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As the impact of the coronavirus (COVID-19) pandemic intensifies, companies and individuals are considering making donations to charities and non-profit organizations (NPOs) assisting healthcare institutions, workers and patients. However, the non-profit sector is especially vulnerable to weaknesses in governance structure due to the altruistic nature of its business, its large, transitory workforce, extended logistical networks and a general lack of resources devoted to internal controls. As such, charitable donations present many compliance challenges such as anti-money laundering, anti-terrorist financing, anti-bribery and corruption, reputational risk and fraud.
The unprecedented challenges inherent in the pandemic increase pressure on donors to quickly identify and screen non-profits out of a large, mixed pool of legitimate organizations and scammers to complete their goodwill mission. NPOs and financial institutions are also facing challenges to evaluate the legitimacy of donations. It is important for donors, NPOs and financial institutions to stay informed of the most prevalent risks in the non-profit sector and minimize their exposure.
There are several risks inherent in the non-profit sector.
Risks of Fraud
Charity scams are unfortunately common. According to a 2018 Federal Bureau of Investigation (FBI) report, fraudulent charities frequently attempt to take advantage of those seeking to provide assistance after high-profile disasters. The National Center for Disaster Fraud received over 400 complaints of fraud after Hurricanes Harvey and Irma in 2017.
In May 2015 the Federal Trade Commission (FTC), all 50 states and the District of Columbia took legal action against four cancer charities for bilking more than USD 187 million from consumers through deceptive fundraising pitches. These four charities—Breast Cancer Society, Cancer Fund of America, Cancer Support Services and Children’s Cancer Fund of America—are connected to James Reynolds Sr. and his family members, who were charged with falsifying financial statements and tunneling donations to benefit family and friends. According to an FTC representative, they face a settlement valued at more than USD 136 million.
Charitable donations can lead to higher risks of bribery and corruption due to a lack of external auditing and internal controls. Donations gifted with an intention to influence impropriety may be considered bribes by regulators. The UK Bribery Act 2010 and the Foreign Corrupt Practices Act (FCPA) in the U.S. both require organizations to institute adequate procedures to prevent bribery and corruption.
In February 2020 the Wuhan branch of the Red Cross Society of China—a designated charity responsible for handling the influx of aid related to the COVID-19 outbreak—acknowledged that it had mismanaged the allocation of face masks and other personal protective equipment (PPE) after receiving widespread criticism online citing the multi-hour waiting periods for equipment that hospitals experienced even though the branch had a warehouse stocked with PPE. Additionally, one of the largest public hospitals in Wuhan was allocated only 3,000 masks, while smaller, private hospitals with no confirmed COVID-19 cases were allocated six times as many. Following coverage of the distribution inefficiencies and possible corruption, Hubei Red Cross VP Zhang Qin was fired for "dereliction of duty while receiving and distributing donated funds and goods."
Money Laundering and Terrorist Financing Risks
According to the Organization for Economic Co-Operation and Development, NPOs can be particularly vulnerable to abuse by terrorists or organized crime groups posing as legitimate entities, concealing or obscuring the clandestine diversion of legitimate donations to criminal activities. Financial Action Task Force’s 40 Recommendations, issued in 2012, included clauses that called for a “risk-based approach” applying focused measures in dealing with identified threats in the non-profit sector.
In May 2013 Minnesota women Amina Farah Ali and Hawo Mohamed Hassan were convicted of conspiring to send more than USD 8,600 to al-Shabab, an al Qaeda-linked terrorist group in Somalia. The former was sentenced to 20 years in prison and the latter received a 10-year term. According to prosecutors, Ali and Hassan, in the name of charity, held religious teleconferences to recruit fighters for al-Shabab and solicit donations, which they then routed to al-Shabab.
Donors’ reputation can be assessed based on the charities with which they are aligned, meaning that donating to a poorly reputed organization carries a reputational risk and can jeopardize the donor’s social responsibility goals. NPOs can likewise suffer reputational harm by establishing a relationship with a controversial donor, which may impact future funding opportunities.
In 2011 a German documentary titled The Silence of the Pandas accused the World Wildlife Fund (WWF) of “greenwashing” corporate operations via public-private partnership programs with donor corporations. Although the WWF was ultimately able to disprove most of the documentary’s claims via its press release, addressing the controversy cost the fund time and money and it still lost members and donations due to the reputational damage.
Both donors and receivers need to minimize their exposure to the regulatory and reputational risks associated with charitable donations. For donors, due diligence is vital to avoid charity scams and to ensure that donations have the intended positive effects. For NPOs, verifying the credibility and legitimacy of donations is essential to managing their reputations as efficient, trustworthy and effective charitable entities. For financial institutions, knowing one’s clients and funding sources is key to meeting mandatory compliance objectives. Organizations need to have proper procedures in place to mitigate risks associated with charitable donations. Below are several steps you can take to meet this objective:
Implement a Well-defined Written Policy to Screen Potential Partners Regularly
This is a necessary first step to ensure you have a good baseline for evaluating whether or not to give, accept or proceed with any type of donation. A well-executed partner screening policy includes clear instructions on conflicts of interest, restricted items and practices and requirements on due diligence, providing discipline and education in evaluating the risks associated with potential donations.
Use a Risk-based Approach to Build a Compliance Program
Globalization enables organizations to give or receive donations from entities of various backgrounds around the world, and this in turn exposes them to increased risks. For donors or NPOs based in regions where corruption is more prevalent, relevant staff members should arrange enhanced due diligence conducted by compliance professionals before proceeding with a donation. Similar tactics should be taken for state-owned organizations, politically exposed persons and their close associates, donors that would like donations to remain anonymous and donors making unusually large or complex donations as well as contributions under irregular conditions.
Perform Due Diligence
This allows you to assess the risks associated with the donation and minimize your exposure to risk. The scope of the checks should be proportionate to the size and nature of the proposal, the amount of income and expenditure involved and the nature of existing and planned activities. A more rigorous due diligence exercise may be necessary for higher-risk subjects.
What Should Due Diligence Check For?
Due Diligence on Potential Donors
Due Diligence on NPOs
Keep Track of Receipt/use of Funds and Monitor Any Red Flags or Suspicious Activities
Ensuring that you are aware of any new or recently identified red flags or suspicious activities helps minimize major legal and reputational risks. For donors, this ensures that your donation will be used for purposes that align with your mission. This is also critical for NPOs and financial institutions to stay on top of their risk exposure as it evolves or escalates, allowing them to act as necessary.
As the pandemic intensifies, now more than ever, it is a time for compassion. By investing in due diligence for donations, donors, NPOs and financial institutions can minimize their exposure of legal and reputational risks in the non-profit sector while making an impact to support the healthcare systems and people in need.
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