Bank Account Closures & UK Muslim Charities

 

The Nigel Farage’s bank account closure with a bank for the rich has hit a nerve for the Government and the media. The calling of the banking leaders to Downing Street and the resignations of the Group CEO and its subsidiary Banks CEO shows this was no little crisis.

This whole saga as it played out questioned the role of banks in our lives and wider society.

I deal with banking issues regularly for my charity clients, large and small. I have seen many examples, good and bad, so it’s imperative to understand the role each plays to understand the real issues.

 

The Banks and their role in business and society

Banks are private businesses, set up to make money for their shareholders. They are not politically aligned (we think so). Yes, during the banking crisis of 2008, the Government stepped in and now owns 39% of the NatWest Group – this is rare and did not change the business objectives of the bank.

Banks are subject to stringent anti money laundering and government sanctions regime with hefty fines when it goes wrong. All designed to regulate the banking conduct to the government domestic and international needs hence international events and wars make this a constant changing environment for sanctions. The introduction of the Politically Expose Person (PEP) protocols to stop corruption by people misusing public office adds another dimension to banking responsibility and risk management.

Nigel Farage was picked up by his bank as a PEP but what made the story interesting is that after he made a subject access request, he found that his political views were also considered as a reputation risk for this niche bank and its niche clientele.

 

“The Nigel Farage story has shaken the very foundations of trust in the wider banking system”.

 

This has shaken the very foundations of trust in the wider banking system. Given the control banks have on individuals and entities, this very notion that banks consider political views when not obliged by regulations, becomes problematic.

 

So where do the Muslim charities in the UK fit into all of this?

 

 

The impact of 9/11 was a game changer for Muslim charities operating in the West. Muslim charities suddenly found themselves working in high-risk countries subject to sanctions or where sanctioned entities operated. The resulting sanctions regime instantly choked many international charity banking facilities without explanation.

No regard was given to any legal or illegal activity as the “perception” of the “ability” to breach sanctions started to dictate the banks risk management process and de-risking. The Muslim sector became guilty until proven otherwise. The International relief sector already had inherent risks of money laundering, aid diversion and fraud for banks to consider, for the Muslim charity sector, it became just that more challenging to convince banks in this new environment.

 

“As a result of de-risking of banks, many individuals unfairly paid the price and their associated charities despite having done nothing wrong or illegal”

 

Another dark side of this additional scrutiny by banks was the spotlight on Trustees. Their social media profile and historical news coverage on the web searches started to become a vital part of the bank’s due diligence. The banks started to de-risk charities based on unfounded risks and perceptions relating to trustees. Many individuals unfairly paid the price and their associated charities despite having done nothing wrong or illegal.

Despite this, the Muslim charities in UK generally responded positively. Charities improved their due diligence processes and vetting of partners and responding to banking queries. Many Muslim charities now use the same due diligence software to vet their partners and staff as the banks.

Despite the pressures since 9/11, the Muslim sector in UK has exponentially grown with talks of annual income reaching £1bn in UK. This could not have been possible without the partnership Muslim charities have with their banks. However, in transferring money abroad charities continue to face blocks and funds returning. In some instances, and surprisingly, banks have been trigger-happy in closing banking facilities without any explanation. Even charities with just UK operations also affected.

 

So, what should be done, a question I am often asked. My response:

 

1. Financial Standards must not only be improved, but they should also be exhibited.

The Muslim community bruised by constant unfair and malicious media headlines, at times feels as if the whole world is against them. So, when a bank asks legitimate questions, some wrongly see this as an attack on their faith, creating an “us and them” narrative. This approach risks undermining real issues relating to good governance, compliance systems, proper due diligence, and effective audit trails for “end use of funds”.

 

“Muslim sector should confidently and boldly market and exhibit the progress made in addressing compliance and governance issues”

 

Muslim sector should confidently and boldly market and exhibit the progress made in addressing compliance and governance issues. Muslim organisations should sign up to a standard that works for banks and helps to demonstrate good financial governance.

