Damaging side-effects: Nicaragua’s government has used legislation to crack down on civil society and not-for-profit organisations under the guise of complying with FATF standards. Image: Sangiao_Photography / Adobe Stock
New guidance from the global financial crime watchdog is likely another cosmetic tweak that will fail to minimise the damage done to civil society organisations worldwide.
What does the charity sector have to do with the fight against illicit finance? For over two decades, sector participants have found themselves caught in the middle of a longstanding debate: how, and to what extent, are not-for-profit organisations (NPOs) misused as a conduit for financing terrorism?
The 9/11 Commission report revealed how Al-Qa’ida raised substantial funds by infiltrating charities (mostly in the Gulf) with weak oversight and internal controls, while simultaneously operating its own empire of charities expressly intended to funnel money to the terrorist organisation. Since then, NPOs have – with some justification – borne a bad reputation for being easy targets for terrorist exploitation. The Financial Action Task Force (FATF), the global standard-setter for anti-money laundering and countering the financing of terrorism (AML/CFT), responded by labelling the sector as ‘particularly vulnerable [to exploitation for terrorism financing]’ and creating a standalone standard to stem abuse: Recommendation 8.
Yet, saddled with this reputation, NPOs have spent years preoccupied with combatting the side-effects of the cure prescribed by the international community to treat this perceived disease. It would fall to NPOs themselves to advocate change to Recommendation 8 in a bid to stem the impacts being suffered by NPOs worldwide. This was achieved first in 2016 and then again last month. While the most recent raft of changes is significant, these edits alone only address some of the outstanding issues and are unlikely to correct the disproportionate harm done to civil society.
It took the NPO sector almost 10 years to collectively wake up to the source of the problems they were facing. Because of the FATF’s guidance, banks found themselves facing new regulatory pressures to limit exposure to terrorist financing risks, sometimes resulting in decisions to ‘de-risk’ NPOs en-masse. Further, overzealous implementation of Recommendation 8 – sometimes accidental, other times deliberate – saw states implementing a suite of blanket measures on the sector, such as ‘onerous licensing or registration requirements, intrusive powers for investigation and audit’ and in the very worst cases, lumping NPOs together with financial institutions as entities with financial crime reporting obligations. These unintended consequences of Recommendation 8 would prevail despite several assessments indicating that terrorist abuse of NPOs was infrequent, with the prevalence and detection of such cases being limited in relation to the scale of the sector. In many ways, the FATF’s proposed cure turned out to be far worse than the disease it was faced with, with adverse impacts on civil society globally almost certainly outstripping the risk of abuse flagged by the FATF.
The FATF updated the text of Recommendation 8 in 2016 in an effort to address overregulation and inappropriate restrictions on NPOs. However, misapplications persisted, and in some places became more pernicious than before. For example, in 2022, Nicaragua’s new AML/CFT legislation provided the state with new powers to crack down on civil society and to shut down NPOs working on human rights and democracy, under the guise of complying with FATF standards. And the problem was not relegated to authoritarian states alone. Debate surrounding the closure of Brexit campaigner Nigel Farage’s bank account this summer drew attention once again to the closure of bank accounts of Muslim NPOs and their leaders across the last decade in the UK. The instances are numerous and extensive.
It is unreasonable to expect NPOs to implement controls or conduct risk assessments on a par with the quality and standards expected of a bank
Facing renewed pressure from the NPO community and the results of its own internal study focused on unintended consequences of its standards, the watchdog chose to address the problem for a second time using the same approach but hoping for a different outcome.
Tweaking the Cure to Limit its Side-Effects: Success or Failure?
Has the FATF fared better in its second attempt at amending the language of its standard? Yes and no.
Several changes made to Recommendation 8, its interpretive note and an accompanying best practices paper are welcome improvements, primarily for their prescriptiveness and exemplification of practices that are distinctly not in line with the intention of the standards. For starters, the FATF has clarified its functional definition of what constitutes an NPO and pushed back against states applying blanket measures across the entire sector, sections of which face little to no terrorism financing risk at all. Explicitly excluding research/advocacy organisations from the definition should help in limiting undue suppression of these organisations.
