The Hole in the Bucket: The Impact of De-risking on Non-Profit Organizations

The international frameworks on Anti-Money-Laundering (AML) and Countering the Financing of Terrorism (CFT) are seen as crucial tools for advancing stability and security objectives, as well as for curbing criminal and extremist activity. However, increased due diligence and reporting requirements for financial institutions have led banks to develop their own increasingly risk-averse controls – generally termed “de-risking.” There are growing concerns about the unintended consequences of de-risking practices on financial inclusion goals, particularly for vulnerable consumers, including the poor, women, migrants and refugees. Global financial inclusion actors, such as the World Bank, G20 and CGAP, have joined the debate on de-risking, aiming to guide policymakers on the implementation of AML/CFT standards while promoting financial inclusion.

The focus of these debates, however, has been the effect of de-risking on the micro level and the individual consumer, and not on the organizations which are crucial to supporting these inclusion processes. While we see a global push for financial inclusion at the individual level on the one hand, whole groups are at risk of falling out of the system on the other, a veritable “hole in the bucket” which needs to be plugged with some urgency. We would like to draw attention to these organizations, as a growing body of evidence shows that the non-profit sector is bearing the brunt of de-risking decisions.

We are not able to open a new bank account anymore... They did not officially refuse it, but the regulations to get the approval to open an account are impossible for us, in regards to the papers we have to provide, information we have to give.

Women’s rights organization in Turkey

In many contexts, not-for-profit organizations (NPOs) have become the direct and indirect target of AML-CFT rules. As a result, they are losing critical access to resources and banking facilities, and thus losing their ability to provide the key services that contribute to financial inclusion processes. Studies have found various negative impacts of de-risking on financial access for NPOs, such as banks’ refusal to release received funds, or issues in opening bank accounts.

An increasing number of non-profits are facing growing barriers to financial access. As one of the women’s rights organizations in Turkey pointed out, “We are not able to open a new bank account anymore... They did not officially refuse it, but the regulations to get the approval to open an account are impossible for us, in regards to the papers we have to provide, information we have to give. We do not have the structure to set up all those mechanisms for reporting. And within the bank, there seems to be no one who can explain the regulations to us.”

Another women's organization from Egypt reported, “In 2011 we had nine grants from different donors, all postponed or frozen with no response. Some donors waited two years for us.”

We are collecting a growing body of evidence for other NPOs that encounter similar challenges – organizations being asked onerous questions about the work they do, and in some cases, being required to register as a trust fund in order to open a bank account. Issues such as these have led some NPOs to resort to “carrying cases of cash to support their personnel and programs on the ground”, leading to serious security issues.

Oxfam has gone as far as to state that “the goal of countering terrorism financing has been given preference over that of financial inclusion”. Most notably, the wider banking sector in countries in the Global South is heavily dependent on correspondent banking relationships (CBRs) with established multinational banks. The global decline in CBRs thus reduces these countries’ ability to participate in the global economy, threatening trade and development. Cross-border remittances from migrants to family members have suffered as well, as banks have stopped doing business with money transfer organizations altogether. There are also concerns that the AML/CFT frameworks are counter-productive and actually end up facilitating illegal money streams since access to formal banking is denied.

In 2011 we had nine grants from different donors, all postponed or frozen with no response. Some donors waited two years for us.

Women's organization from Egypt

The consequences of de-risking have been discussed in several fora in recent years. The Financial Action Task Force (FATF) has been active in clarifying the international standards to avoid misunderstandings that could contribute to de-risking, for example in its report to the G20 Leaders’ Summit. The World Bank and Association of Certified Anti-Money Laundering Specialists have developed workstreams with relevant stakeholders in order to identify solutions, especially focused on bank transfers for humanitarian support.

However, solutions for NPOs are more difficult to find due to banks’ unfamiliarity with their work. In order to change that and move the needle on this issue for civil society, here are a few of the actions we need to take:

• Include NPOs as target groups in financial inclusion agendas. These organizations are crucial to financial inclusion efforts, considering they often provide the link between individuals and the banking system. 
• Promote proportionate and calculated risk-based implementation of AML/CFT measures. By advancing financial inclusion goals for both individuals and organizations, a more nuanced implementation of AML/CFT could bring more economic activity into the formal banking sector, thus enhancing transaction monitoring and customer due diligence, and in turn helping advance AML/CFT goals.
• Address the lack of NPO expertise within financial institutions, especially for local (non-international) organizations which are little known and even less understood by financial institutions.
• On the flip side, address the lack of financial capability and knowledge of financial sector requirements within NPOs. To tackle this gap, some banks (e.g., Standard Chartered) have started organizing financial literacy programs for NPOs on regulatory complexities – these examples can be brought to the forefront of the discourse.

The Human Security Collective has engaged in a number of fora, including becoming part of a transnational coalition of non-profit organizations seeking to highlight, stem and reverse the unintended consequences of these financial policies on civil society space. The Non-Profit Platform on the FATF has been set up to ensure that civil society is effectively engaged in the debate. However, as long as there is a lack of awareness and understanding of these problems, it is unlikely that a clear mandate to develop solutions will appear. We need to build collaborations and co-create suitable solutions to these issues by engaging with policy makers as well as the financial sector, in order to prevent these issues getting more deeply embedded in the intergovernmental order, national laws and banking practice. We are looking forward to getting feedback and reactions from the financial inclusion stakeholders on how to effectively bring these issues to the forefront of the discourse.