front-line facilitators of finance, banks have been pushed into an enforcement role. NGOs and the people they seek to help have been among the hardest hit. Nearly a third of charities questioned in a recent survey by the U.K. Charities Finance Group said that they felt banks had become “substantially more risk averse.” Considering the pressure that banks are under to comply with regulations that are not always clear and that continue to evolve, this is not surprising. One of the difficulties charities and NGOs have faced with U.K. anti-terror legislation is that it is “far from clear. People are struggling to be confident that they’re compliant,” said Tim Boyes-Watson, director at Mango, an NGO that trains other NGOs on financial management and accountability. As with sanctions, the issue with the legislation isn’t so much about making sure that NGOs don’t break the rules. As long as NGOs already have in place sensible procedures ensuring due diligence of every organization they move money through in the aid chain “it seems quite unlikely there would ever be a case brought against you,” he said. But for banks, the issue is more sensitive. With many already under pressure to reduce risk, issues like sanctions, counterterrorism legislation, fraud and financial crime are making it harder for them to process the types of transactions that many charities make, especially in the case of smaller organizations that don’t have robust risk-management mechanisms in place, said Justine Walker, financial crime director at the British Bankers Association. While efforts to facilitate discussions on the issue between banks and NGOs are proving fruitful, making transactions to certain countries looks set to remain challenging, she said. In connection with its Gaza crisis appeal, the Disasters Emergency Committee is working with BBA and other partners on a document that will help NGOs navigate the U.K. legislation, providing members with a set of due diligence principles covering issues such as how they contract partners on the ground in Gaza. The guidelines will act as an extension to another guide, “Getting Aid to Syria,” which DEC and BBA co-published in December 2013 and provides a useful overview for NGOs and charities of how sanctions against Syria impact the sector and provides practical tips on how to get money into the region without running afoul of legislation. The counterterror document should therefore be something any NGO concerned about the issue keeps on its watch list. In the meantime, there are a number of ways NGOs can help limit the extent to which such legislation affects their operations. At the heart of these is giving banks as much confidence as possible that a transaction won’t land either of them in hot water. 1. Spring clean your policies and procedures. Before an NGO can demonstrate to a bank that its work does not support terrorism, breach sanctions or facilitate corruption, it needs to be absolutely sure of the same itself. A good first step is to conduct an internal health check — even better, hire an independent to do it for you — to confirm necessary policies and procedures are in place. In its most basic form, it should allow you to track exactly where your money goes and what it is used for. Put in place mechanisms that give you a clear and detailed understanding of the identity and activities of individuals that receive any money you transfer, as well as on-the-ground partners that use it, said Tom Keatinge, a former investment banker and author of “Uncharitable Behavior,” a report British think tank Demos released late last year, which looks at the impact of counterterrorism regulations on charities. The same clarity is needed regarding trustees and board members. Make sure also that you thoroughly audit programs months after they are set up, not just at the outset. Thorough research before you attempt a transaction always pays, said Dougal Freeman, chief financial officer at the Global Alliance for Improved Nutrition. This can include “even simple things like some countries still being on the U.S. government watch list, which you might not even realize, or that it’s better to do some transactions in euros than dollars or to route money in a different way.” Research should ensure not only that partners have no links to terrorism but that they are not the target of sanctions. The U.K. government website has a list of “designated persons subject to financial sanctions” as well as a page on embargoes and sanctions. A similar list is available on the U.S. Department of Treasury’s website. 2. Communicate. Although it may feel that way, banks are not specifically targeting NGOs in their “de-risking” and the number of organizations whose accounts have been frozen remains small, said Michael Wright, director of communications and membership at Bond. The trick is to make them comfortable that they have every tool possible to accurately assess the risk your organization presents to them, and to demonstrate that that risk is minimal. So make sure your bank has all the information it needs to cover its own back and allow payments through. Of course, closer dialogue won’t eradicate every issue banks face regarding transferring money to fragile states, but “you can get around some of that through proactive communication with your bank — explaining to them the type of work you’re doing, how you work, being upfront about any of the risks involved, being clear about what sort of organization you are and what you do,” Wright said. Regularly update your relationship manager with any issues arising in the country where you operate. This will “minimize the risk of you being de-risked from their portfolio,” he said. Maintaining an honest dialogue with your bank will also help you understand the mechanisms they use to “red flag” certain transactions, Boyes-Watson noted. “The most valuable thing [NGOs] can do is talk to their bankers … so they feel fully invested in the NGO’s mission and then operate on a no-surprises basis,” Keatinge agreed. Crucially, make sure your relationship manager at the bank has enough information to make your case to the risk committee that really makes decisions. Building a strong relationship with your bank will also help it understand how your organization works, including the challenges it faces. It can also allow you to ask your relationship manager to check in advance whether the bank will let you send money to a particular region, Abdurahman Sharif, executive director at the Muslim Charities Forum, said. If not, a good bank will help you find alternative ways. Finding out as much as possible about compliance measures banks have to adhere to will also help charities anticipate what kinds of questions they will be asked and what information they should volunteer, he said. As much as possible, prepare in advance the answers to questions your bank will probably ask, CAF Bank CEO Paul Ostacchini suggested. The bank provides NGO clients with a questionnaire to help them through the process and give “them a lead into what they need to consider.” Questions on the list include whether a designated officer is responsible for overseeing operations and payments in overseas countries and whether they have a compliance