Sometimes the race to raise monies creates pressure to look good before donors with emotional marketing material in the year-end financial statements, ignoring the needs of other key stakeholders like banks.

Muslim charities like all charities should learn from the mainstream charities that practice good governance. Often such charities, in their annual audited financial statements, will discuss their governance or when it fails against their actions plans and risk management extensively. They do this to assure their stakeholders that they understand the risks relevant to them and how they mitigate these risks.

 

2. Effective or meaningful third-party check or oversight over the banks decision to close an account.

When a charity finds itself with a bank closure notice, it finds limited alternative options for new banking facilities. This has a devastating impact on the vital and often life and dignity saving work charities deliver.

 

“There is no effective or meaningful third-party check or oversight over the banks decision to close an account”

 

There is no process to ensure the decision was fair and risk driven. It becomes easy for the banks to close an account instead of spending resources to manage their risks by requesting and assessing relevant information to satisfy themselves.

Charities should lobby the Government and the Charity Commission to address this gap in the system on the back of Nigel Farage’s high-profile case. The banking sector should be subject to detail regulations and guidelines that are shared with the wider public and charities so that all know what is expected of them.

Standard complaints to the Financial Ombudsman Service does not address this issue, given the urgent and devastating impact on bank closures.

 

3. Covid crisis caused the banks to prioritise businesses over charities.

The Covid crisis placed a significant burden on banks for opening bank accounts for businesses as Government grants were restricted to having a bank account. As it transpired many in their thousands did not. To address this need, mainstream banks prioritised businesses over charities.

 

“Some high Street banks stopped opening charity bank accounts or gave extraordinary long processing times”

 

As a result, some high Street banks stopped opening charity bank accounts or gave extraordinary long processing times. Muslim charities were hit the hardest as requirements for that additional bit of scrutiny meant it was no longer commercially viable to entertain them. This is unacceptable as the same banks have been making huge profits.

The Government should make it mandatory on banks to address the requirements of the charity sector as part of their business, so it is not ignored or undermined for commercial reasons- there is no better corporate social responsibility than this for the banks.

Muslim Charities play a vital role in addressing the needs of the most vulnerable, often stepping in when governments fail. This vital service is not possible without the banks facilitating this.

It’s time real issues are discussed and resolved on both sides for betterment of mankind, society, and country. It is in the Government and wider society’s interest to do so and the sector should lobby on this basis.

Nobody wins with the blame game on both sides ignoring the real issues.

 

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 works and deals with a large portfolio of Muslim charities in UK and has been advising them with their banking issues, working with many high street banks.

Nasir has directed treasury functions in large UK Muslim charities with operations worldwide.

Email: info@duagovernance.com

Turkiye / Syria Earthquake, the Relief and Sanctions

The scenes of the earthquake rescue have been heart wrenching. With the coldest nights upon the effected, seeking shelter in the buildings that have survived, has become a challenge for many. This risk of collapse, aftershocks and the memory of the disaster that struck, is too much.

Many charities are reporting a record-breaking fund-raising campaign.

The world has responded, and UK charities have once again responded to the call. Many charities are reporting a record-breaking fund-raising campaign. Despite the cost-of-living crisis, rich and poor have reached deep into their pockets, some even donating their household items to awaiting containers ready to go.

The dark open secret

In the midst of this crisis where the best of humanity has come out, there is an open secret with dire consequences on the most desperate – the sanctions over Syria.

As the Syrian crisis began, banking financial sanctions were imposed on the Syrian Government, making aid transfer of funds to Syria impossible. The current focus is on the eastern Turkyie and only the areas of Syria under the control of Turkyie Government. The rest of Syria under the Syrian Government control is out of reach with the affectee losing out.

The sanction regime

The UN and / or the UK government place financial sanctions / restrictions to achieve a specific foreign policy or national security objective. The Office of Financial Sanctions Implementation (OFSI), part of His Majesty’s Treasury (HM Treasury), provides information for charities operating internationally in its guidance for the charity sector. Those working in the international charity sector must refer to this.

