Summary of 2005 Revisions to U.S. Department of the Treasury's Anti-Terrorist Financing Guidelines:

On December 5, 2005 the U.S. Department of the Treasury (Treasury) released a revised version of its November 2002 Anti-Terrorist Financing Guidelines: Voluntary Best Practices for U.S.-Based Charities. The Treasury Department announcement requested public comment on the revisions by February 1, but said the revised Guidelines immediately replace the 2002 version. In other words, the revised Guidelines are now operational. The revised Guidelines dropped some of the 2002 provisions, but added new ones as well. An expanded Introduction and a Statement of Principles (Section I and II) have also been added. Parts III-V address nonprofit governance and accountability measures. The heart of the document is in Part VI, Anti-Terrorist Financing Best Practices, which comprises over four of the document's 11 pages, contains most of the new and expanded provisions. They do not reference the Principles of International Charity, developed by a nonprofit sector working group and sent to Treasury as a proposed replacement for the 2002 Guidelines, but incorporate some elements from the Principles. Although the Guidelines are presented as voluntary, the recommendations are stated as action charities “should” take. It leaves open the possibility that lack of compliance could trigger investigations. Thus, they carry more weight that voluntary suggestions. Moreover, they apply to all charities, including foundations and grantees. Other highlights of the revised Guidelines include:
  • A presumption that charities are conduits for terrorism, although no evidence is provided for this;
  • Applies to all recipients a charity deals with, not just "foreign recipients;"
  • A recipient is an entity or individual that receives not only transfers of money from a charity, but also in-kind assistance or services of any type. Thus, the Guidelines cover nearly every activity of a charity;
  • Charities must comply with Treasury Department’s sanctions programs, and should check to see whether a recipient is on the Specially Designated Nationals terrorist watch list. Charities should also “conduct a reasonable search of public information” (including a host of foreign and U.S. terrorist watch lists) to determine if a recipient is “suspected” of terrorism related activities;
  • Charities should report "suspicious activity" of recipients, employees or board members of recipients, or employees of the charity to the FBI, as well as report to the Treasury Department valid matches on the Specially Designated Nationals terrorist watch list maintained by the Treasury Department; and
  • Charities should require recipients to certify they do not employ, provide services to, or in any way deal with any individual or group that is sanctioned by the Treasury Department or is known to support terrorism.
Treasury Press Release and Web Announcement: Public Comment Period to Feb. 1 The press release issued Dec. 5 says the Guidelines are intended to "help the charitable sector protect itself from abuse by terrorist organizations." Patrick O'Brien, Treasury Assistant Secretary for Terrorist Financing and Financial Crime, noted American's generosity, but goes on to make the unsubstantiated claim that "terrorist networks and their sympathizers have preyed upon this goodwill to raise and move money in support of their deadly agendas." The web announcement makes a more inaccurate and critical statement about charities and terrorist financing. Referring to its investigations of terrorist financing conduits, the statement says, "Investigations carried out during the campaign have revealed consistent terrorist abuse of the charitable sector through diversion of charitable funds and services to terrorist organizations such as Al Quaeda." (emphasis added) The release points out that the Guidelines are voluntary and do not change existing legal obligations of charities, but employ a "risk-based, transparent approach to guard against the threat of diversion of charitable funds." The Treasury Department says it has worked "hand-in-hand with the U.S. charitable and community, notably the Arab-American and Islamic-American community, to raise awareness of terrorist abuse and steps charities can take to protect themselves." The web announcement also refers to an "ongoing dialog" with the charitable sector. These statements should not be interpreted to mean the nonprofit sector has endorsed these Guidelines. While a working group of nonprofits met with the Treasury Department about the need to change the Guidelines, the 2005 revisions do not reflect their recommendations. The working group did not see the revisions until their public release on Dec. 5. Parts I - II: Introduction and Fundamental Principles of Good Charitable Practice The expanded Introduction goes well beyond the 2002 version's short statement, which merely noted that adherence to the Guidelines provides no legal protection from government sanctions, including asset freeze and seize powers. The 2005 version makes that point in a footnote, and addresses three additional points: the Guidelines are voluntary, intended to assist the sector in avoiding the risk of diversion of funds, and are a response to what the Treasury Department perceives as a widespread problem of terrorist abuse of charities. The Introduction says, "Investigations have revealed terrorist