Money laundering and terrorist financing: Over half of active NPOs fall under FATF-defined NPOs

National Inherent Risk Assessment (NRA) on Money Laundering and Terrorist Financing has found that over half of the functionally active non-profit organizations (NPOs) in Pakistan fall under the FATF defined NPOs as these are involved in service-type activity as well as raising or disbursing charitable funds.

This has been mentioned in the updated guidelines for non-profit organizations (NPOs) issued by the Securities and Exchange Commission of Pakistan. The old guidelines were issued by the SECP in 2018 and now the same guidelines have been updated and revised containing additional material on NGOs and NPOs.

Referring to the NRA assessment, the SECP said that besides federally and provincially regulated NPOs and INGOs, there is a large number of unregistered charities operating in the country whose exact number is not known. Despite less resource availability or access to funding from formal sources, they may pose greater risk if they have links with international terrorist networks or UN listed entities, or their associated entities. Therefore, unregistered NPOs were assigned high risk in NRA.

In continuation of the risk assessments conducted earlier, National Inherent Risk Assessment (NRA) 2019 on Money Laundering and Terrorist Financing was undertaken to get an insight into threats, vulnerabilities and risks associated with money laundering and terrorist financing in Pakistan, as well as to highlight the way forward for national stakeholders to plan actions to mitigate the risks.

The SECP guidelines said that overall, a large segment of the NPO sector is seen as having a significant inherent vulnerability for terrorist financing (TF). Given the significant TF threats in Pakistan, the overall TF risk is also very significant. The NPOs rely on cash collections and street donations and also solicit funds from other countries and international development agencies. They often process large amounts of cash and some of them may regularly transmit funds between different regions and countries, report said.

Pakistan-based proscribed and UN-designated organizations had solicited funds from charities and undertook fund-raising domestically and from abroad including through social media for social welfare activities in Pakistan or abroad. Such entities may pose outgoing transnational TF threat under the garb of social/ welfare activities abroad.

The NRA also cites reference to a World Bank's research study10 in terms of which NPOs can be divided into "complicit" and "exploited" for terrorist financing purposes. While the former willingly function as a front for terrorist organizations, the latter are abused. Charities, through acts of omission or commission, may become a part of this funding effort, and money may be transferred through international channels to terrorist groups, it said.

The abuse of NPOs for TF purposes continue to pose a significant threat, both domestically and externally. The NRA highlighted that domestically, front NPOs of designated persons and entities were identified and subsequently proscribed under ATA1997. A front NPO acting for or on behalf of designated or proscribed entities or persons pose the same level of risk from TF perspective.

Some NPOs also receive donations from other countries and this makes these NPOs more vulnerable to TF, particularly when originator or beneficiary entities of such funds have links with designated/ proscribed entities or persons, it said.

Besides the aforesaid findings, the NRA also highlighted the consequences of money laundering, terrorist financing, predicate crimes and other abuses on the NPO sector in the country, as summarized below: Recognizing that NPOs often operate on limited budgets and rely on government funding, charitable donations or international donors, reputational loss arising from the aforesaid criminal abuses can lead to revenue loss through either budget reductions or diversion of funds, and can also seriously compromise an NPO's operations and ongoing viability.

TF consequences are higher than those of ML because of the national and international security impacts, and the reputational risks to the sector following a suspected or actual TF.

Regulatory or law enforcement action against the NPO and its governing body/senior management Breakdown in the relationship with financial institutions, including potential costs to repair or establish new banking relationships. Increased costs to combat and deter criminal attacks, particularly its security costs to build cyber resilience, the SECP report added.