In 2015, the official records of the Lebanese Ministry of Interior and Municipalities showed the presence of more than 8300 registered non-profit organisations (NPOs). With more than 13000 registered lawyers by the end of 2017, one could argue that, theoretically, for every lawyer there is, at least, one or two, existing or potential, NPO as a client.
Nevertheless, some NPOs may be vulnerable to money laundering and terrorist financing abuse by terrorists because such organisations usually enjoy the public trust, have access to considerable sources of funds, and are often cash-intensive. Terrorist organisations may take advantage of these characteristics to infiltrate some NPOs and misuse funds and operations to cover for, or support, terrorist activity.
FATF’s Recommendation 8 related to “non-profit organisations” recommends that countries review the adequacy of laws and regulations related to NPOs in order to protect them from terrorist financing abuse. NPOs are identified as being vulnerable to terrorist financing abuse, including that:
- by terrorist organisations posing as legitimate entities
- by exploiting legitimate entities as conduits for terrorist financing
- by obscuring the diversion of funds intended for legitimate purposes to terrorist organisations.
FATF defines an NPO as “a legal person or arrangement or organisation that primarily engages in raising or disbursing funds for purposes such as charitable, religious, cultural, educational, social or fraternal purposes, or for the carrying out of other types of “good works””.
This definition is based on the activities and characteristics of an organisation which put it at risk of terrorist financing abuse, rather than on the fact that it is operating on a non-profit basis, like the 1909 Ottoman Law on Associations applicable in Lebanon, which defines an NPO as “a group composed of several individuals who unite their information and efforts in a permanent fashion and the goal of which is not to divide profit”.
Identifying the risks
Since not all NPOs are high risk, lawyers who have NPOs as clients may find it useful to identify which categories of NPOs present high terrorism financing risks, by using all relevant sources of information provided by regulators, tax authorities, FIUs, donors or law enforcement and intelligence authorities, in order to detect features and types of NPOs which, by virtue of their activities or characteristics, are likely to be at risk of terrorist financing abuse.
Some of the following measures may be applied by lawyers for that purpose:
- Have a certified recent copy of the NPO’s license or registration. In Lebanon, according to Article 6 of the above-mentioned Ottoman Law on Associations, an association is required to submit a notification to the Ministry of Interior and Municipalities in exchange of which it is granted a receipt of notification within 30 days by the same Ministry.
- Maintain updated information on the NPO’s stated activities and compare them with the legal services required by the NPO.
- Maintain updated information on the identity of the person(s) who own, control or direct the NPO’s activities, including senior officers and board members.
- Maintain updated documentation of the NPO’s annual financial statements that provide detailed breakdowns of incomes and expenditures.
- Apply due diligence measures according to the appropriateness of the controls put in place by the NPO to ensure that all funds are fully accounted for and are spent in a manner that is consistent with the purpose and objectives of the NPO’s stated activities (The external auditor’s report is useful in this case).
- If the required legal services necessitate dealing with other beneficiaries and associate NPOs, take reasonable measures to confirm the identity, credentials and good standing of such beneficiaries and associate NPOs and that they are not involved with and/or are using their funds to support terrorist organisations.
- If the required legal services necessitate dealing with the NPO’s donor, take reasonable measures to document the identity of significant donors.
- If the lawyer was involved in the assistance of fund transfers, maintain, for a period of at least five years, records of domestic and international transactions that are sufficiently detailed to verify that funds have been received and spent in a manner consistent with the purpose and objectives of the organisation, noting that the lawyer could be required to make these available to competent authorities in some circumstances.
On another hand, lawyers should also identify the nature of threats posed by terrorist organisations to the NPOs. Terrorist organisations may exploit some NPOs to raise and move funds, provide logistical support, encourage terrorist recruitment or support terrorist operations.
In this regard, five typologies of threats, facing NPOs, may be identified:
- Diversion of funds: Diverting funds is a significant method of abusing NPOs. Internal or external actors (such as foreign partners or third-party fundraisers) are usually responsible for the diversion to support terrorist organisations through the NPO’s operational or financial processes.
- Affiliation with terrorists: NPOs or their directors may, knowingly or unknowingly, maintain an affiliation with a terrorist entity which may result in the NPO being abused for multiple purposes, including general logistical support to the terrorist organisations.
- Human capital support: NPOs may be illegitimately used to support local and international recruitment efforts by terrorist organisations.
- Program abuse: The abuse of real programs in which the flow of resources is legitimate, but where NPO programs are abused at the point of delivery.