abuse of charitable organizations, both in the United States and worldwide, often through the diversion of donations intended for humanitarian purposes but funneled instead to terrorists…This abuse threatens to undermine donor confidence and jeopardizes the integrity of the charitable sector, whose services are indispensable to both national and world communities." No facts are presented or referenced to support the breadth of this claim. It simply says the Treasury Department wants to "minimize the threat of well-intentioned donations not reaching their intended beneficiaries…" The Treasury Department implies that the nonprofit sector supports these new Gudelines when it notes the revisions are based on "extensive review and comment by public and private sector interested parties." It is accurate that the Treasury Department has invited comments from a working group of nonprofits and has reached out to keep open communications about these issues. However, the Guidelines, in whole, have changed only modestly. The language is tighter and the explanation of what is expected of nonprofits is clearer than the 2002 version. But this version not only does not incorporate the Principles of International Charity, a proposed alternative to the 2002 Treasury Guidelines developed by a working group of nonprofit organizations and released in late 2004, but it moves in the wrong direction adding new and quite onerous requirements on nonprofits. After noting that the Guidelines are voluntary, Treasury says they are "intended to assist charities in developing a risk based approach to guard against the threat of diversion of charitable funds for use by terrorists" and that they "recognize that certain aspects will not be applicable to every charity, charitable activity, or circumstances." However, the Guidelines provide no information to indicate what circumstances involve greater or lesser risk. It does acknowledge that greater flexibility may be needed when charities are responding to disaster situations. Moreover, the Guidelines themselves are quite prescriptive, leaving few alternatives to the approaches suggested in the Guidelines. For most nonprofits, these “voluntary” Guidelines will be interpreted as requirements. Ironically, the Treasury Department is very clear that complying with the Guidelines does not afford any protection under the law. The Fundamental Principles statement is a short list of four very general principles: that charities should follow the law, exercise due care in performing their duties, maintain fiscal responsibility and consider precautions that are above and beyond legal requirements. Parts II - V: Governance, Financial Practice/Accountability, and Disclosure/Transparency in Governance and Finances Governance The revised Guidelines drop some of the overly specific provisions in the 2002 version, such as the number of board meetings held in a year and definitions of conflict of interest that were inconsistent with IRS rules. It recommends that charities operate in accordance with government instruments that define its structure and financial practices and comply with local, state and federal laws. It adds two new recommendations for Boards of Directors, saying each member is responsible for ensuring the charity complies with all laws, and records of organizational decisions "should immediately be made available for inspection by the appropriate regulatory/supervisory and law enforcement authorities," without any reference to normal standards for regulatory investigative thresholds or search warrants. Financial Practice/Accountability Specific recommendations from the 2002 Guidelines are mostly intact in the 2005 version, recommending that the board approve an annual budget and be audited by a certified public accountant if the budget exceeds $250,000. The audit statement should be available to the public. There is no explanation of why the Treasury Department picked the $250,000 threshold, which does not correspond to any legal standard. Federal grantees are required to have such an audit if their federal grants exceed $500,000. The section on disbursement of funds says charities should keep accounts of all funds received and disbursed, maintain records of salaries and expenses and deposit funds into financial institutions promptly after they are received. The 2002 Guidelines said there should be no cash disbursements, but the new version is more flexible, recommending that cash disbursements be made only when necessary, and then only in small amounts for short periods of time. However, it goes on to recommend that the charity oversee spending of currency, a provision that would be difficult if not impossible to implement. Disclosure/Transparency in Governance and Finance The Guidelines continue to duplicate and contradict IRS and state regulatory requirements in this area, expanding beyond the 2002 version. It exceeds what is required in the IRS Form 990, the annual information return filed by charities and foundations. It recommends charities collect the following information, adding vague language that it does so "while fully respecting privacy rights":
  • Identifying information on board members of the charity and its subsidiaries or affiliates, including social security numbers
  • Identifying information on its highly compensated employees or those with substantial influence over day-to-day operations, and all foreign employees.
