Nonprofits Impacted By New Anti-Terrorism Guidelines
March 5, 2007 Joseph Bender
There’s no such things as innocently granting money these days, especially since the September 11 terror attacks. The U.S. Department of the Treasury recently issued revised Anti-Terrorist Financing Guidelines designed to help domestic exempt organizations avoid having their resources diverted for terrorist purposes. These guidelines are an updated final version of those released in 2002 and include public comments.
And recently, the Council on Foundations and 40 other organizations called on the Treasury Department to withdraw its latest version of the guidelines. The group is concerned that if charities have to spend more of their limited resources on the administrative costs of complying with the guidelines, they will have less to spend on program activities, many of which address issues of poverty and other factors that can contribute to the growth of terrorism.
The guidelines outline some helpful steps that all domestic exempt organizations should consider adopting. It is important to note that the new guidelines are voluntary and thus the extent to which you adopt these practices will be your decision.
However, there are several reasons why exempt organizations should consider adopting some or all of the practices. First, while the guidelines are voluntary, it is certainly possible that they might become mandatory at some point, so acting now will help you avoid scrambling to meet some potential future deadline.
Also, adopting these guidelines could help you set yourself apart from other exempt organizations to potential donors, thereby enhancing your fundraising potential.
Finally, there is precedent for a domestic charity being sued by victims of terror overseas, so these guidelines may help you avoid potential liability, or at least keep you out of the fray.
The new guidelines contain five essential elements. The first three elements involve advice regarding good corporate governance and financial accountability, which you should be following anyway. For the purposes of this column, the last two areas are of the most interest: Programmatic Verification and Anti-Terrorist Financing Best Practices.
When your exempt organization is considering making a grant of money or other resources to accomplish a specific goal, you should consider a number of steps to ensure that your grantee can accomplish that goal, including:
- Ensuring that your grantee has the ability to accomplish the goal for which you are making the grant, as well as the ability to ensure that your organization’s grant won’t be diverted for inappropriate purposes;
- Making the grant subject to a written agreement between your organization and the grantee, where the grantee will specifically state how and when it will use your organization’s grant; and,
- Establishing processes for the ongoing monitoring of your grantee, including a specific provision allowing you to terminate your funding should any inappropriate activity or diversion occur. In the case of large grants, you might want to reserve the right to audit your grantee. In terms of ongoing grants, this written agreement between you and your grantee will be particularly important, carving out the right to stop funding upon the occurrence of any use of the grant outside of your expectation.
Before making a grant to a potential grantee, there are a few steps you should consider taking. These steps are probably best described as “know your grantee,” similar to the “know your customer” rules in anti-terrorist and anti-money laundering banking regulations. The rules can be broken into two categories:
- Information you request from the grantee; and,
- Due diligence you undertake on your own.
While the cynical among us will recognize that any information you request is only as reliable as the person providing that information, much can be learned in how the information you request is presented and how your request for information is received. If a potential grantee is reluctant or unable to provide information that would typically be maintained by a charity, your suspicion should be aroused, and this may trigger a desire to do further investigation. Information you should request from your grantee will include:
- The jurisdiction(s) in which your grantee operates and historical information about your grantee, including copies of governing documents and information about the grantee’s founders. Obviously, the more history you obtain, the more confident you can feel about your grantee;
- A clear and concise statement of the grantee’s purpose and steps the grantee intends to take to accomplish that purpose;
- Information about the grantee’s proposed use of your grant, such as who the grantee will support. Importantly, this should include a list of anyone your grantee intends to subcontract with in performing its goals;
- The grantee’s other sources of support. This is potentially another very valuable source of information. The more transparency there is between the money that funds your grantee and the grantee’s use of that money, the safer you can feel your potential grant will be; and,
A certification from your grantee that it is in compliance with all applicable laws regarding anti-terrorist funding.
On your own, you should conduct basic due diligence by:
Searching publicly available information to determine whether your grantee has ever been connected with terrorist activity. In this regard, there is a wealth of readily available information online that can be quickly and inexpensively searched. Reviewing the Office of Foreign Asset Control (OFAC) master list of Specially Designated National (SDN) List. This list is easily viewed on the OFAC’s Web site at www.treas.gov/offices/enforcement/ofac/sdn
- You should ensure that your grantee, its principals and affiliates, are not on the list or otherwise subject to sanctions. The due diligence should also include key employees, managers, directors and other principals of the grantee.
Further, you should note that the United Nations Security Council Resolution 1373, passed in the aftermath of the September 11 terrorist attacks, calls upon the various nations to set out their own lists of terrorist related individuals and organizations, and thus these other lists should be searched to see if you proposed grantee is listed.
The U.S. Department of the Treasury’s recently updated Anti-Terrorist Charity Guidelines should serve as an alert to domestic exempt organizations of the various steps you should take to ensure that your grants are not being diverted for non-charitable purposes.
You should consider a two-step approach in which you seek information from a potential grantee and also you investigate your potential grantees. Between the two sources of information, your organization should have a reasonable comfort level that your grants aren’t being used for inappropriate terrorist purposes.
Joseph E. Bender is a partner in the corporate, securities and tax practice group at Wildman Harrold in Chicago. He regularly advises exempt organizations on a variety of compliance issues. His email is firstname.lastname@example.org