Another welcome change is an unequivocal statement that NPOs should not be held to the same reporting and compliance standards as banks or so-called designated non-financial businesses and professions. NPOs are not profit-driven (hint: it’s in the name), they do not boast their own compliance units, nor do they have the resources of a large financial institution. And so, it is unreasonable to expect NPOs to implement controls or conduct risk assessments on a par with the quality and standards expected of a bank. This change of language immediately puts a vital tool in the hands of advocacy organisations working to remove NPOs from the list of organisations required to implement financial crime standards – a success recently achieved by Nigerian civil society – and will relieve the NPO sector of burdensome and inappropriate anti-financial crime obligations.
And yet, one is compelled to question whether editorial changes to a handful of PDFs on the FATF’s website could possibly match the expectations of the civil society leaders who have pushed for this for several years.
The FATF will continue to cast a long shadow over civil society so long as the watchdog continues to abdicate its responsibility to take ownership for the outcomes of the legislative, regulatory and administrative measures it promulgates
For starters, it is debatable whether the current revisions to Recommendation 8 meet the expectations set by the FATF's own project on the Unintended Consequences of the incorrect implementation of its standards. Although the adjustments are expected to have a good impact on some of the project’s focus areas – including financial exclusion, de-risking and NPO targeting – there is little reason to believe that changes to Recommendation 8 will have much impact on the fourth pillar of human rights, particularly relating to due process and procedural rights.
As the CFCS project on Authoritarian Abuses illustrates, selective interpretations of Recommendation 8 alone do not account for the entirety of the threats posed to NPOs and civil society. Investigative journalists, political opposition leaders and independent businesses have experienced the sharp end of a perversion of the FATF’s anti-financial crime regime by ill-intended states. While advocates have been focused on achieving changes to the text of Recommendation 8, autocratically minded leaders have gradually seized upon the entire FATF regime as a useful means and convenient pretence not just for frustrating the NPO sector as a whole, but for imprisoning and freezing accounts of particular individuals and organisations deemed to pose a threat.
The Patient’s Condition
Although the FATF has completed its work to the best of its current ability, for these positive changes in policy to be actualised, much more must be done by several actors. Firstly, the FATF’s team of assessors who evaluate states’ compliance with the standards need focused training so that they can effectively determine whether over-application has occurred and resulted in undue harm to the NPO sector. Secondly, sustained outreach to states, NPOs and financial institutions will also be needed to imbue in them the letter as well as the spirit of the re-revised Recommendation 8. Expertise developed within civil society forums such as the Global NPO Coalition on FATF and in academia and think tanks ought to be capitalised on in these efforts.
The FATF will continue to cast a long shadow over civil society so long as the watchdog continues to abdicate its responsibility to take ownership for the outcomes of the legislative, regulatory and administrative measures it promulgates. Changing the language of its standards to reduce the ambiguity that has allowed for misapplications and over-implementation is certainly welcome, but the FATF should also consider establishing channels of communication and mechanisms to respond boldly when wilful abuse of the standards is brought to its attention, including penalties and meaningful consequences for transgressing states.
Until such appetite for enhanced accountability within the FATF emerges, advocates should turn their attention to other missions, having achieved all that can be reasonably expected from working with the FATF itself. It is time for civil society to zoom out and recognise the various other standards and aspects of the FATF machine that serve to suppress civic space, giving rise to a ‘whole-of-FATF’ approach to advocacy and transcending the as-yet singular focus on Recommendation 8. Short of this, we are left with cosmetic edits and clarifications that may or may not grab the attention of regimes which are already resolved to continue weaponizing the FATF system.
The views expressed in this Commentary are the author’s, and do not represent those of RUSI or any other institution.
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Note: A minor update was made to this Commentary on 21 December 2023.
CPF Technical Assistance Programme Research Fellow
Centre for Financial Crime and Security Studies