The revised Guidelines recommend that charities publicly disclose the following information at the request of a member of the public:
  • A list of its Board of Directors and their salaries
  • Direct and indirect benefits paid to highly compensated employees or those that have substantial influence over day-to-day operations
  • A list of branches, affiliates and subsidiaries that receive services
  • An annual report describing its purpose, programs, structure, tax-exempt status and financial information
  • Complete annual financial statements
  • A statement of its goals and purposes
  • Information to substantiate that its fundraising materials are true and not misleading
  • A statement of justification whenever it determines funds raised for one charitable purpose should be spent for another charitable purpose.
A new section on supplying resources assumes all transfers — money or in-kind assistance — are grants, recommending information collection and oversight that is similar to, but not the same as, IRS expenditure responsibility rules followed by foundations. It generally makes sense as to grants, but not as to other situations when resources are being supplied. Additionally, the Guidelines do not provide detail on what it means when it says the charity should provide “ongoing monitoring” of the recipient that receives the transfer of resources. A new section on supplying services fails to distinguish between grants and direct services to people in need, recommending an overly broad and invasive approach to both. It assumes that a charity can control distribution of services to the extent that it would follow service beneficiaries to control how funds are used. For example, should a food bank go to the home of a needy family to make sure they are not sharing their dinner with suspicious persons? The Guidelines not only suggest monitoring the actions of recipients with regards to activities “that supports terrorism,” but also whether the assets are “used for non-charitable purposes.” Part VI: Anti-Terrorist Financing Best Practices The most detailed recommended practices are included in this section, which has expanded the 2002 version to apply to all U.S.-based charities, not just foreign recipients. It also expands the amount of information to be collected. It encourages charities to “apply a risk-based approach, particularly with respect of foreign recipients” but does not explain what factors indicate increased risk. In addition, it does not distinguish between foundation grants to charities and charitable aid provided to individuals. Part A covers information charities “should” collect from recipients of funds or in-kind services. These include:
  • The recipient’s name in English and language of origin and any acronyms. A footnote indicates that charities investigate when there is reason to believe an organization has changed its name and "uncover any such prior identity or name."
  • A list of the jurisdictions where the recipient has a physical presence
  • All reasonably available historical information relating to the recipient’s identity and integrity, including copies of governing instruments, information on the founders and operating history
  • Address and phone number of each place of business
  • A statement of purpose and report on projects and goals
  • Names and addresses of individuals, entities and groups that receive funds, services or material support from the recipient, to the extent possible
  • Names and addresses of all subcontracting organizations
  • Copies of public filings with pertinent government regulators, and
  • Sources of income.
Parts B and C address vetting procedures for recipients and its key employees, which include “highly compensated employees” and those who “exercise substantial influence over the day-to-day operations of the charity.” It clarifies and expands the 2002 version to put charities more squarely in the role of government investigators, and ignores IRS expenditure responsibility regulations (which define vetting procedures for foundations). Part B recommends “basic vetting” of recipients include the following:
  • A reasonable search of public information to see if a recipient or their board members, key employees or senior management are suspected of terrorist activity.
  • Comply with programs administered by the Office of Foreign Assets Control (OFAC) and assure itself recipients and their board members, key employees and senior management at all business locations do not appear on the Specially Designated Nationals (SDN) terrorist watch list. Footnotes encourage checking other lists, including those of other countries. This could raise problems in countries that use terrorist watch lists to suppress dissent.
  • Require recipients to certify that they do not employ or deal with groups or people listed or are known to support terrorism.
  • Search public information to ensure its own key employees are not suspected of activity related to terrorism.
Part D, a new provision, recommends that charities report any leads from their vetting process to OFAC or the FBI. If there is a match with the SDN list, the charity should “immediately” report it to OFAC. The Guidelines also indicate that the charity “can provide” information on “any suspicious activity” to OFAC and the FBI. There is no definition of what constitutes suspicious activity that would cause a charity to report an employee, board member, grantee or recipient of services to federal authorities. Part E expands the 2002 Guidelines on review of financial operations of foreign recipients to include financial and programmatic operations of all recipients, including U.S. charities. It recommends that charities require periodic reports from recipients, including information on steps taken to ensure funds are not distributed to terrorists. On-site audits are recommended "to the extent possible." The section dropped language from the 2002 Guidelines that required charities to ensure funds "ultimately" do not end up in the hands of terrorists, responding to criticism that such a requirement would be impossible to implement. Nonetheless, the new Guidelines call for the charity to take reasonable steps to ensure that the funds are not distributed to terrorists or their support networks.
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