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| August 2004 | The
Monthly Newspaper of the NYSSCPA |
Vol.
7, No.11 |
Funding of Terrorism Underscores Need for Due Diligence by Charities
Society Member Plays a Part in Treasury Guidelines
U.S.-based charitable giving may be only a minor source of financing for international terrorist operations but the problem, as one state Society member learned earlier this year, is that it doesn’t take a great deal of money to inflict harm.
The amount of nonprofit funding that is diverted from legitimate foreign recipient organizations to terrorists is “hard to quantify,” according to Paul E. Hammerschmidt, who in late spring met with U.S. Treasury officials to discuss these issues.
“As for a percentage, I would think it would be quite small,” Hammerschmidt said. “But even just a few hundred thousand dollars in the wrong hands can be problematic.”
Because of related comments submitted last year by the NYSSCPA’s Exempt Organizations Committee to the Internal Revenue Service, the Treasury invited the Society to participate in its April 28 conference on terrorist financing through the nonprofit sector. A member of the committee, Hammerschmidt attended the conference on behalf of the Society, helping provide feedback on Treasury’s anti-terrorist financing guidelines.
“It was described to us that what happens from time to time is that these organizations involved in international activities are contacted for funds for a specific purpose,” Hammerschmidt said. “Once those funds are released, however, instead of ABC happening, XYZ happens. The organization has been duped.”
Though Treasury indicated during the conference that this is the most common occurrence of misappropriated charitable funds, there are instances when nonprofits knowingly remit funds to terrorist groups. This could involve an individual affiliated with the charity, such as a board member or manager, who is also connected to a terrorist organization.
Know Your Grantee
To help mitigate the risk of nonprofits being “duped,” the Treasury created the anti-terrorist financing guidelines, which are organized into four categories: Governance, Disclosure/Transparency in Governance and Finance, Financial Practice/Accountability, and Anti-Terrorist Financing Procedures. These guidelines include a number of due diligence procedures that nonprofits distributing grants and conducting other activities abroad should follow.
Among them, the Treasury recommends that charities establish a conflict of interest policy for board members and employees; maintain records containing additional identifying information on their key employee and board members as well the key employees and board members of their recipient organizations; and publicly identify those subsidiaries or affiliates that receive funds. Charities should also make clear their goals and purposes; tell donors how and where their money will be expended; account for all funds received and distributed in accordance with generally accepted accounting principles; and make disbursements by check or wire transfer, but not in cash.
Although they are written as voluntary best practices for U.S.-based charities, Hammerschmidt said conference attendees expressed concerns with certain sections of the guidelines. In particular, he noted that some practitioners were troubled by the guidelines’ lack of safe harbor. Because charities following the guidelines to the letter could still be deceived by their foreign grantees and, as a result, be held responsible for helping to facilitate terrorist financing, these practitioners indicated their preference for some form of safe harbor in the guidelines.
Another issue, as Hammerschmidt mentioned, involved the role of the CPA working with nonprofits.
“Quite honestly, we had concerns that the Treasury wanted us to be the enforcement arm for their efforts,” the tax director for BDO Seidman said.
While CPAs recognize their responsibility to report suspicious activity to their nonprofit clients, and even, under certain circumstances, to encourage them to pass along the information to the authorities, none of the conference attendees were comfortable playing the role of a Treasury “policeman.” Further, he added, audits aren’t necessarily designed to identify fraud, especially when there is collusion.
The final category of the guidelines, Anti-Terrorist Financing Procedures, also sparked some debate amongst the attendees. According to the procedures, charities should collect certain information about a foreign recipient organization; conduct basic vetting of the organization; and review the financial operations of the organization.
Basic information includes the organization’s name in English and in the language of origin, and any acronyms or alternative names; the jurisdiction in which the organization has a physical presence and is incorporated; copies of filings or releases by the organization; sources of income; and names and addresses of subsidiary organizations, among other items. Additional steps include verification that the organization is not listed on certain U.S. or international databases as having ties to terrorism or money laundering, and the identification of financial institutions in which the organization maintains accounts.
“It becomes very difficult to ferret out what is problematic and what is okay,” Hammerschmidt said.
As other conference attendees observed, Hammerschmidt believes that complying with this category of the guidelines, in particular, could present financial and administrative burdens for small charities that lack the controls and resources of larger ones.
Going Forward
Given the issues raised and the Treasury’s willingness to modify its guidelines as well as foster an ongoing dialogue with the nonprofit community on these matters, the conference attendees established a “Treasury Guidelines Working Group” subsequent to the meeting. Though Hammerschmidt is unaware of any follow-up meeting with the Treasury, the working group has drafted a report, not yet issued, called a “Framework for International Charity.” The report puts forward seven basic principles for charities to follow, from complying with all laws of the United States and foreign jurisdictions to careful consideration for the safety of individuals providing charitable services in crisis regions.
To view the guidelines, go to the Treasury website at www.ustreas.gov, click on the “Terrorist Financing and Financial Crimes” link on the left-hand side of the page and then click on the “Protecting Charitable Organizations” link.
