Ever since the terrorist attacks of September 11, 2001, anti-financial crime regulators have intensified their oversight of any organisation that deals with considerable amounts of cash inflows and outflows.
The way terrorist organisations finance their activities alerted the Financial Action Task Force (FATF), the most prominent anti-financial crime watchdog, to the risk of criminals using non-profit organisations and charities to launder money.
The non-profit sector is a crucial component of the global economy. Many national economies and social systems depend on the charitable sector's work to supply a wide spectrum of public services and improve the quality of people’s lives. Crucially too, some also help to defend and strengthen regard for the environment or the democratic rights of citizens. In Malta, the sector has flourished, with NGOs active on several important fronts, from poverty reduction to the management of terminal illness, heritage protection to defence of the rule of law.
International regulators whose mission is to act as watchdogs against financial crime acknowledge that non-profit organisations have an essential role in modern society. They rightly insist that they should not be hindered in their work, even if this does not exclude robust oversight of their financial activities.
Malta has followed the stance taken by many developed countries in issuing regulations on how non-profit organisations should manage their finances to prevent them from being abused by criminals for money laundering. Last September, the Commissioner for Voluntary Organisations, Anthony Abela Medici, issued new rules to combat money laundering within the voluntary sector. However, these rules were considered too draconian by the non-profit sector, insisting that they be amended to make them more sensible.
The commissioner's effort to promote transparency within non-profit organisations' operations and prevent the abuse of the sector by those wishing to support terrorist financing and other financial crimes, has to be acknowledged. But most small NGOs do not raise significant amounts of money from public sources. They have limited resources that make it difficult for them to cope with the commissioner's compliance burdens.
The one-size-fits-all set of regulations that were intended to come into effect in July needs to be redrafted to follow FATF principles for effective government oversight of the non-profit sector: the FATF insists that “government oversight should be flexible, effective and proportional to the risk of abuse”. Most local NGOs do not present a high risk of abuse by criminals. A risk assessment of the sector must form the basis of how different organisations should be regulated.
Rather than use a bazooka to shoot down any theoretical risk of abuse by small non-profit organisations, the FATF urges these organisations to introduce measures to strengthen self-regulation to reduce the risk of abuse by criminal groups.
It is encouraging that the commissioner has now promised that changes will be made to the first set of published rules. Hopefully, the redrafted regulations will be based on best practices adopted by other countries like Germany and Australia, which have dealt with the risk of abuse by criminals more pragmatically.
Such best practices include regulations to promote sound governance systems and strong financial management, including robust internal controls and risk management procedures. NGOs should also conduct proper due diligence of individuals and organisations they give money to, receive money from or work closely with.
Oversight of non-profit organisations can only be effective if it is inspired by a cooperative undertaking between the government regulator, the non-profit community, people who support charities and those that they serve.