Scrupulous background checks on account holders and beneficiaries are critical to fighting money laundering and terrorism funding in the financial sector. Such “know your customer” due diligence is a fundamental requirement imposed by regulators. In recent years, due diligence processes on current and future employees have also become an inevitable step in the recruitment process. So much so, that due diligence is now considered good practice amongst corporations and organizations worldwide, no matter the industry.
Charities and nonprofits targeted for abuse
Foundations as well as nonprofit and charitable organizations face a similar challenge. Funded by voluntary donations, such organizations are more frequently the victim of donors acting without the best of intentions.
Several sources report that charitable and nonprofit organizations are exposed to abuse in connection to donors and donated funds. The OECD “Report on Abuse of Charities for Money-Laundering and Tax Evasion” shows that authorities of many EU countries identify cases of tax evasion, tax fraud and money laundering committed through the nonprofit sector and that the schemes used for such unlawful activities are becoming more sophisticated and harder to detect. In the US, as reported by the Philanthropy Journal, individuals running Ponzi schemes began making large donations to various charitable organizations, particularly those focused on children, healthcare and arts. Another type of abuse is committed through the use of stolen credit cards where such cards are used for test payments on the organizations’ donation pages.
Fighting back: donor due diligence
Charitable and nonprofit organizations must begin protecting themselves against harm and abuse by monitoring where and how the donated funds are spent and, equally important, who they came from. An organization may be exposed to a number of risks – from financial risks to reputational, operational and regulatory risks – if due diligence on donors isn’t performed “diligently” enough. Imagine the extreme but plausible situation: the donated funds your organization applied to building a hospital initiative originated from unlawful, criminal activity. Not only may your organization be under the regulators’ watch or even inspection, you might also lose trust (both that of the public as well as of prospective donors) – potentially endangering the existence of your organization.
Monitor donor relationships to prevent fraud
Such situations can be prevented by implementing a thorough due diligence process around the relationship with your donors. Actually, there’s a lot you can do in-house even if you don’t have the latest automated solutions or cutting-edge technology.
Your due diligence review should follow a risk-based approach and cohere with your internal risk management framework. You can take the following steps:
- Perform a basic online check on the donor’s background using internet search engines, corporate watch websites or, if accessible, research tools such as Factiva, World Check or Lexis Nexis.
- Study corporate registers and annual reports (when available).
- Check for adverse press and media coverage by using key search words such as scandal, corruption and fraud, allegation and accusation, investigation and prosecution, etc.
- Run database checks for potential litigation, sanctions, disqualifications and proceedings on the donating organization.
By performing these steps, you should be able to:
- Establish the identity, credibility and legitimacy of the donating organization.
- Understand the source of funding or business model of the donating organization.
- Clear any potential conflict of interest or dependency threat between your organization and a donor and understand the true motives behind the donation.
- Provide your organization with reasonable assurance that the donation isn’t from an illegal or inappropriate source.
By investing in a donors’ due diligence process, you’re significantly reducing financial and reputational risks as well as creating a solid base of mitigating factors in case the regulators decide to inspect your organizational structure and related relationships.
 Source: Donor due diligence: A necessary evil
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