10 January, 2016
On 31 October 2015, the Accounting and Corporate Regulatory Authority (“ACRA”)issued a guide (“Guide”) to provide more information about the risks of money laundering (“ML”) and terrorism financing (“TF”) for non-profit organisations (“NPOs”) which are companies limited by guarantee (“CLG-NPOs”).
This article highlights key points in the Guide which are intended by ACRA to help CLG-NPOs identify and manage their exposure to ML/TF risks.
Background
As a member of the Financial Action Task Force (“FATF”), an independent inter-governmental body, Singapore is committed to implementing international standards and policies developed and promoted by FATF to prevent ML and counter TF.
FATF defines an NPO as “a legal person or arrangement or organisation that primarily engages in raising or disbursing funds for purposes such as charitable, religious, cultural, education, social or fraternal purposes, or for the carrying out of
other types of ‘good works’”.
According to FATF, NPOs are vulnerable to TF risks because they enjoy public trust and have access to a large amount of funds (often cash-intensive). Also, NPOs are usually not subject to governmental oversight and have a global presence that facilitates international financial transactions. FATF studies have shown that high-risk NPOs include those engaged in ‘service’ activities such as those engaged in programmes focused on providing housing, social services, education or health care.
Money Laundering vs. Terrorist Financing
NPOs should be aware of the differences between ML and TF. ML involves a criminal act where the proceeds of crime are disguised as legitimate sources, so that they can subsequently be used for the benefit of money launderers, whilst TF refers to facilitating the financing of acts of terror.
The concealment of proceeds of crime for ML is similar to the usage of terrorist funds for TF. However, sources of TF funds may be both legitimate and illegitimate.
As TF’s impact on the public is also greater and more immediate than ML’s impact, FATF recommends that TF risks should be mitigated earlier than ML risks.
In Singapore, the primary legislation for ML is the Corruption, Drug Trafficking and Other Serious Crimes (Confiscation of Benefits) Act (“CDSA”) and the Terrorism (Suppression of Financing) Act (“TSOFA”). Both the CDSA and the TSOFA impose reporting obligations – the CDSA requires a person to lodge a suspicious transaction report (“STR”) for properties connected to criminal activities, while the TSOFA requires a person to provide information on TF activities to the police.
Methods and Risk of Abuse of NPOs
Money launderers and terrorist financiers may abuse NPOs in a number of ways:
A. Diversion of funds
An NPO, or an individual acting on behalf of an NPO, can divert funds raised (e.g. for humanitarian programmes) into a known or suspected terrorist activity.
An NPO may also be used as a legitimate front for money laundering.
B. Affiliation with a terrorist entity
An operational affiliation may be formed between an NPO, or an individual acting on behalf of an NPO, with a terrorist organization or supporters of terrorism. Such an affiliation may be through informal personal connections or more formal relationships between NPOs and terrorists. Terrorism recruitment related activities may also be conducted through the resources and facilities of the NPO.
C. Abuse of programming
NPO-funded programs meant to support legitimate humanitarian purposes can be manipulated at the point of delivery to support terrorism.
D. Support for recruitment
NPOs may also support terrorism recruitment activities by being involved in transferring funds to terrorists, providing financial support to families of terrorists or organizing and hosting events that support terrorists
E. False representation or sham entities
Terrorists have been known to set up NPOs as a sham front to raise funds and promote terrorist activities.
Money launderers may also set up a shell or front company to launder funds. Methods to Protect Against ML/TF Risks The Guide proposes a number of ways for CLG-NPOs to protect themselves against ML/TF risks:
1. Maintain strong corporate governance and financial transparency: CLG-NPOs are expected to maintain robust financial management and internal processes, as well as conduct regular reviews of their internal controls, policies and procedures, key charitable programmes and partnerships to protect themselves from ML/TF risks.
2. Know key donors and beneficiaries: CLG-NPOs are expected to carry out reasonable due diligence checks on their key donors and beneficiaries, while respecting donor confidentiality.
3. Accept and apply funds in a manner consistent with the CLG-NPO’s objects: CLG-NPOs should always know what their funds are being accepted and used for, and review their expenses to ensure that funds are channelled towards causes which are consistent with their objects.
4. Conduct financial transactions through regulated financial channels: To minimize any potential abuse while the funds are in transit, CLG-NPOs are expected to check that financial transactions are conducted through regulated financial channels.
5.Report suspicious transactions: CLG-NPOs must lodge a STR if they have:
(a) reason to suspect that any property represents the proceeds of, or is connected to, a criminal activity; or (b) possession, custody or control of property or information about any transaction (or proposed transaction) relating to any property belonging to terrorists.
6. Apply to Commissioner of Charities for permit to conduct fund raising for foreign charitable purposes: CLG-NPOs that wish to conduct fund-raising for foreign charitable purposes must first apply to the office of the Commissioner of Charities for a permit. The beneficiary must be proved to be a bona fide organization in its country and must acknowledge in writing that the fund-raising activity is being held in its name.
Conclusion
ACRA expects CLG-NPOs to take proactive steps to ensure that they properly manage their exposure to ML/TF risks. CLG-NPOs should study the Guide carefully and take the necessary measures to avoid being victims of money launderers or terrorist financiers.
NPOs that are charities should also take note that the office of the Commissioner of Charities has recently updated the Charity Portal to include guidance for governing board members on how to exercise appropriate due diligence on beneficiaries, partners and donors. The guidance also refers to a non-exhaustive list of “Red Flag Indicators for Terrorism Financing in Charities”, which will further assist charities in this area.
