EU Supranational Risk Assessment partially lowers risk rating for NPOs

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In July this year, the EU published its 2019 Supranational Risk Assessment (SNRA). Philanthropy Advocacy, a joint initiative of DAFNE and the EFC, and its joint Legal Affairs Committee as well as other NPO partners were pleased to see that the assessment lowered the terrorism financing and money laundering risk in 3 out of 4 NPO scenarios compared to the 2017 risk assessment (read the press release, which contains links to relevant documents).

The NPO sector is not mentioned in the press release but is mentioned in the summary report under point 2.1.5. “Collection and transfers of funds through non-profit organisations”. The report covers the categories of non-profit organisations defined in the Recommendation of the Financial Action Task Force. The risk scenario in the report is linked to non-profit organisations’ collection and transfers of funds to partners/beneficiaries both within and outside of the Union. The report acknowledges that a risk analysis from a threat perspective is complicated due to the diversity of the sector. The report considers that, “ ‘Expressive non-profit organisations’ present some vulnerability because they may be infiltrated by criminal or terrorist organisations that can hide the beneficial ownership making the traceability of the collection of funds less easy.” It also states that, “some types of ‘Service non-profit organisations’ are more directly vulnerable due to the intrinsic nature of their activity” (due to the fact they may involve funding to and from conflict areas or third countries identified by the Commission as presenting strategic deficiencies in their anti-money laundering/terrorist financing regimes).

The report also states that, “Nonprofit organisations are vitally important for providing humanitarian assistance around the world.” The report recalls that regulated financial service providers may be reluctant to engage with certain non-profit organisations in order to de-risk and that this could lead to financial exclusion or rejected customers turning to underground banking or transfer services instead. Finally, the Commission announced in the report that it will launch still in 2019 a call for proposals for a preparatory project on capacity building, programmatic development and communication in the context of the fight against money laundering and terrorist financing.

Even though the threat rating has been lowered in 3 out of 4 scenarios, DAFNE-EFC Philanthropy Advocacy is still worried that the risk rating with regard to the threat of NPOs for terrorism financing abuse remains at level 3 (significant), despite the fact that the wording of the actual rating in the annex of the report acknowledges that, “NPOs have been infiltrated only in very few cases and that generally more specific knowledge is needed to access funds collected or transferred by NPOs to finance terrorist activities.”  As stated on earlier occasions we fear that such a rating may give governments an excuse to further close down NPOs’ operating space and should according to our own assessment be also put at a lower level for the following reasons:

  • Changed regulation increasing transparency and accountability in sector organisations and financial flows
  • More risk awareness at the level of both the sector and individual organisations
  • Careful mitigation measures are put in place by many organisations (due diligence on partners and beneficiaries and financial flows)
  • National risk assessments rate NPO/philanthropy activity at lower risk
  • There is no publicly accessible evidence that could justify a significant level of risk rating

We are however happy with the fact that the EC report recalls the concern about bank de-risking and the call on governments to engage the NPO sector in national risk assessments and in the development of mitigation measures in the SNRA. The sector is now reaching out to the EC to see how to discuss follow up actions, in particular the new EU activity pipeline and also the organisation of a suggested EU level multi-stakeholder dialogue. We are also eager to understand how the new Commission under President von der Leyen will address the issue.

Below are the mitigating measures that the EC report suggests regarding these issues:

1) For the European Commission

  • Continue to engage with NPOs that receive EU funding on the relevant EU legal framework, as well as on how to identify risks and meet due diligence requirements.
  • Continue to take part in multi-stakeholder exchangesinvolving all professional sectors, in particular the financial sector, involved in business with NPOs.
  • Continue to engage with and provide guidance to humanitarian NPOs in receipt of EU funding on the risks of ML/TF and due diligence requirements, taking into account the best practices of humanitarian organisations.

2) For competent authorities

  • Member States should ensure better NPO involvement in national risk assessmentsand in developing information and awareness programmes designed to counteract the risk of abuse, and should support NPOs by providing awareness-raising materials for NPOs (at Member State level as well as EU level).
  • Member States should also further analyse the risks faced by the NPO sector.

For more information, please contact the Philanthropy Advocacy secretariat via Hanna Surmatz.

 

ANNEX:

Abstract from SNRA Annex: NPO RISK RATING: 3 out of 4 ratings are lowered compared to the 2017 report but the 2019 report keeps terrorism financing threat at “significant” level 3, see also https://ec.europa.eu/info/files/supranational-risk-assessment-money-laundering-and-terrorist-financing-risks-affecting-union-annex_en

Ratings:

Terrorism Financing  THREAT: The NPO landscape is very diverse. Although NPOs have been infiltrated only in very few cases and that generally more specific knowledge is needed to access funds collected or transferred by NPOs to finance terrorist activities the level of threat for TF is considered as significant (level 3).  

For NPOs receiving institutional funding, among others by the EU or Member States in charge of the management of EU funds, the level of threat is considered as less significant (level 1).

Money Laundering THREAT: In that context, the level of threat for ML is considered as moderately significant (level 2).    

Terrorism Financing  VULNERABILITY: The risk exposure of the NPOs is impacted by the intrinsic nature of their activities, and various degree of risk awareness exist. The applicable legal and tax frameworks and national practices are diverse but appear to provide controls and checks while the specific setup of the humanitarian sector described above should be acknowledged. In that context, the level of TF vulnerability is considered as moderately significant (level 2). 

For NPOs receiving institutional funding, among others by the EU or Member States in charge of the management of EU funds, the level of threat is considered as less significant (level 1).

Money Laundering Vulnerability: In that context, the level of vulnerability for ML is considered as moderately significant (level 2).   For NPOs receiving institutional funding, among others by the EU or Member States in charge of the management of EU funds, the level of vulnerability is also considered as less significant (level 1).

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