On November 19, the Board of Governors of the Federal Reserve System, the Federal Deposit Insurance Corporation, the Financial Crimes Enforcement Network, the National Credit Union Administration, and the Office of the Comptroller of the Currency issued a joint fact sheet to provide clarity to banks regarding how to apply a risk-based approach to charities and other non-profit organizations (“Guidance Document”).
First, the Guidance Document notes that the U.S. government does not view the charitable sector as presenting a uniform or unacceptably high risk of being used or exploited for money laundering, terrorist financing, or sanctions violations. However, U.S. charities that operate abroad, provide funding to, or have affiliated organizations in conflict regions, can present potentially higher terrorist financing risks.
The Guidance Document then clarifies that it does not alter existing Bank Secrecy Act (“BSA”) and Anti-Money Laundering (“AML”) requirements nor establish new supervisory expectations. Instead, the Guidance Document emphasizes that banks should continue to apply a risk-based approach to customer due diligence requirements when developing the risk profiles of charities and other non-profit customers. More specifically, banks must adopt appropriate risk-based procedures for conducting customer due diligence that, among other things, enable banks to: (i) understand the nature and purpose of customer relationships for the purpose of developing a customer risk profile, and (ii) conduct ongoing monitoring to identify and report suspicious transactions and maintain and update customer information.
Finally, the Guidance Document recommends that banks collect the following information to determine the money laundering and terrorist financing risk profile of charities and other non-profit organizations customers, although such information is not required:
- Purpose and nature of the non-profit organization, including mission(s), stated objectives, programs, activities, and services;
- Geographic locations served, including headquarters and operational areas, particularly in higher-risk areas where terrorist groups are most active;
- Organizational structure, including key principals, management, and internal controls of the non-profit organizations;
- State incorporation, registration, and tax-exempt status by the IRS and required reports with regulatory authorities;
- Voluntary participation in self-regulatory programs to enhance governance, management, and operational practice;
- Financial statements, audits, and any self-assessment evaluations;
- General information about the donor base, funding sources, and fundraising methods, and for public charities, level of support from the general public;
- General information about beneficiaries and criteria for disbursement of funds, including guidelines/standards for qualifying beneficiaries and any intermediaries that may be involved; and
- Affiliation with other non-profit organizations, governments, or groups.
The Guidance Document is available here.
We will continue to monitor developments in this area. Please contact the authors or your usual Herbert Smith Freehills contacts for more information.