Article: Risk based approach for NPOs
When thinking non-profit organizations (NPOs), most individuals immediately associate them with clear objectives. For instance, Greenpeace advocates for the climate, Unicef for children’s rights, and the Red Cross for disaster relief. NPOs primarily focus on fundraising and then allocating those funds towards charitable, religious, cultural, educational, or social causes. While these organizations often maintain a positive image, regrettably, some non-profit entities are exploited for money laundering and terrorist financing. NPOs present an attractive structure for criminals to launder money, as they aren’t obligated to maintain high levels of transparency and may not always publish comprehensive financial statements.
The Prevention of Money Laundering and Terrorist Financing Act (WWFT) delineates the expectations for financial institutions in preventing money laundering and terrorist financing. However, this law is broadly framed, placing financial institutions under regulatory pressure to adhere to its stipulations. Although it’s commendable that banks are keen on complying with these laws and are internally driven to prevent abuse of the financial system, this compliance motivation inadvertently results in adverse effects within the legislative framework, known as de-risking.
De-risking is a strategy wherein financial institutions minimize or steer clear of dealings with customers or transactions deemed risky. This is done to align with the stringent requirements and avoid potential fines imposed by the regulator in the battle against money laundering and terrorist financing.
Unfortunately, non-profit organizations bear the brunt of this strategy. Due to heightened scrutiny by financial institutions, NPOs face significantly increased administrative burdens and prolonged approval processes when opening or managing bank accounts. Consequently, NPOs encounter operational challenges that impede their ability to efficiently manage their finances and fulfill their mission.
The Dutch Banking Association (NVB) has not overlooked this hurdle. To establish a transparent and level playing field, the NVB, in collaboration with De Nederlandsche Bank, relevant trade associations, and the Ministry of Finance, has devised a standardized framework. This framework identifies risk factors and estimates the risks of money laundering and financing terrorism at a non-profit organization. The comprehensive standard, available on the NVB’s website, swiftly illuminates the governance, funding sources, activities, geographical reach, and beneficiaries of the NPO. The responses to these aspects are correlated with specific risk-enhancing and mitigating factors identified by the NVB.
These novel benchmarks ensure that risks of money laundering and terrorist financing are accurately identified without penalizing honest and upright NPOs. Financial institutions will still request data from NPOs, but thanks to the new methodology, these requests will be more precise, thereby alleviating the burden on NPOs. This is also emphasized in the subsequent crucial paragraph:
For most NPOs, the bank will initiate contact to gather necessary information and documentation. By providing isnsights on pertinent risk factors, this information request can be tailored proportionately to the potential levels of money laundering (ML) and terrorist financing (TF) risks. Furthermore, a targeted, risk-based approach is imperative to curtail unnecessary information requests from customers and enhance access to financial services.
Compliance Champs believes that these standards mark a significant stride in elucidating to both financial institutions and their clientele what can be requested and, more importantly, why such requests are made. In the ensuing months, the NVB will release additional standards for various sectors, including crypto companies, retail, and automotive businesses. Naturally, we will keep you informed about these updates via our LinkedIn page and website (www.compliancechamps.com) as soon as they are made public.