or audit function for the same. It asks whether the organization screens for international sanctions, what policies are in place to comply with regulations and how it identifies beneficiaries. Other questions include what training the organization has for trustees, management and senior staff, whether they operate cash programs and what are their sources of funding. CAF Bank also asks about partner organizations in foreign countries because “we need to know about our customer’s customers,” Ostacchini said. For charities with complex operations, especially when they deal with countries that are subject to sanctions, NatWest looks favorably on those that are “open and transparent and whose trustees clearly ensure that such risks are properly managed,” said Richard Stacey, a senior relationship manager for nonprofits at NatWest parent Royal Bank of Scotland Group. While some charities don’t like the level of scrutiny banks subject them to, “that’s the environment you’re in now,” BBA’s Walker said. “If you want to send money to areas of conflict, you have to be ready for those questions and be prepared to answer them.” Communication with banks should be fairly granular. For each transaction into a sanctioned or conflict environment, for example, attach a detailed explanation of its purpose as well as a contact telephone number for a person at the organization who can provide more information if required, she advised. The Getting Aid to Syria guide also recommends that NGOs explain how they conduct due diligence on local partners, including how often they screen them, what sanctions lists they used for screening, and what criteria they apply before starting a relationship. 3. Prepare for delays. Even when you are confident that transfers to difficult regions will be approved, anticipate delays and prepare for them. “If you are sending money to Syria, or bits of Iraq under Islamic State control, you should factor in that you will have a delay,” Walker said. “All of those payments will now get held for further scrutiny.” NGOs shouldn’t expect transfers to these fragile and sanctioned states to “arrive in the same way that you would do a domestic transaction.” 4. Involve your finance team in everything. “Make sure that finance is central to your operations,” Keatinge said. “Don’t dismiss financial hygiene as something only for accountants. It’s for everybody.” Some NGOs now have someone from the finance team present at all program-planning meetings, “so that the program is planned in a way that makes it as easy as possible to audit and as easy as possible to evidence, rather than the finance guys trying to figure things about six months after a project’s happened.” 5. Invest in training. But smaller charities often can’t afford to hire a dedicated finance person. Borrowing expertise, for example by inviting accountants or other financial expertise to join your board, can help plug that gap. Remember though that in most cases their experience will be private sector in nature. Additional training for staff at charities can therefore be an important step toward staying in line with legislation, Boyes-Watson and Sharif said. Although lack of clarity on counterterrorism legislation means charities could struggle to find training specifically targeted at this issue, organizations such as the Charity Finance Group, Bond and Mango run seminars on related issues, including governance and the prevention of fraud or corruption. In essence, these will cover the bulk of what NGOs need to know. “It’s about having good internal controls and good due diligence with all the people that you’re going to work with,” Boyes-Watson said. 6. If all else fails, find another way. If a bank refuses to process a transaction, there may be another way of getting the money to where it is needed. Different banks have different mechanisms for red-flagging transfers, so just because one bank says no doesn’t mean all will. For this reason, the Muslim Charities Forum advises charities to have at least two or three bank accounts from different providers. If no bank will touch your transaction, perhaps because of concerns about your local partners, but you are absolutely confident from your due diligence that funding them would not fall afoul of counterterrorism or other legislation, there are other options. You could, for example, simply transfer cash to your nearest field office and pay the partner locally, Boyes-Watson said. While “this is the sort of thing that would worry many sensible trustees,” an NGO could develop “an extra procedure that would kick in to make sure you’re really doing your checks where the bank has flagged something up,” he said. There is anecdotal evidence of charities physically taking cash to program destinations, although again this leaves them vulnerable to issues surrounding transparency and even losing the money, Wright noted. 7. Work together. Working collectively, for example through umbrella organizations like Bond or the Muslim Charities Forum, can help charities navigate and stay abreast of complex issues related to sanctions and legislation. This is especially true for small charities that may not have a large staff or officials with specialist financial expertise, Boyes-Watson said. If charities aren’t big enough to devote man-hours to compliance and financial hygiene, they are probably too small anyway, Keatinge said. The number of charities with a Syria mission has ballooned in the past four of five years “and with the best will in the world those standards probably aren’t what they should be,” he said. And while their argument that small is nimble holds some weight “that is not probably going to endear you to your bankers.” 8. Enter the debate. Dialogue between charities and banks in the U.K. has “improved a huge amount,” despite inevitable frustrations on both sides, BBA’s Walker said. However, comprehensive dialogue at the global level is still vitally needed. Internationally “there’s no one body getting a grip and taking [the dialogue] forward,” she said. “There are people doing bits and pieces — they might do something on a specific piece of counterterrorism legislation but not covering the whole picture of risk management.” Mango would like to see the Charity Commission work with the U.K. government to put in place a mechanism where charities refused banking services can internally check their compliance with relevant legislation and then voluntarily disclose any alternative method of getting money into a country that they are forced to use. This would allow the sector to more efficiently flag with the government any challenges it faces and hopefully lead to a more understanding dialogue, Boyes-Watson said. Ultimately, NGOs are not powerless bystanders in the countries where they are based and there are many ways they can influence how their needs are taken into account in the drafting and application of legislation that affects them. So be vocal about the challenges you face — either individually or through an umbrella organization — and enter the debate. Check out more funding trends analyses online, and subscribe to Money Matters to receive the latest contract award and shortlist announcements, and procurement and fundraising news.