Preventing the abuse of non-profits to finance terrorism – the EU response

Following September 11 2001, the legal and regulatory frameworks within which non-profit organizations (NPOs) function have been the subject of intense scrutiny in order to prevent their abuse for terrorist purposes. In this short article, we consider the European Union response to possible abuse, particularly with regard to the use of NPOs for financing terrorism. In general, both the EU response and the non-profit response to it has been a much more muted affair than has been seen in the US.

The problem

Although it is possible to determine how NPOs are manipulated for the purposes of terrorism, the extent to which this occurs is less clear, and attempts to establish this are inevitably bound up with identifying suitable measures to detect and address the problem. According to a Financial Action Task Force[1] (FATF) 2004 report, the exploitation of NPOs for terrorist purposes may take the form of:

• Using the non-profit form to raise funds, sometimes using very aggressive fundraising strategies or by targeting certain groups in society, eg particular religious or ethnic communities. Fundraising may also be very informal in nature within closed communities, with the ‘NPO’ for which the funds are gathered being used for the purposes of laundering money.
• Using the NPO to facilitate the transfer of revenue from one location to another, usually across national boundaries. Suspicions may be raised if an executive of the NPO opens another bank account in the name of an individual and then engages in a series of transactions between accounts.
• Using the NPO as a façade to conceal the operations of terrorist organizations, or for the provision of logistical support. Again, suspicions may be aroused if the website of the organization is not altered over a period of time or if it contains links to extremist websites.

It should be said that concerns about the use of foundations and non-profits as conduits and accumulation points for funding and supporting ‘illegal activities’, and even terrorism, are not new. There is a long history of transnational flows of resources, monetary and in kind, from one country to another to support various activities, including terrorism. Examples include funds collected by Irish communities in New York and Boston to support the IRA; funds collected by Jewish communities to support settlements on the West Bank; European money going to Palestinian groups on the West Bank; West German funds to help dissident groups in Central and Eastern Europe via Protestant and Catholic church organizations during the Cold War; and European and American funds finding their way to clandestine organizations in Apartheid South Africa.

Whether one sympathizes with any of these causes or not is immaterial here. What is crucial is that key policy actors and communities have known about these transfers for a long time. They were, so to speak, a calculated political risk; if they were not generally welcome, they were largely tolerated. Following the events of September 11, however, efforts to counteract the misuse of philanthropic institutions for terrorist and other criminal purposes have been intensified. In the US, under the authority of the Patriot Act 2001, the government introduced the Anti-Terrorist Financing Guidelines: Voluntary Best Practices for US-Based Charities in November 2002, as a first step towards putting in place detailed and more stringent regulations governing the operations of financial institutions, including foundations. These guidelines provoked criticism and opposition from many larger foundations and representative organizations such as the Council on Foundations.[2]  

In the US, prominence given to the issue of the potential abuse of non-profits for terrorist purposes has been combined with an adversarial style of policy-making. In Europe, different countries have responded to the problem in different ways. At the European level, which we focus on here, the position is broadly the reverse of that in the US: low prominence given to the possibility of abuse combined with a consensual style of policy-making.[3]

The European Union response

Preventing the use of NPOs to finance terrorism is of course part of a broader effort within the EU to counter terrorism, particularly the financing of terrorism. Since September 11, the EU has pursued a cautious and measured approach to the issue of the potential exploitation of NPOs, largely guided by the recommendations of FATF and OECD  (Organization for Economic Co-operation and Development).[4]

In October 2001, the FATF issued eight Special Recommendations, to counter money-laundering and the financing of terrorism. Special Recommendation VIII focused on the abuse of non-profit organizations:

Countries should review the adequacy of laws and regulations that relate to entities that can be abused for the financing of terrorism. Non-profit organizations are particularly vulnerable, and countries should ensure that they cannot be misused:

1. by terrorist organizations as legitimate entities;
2. to exploit legitimate entities as conduits for terrorist financing, including for the purpose of escaping asset freezing measures; and
3. to conceal or obscure the clandestine diversion of funds intended for legitimate purposes to terrorist organisations.

In setting out some potential ‘best practices’ to counter the abuse of NPOs for terrorist purposes, in 2002 FATF suggested some preventive measures that foundations and NPOs can take. These include creating and/or clarifying the role of oversight bodies, improving financial transparency and administration procedures, and developing clear ‘follow-up’ measures for verifying the validity (and legality) of projects funded.

These recommendations are echoed in the Commission Staff Working Paper on Actions to combat the Financing of Terrorism (SEC (2003) 414/1) and in the Commission’s 2004 communication on the measures that need to be taken to counter terrorism and other serious crime (COM(2004)221 final). Both documents underline the urgency of improving the regulation of NPOs to prevent their use for the financing of terrorism. They acknowledge the importance of preventing the abuse of non-profits and outline the issues which may require further consideration to achieve this objective:

• registration of charitable organizations;
• information about their objectives, management structure and personnel;
• requirements to submit annual statements and accounts and information about disbursements.  

