How vague money-laundering and counter-terror rules slow aid

5 May 2023
This story was originally published by The New Humanitarian.
By Zach Theiler

Humanitarian groups need cash to operate. But in many crisis hotspots, the biggest hurdle to accessing funding is often their own banks – leaving them scrambling for workarounds and slowing life-saving aid.

That’s what Dalell Mohmed found in the crucial days after earthquakes struck Syria and Türkiye in February when her NGO’s bank wouldn’t wire the cash needed to provide quick relief to some 12,000 people.

“When I reached out to our bank, they said it went into our compliance section, and then went back out, and then went back into compliance,” said Mohmed, director of Kinder USA, a Texas-based NGO with programmes helping children in parts of the Middle East.

Even though the programmes were in Türkiye, simply mentioning Syria in the bank wire transfer request memo triggered a lengthy screening process. The earthquakes killed more than 50,000 people on both sides of the border. Kinder USA’s wire transfer ended up being delayed for a month.

It’s a common problem for humanitarian groups responding to emergencies in some of the world’s most urgent crises – including in countries subject to international sanctions, counter-terrorism laws, and financial crime regulations.

Many financial institutions consider Syria, as well as other areas in conflict, to be a “no banking zone”, due to the perceived risk of running afoul of these rules.

Fearful of transferring funds in these destabilised areas, banks often subject clients to extensive compliance measures, as seen by Kinder USA, or outright deny banking services – a practice known as “de-risking”.

Financial sector experts say the biggest roadblocks are caused by vague anti-money laundering and countering the finance of terrorism (AML/CFT) regulations – enforced in the US by a web of government agencies, and for which there are no viable humanitarian exemptions.

Bank de-risking can tie up humanitarian funding for months, stalling aid programmes and threatening operations.

A pre-earthquake study on Syria, for example, estimated that de-risking had reduced available cash by 35 percent. Last year, the UN’s humanitarian coordination arm, OCHA, estimated that $1 million in funding for Libya was tied up for months due to AML/CFT-like laws in Libya and Europe. The problem is even more pronounced for local NGOs, who lack the reputation and resources of bigger aid groups.

De-risking is a global problem for humanitarian aid, but US regulations are particularly stringent. Many NGOs around the world are dependent on US-based donors, which accentuates the problem. The US Department of the Treasury recently issued guidance aimed at countering de-risking, targeted squarely at banks. But financial experts who work closely with the banking sector say more is needed to convince banks to change their practices and ensure government policy doesn't scare them from working in crisis zones.

How banks see it: High risk, low reward

At the heart of banking fears is the Bank Secrecy Act, a 50-year-old regulatory framework designed to federally enforce AML/CFT measures through regular bank examinations. Crucially, this makes financial institutions the first line of defence against financial crime.

Federal regulators examine bank transactions, line by line, to assess whether they uphold AML/CFT obligations. Penalties can range from a formal reprimand to billions of US dollars in fines, stripping of their banking charter, and even prison time for individuals accused of “willful violations”.

However, AML/CFT regulation as part of the Bank Secrecy Act is so vaguely defined that banks are unclear on the rules. The examiners’ manual, for example, states that bank compliance programmes must be “reasonably designed”. Afraid of damaging reviews, banks over-comply and de-risk NGOs working in countries seen as problematic – delaying or refusing to complete transfers.

“Inherently, they're [humanitarian NGOs] working in high-risk places,” said Alex Zerden, a former US treasury department official, now founder of Capital Peak Strategies, a Washington-based consulting firm that advises companies on risk. “Some financial institutions do not want to incur the costs and the regulatory repercussions or legal liability of maintaining these relationships, which tend to be low, low value.”

“You shouldn't be in this conflict zone. Don’t you know that there's terrorist activity?”

The US government officially discourages de-risking, and emphasises that the vast majority of NGOs pose little or no risk of being abused for terrorist financing. The Financial Action Task Force (FATF), the leading global money laundering watchdog formed by G7 countries, notes the importance of protecting NGO programmes.

But supportive guidelines do not always trickle down to the actual bank examiners who audit financial institutions for compliance.

“I can tell you, more than anecdotally, where an examiner has said to a banker: ‘You shouldn't be in this conflict zone. Don’t you know that there's terrorist activity?’” said John Byrne, president of AML RightSource, a firm that specialises in anti-money laundering compliance.

“And if you're [the banker] not pushing back on that, and it's [the NGO client] not bringing a lot of return, what are you doing? You're like, ‘Alright, I'll exit the relationship.’”

As a result, de-risking is discouraged as a public policy, but it remains a “practical reality”, Zerden said.

De-risking is seldom discussed publicly by banks fearful of damaging their reputations or appearing unsympathetic to charity work. “No banker is going to say, ‘We’re actually not banking this charity,’” he said.

Costly hurdles lead to riskier workarounds

Humanitarian groups facing tight public scrutiny of their finances often fear damaging their reputations by raising banking issues or financial access challenges publicly, especially when it relates to terrorism.

But it’s still a top-of-mind problem. For example, a private working group with more than 100 members regularly meets in Washington to discuss bank de-risking and financial access.

Sharif Aly, executive director of Islamic Relief USA, said banking challenges have forced the NGO to cancel several projects in Syria over the last decade, including food security programmes.

“You're limiting a huge population from being able to provide support to legitimate humanitarian operations because of banking regulations and limitations.”

Additionally, blockages to international transfers have pushed the organisation to raise funding for humanitarian relief within Syria.

