and Terrorist Financing
What CPAs Need to Know
Peter Romaniuk and Jeffry Haber
MARCH 2008 - During
the summer of 2007, two trials under anti–terrorist financing
laws—both involving charities—made headlines. In Florida,
of three men found guilty of conspiracy to commit terrorism and
of offering material support to terrorists, one ran the American
Worldwide Relief Organization, which is reported to have funneled
support to Chechen rebels in the 1990s. In Texas, the Holy Land
and several of its officers were accused of providing material
support to a designated Foreign Terrorist Organization. Though
the case ended in a mistrial, the Foundation was shut down. These
cases serve to illustrate the role that charities may play in
funding political violence and the determination of federal authorities
to crack down on terrorist financing.
work in the nonprofit and private foundation sectors should be
aware of the federal anti–terrorist financing rules. Accountants
are well positioned to provide advice regarding compliance in
this area. They have access and exposure to critical and sensitive
information—for example, regarding grantees and financial
transactions—that is useful in spotting and identifying
terrorist financing issues. Compliance requires awareness of the
relevant rules and regulations as well as how the laws and rules
apply to specific activities.
To be clear,
the authors do not wish to contribute to the perception that CPAs
are in the “front line” of the war on terrorist financing
(although it is the case that CPAs abroad are increasingly expected
to undertake regulatory tasks previously reserved for banks, such
as reporting suspicious activity). Rather, they seek to raise
consciousness about relevant developments, as prudence demands.
caveat: The description of laws and regulations provided herein
should not be interpreted to mean that CPAs should approach individuals
with suspicion. Far from it. Charities provide valuable services
to needy populations in the U.S. and abroad. While cases involving
the misuse of charities for terrorism purposes have come to light,
they contrast sharply with the vast legitimate majority of charitable
activity. Moreover, the nonprofit sector has taken proactive measures
in the past several years to ensure that the donating public maintains
trust in the operations of charities, providing significant input
into the federal government guidelines discussed below. In this
regard, CPAs can contribute to the ongoing vitality and integrity
of this critical sector of the economy.
Financing: The Basics
groups incur both organizational and operational costs. Evidence
indicates that terrorists use diverse methods—both licit
and illicit—to raise and move funds. The misuse of charities
represents one illicit method. By presenting themselves as charities,
terrorists can exploit unwitting donors and provide a cover for
the disbursement of funds. In recognition of these vulnerabilities,
the oversight of charities has attracted increased attention among
governments and international organizations in recent years.
law, it is an offense to provide or collect funds for acts of
terrorism (18 USC section 2339C), to provide material support
to terrorists (18 USC section 2339A), or to provide material support
to designated terrorist organizations (18 USC section 2339B).
The U.S. has a range of legislative and executive authorities
under which individual terrorists, entities linked to terrorism,
and terrorist organizations can be designated. The consolidated
list—the specially designated nationals (SDN) list—is
maintained by the U.S. Treasury’s Office of Foreign Asset
Control (OFAC), which also has responsibility for administering
sanctions programs not related to terrorism. The list is available
from OFAC’s website at www.treas.gov/offices/enforcement/ofac/sdn/index.shtml.
The SDN list is a critical reference point for charities (in their
dealings with grantees) and their accountants and auditors. More
than 40 charitable organizations have made an appearance on the
list. (For more information about these charities, see www.treasury.gov/offices/enforcement/key-issues/protecting/
As a first
step, nonprofits should check potential foreign grantees against
the list. Admittedly, the list can be a blunt tool. A potential
grantee’s name may appear on the list by coincidence; duplicate
names occur with some frequency. Key protections that a nonprofit
can establish include relevant and appropriate procedures to first
identify potential problem areas and a set of guidelines on how
to handle identified problems. The nonprofit should have written
procedures for what to do when an SDN name-check reveals that
a potential payee is on the list.
steps the nonprofit can take would be to request a representation
from the potential grantee that they are not the entity or individual
listed on the SDN list. While not providing any significant level
of comfort, this is a necessary first step. The nonprofit can
then seek to develop evidence that the named entity or individual
is indeed different from the potential grantee. For corporate
entities, such additional checks can include simple and basic
steps, such as using a database like GuideStar.org to see if multiple
entities have the same name, and searching for the name on the
Internet, looking for distinct addresses for each entity. For
individuals, the SDN list will provide a date and place of birth
(albeit less than a complete address in most cases). By asking
to see the passport of the potential grantee, the nonprofit can
check whether the birthdate matches and whether the individual
spends time in his or her country. Further guidance from OFAC
is also available at
SDN list, a key plank of the U.S. Department of the Treasury’s
effort to suppress terrorist financing through nonprofits is industry
outreach. The government and the nonprofit sector have not always
agreed on how best to protect charities against terrorist financing.
