Background In May 2003 the IRS sought comments on ideas that U.S. charities might employ to prevent diversion of charitable assets to terrorists. The IRS Announcement referenced Anti-Terrorist Financing Guidelines: Voluntary Best Practices for U.S.-Based Charities, a document released by the Treasury Department's Office of Foreign Assets Control (OFAC) in November 2002. The Guidelines, issued without public comment, cover governance, disclosure, transparency and financial practices and include procedures for groups that distribute funds to foreign organizations. The agency developing the Guidelines did not consult charities and apparently did not consult with the IRS Exempt Organizations division. In submitting comments to the IRS, OMB Watch called for the withdrawal of these guidelines since they do not reduce the risk of diversion of charitable assets to terrorists, are inconsistent with federal and state laws and place charities in a governmental role of collecting information and assessing potential for terrorist activities. On Dec. 5, 2005 the Treasury released a revised version of the guidelines. The Treasury Department announcement requested public comment on the revisions by Feb. 1, but stated the revised guidelines are immediately operational. The 2005 version not only does not incorporate the Principles of International Charity, a proposed alternative to the earlier guidelines developed by a working group of nonprofit organizations and released in late 2004, but moves in the wrong direction by adding new and onerous requirements on nonprofits. The revised guidelines apply to all charities, including foundations and grantees, both foreign and domestic. An expanded introduction notes that adherence to the guidelines provides no legal protection from government sanctions, including the freezing and/or seizing of assets, and makes three new points: 1) the guidelines are voluntary, 2) they are intended to assist the sector in avoiding the risk of diversion of funds, and 3) they are a response to what the Treasury Department perceives as a widespread problem of terrorist abuse of charities. Comments filed on Feb. 1, 2006 from a number of charitable groups and umbrella organizations called for withdrawal of the guidelines. Current Status A Treasury Department official, speaking at a gathering of attorneys in May 2006, announced that the department is revising the Anti-Terrorist Financing Guidelines: Voluntary Best Practices for U.S.-Based Charities, based on public comments submitted last February. According to the official, the revisions are undergoing review and the department hopes to release them in the summer. This will be the third version of the Guidelines, since their release in November 2002. Treasury's Anti-Terrorist Financing Guidelines are Ineffective, Problematic Although labeled "voluntary", Treasury has authority under the USA Patriot Act to freeze or seize assets of charities. The draconian nature of this remedy is at odds with the characterization of the Guidelines as voluntary. As a result, it is likely that Treasury?s ?best practices? will impose a standard for due diligence that U.S. charities must follow. Accordingly, the November 2002 Guidelines, which affect all U.S. charities, not just those making international grants, has enormous implications for all nonprofits. The Guidelines address areas generally regulated by the states or Internal Revenue Service. For example, Guideline I(B)(1) requires a board to meet at least three times a year with the majority attending in person. This would preclude the possibility of meeting via teleconference, web casting or other alternatives used by organizations whose directors might be geographically distant. Compliance with the "in person" requirement could incur substantial travel costs, burdening the organization's budget or the personal finances of the director. And what would be achieved? If an organization intends to divert funds for terrorism, meeting in person is unlikely to prevent it from happening. Nonprofits have objected to Treasury?s characterization of the Guidelines as "Best Practices," noting the substantial difference between government standards and "best practices." It is inappropriate for a government agency in charge of terrorism-related actions to establish such practices for all U.S. nonprofits. The nonprofit sector itself should define its best practices, not government. Groups like the Maryland Association of Nonprofit Organizations have established a Standards of Excellence Program that promote best practices for the sector. Although the Guidelines focus on grantmaking organizations, they apply to all charities, including domestic and international groups and operating and grantmaking organizations. There are substantial legal and practical differences between public charities and private foundations, and anti-terrorism financing policies should take this into account. Nonprofit Sector Response In April 2004 representatives of nonprofits and foundations met with Treasury officials to voice concern over the Guidelines. The participants in the meeting were groups that responded to Treasury?s request for public comment. Many groups had called on Treasury to withdraw the Guidelines, and all felt they are overbroad, place unnecessary burdens on charities and foundations, and are inconsistent with federal and state laws. The meeting resulted in agreement that the nonprofits would develop an alternative to the Treasury Guidelines that would be the result of an open and transparent process. A diverse working primarily comprised of international grantmakers and service delivery groups was formed. Some nonprofit sector organizations are also involved, including the ACLU, Independent Sector and OMB Watch. The working group circulated a draft for comment within the sector and with Treasury in the fall of 2004. After meeting with Treasury to discuss the draft, the final Principles of International Charity was released in March. The Principles address the issues of terrorism more effectively than the Treasury Guidelines because they take into account the different ways that charities operate internationally and acknowledge that, beyond complying with the law, no one set of procedures for safeguarding charitable assets against diversion to terrorists will be appropriate in every case. The Principles stress the importance of due diligence, of knowing one's international partners, and maintaining responsible financial controls over charitable assets. While this process is taking place inappropriate application of the Guidelines is beginning to be seen in government and the sector. The IRS has asked some groups applying for tax exempt status whether or not they comply with them. The Combined Federal Campaign cited the Guidelines as justification for their new requirement that participating charities check employees against watch lists, although the Guidelines do not require this. Some foundations are already adopting some of the core ideas from the initial Guidelines or asking grantees about compliance. For example, a Detroit Free Press article described how the Mott, Kellogg, and Ford Foundations have each established processes for checking potential grantees to see if they are on government watch lists. What Needs to Happen Treasury should:

• Give priority to areas where there is the greatest potential for diversion of funds to terrorism. A GAO report made it clear charities are not a major threat;
• Not impede international charitable work;
• Not require nonprofits to do the investigative work of government; and
• Use the Principles as basis for new policy.

The sector should:

• Educate decision makers and the public on the positive role philanthropy plays in relieving suffering and the conditions that drive people to terrorism;
• Adopt and use the Principles in place of the Treasury Guidelines;
• Guard against inappropriate application of the guidelines.