“This is not very effective or ideal because the US is probably the most generous community that's raising resources for a lot of these humanitarian crises across the world,” he explained. “You're limiting a huge population from being able to provide support to legitimate humanitarian operations because of banking regulations and limitations.”

Aly refrained from discussing bank-related challenges in detail, fearful of damaging Islamic Relief USA’s relationships with its financial institutions. “One day they could be with you, and then the next day they can be against it,” he said. “Any type of PR plays a huge role in whether they decide to choose to work with you or not.”

To cope with this threat, Islamic Relief USA has seven different US bank accounts. The hope is that at least one will facilitate transfers to the fragile zones in which the organisation works.

Other NGOs, such as members of the American Relief Coalition for Syria, reported delays or blocks to wire transfers impeding their ability to serve people in need.

Read more: A bureaucratic labyrinth

The US government acknowledges bank de-risking is a problem for humanitarians. However, a patchwork of government agencies with different mandates involved with bank regulation hampers efforts to address the issue uniformly.

For instance, federal financial regulatory strategy is set by the Financial Crimes Enforcement Network (FinCEN), a bureau within the treasury department. FinCEN oversees compliance with the Bank Secrecy Act. But bank examiners are primarily from the Federal Reserve, the Congress-mandated Federal Deposit Insurance Corporation (FDIC), or another treasury bureau, the Office of the Comptroller of the Currency (OCC).

Meanwhile, the inter-governmental Financial Action Task Force evaluates countries like Syria on their financial crime potential – standards that influence banks and their regulators across the globe.

The US treasury department’s Office of Foreign Asset Control (OFAC) issues economic sanctions. It also creates exemptions specific to OFAC-issued sanctions, known as licences, aimed at smoothing the way for humanitarian activity in Syria and elsewhere. OFAC is not a bank regulator, but it is responsible for placing economic sanctions on individuals and entities by putting them on the Specially Designated Nationals and Blocked Persons List (SDN).

Financial institutions are examined by bank regulators, like the OCC, to ensure they comply with the SDN list and exercise adequate due diligence.

Yet bank compliance with the SDN list makes up only one fifth of the Bank Secrecy Act framework that bank regulators use to examine financial institutions. The other four pillars are dedicated broadly to implementing AML/CFT programmes.

Different legal jurisdictions mean that various AML/CFT obligations within the Bank Secrecy Act framework, including the anti-terror USA Patriot Act, are not waived by OFAC’s humanitarian licences.

A recent working group made up of federal agencies, financial institutions, and NGOs discussed de-risking. During the meeting, federal agencies blamed banks for the misapplication of AML/CFT guidelines, while banks argued there is an absence of clear policies and instructions. One recommendation born from the meeting was to create an inter-agency committee to address de-risking uniformly.

Many humanitarian groups rely on imperfect workarounds.

In Syria, for example, some organisations transfer international funds through Türkiye by way of the Turkish Post and Telegraph Organization (PTT). However, transfers are capped at $5,000, which is well short of what’s needed for large-scale relief projects that can easily cost hundreds of thousands of US dollars.

Additionally, the PTT is mostly unavailable in northwestern Syria’s rebel-held Idlib province, which already faced multiple crises before the earthquakes struck. To send money in the absence of reliable banking, NGOs often rely on hawala networks and companies – value transfer systems often considered to be informal and less regulated by Western traditions but widely used across many countries.

Many NGOs wire funds to the nearest “bankable” country or region and then carry cash over the border. But the practice is operationally slow and places a high risk on individuals carrying cash through volatile territory.

The irony is that in the effort to mitigate the risk of AML/CFT breaches, US federal agencies have created a situation that not only undermines life-saving work, but pushes NGOs into more opaque and riskier modes of moving funds.

The bottom line

Policy experts have proposed a range of measures to address de-risking, from making it clearer how banks can comply with regulations to developing special payment platforms for high-risk jurisdictions. But there’s little consensus among the financial community.

One proposal calls for creating a “safe harbour” where financial institutions wouldn’t be held liable if humanitarian funding ends up in the wrong hands. Byrne criticises this idea as unrealistic. He doesn’t believe the US government will give a pass to banks on AML/CFT obligations, especially as it relates to terrorist activity.

Even if this were successful, banks would still likely favour well-resourced aid agencies that meet stringent due diligence requirements – overlooking smaller NGOs, diaspora aid, and private sector groups that are just as integral to driving humanitarian responses and keeping economies afloat.

Byrne believes there is little chance of a “legal panacea”. Instead, he suggests streamlining due diligence measures through a standardisation process to quicken financial services for NGOs responding to crises. But given the time-sensitive nature of humanitarian relief, even the speediest due diligence processes may be too slow.

Zerden says appealing to banks’ business savvy is the solution. Banks are best suited to manage risks, he argues, suggesting donors pay for the cost of compliance for humanitarian projects in “high-risk” areas. This could include time banks spend on staff training, updating systems, and collecting data.

Without financial incentives, there may not be a breakthrough. Banks frequently drop clients seen as high risk because they don’t bring in enough return, Zerden said, and humanitarian relief in conflict zones is a “high-risk, low-margin business”.

“From a business perspective – of which banks are – it is a pretty simple mathematical exercise,” he said.

Edited by Irwin Loy.

Zach Theiler provides freelance editorial services for the Charity & Security Network, a Washington-based resource centre for non-profit organisations that has researched and advocated against de-risking. He is writing this in a personal capacity.

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