FinCEN’s Recent Customer Due Diligence Guidance for Financial Institutions, Charities and Non-Profits, May Lead to Greater Donor Scrutiny

On November 19, 2020 the U.S. Department of the Treasury’s Financial Crimes Enforcement Network (FinCEN), along with the Federal Banking Agencies—the Federal Reserve Board, the Federal Deposit Insurance Corporation, the National Credit Union Administration and the Office of the Comptroller of the Currency—issued a Joint Fact Sheet on Bank Secrecy Act Due Diligence Requirements for Charities and Non-Profit Organizations (fact sheet). The fact sheet guides commercial banks to apply a risk-based approach to charities and other non-profit organizations (NPOs) they seek to maintain relationships with, taking into account FinCEN’s 2016 Customer Due Diligence (CDD) Final Rule requirements.

The fact sheet requires banks to consider the significant impact COVID-19 has had on the charitable sector and provides financial institutions with the expectation that a risk-based approach should be applied when conducting due diligence and developing risk profiles for charities and NPO customers. This is paramount in identifying and mitigating potential risk for money laundering and terrorist financing.

The U.S. government does not view the whole charitable sector as presenting a uniform or unacceptably high risk of being used or exploited for money laundering, terrorist financing or sanctions violations. FinCEN and the Federal Banking Agencies seek to ensure that as customers of financial institutions, charities and NPOs are subject to Bank Secrecy Act/anti-money laundering regulatory requirements, including those related to suspicious activity reporting, customer identification, CDD and beneficial ownership. Financial institutions need to consider that if this is the standard, does this requirement transfer to donors and raise the expectation of what a charity and NPO’s responsibility to them would entail?

By implementing a risk-based approach to due diligence of their donors, Charities and NPOs ensure that the donors haven’t previously been involved in accepting proceeds derived from criminal activity or been utilized to facilitate the laundering of illicit proceeds. Fundamentally, charities and NPOs should know where donations originate and take reasonable and appropriate steps to know who their donors are, particularly in instances where significant sums are donated.

For charities and NPOs to address the potential risk donors may pose, it is imperative that, at a minimum, they understand who the donor is, where they are located, where their donation came from and the value of the donation. By implementing a risk-based approach to due diligence of their donor populations, charities and NPO’s will be able to understand the nature and purpose of their relationship with them and ensure that the potential for illicit proceeds ultimately being transferred to the financial institutions that bank them does not occur.

Charities and NPOs need to implement effective processes to collect and analyze accurate information to maintain the integrity, reputation and mission of their respective organizations. This approach will ensure transparency and accountability to determine how to proceed with a potential donor. The below reflects the type of information that should be collected and considered as it relates to assessing the donor population:

• General information about the donor
• Purpose and nature of the donation
• Monetary value of the donation
• Source of funds for the donation
• Geographic locations of the donor, particularly any higher-risk areas where terrorist groups are most active
• Organizational structure of any entity donating, including key principals, management and internal controls of an entity making the donation
• Beneficial ownership of an entity, if applicable
• State incorporation, registration and tax status of the donor
• Donor entity financial statements, audits and any self-assessment evaluations
• Negative news screening

In addition to this information, it’s recommended that entity donors voluntarily participate in self-regulatory programs to enhance governance, management and operational practices.

Charitable efforts are an integral part of our commitment to society in these challenging times but may provide bad actors with a safe haven for their illicit proceeds to be laundered through. FinCEN and the Federal Banking Agencies’ fact sheet seeks to ensure that financial institutions and their charitable clients exercise reasonable caution through their due diligence process to meet their regulatory obligations associated with knowing your customers (KYC). If this is the expectation of regulators it would only make sense to ensure that financial institutions assume the same approach of “knowing your donor” with charities and NPOs. This methodology may prevent global charities from facing financial crimes and reputational risk as they seek to fulfill their missions. Those who operate in charitable and non-profit environments must recognize the importance of understanding the risk potential donors pose to an organization and the value of making an investment to manage that risk by conducting an appropriate degree of due diligence.