Partly in response to industry concerns, the Treasury Department
reissued guidance in September 2006 targeted to the nonprofit
sector: Voluntary Best Practices for US-Based Charities
charities-intro.shtml). The guidelines emphasize a risk-based
approach to countering terrorist financing. Although the primary
audience for the guidelines is managers of charitable organizations,
CPAs working in the sector are well advised to review them.
practices identified by the Treasury Department include the following:
accountability and transparency. The guidelines specify
that charities should establish transparent and robust governance
procedures, including independent oversight by a governing board
and the public disclosure of information about key employees.
accountability and transparency. The guidelines recommend
that charities with a total annual gross income of $250,000
or more should select an independent CPA firm to conduct an
audit and issue an annual financial statement. All charities
should account for all funds received and disbursed. The names
of all grantees should be recorded and, to the extent possible,
disbursements should be made by check or wire transfer. Where
it is necessary to make disbursements in cash, the guidelines
recommend that charities use small increments and exercise additional
verification. The guidelines advise that charities require
grantees to periodically report on their use of disbursed funds.
Indeed, grantees should take reasonable steps to ensure that
funds provided by the charity are not distributed to terrorists
or their support networks. Where reasonable, charities should
exercise oversight—including, for example, on-site audits—to
ensure the integrity of disbursements.
and due diligence. The guidelines suggest that charities
collect and maintain detailed information about grantees and
conduct basic vetting of grantees (e.g., by using the SDN list).
Charities should require grantees to certify that they are in
compliance with all OFAC sanctions programs. Similarly, charities
should conduct basic vetting of their own employees.
as noted above, in the event that the name of a grantee or employee
appears to match a name on the SDN list, charities should undertake
appropriate due diligence and consult further OFAC guidance (www.treasury.gov/offices/enforcement/ofac/faq/answer.
shtml#hotline). For suspicious financial activity related
to terrorism but not involving a possible match, the guidelines
recommend using the “counter-terrorist referral form for
provided in the Voluntary Best Practices is broad in
scope. But regulators acknowledge that some charities are more
vulnerable to misuse than others. To make implementation manageable,
the Treasury advocates a risk-based approach. In practice, this
has meant issuing additional guidance in two forms.
March 2007, OFAC released the Risk Matrix for the Charitable
Sector (see www.treasury.gov/offices/enforcement/ofac/policy/charity_risk
_matrix.pdf). The matrix is useful for CPAs because it effectively
operationalizes the Voluntary Best Practices, giving
a more concrete indication of what to look out for. In auditing
charities, for example, it is prudent for accountants to be alert
to red flags such as charitable grants that are not made in writing,
charities that do not perform due diligence, large disbursements
to grantees made in cash, and grantees with little or no history
of charitable activity.
the U.S. Treasury Department (www.treasury.gov/
and international bodies (www.fatf
gafi.org/dataoecd/39/19/34033761.pdf) have issued “typologies”—past
examples of terrorist financing through charities—to provide
illustrations of how abuse can occur. In addition to general examples,
the Treasury Department document has a specific focus on the abuse
of charities as part of the international response to the October
2005 earthquakes in Pakistan and India. Beyond the diversion of
funds and the use of charities as front organizations, these typologies
suggest that terrorist financing may occur through fraud at the
branch or field office level.
an increasingly important role in ensuring that charities and
their grantees comply with terrorist financing laws and regulations.
In their role as “gatekeepers,” accountants are exposed
to a broad range of financial information and have a unique perspective
of what goes on in an organization. In approving transactions
or auditing financial statements, CPAs are well placed to detect
and prevent suspicious activity. Moreover, in large financial
institutions, accountants play an increasing role in designing
and implementing counter–terrorist financing and anti–money
laundering compliance programs and systems. In these ways, CPAs
are in a unique position to help identify and mitigate potential
problems by understanding the rules related to terrorist financing.
here to view Sidebar.
Romaniuk, PhD, is an assistant professor of government
at the John Jay College of Criminal Justice, CUNY, New York, N.Y.
Jeffry Haber, PhD, CPA, is an associate professor
of accounting at Iona College, New Rochelle, N.Y., and controller
of the Commonwealth Fund, a private foundation focused on healthcare
policy, New York, N.Y.