Banks are the most important stakeholder for charities with international operations. The relief they provide saves lives and protects dignity of beneficiaries in the most remote and desperate places worldwide. However, they can do this properly only when the banks allow them to do so.
The role of banks is often misunderstood – is it a regulator? is it an evil business? is it a money transfer agent? or is it a government spy? The answer is No, it can be all of that and more.
The role of banks is often misunderstood – is it a regulator? is it an evil business? is it a money transfer agent? or is it a government spy? The answer is No, it can be all of that and more.
Banks are private or public limited businesses and have all the pressures a business has – Yes, they can go bust and as we saw during the 1990s banking crisis, size did not matter. The failed banks had an effect of destroying livelihoods and dreams of many.
We live in a digital world; no activity be it a noble or a criminal can exist without it. ALL use banks and the banks then suddenly become the conduits in promoting the good and the bad – this is where the government regulation comes in, mainly aimed at stopping the bad as defined by the government and backed by hefty penalty regimes and licenses.
To stop the bad and to avoid penalties, the banks adjust their business practices. Each bank will have its own risk appetite, and this will dictate how they manage their customers, be it a business or a charity.
International charities can be a risky business for banks as they can and have been used to launder money to fund terrorist activities, evade taxes and used to hide personal wealth.
International charities can be a risky business for banks as they can and have been used to launder money to fund terrorist activities, evade taxes and used to hide personal wealth.
Banks design their systems to pick up the bad and money laundering – these systems are often sophisticated and based on artificial intelligence (AI) reflecting decades of banking transactional behavior.
To ensure business and commercial conflicts are managed by banks, many banks have in recent years centralised their anti money laundering checks and related decision making. As a consequence, local bank managers and relationship managers no longer have a say or control like they had in the past.
International money routes
Another layer of complication for international charities is the international nature of bank transfers.
In between the charity’s own bank and the bank receiving funds in another country, there are different intermediary banks subject to different regulatory regimes.
Each banking side (i.e. sending and receiving) does not necessarily control the banks in between. International transfers are only made possible when the intermediary banks allow them.
To understand this point, staying within your own country, we don’t need visa or custom and bag checks, however travelling outside the country, we are subject to all sorts of checks and regulations and depending on what passport you hold, your treatment will differ.
This is also the case with international bank transfers, like roads and flight paths there are various international money transfer routes with different intermediary banks in between. Each route is subject to its own compliance regime, regulator and political sanction regime.
It is in this context of money laundering risks, international charities can struggle to open a bank account, transfer money internationally or in extreme cases have their accounts closed (de-risked) with no recourse or remedy. I see this too often.
In my opinion, this necessarily is not because of a personal, an anti-charity or an anti faith agenda by the banks. It’s often a simple matter of compliance to anti-money laundering rules set by regulators and political governments.
Know Your Clients (KYC)
Banks need to update their systems with KYC (Know Your Client) details and below are the three main questions that they need to answer for money coming in and going out the banks:
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Who is donating to the charity? Does the charity itself know and make checks to ensure this is not dirty money?
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Who is the money transferred to? Is the bank account receiving money owned and controlled by a locally registered charity that has the permission to receive the monies by the local government or regulator?
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The money that is being transferred to a country, project or beneficiary – are there any sanction implications?
Once the money is in the banking system and transferred abroad, the bank becomes a facilitator, so they need to know and be satisfied that these questions can be answered.
Many times, charities fail to understand the importance of these questions and often lack the policies, systems and processes that can help them answer the banking concerns.
In the banking world, the banks do not wait for charities to develop their system, they expect them to have all the answers before any money is put into the banking system –
Banks are businesses and take a business approach to due diligence and anti-money laundering checks. If the bank feels the charity business is more risk than benefit in commercial terms, then it will simply fail the transactions or de-risk the charity. Banks are not obliged to give their custom to charities.
The impact of the pandemic – worst for charities
The pandemic has had the effect of escalating the move to a cashless economy.
Government Covid19 grants required businesses to have bank accounts, many small businesses did not. All this created a significant backlog in banks for business accounts. With staff shortages, working from home, closed bank branches and fewer staff, this all together has compounded the issue for charities specifically.
Unfortunately, it seems the banks have put charities way down down in the priority order. What was cumbersome and difficult in normal times has become impossible after the pandemic and this is most likely to stay like this for years to come.
Unfortunately, it seems the banks have put charities way down down in the priority order. What was cumbersome and difficult in normal times has become impossible after the pandemic and this is most likely to stay like this for years to come.
Charities need to up their game to stay relevant
In this environment, my advice to individual charities with international operations is as follows:
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Partner with charities that have proper systems in place that meet the banking anti money laundering requirements
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Invest in your back-office operations and do not underestimate the importance of treasury advise and protocols, especially in relation to anti money laundering processes and due diligence processes.
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Treat your finance function as a compliance function and not just a money transfer function. Recruit finance professionals with this in mind and relevant experience.
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Don’t take risks with money transfers, always assume each transfer will be questioned. Taking risks can backfire with the whole charity operation ending up in jeopardy. Ensure proper paperwork is in place before transfers are made.
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Anti-money laundering checks must be made on large donations (i.e. £5000 and above).
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Use the mainstream banking system and avoid using cash transfer agents. The audit trail often fails with cash transfer agents and increases the risk to banks.
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Work with local partners that have proper local registrations and due diligence in place.
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Large charities should establish a good working relationship with their bank relationship manager by treating this position as a key stakeholder of the charity. A transparent relationship should be forged with ongoing issues and future plans. This all helps to keep the bank informed with update to date KYCs.
In short, international relief should not be a about a mad rush for raising money and spending money abroad irresponsibly. It has to be done properly with proper policies, systems and processes for it to be sustainable and impactful for the beneficiaries in the short and long term.
Unfortunately charities can’t change banking behavior, they need to adapt to the new reality to ensure the lifeline they provide to the most desperate for their sake continues.
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Author: Nasir Rafiq BA, FCA is the Managing Partner of Dua Governance Chartered Accountants, an ICAEW firm specialising in charity financial governance and internal audit.
Nasir has directed treasury functions in large UK charities with operations worldwide.
Email: info@duagovernance.com