In the banking world, the risk associated with charities working in sanctioned countries is considered to be high. Consequently, Muslim charities working in Syria often become a target.

UK financial sanctions apply to all entities and persons subject to UK law, wherever they are in the world. These cannot be ignored as it is crime to breach these sanctions.

The banks take sanctions seriously and will not engage in business if there is a risk of a sanction breach. In the past banks have attracted hefty fines from regulators for facilitating a sanction breach. In the banking world, the risk associated with charities working in sanctioned countries is considered to be high. Consequently, Muslim charities working in Syria often become a target.

Recently an update to Syrian sanctions regulation came into force. Although this opened a restricted corridor for INGOs, I expect only the large mainstream non-Muslim INGOs to benefit. Many Muslim charities may still lose out.

So what should charities do

A meaningful due diligence is a must to have any credibility with the banks. Five key components being:

1. Know the sanctions: Its not enough to operate a international relief charity just driven by faith values. Those running the charities must know the sanctions regime and therefore must refer to the OFSI list of restriction before engaging an individual, partner, or supplier for work in Syria.

2. Adopt the right policies: This is the minimum standard required to operate within the international relief sector. Anti money laundering policies, sanctions compliance policy, counter terrorism financing policy, anti-fraud and bribery policies are ALL relevant – these may be separate documents or all on one. The coverage and trustee approval is what matters.

Charities operating in high risk countries are often subject to enhanced due diligence by banks. As part of this, the banks assess compliance to policies and expect to see real examples showing compliance. Therefore, these policies should be relevant and up to date.

3. Audit Trail matters: High risk banking transactions are flagged up by the banks AI systems. Charities are then contacted for information relating to these transactions. This includes the following:

  • Background on the recipient of the funds – this is where the documents confirming checks against the OFSI lists matter. Personal references do not count.
  • Rationale of the transfer – this is where project proposals, project invoices become relevant. Charities that compromise on paperwork and run based on verbal assurances, lose out.

Complying with sanctions is a legal requirement and a crime if breached

4. Employ the right people: Complying with sanctions is a legal requirement and a crime if breached. Charities should ensure that the right senior person is the overall lead for compliance to the policies. Staff normally in the finance department independent to Programmes should ensure that the necessary checks are completed and documents completed before transfers are made.

Management override of policies compromises a key control for banks.

5. Relationship with the bank manager: Charities should treat the bank as a member of their team. They often have more intelligence over charity finances and business relationships than charity trustees and management think. Be open and ensure the bank to be one step ahead, so when you transfer funds, the bank systems already expect such a transfer. Banks don’t like surprises as the whole ani-money laundering regime is based on “knowing your client”.

Banks don’t like surprises as the whole ani-money laundering regime is based on “knowing your client”.

Working in the international charity sector requires embedded and robust due diligence processes and an able management to navigate through the complexities of international fund transfers. Mere good intensions are not enough.

And it is also the case that the politics and resulting sanctions can restrict vital humanitarian aid that saves lives and protects dignity of those in most need. There is a cost that humanity pays.

 

End –

Author: Nasir Rafiq is a widely experienced Fellow Chartered Accountant (ICAEW) and a Charity Financial Governance Expert.

He is the Managing Partner of Dua Governance, a Charity Governance specialist accountancy firm.

Nasir has held many senior finance positions within the UK charity sector and continues to advise many charities on financial governance matters.

Email: info@duagovernance.com

Charities and Banks – A difficult relationship

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:

  1. Who is donating to the charity? Does the charity itself know and make checks to ensure this is not dirty money?

  2. 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?

  3. 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:

 

  1. Partner with charities that have proper systems in place that meet the banking anti money laundering requirements

  2. 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.

  3. 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.

  4. 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.

  5. Anti-money laundering checks must be made on large donations (i.e. £5000 and above).

  6. 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.

  7. Work with local partners that have proper local registrations and due diligence in place.

  8. 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.

 

End –

 

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