- Representation abuse: This abuse occurs through false representation in which terrorist organisations establish fake NPOs or falsely represent themselves as the agents of existing NPOs in order to deceive donors into providing support. In general, well-planned deceptions are difficult to penetrate with the limited resources available to NPOs, which makes the lawyer’s vigilance indispensable to detect threats.
Minimising the risks
The existing Lebanese regulations, including Law No. 44 dated 24/11/2015 related to Fighting Money Laundering and Terrorist Financing, may sufficiently address the current terrorism financing risk faced by the NPOs. However, additional measures need to be considered by lawyers when existing measures become technically inappropriate to mitigate that risk, or as the nature and applications of the risk evolve and change over time.
This does not mean that all NPO clients should be made subject to the same measures. Lawyers should use their resources to ensure that the measures taken are commensurate with the risks identified. In addition, measures taken should not unduly restrict the client’s ability to access legal services.
In cases where the lawyer suspects that an NPO client may be or may become the subject of a terrorist abuse, a variety of measures should be implemented depending on the severity of the case, including the following three measures:
- Ongoing communication with the NPO client
Regular dialogue with the NPO client, even outside the framework of providing legal services, helps establish collaborative relationship with the client. In practice, the outreach could focus on the organisations which are at higher risk of abuse.
Another form of communication may take the form of providing education on the terrorism financing risks. In fact, the lawyer handling the NPO’s legal matters may involve its client in the education about the specific terrorist risks facing an NPO and provide examples of risk mitigation good practices. Preferably, this dialogue/education should be a two-way ongoing dialogue between the lawyer and the NPO client.
This task might seem as time consuming for a lawyer. However, it offers a lot of advantages to both parties:
- By obtaining information from the NPO clients about their specific needs, concerns, vulnerabilities, risks and challenges, the lawyer can use this information to offer the development of more effective policies, guidance and risk mitigation measures for the NPO clients.
- The lawyer may help its NPO clients prevent, detect or even disrupt high-risk activities before they escalate to instances of terrorist abuse if issues and concerns were proactively flagged by the NPO client.
- Risk-based monitoring
A generalised monitoring approach is inconsistent with a risk-based approach, which takes into consideration the resources available to the lawyer. In fact, lawyers should implement measures that are commensurate with the risks identified through their review of their NPO clients and their understanding of the terrorism financing risks facing those clients and should only apply enhanced measures where the risks are relatively higher. In doing so, particular attention should be directed towards the following typical characteristics of higher risk NPOs:
- NPOs with significant financial resources.
- NPOs that have a substantial share of international activities.
- NPOs operating in a close proximity to an active terrorist threat, whether domestically or internationally.
- Information gathering and sharing
In addition to the basic identification information of the NPO client, the lawyer may gather the following types of information that might be useful from a terrorism financing risk mitigation point of view:
- The governance structure: Name of governing body; Description of relationship to other organisational entities (board functions must be separate from management); List of current Board members with occupations and places of residence; If applicable, the beneficial owner(s) of the NPO should be identified …
- The governing body (the board): Basic responsibilities and powers; Duties of individual board members; Minimum number of board members; Membership rules (including eligibility, suspension and expulsion) and terms of office (ex. length of terms, limits on re-election); Election procedure; Minimum number of board meetings and method of convening meetings; Decision-making procedures (ex. number needed for quorum, voting process and recording of decisions, indications if decisions have to be taken collectively); Record of Board meeting minutes; Conflict-of-interest provisions (for the Board and organisation overall); Board member remuneration …
- Accounting data: Books of accounts (ex. general ledger, general journal); Cash receipts book; Cash disbursements book; Bank accounts records; Policies and procedures that follow internationally accepted principles of accounting (IFRS or GAAP); Division of functions: the approving officer for fund releases (e.g. CEO) is different from the bookkeeper and the cash custodian; Annual audits commissioned by the Board; Identity of the appointed auditor (must not have a relationship to anyone in the organisation) …
- AML/CFT data: Full and accurate audit trails of funds transferred outside Lebanon and to Lebanon from suspicious or high-risk jurisdictions; Use of registered bank accounts for every transaction; Procedures to verify the identity of beneficiaries, donors and associate NGOs; Confidential maintenance of the list of bank account numbers under the name of the NGO and any document on identifying information of persons …
Finally, a lawyer should establish an appropriate mechanism in response to a suspicion that a particular NPO client is being abused by a terrorist organisation. Such a mechanism should aim at ensuring that relevant information are promptly shared with competent authorities, in order to take preventive or investigative actions.
Sources: ACAMS. FATF.
The author hereby expresses his gratitude to the contribution of Mrs. Celine El Hajje.