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Charities, nonprofits: how to cut the risk of terror financing

By Simon Norton and Paula Chadderton

Over the past fortnight, two high-profile cases have revealed that Australian money may have inadvertently financed terrorism.

Australian Federal Police are investigating whether more than $27 million in Commonwealth childcare benefits and rebates has been fraudulently obtained and sent overseas, possibly to fund terrorism. Those arrested or questioned have links to Dar al Quran wa Sunnah, a Sydney-based Lebanese charity established to raise money for Syrian refugees. This charity is already under investigation by the financial intelligence agency AUSTRAC and the Australian Charities and Not-for-profits Commission for possible terrorism financing.

This case follows the arrest of World Vision’s Gaza manager for allegedly diverting$US7 million a year — about 60 per cent of World Vision’s annual budget in the Palestinian territories — to Hamas. Donations were allegedly used to construct a military base, dig tunnels, pay salaries and buy weapons for Hamas. According to the Israeli intelligence agency Shin Bet, Hamas recruited this manager in 2004 to infiltrate the international aid organisation.

Australia’s Department of Foreign Affairs and Trade has donated more than $5m over the past three years to World Vision’s Palestinian territories programs. Funding has now been suspended pending investigation.

Despite this, Australia was criticised by the Financial Action Task Force — the global standard setter for money laundering and terrorism financing — last year for not undertaking a risk assessment and for inadequate outreach and supervision of the sector.

The recent review of the Anti-Money Laundering and Counter-Terrorism Financing Act 2006, released in April this year, was also silent on the terrorism financing risks associated with of charities and nonprofit organisations.

However, the Australian government announced a response at the second regional counter-terrorism financing summit held in Bali this month.

At this summit, AUSTRAC and its Indonesian counterpart, PPATK, released the world’s first regional risk assessment on terrorism financing.

It lists, as priority actions, identifying high-risk nonprofits and adopting targeted oversight and outreach.

Australia will undertake a further risk assessment of this sector and work with regional partners to enhance the initial regional risk assessment. In Australia, the ACNC is crucial to this work and future oversight, outreach and education.

The ACNC currently undertakes some oversight and outreach in the sector, including governance and counter-terrorism financing education. But the AML/CTF Act limits the amount of information ACNC can obtain automatically and directly from AUSTRAC to match with its own holdings.

Amending the AML/CTF Act to specify the ACNC as a designated agency would help fix this problem. It would also give law enforcement and intelligence agencies access to greater information on nonprofits suspected of terrorism financing. Following the risk assessment of nonprofits, further legislative change may be required to mitigate the terrorism financing risk.

This will probably mean more regulation for at least some charities, and no matter how minimal, that will add to their administrative costs. Of course, being seen as a terrorist financing risk is also likely to have an impact on donations.

The approach to making this work requires three elements to come together.

The first is carefully targeted compliance measures, based on an assessment of terrorism financing risk.

Such targeting is within government’s abilities, if the right agencies have the right information available about the activities of charities.

The second element is action by charities and nonprofits themselves — especially those raising funds for causes in high terrorism risk countries such as Iraq, Syria, Afghanistan and Libya. Understanding how organisations can be misused, and then implementing good governance practices and mitigation strategies, is crucial.

AML/CTF controls help nonprofits mitigate their terrorist financing risks and safeguard them from general risks such as internal fraud. This stronger governance will balance out the additional compliance burden. Their voluntary acceptance of the additional burdens will be crucial to overall success of the whole effort.

The third element is public awareness. We all must be aware of the risks involved in donating to unregistered, pop-up charities that claim to support causes. The average member of the public can’t carry out any due diligence on these collectors. Best to give only to registered charities that work closely with regulators.

Charities and nonprofit organisations undertake much important work. It’s vital that this work is not undermined by nefarious actors and a loss of confidence in reputable organisations.

Paula Chadderton is a visiting fellow and Simon Norton is an analyst at the Australian Strategic Policy Institute.

Originally published: The Australian. 22 August 2016.