Understanding AML in the UK Charity Sector

The charity sector is often called the Tertiary Sector, the volunteer sector, the not-for-profit sector, the community sector or the civic sector. The aim of this sector is to generate social wealth rather than material wealth. Let's analyse it in the context of anti money laundering and compliance.

With the annual income of £53.2 billion, the charitable sector in England and Wales can be attractive to organised fraudsters. Charities are perceived by the public as  trustful and honest organisations.
Those organisations are built on altruism, voluntarism and a mutual goal. Therefore staff who work there might be less suspicious and vigilant while operating day to day tasks.  It is essential for charities to provide appropriate training and  awareness sessions for their staff so they are alert to the possible risk flags They could encounter. 
Illicit activities might be carried out by individuals and entities connected to the charity as well as external parties. Charities should establish relevant policies and a comprehensive financial crime strategy. 
All of the above makes AML a  potential complex issue in the charity sector.
 

Charities and their responsibilities

In the UK, The Charity Commission for England and Wales (‘CCEW’) is responsible for regulating charities in England and Wales.  The CCEW Guidance for Charity Trustees sets out their obligations.  These include managing the charity’s resources responsibly.  The guidance, at chapter 7.1 states:

Some charities work in areas or undertake activities which involve greater exposure to risks such as fraud, financial crime, extremism, or terrorism.  Charities should assess their exposure to these risks and take proportionate action.

Also, The Charity Commission for England and Wales provides comprehensive guidance for charities to understand and comply with AML regulations. This includes practical advice on conducting risk assessments, implementing internal controls, and ensuring transparency in financial transactions.
A Few of charities responsibilities are:

• have relevant financial controls
• charitable organisations should understand the origin of the funds donated to them
• when operating in a sanctioned country, relevant rules should be applied
• compliance with anti-money laundering (AML) laws
• identification and verification of donors and beneficiaries.

Money Laundering within Charities

Red flags to look out for when looking for potential money laundering within charities are:

1. Donations from unknown sources- anonymous donations are a commonly used method by criminals to hide the origins of their funds.
2. Hiding the purpose of donations- money launders might mispresent the purpose of their donation.
3. Misuse of donated money- funds can be used to make illicit transactions.
4. Imposter charities -criminals can pretend to be an exciting charity to trick donors and launder money.
5. Shell charity- establishing new charities which looks legitimate; however, they are a  front for money laundering.

One of the reasons why criminals are using charities to launder money is that as a trusted organisations and they have several privileges like tax exemption.
Examples when the donations are not used for charitable purpose:

• Buying property under the charity name to avoid tax payment and then renting or selling property for commercial gain
• Over estimating of welfare benefits and under reporting of salaries results in Income Tax and National Insurance losses
• Undertaking activities for commercial profit when claiming that is done for charitable purpose. 

Charities have been urged to stay vigilant and aware of suspect donations.

AML Regulations for Charities 

AML Regulations for Charities in the UK include: 

1. Corruption and bribery (Bribery Act 2010)
2. Laundering of funds (Charities Act 2011 and charities should be conscious of the responsibilities of their banks under the Money Laundering Regulations 2017)
3. Terrorism (under the Terrorism Act of 2000 and the Proceeds of Crime Act of 2002)
4. Penalties (various including UK, EU, UN, USA sanctions regulations)

According to www.gov.uk, the following situations may indicate higher risk:

• unusual or substantial one-off donations or a series of smaller donations or interest-free loans from sources that cannot be identified or checked by the charity
• where a charity is asked to act as a conduit for the passing of a donation to a second body which may or may not be another charity
• if conditions attached to a donation mean that the charity would merely be a vehicle for transferring funds from one individual or organisation to another without the trustees being able to satisfy themselves that they have been properly used
• where a charity is told it can keep a donation for a certain period of time, perhaps with the attraction of being able to keep any interest earned whilst holding the money, but the principal sum is to be returned at the end of a specified, short, period.
• where donations are made in a foreign currency, and again unusual conditions are attached to their use, eg including a requirement that the original sum is to be returned to the donor in a different currency
• where donations are conditional on individuals or organisations being used to do work for the charity where the trustees have concerns about those individuals or organisations
• where a charity is asked to provide services or benefits on favourable terms to the donor or a person nominated by the donor.

Conclusion

Financial institutions must follow Know Your Customer (KYC) requirements to avoid being used by criminals to launder and transfer illicit money.  It is their responsibility to understand how charities operate, who they work with, their beneficial ownership structure, location, and the source of their money.
Lack of properly followed standards has negative impact on the worldwide society as it gives criminals the opportunity to carry out illegal activities. 
To prevent financial crime, the banking sector, charities as well as governments and regulators must collaborate to stay one step ahead of potential money laundering threats and ensure that charitable funds fulfil their intended purpose of creating positive social impact.