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COVID-19 & Philanthropic Fraud | Ballard Spahr LLP


Within the wake of the continued pandemic, varied charities have been created with mission statements particular to COVID-19. What looks like a possibility for giving again could current one more car for fraud to cash launderers and different fraudsters.

To attempt to assist weed out the authentic from the not so harmless, on November 19, 2020, the U.S. Division of the Treasury’s Monetary Crimes Enforcement Community (FinCEN) issued a press release saying a joint fact sheet (Truth Sheet), ready in coordination with Federal Banking Companies (outlined beneath), “to offer readability to banks on easy methods to apply a risk-based strategy to charities and different non-profit organizations (NPOs).” The press launch and Truth Sheet search to strike a stability between recognizing “the essential function performed by the charitable sector, particularly throughout the COVID-19 pandemic” whereas reminding monetary establishments to make the most of the risk-based strategy when conducting due diligence and growing threat profiles for charities and different NPOs.

This not the primary time that the Treasury Division has raised considerations about charities, albeit in a special context: based on the Treasury Division’s experiences on the 2020 National Strategy for Combatting Terrorist and other Illicit Financing and the 2018 National Terrorist Financing Risk Assessment, some charities and non-profit organizations (NPOs) “have been misused to facilitate terrorist financing.” And it’s actually not the primary time that FinCEN has raised considerations about particular sorts of fraud fueled by the worldwide pandemic (see here, here and here).

The Truth Sheet

The Truth Sheet was developed by FinCEN and the Federal Reserve Board, the Federal Deposit Insurance coverage Company, the Nationwide Credit score Union Administration, and the Workplace of the Comptroller of the Foreign money (collectively, “the Companies”). Moreover, the U.S. Division of Treasury said its “dedication to offering steerage and clarification on AML/CFT and sanctions obligations related to the charitable sector.”  Within the press launch for the Truth Sheet, FinCEN Director Kenneth A. Blanco said:

FinCEN appreciates the function of these charities and NPOs who’re on the entrance traces of the COVID-19 pandemic. FinCEN demonstrates on this communication our joint resolve and the significance of making certain their entry to banking providers, whereas on the identical time defending our nationwide safety, conserving our residents protected from hurt, and safeguarding our monetary system.

Just like the press launch, the Truth Sheet emphasizes the federal government’s help to make sure “that humanitarian help continues to achieve at-risk populations by authentic and clear channels, together with throughout the COVID-19 pandemic.” That mission requires entry to monetary providers, which the Truth Sheet acknowledges some charities have had difficulties acquiring. To that finish, the Truth Sheet emphasizes that the charitable sector as a complete doesn’t “current[] a uniform or unacceptably excessive threat of getting used or exploited for cash laundering, terrorist financing, or sanctions violations.”

Nonetheless, charitable and NPO prospects are nonetheless topic to a monetary establishment’s BSA/AML regulatory necessities, together with these associated to suspicious exercise reporting, buyer identification, buyer due diligence (CDD), and helpful possession, as relevant. On CDD:

Banks should apply a risk-based strategy to CDD in growing the chance profiles of their prospects, together with charities and NPOs and are required to ascertain and preserve written procedures moderately designed to establish and confirm helpful house owners of authorized entity prospects, as relevant. Extra particularly, banks should undertake acceptable risk-based procedures for conducting CDD that, amongst different issues, allow banks to: (i) perceive the character and objective of buyer relationships for the aim of growing a buyer threat profile, and (ii) conduct ongoing monitoring to establish and report suspicious transactions and, on a threat foundation, to take care of and replace buyer data. In keeping with a risk-based strategy, the extent and kind of CDD needs to be acceptable for the dangers introduced by every buyer.

The dangers introduced by every charitable group will fluctuate relying on its operations, actions, management, and affiliations. This risk-based strategy is per the CDD necessities from FinCEN’s 2016 CDD Rule, which requires monetary establishments to establish the helpful house owners of entities opening new accounts, together with not-for-profit entities (the CDD Rule requires monetary entities to solely establish a single particular person with “management” over a not-for-profit entity; the “possession” prong of the CDD Rule doesn’t apply to not-for-profits).

Though the CDD Rule doesn’t require assortment of the next particular data, the Truth Sheet recommends a listing of buyer data helpful in growing a charity or NPO’s threat profile:

  • Goal and nature of the NPO, together with mission(s), said aims, packages, actions and providers;
  • Geographic places served, together with headquarters and operational areas, significantly higher-risk areas the place terrorist teams are most lively;
  • Organizational construction, together with key principals, administration, and inner controls of the NPO;
  • State incorporation, registration, and tax-exempt standing by the IRS and required experiences with regulatory authorities;
  • Voluntary participation in self-regulatory packages to boost governance, administration, and operational follow;
  • Monetary statements, audits, and any self-assessment evaluations;
  • Normal details about the donor base, funding sources, and fundraising strategies, and for public charities, degree of help from most people;
  • Normal details about beneficiaries and standards for disbursement of funds, together with pointers/requirements for qualifying beneficiaries and any intermediaries that could be concerned; and
  • Affiliation with different NPOs, governments, or teams.

Such data can seemingly be present in public filings. For instance, charities report data relating to their “said mission, packages, funds (together with non-cash contributions), donors, actions, and funds despatched and used overseas” of their annual IRS Kind 990, whereas many NPOs report on their “voluntary self-regulatory requirements and controls to enhance particular person governance, administration, and operational follow, along with inner controls required by donors and others.” The Treasury Division has listed extra data that could be related to charity or NPO threat profiles on its website.

Whereas it’s clear that charitable work is of the utmost significance, particularly in these making an attempt occasions, it’s clear that FinCEN and the Companies are preemptively placing towards what anticipated fraud surfacing within the philanthropic sector referring to the COVID-19 pandemic.



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