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NATIONAL RISK ASSESSMENT

Victory for charities as risk rate gets slashed to ‘low’

30 October 2017

October 26th was a big day for charities, although few may have noticed it. The Government published with little fanfare a document that goes by the title of the updated National Risk Assessment for money laundering and terrorist financing.

The National Risk Assessment – known as NRA 17 – attempts to evaluate the extent to which certain sectors of the UK economy are exposed to the risk of being used for money laundering and terrorist financing.

Crucially for charities, the assessment rates the risks of the not-for-profit sector as low, slashing the risk rating from medium-high in the last assessment, which was published in 2015.

NRA 2017 is an incredibly important document for charities because it sets the tone for how they will be regulated and in particular, how financial service providers assess risk in the sector.

Concerns that charities are at risk of being abused by those wishing to funnel money to terrorist groups or other forms of financial crime has led to big increases in the scrutiny they face by banks and other financial service providers, which face huge penalties if they allow money to slip into the wrong hands.

Obviously it is vital that charities are not abused by criminals, and it is crucial that they do not – however unwittingly – allow money to fall into the hands of criminals or terrorists. Everyone in the sector must be vigilant to prevent organisations that have been founded to prevent human suffering being co-opted by those who seek to perpetrate it. And that is particularly true of organisations working in fragile states and conflict zones such as Iraq and Syria.

Until recently, documents such as the National Risk Assessment have reinforced a perception that charities, as the most significant component of the NPO sector, are somehow innately at risk of abuse. But now, NRA 2017 recognises that in “comparison to the overall size of the UK charity sector, the amount of known abuse for terrorist financing is very low.” 

This change is a victory for the sector and has come about after a huge amount of work by charities, as well as the Home Office, Treasury and the Charity Commission which deserve credit for listening and acting on the concerns of not-for-profit organisations.

Rather than rating the entire sector as “medium-high” risk, as NRA 2015 did, NRA 2017 highlights specific areas of risk for charities. Organisations operating in high risk countries and in particular those where ISIS operates are undeniably at greater risk and while many organisations have extremely effective processes in place to mitigate these threats, some organisations and practices are vulnerable. In the rare cases where abuse has occurred, most of the organisations were established for legitimate purposes have been be taken advantage of by people using their name illegitimately to raise funds for terrorist groups, by employees or trustees diverting funds or were victims of looting, blackmail and kidnapping.

Perhaps the most striking and pleasing aspect of NRA 2017 is its recognition that the risk of terrorist financing in charities cannot be viewed in isolation from the impact of their work. Charities play an essential role not only in mitigating the impact of terrorism but in preventing it. By addressing the causes of discord between communities and alleviating the desperation and suffering that can drive people towards extremist groups, charities are a crucial weapon in the fight against global terror. Furthermore, it is increasingly understood that rather than reducing the risk of charitable money falling into the hands of terrorist groups, de-risking may “have the effect of pushing charities out of more intensely regulated areas of activity and into higher risk ways of working, such as transacting through physical cash or unregulated MSBs, thereby increasing the risks in the sector.”

NRA 2017 comes at a crucial time with the UK is currently being evaluated by the Financial Action Task Force (FATF) – an international organisation that monitors countries' progress in implementing its recommendations on tackling money laundering and terrorist financing. Indeed, FATF will look to NRA 2017 in judging the implementation of its recommendations to assess whether regulatory measures are appropriate and proportionate in mitigating risk.

The NRA 2017 is merely the latest positive development in an area where the UK is increasingly driving progress having played a key role in influencing changes to key FATF documents relating to NPOs. Most strikingly, last year FATF changed “Recommendation 8” to remove the assumption that NPOs “are particularly vulnerable” and now suggests that countries employ a “risk-based approach”. In this way, the UK is not only helping to reverse regulatory assumptions which are leading to barriers in accessing vital financial services for UK charities; it is setting a precedent for other governments to follow. It is hoped that FATF now hold up the risk-based approach for charities outlined in NRA 2017 as an example for others to follow and improve on.  

If there is one dark cloud left on the horizon for charities in this area it is the concern that whilst risk-based approach removes the presumption of risk for the many, it could ultimately further stigmatise the few. Small organisations operating in fragile states may, without improved communication between financial service providers, regulators and the charities themselves, find it increasingly hard to operate. Given this, it is crucial that we see NRA 2017 as progress, but not the end point in our effort to create an environment where charities and donors can move money to where it is needed, safe from the threat of abuse.

It is great news that the government has found the risk of money laundering and terrorist financing in charities to be low. However, now is not the time to be complacent, either about the need to ensure that charities are able to access financial services and get money to where it is needed or about the need for our sector to constantly improve our governance and practices to guard against those who would use our sector as Trojan horse for their malign intentions.

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