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Non-Profit Organisations and Their Relationship with FATF Recommendation 8

·Regional
Volunteers organizing donations at a community center, illustrating nonprofit organizations work related to FATF Recommendation 8

Non-profit organisations (NPOs) are entities formed by the will of one or more persons (individuals or legal entities) to carry out activities for the benefit of their members, third parties or the community at large. NPOs make up what is known as the "third sector" of the economy, since they belong neither to the public nor to the private sector.

Legal structure of NPOs

Countries are free to define in their legislation which legal structures may have "non-profit" characteristics, but the following types of legal entity stand out:

  • Associations

  • Corporations

  • Foundations

  • Cooperatives and pre-cooperatives

  • Mutual associations

  • Employee funds or unions

  • Non-governmental organisations

Types of activity NPOs carry out

NPOs can be classified in various ways according to their activity. Below are some of the categories they usually fall into:

Solidarity economy:

Entities that promote association, cooperation and self-management, geared towards producing, consuming and trading goods and services, largely on a self-managed, cooperative basis. This activity is mainly carried out through legal structures such as cooperatives, pre-cooperatives or mutual associations. These entities may carry out microfinance activities.

Non-governmental or development cooperation organisations (NGOs):

Entities that promote economic and social development and social justice, including reducing poverty or economic disparity, and that provide humanitarian aid, among other areas.

Civil society organisations:

These entities champion various causes, such as human and civil rights, environmental protection and democracy, among others. In some classifications they are also considered NGOs.

  • Trade unions and workers' or professional associations: entities that promote rights relating to the working environment of employees and professionals.

  • Trade bodies: associations of business owners that seek to promote their economic sector or industry.

  • Religious entities: entities that promote the development and practice of a religion or spiritual training.

  • Political parties and movements: entities that promote political ideas and candidates to represent those ideas in elected public bodies and institutions.

  • Organisations providing non-profit services: entities offering services that may also be provided by the public or private sector, but here without a profit motive, delivered through legal structures such as foundations, associations or corporations. These services cover various areas, including for example:

    • Education — e.g. educational institutions, universities.

    • Healthcare — e.g. hospitals, health centres.

    • Environmental or animal protection — e.g. animal shelters or waste collection and recycling centres.

    • Services for groups with special needs — e.g. children, people with disabilities or particular illnesses, refugees.

  • Artistic, cultural, training or sports organisations: entities focused on developing and promoting artistic, cultural and sporting expression, such as theatre, dance, music or any sport.

  • Grassroots or community organisations: entities that promote activities in communities or social groups, including for example:

    • Minority, ethnic or gender communities.

    • Groups of people in particular areas, such as neighbourhoods or cities.

    • Groups of people who come together around a shared characteristic, such as a profession (e.g. an association of engineers) or an age range (e.g. an association of retired people).

  • Corporate social responsibility foundations: institutions created and funded by a company in order to make donations and carry out philanthropic activities, legally separate from the company that set them up.

FATF Recommendation 8

According to FATF Recommendation 8, "Countries should identify which subset of organisations fall within the FATF definition of non-profit organisation (NPO), and assess their terrorist financing (TF) risks. Countries should have focused, proportionate and risk-based measures in place, without unduly disrupting or discouraging legitimate NPO activities, in line with the risk-based approach. The purpose of these measures is to protect those NPOs from TF abuse, including:

  • by terrorist organisations posing as legitimate entities;

  • by exploiting legitimate entities as conduits for TF, including for the purpose of escaping asset-freezing measures;

  • by concealing or obscuring the clandestine diversion of funds intended for legitimate purposes to terrorist organisations."

NPOs that fall within the FATF definition

Recommendation 8 defines an NPO as a legal person, arrangement or organisation that primarily engages in raising or disbursing funds for charitable, religious, cultural, educational, social or fraternal purposes, or for carrying out other types of "good works".

Identifying which NPOs fit the FATF definition is a challenge, and it can differ greatly from country to country since it depends on many factors, among them: the local and international terrorist threat, the structure of the domestic NPO sector, the territory in which they operate, the types of channels used for their operations and the jurisdictions they deal with.

TF risk in NPOs

A TF risk assessment is a product or process based on a methodology that seeks to identify, analyse and understand TF risk, and serves as the first step in addressing it. Although assessments can take different forms, a TF risk assessment should generally cover every aspect of raising, moving, storing and using funds or other assets (including goods, vehicles, weapons and so on) to meet the needs of a terrorist or terrorist organisation.

BEST PRACTICES ON COMBATING THE TERRORIST FINANCING ABUSE OF NON-PROFIT ORGANISATIONS — FATF, NOVEMBER 2023

For a risk to exist, both a threat and a vulnerability must be present. Where a vulnerability affects the sector as a whole (for example, because there is no oversight or capacity to obtain information about new entrants to the sector), there is scope for bogus NPOs to enter it. Where the vulnerability is specific to one organisation (for example, an NPO that would not verify how its funds are used), it can still affect other legitimate NPOs working with it and potentially be exploited for TF purposes.

Recommendation 8 expressly acknowledges that measures taken to protect NPOs should not unduly disrupt or discourage their legitimate activities.

At Líderes Empresariales APLA we specialise in training and advising compliance officers, and in implementing money laundering, terrorist financing and proliferation financing prevention rules for the various obligated entities. If you need help, do get in touch.

Non-profit organisations have obligations of their own: see our AML/CTF consulting for foundations and NGOs.