More recently, efforts have been made at the European level to move beyond anodyne references to the need for better transparency and improved regulation of NPOs to consideration of how to bring these necessary improvements about. While FATF’s Special Recommendation VIII continues to form the framework for the EU approach, greater emphasis is being placed on how it can best be implemented. At present, these efforts have taken the form of a (draft) Action Plan. The paper underlines the need for further discussion and action in three key areas:

• If transparency among NPOs is to be improved, a common, meaningful definition of what this implies will need to be established across all members of the EU. In terms of legal forms, the Commission has focused specifically on foundations and associations.
• Regarding the need to guarantee that there are adequate control/oversight mechanisms, it will be necessary to identify the appropriate body to be responsible for such a role, such as tax authorities within member states.
• A registration system for European associations and foundations is also proposed.

Thus far, discussion of the proposals has taken place within the consultative framework of the European Forum for the Prevention of Organised Crime. In addition to members of the European Commission, this includes representatives from Europol and from NPOs and regulatory bodies in Europe and the US. The Commission now proposes to broaden this consultative process.

The EU response assessed

The principle of subsidiarity underpins the EU’s response to the extent that it must be clear that the problem is one that is best addressed via a European-level initiative. Questions about what form a European initiative should take also need to be considered against arguments that NPOs should be self-regulating. Although initially supported by the European Commission, this is not regarded as a viable option, particularly given the nature of the problem to be addressed. Taking account of the diversity of NPOs and their activities is also acknowledged as fundamental to any proposals.

Implementation of the resulting recommendations at the national level must take account of the nature and perhaps the performance of existing regulatory structures, not to mention the absence of comprehensive mechanisms in some countries. What is more, questions are also raised about whether suitable proposals for the more careful regulation of foundations and associations already exist in the form of proposals for a statute for the European Association (EA) and the European Foundation Statute.[5]

The NPO response

It is of course difficult to make any comprehensive assessment of the European response to the potential exploitation of NPOs for terrorist purposes when it remains in such an early stage of development. It is similarly difficult to assess the responses of NPOs to these proposals. Foundations and associations are represented in the European Forum for the Prevention of Organised Crime by the European Foundation Centre and the European Council for Non-Profit Organizations (CEDAG) respectively. Overall European NPOs have not been particularly vocal either in calling for or in responding to measures by the EU to protect them from being exploited by terrorist forces. This is not wholly surprising given the low-key approach adopted by the EU. On the one hand, this may suggest that NPOs have confidence in their existing procedures. On the other, it may signify a reluctance to highlight the need for further regulation of their operations, a viewpoint expressed by foundations in some countries.

In this broader scenario, a careful and measured approach is advisable. The EU will need to find a balance between the need for a European initiative, on the one hand, and the need to take account of the diversity of existing regulatory frameworks, NPO forms, activities and interests, on the other.

1 FATF is an inter-governmental body whose aim is to develop and promote policies to counter money-laundering and the financing of terrorism. It was established by the 1989 G-7 Summit in Paris. See http://www1.oecd.org/fatf/AboutFATF_en.htm Its eight Special Recommendations are complementary to the existing 40 Special Recommendations on combating money-laundering, which were also revised in 2003.

2 See H K Anheier and S Daly (2004), ‘The Future of Global Philanthropy’, in M Kaldor, H K Anheier and M Glasius (eds) Global Civil Society Yearbook 2004/2005. London: Sage; and B Baron (2004) ‘Deterring Donors: Anti-Terrorist Financing Rules and American Philanthropy’ in Alliance Extra, December 2003.

3 See J Kendall and H Anheier (1999), ‘The third sector and the European Union policy process: an initial evaluation’, Journal of European Public Policy 6 (2)

4 Although our focus is on the EU, the Council of Europe, through the Multidisciplinary Group on Terrorism, the Committee of Experts on Terrorism and the Select Committee of Experts on the Evaluation of Money Laundering Measures (MONEYVAL), has also engaged in initiatives to counter the financing of terrorism. FATF’s Special Recommendations provide the framework for initiatives undertaken by MONEYVAL.

5 See S Daly (2004), ‘The European Union and the Third Sector’ in European Foundations and Grant making NGOs London: Europa; European Commission (2004) Minute: European Forum for the Prevention of Organised Crime. Minutes of the Round Table Meeting of 29 October on The misuse of the charitable and non-profit sector for Terrorist Financing – A possible EU Approach. Available at http://europa.eu.int/comm/justice_home/fsj/crime/forum/fsj_crime_forum_e...

Siobhan Daly is a former Lecturer in Comparative Politics at the University of Sheffield.
Helmut Anheier is Director of  the Center for Civil Society, UCLA. He can be contacted at helmut.anheier@csi.uni-heidelberg.de