Nonprofit organizations and human rights defenders and their vital work worldwide are getting tangled in a web of legislative, regulatory, and policy strictures set up to combat financial crime but that too often result in “unintended consequences,” hampering everything from humanitarian aid to community conflict prevention. The sector has been battling for decades to mitigate the impacts, and one of the key culprits, intended or not, is the still relatively opaque Financial Action Task Force (FATF), established in 1989 to set anti-money laundering standards but given superpowers in the aftermath of 9/11 to fight the financing of terrorism.

After years of frustrated attempts to raise the alarm over the detrimental side effects of the FATF’s power, the nonprofit sector now is more determined than ever to push  for another way to encourage the needed course correction. In a recent report, we explored three key elements of the problem and whether the most effective method of achieving change in the FATF’s approach is to continue on the current gradual, “evolutionary” path or take a more “revolutionary” tack, requiring a more radical shift.

The 9/11 attacks changed the international security landscape by defining terrorism, rightly or wrongly, as the preeminent threat to society, and making countering it a security mainstay. Building on regulations that predated 9/11, countering terrorism included investigating the money flows that prop up terrorists and their networks. This task was given to the FATF. As a result, the body of now 39 members (including the European Union and the Gulf Cooperation Council)# was transformed from a standard setter on anti-money laundering to being newly tasked with also setting and seeing to the implementation of standards that all countries are effectively required to follow to counter terrorism financing.

Yoking those two very different kinds of financial-integrity risks was problematic from the start. In the case of money laundering, in which money that is generated illegally is sought to be integrated into the legal financial system, it is the source of money that needs investigating. For terrorism financing, on the other hand, the source of the money could be legal or illegal, and it is the purpose to which that money is put (terrorist activity) that is illegal. Also problematic was that the FATF was not — and is still not — a treaty body; it seats only the large economies at the policymaking table, even though all countries worldwide are forced to comply because failure to do so has tangible impact on trade, aid, and investment.

Based on patchy empirical evidence, the FATF singled out nonprofits as a sector from the beginning of the newly enlarged mission in 2001. The FATF saw them as “particularly vulnerable” to terrorism financing. Nonprofits were the only legal entities to merit their own “Recommendation,” the term the FATF uses for its normative standards (which, of course, essentially become mandatory).  Now known as “Recommendation 8” in the current version of the Recommendations, it was one of nine new ones related to terrorism financing that were appended to the existing 40 anti-money laundering provisions.

In the last two decades-plus, this unusual attention to nonprofits has led to the overregulation and suppression of the sector, as well as challenges for civil society in accessing financing. Among the hurdles they face is the practice of “de-risking,”  in which financial institutions close accounts, delay or block transfers, or otherwise break ties with clients perceived as high risk for money laundering or terrorism financing abuse, regardless of whether they have done – or are likely to do — anything wrong.

Amid the drive to counter terrorism, nonprofit organizations have been consistently vulnerable to abuse and mischaracterization in various contexts. Legal and regulatory provisions, for example, often restrict nonprofit activity (whether humanitarian, development, peacebuilding, or human-rights related). Repressive measures target lawful, nonviolent activists or groups. Access to financial resources or foreign funding for nonprofits may be limited, if not eliminated entirely. And governments sometimes mount smear campaigns, with the objective of delegitimizing groups they see as opposed to their narrow interests by loosely characterizing them as “terrorists.”

FATF’s “Recommendation 8”

More often than not, this pattern has been found to be related to the implementation of the FATF’s Recommendation 8. Countries often explicitly cite “compliance” with the provisions as the impetus for the change (the many examples include Turkey and Zimbabwe).

The problem facing nonprofit organizations caught in this web is threefold. The first is the framework of the FATF itself and the nonprofit standard within it (Recommendation 8). The second is the implementation of the standard at the national level. Finally there is the “market,” which reads the signals generated at the normative and national levels and applies these rules and regulations for the nonprofit sector into regulating financial access and transfers – the very lifeblood of nonprofit operations.

Applying the  “evolutionary” and “revolutionary” approach to each of these three types of issues can help analyze potential solutions for each that might better serve civil society going forward.

In terms of the norms set by the FATF framework, the radical call is to get rid of Recommendation 8 entirely, with the argument that not every risk of terrorism financing needs its own Recommendation. The sector would then be assessed for risk under Recommendation 1 (which focuses on the entirety of financial integrity risk posed to society), and any residual risk pertaining to the sector that is uncovered would then be dealt with under Recommendations 24 and 25 with beneficial ownership-style regulations.

Alternatively, an evolutionary approach would require the nonprofit sector to continue pressing for incremental change. The Global NPO Coalition on FATF in the past decade has highlighted unwarranted overregulation, suppression, and financial exclusion of civil society worldwide resulting from the (mis)implementation of the FATF standards. Realization of the scale of the problem prompted  FATF to institute the Unintended Consequences workstream in 2021. This led to recent changes to Recommendation 8 and a revised guidance paper on its implementation.

While welcome, this will not solve the problem of the intentional misuse of the standard. The Coalition has called for fundamental changes to the FATF assessment methodology so that disproportionate regulation of the sector can be called out. Additionally, FATF assessors need to be trained appropriately so that they are sensitized to these consequences. They also  need to be made aware of other equally legitimate policy priorities that governments have, such as  upholding international humanitarian and human rights law (IHL/IHRL), and the obligations of countries related to the freedoms of expression, association, and assembly, so that intentional misuse and routine derogation of these rights can be called out in the assessment.

While the FATF urges implementation of its standards in compliance with international law, including IHL/ IHRL, and without undermining fundamental freedoms, it provides no guidance to that end. Nor does FAFT demonstrate how States can minimize infringements. Simple reference to international law in FATF standards without pointing towards specifics is meaningless in practice. At worst, the mere mention can create the illusion that the FATF and the implementing government have seriously considered rights  as foundational for the policy in question, even when that is (often) not the case. A structural relationship through a Memorandum of Understanding between the FATF and the mandate of the United Nations Special Rapporteur on Human Rights in Countering Terrorism could, for example, help plug this gap and meaningfully support human rights and other international law compliance.

The Risks of a ”Risk-Based” Approach

It is in the national context that all of these problems come home to roost. The FATF calls for a risk-based approach, which entails a country (and the relevant institutions within it) understanding the money-laundering and terrorism-financing risk to which they are exposed in order that they can then put in place the appropriate mitigation measures calibrated to that risk. While this risk-based approach is necessarily contextual, this is where an essential implementation dichotomy emerges. The FATF framework is, at the end of the day, a set of universal benchmarks that must be adhered to in vastly different settings, yet the measure of effectiveness within the framework remains predicated on box-ticking technical compliance with universal standards, and not on the reality of financial-integrity risk in a specific country.

This becomes all the more apparent when looking at the FATF “grey list,” which identifies jurisdictions deemed to have failed compliance standards and are therefore subject to increased monitoring. The list is largely populated by countries of the “global south,” even though it is the large (mainly developed) economies that enable and facilitate money laundering. Countries on the grey list tend to then go into overdrive trying to plug technical compliance gaps, given the impact that being on the list has on a country’s economy because the grey listing scares away investors and trade. And this over-correction mode is where much of the damage is done to the nonprofit operational environment, as countries scramble to impose restrictive laws and regulations that they hope will return them to FATF compliance.

This brings us to the third issue, the “market. Banks are entrusted with making key decisions gauging financial-integrity risk. In practice, therefore, governments leave the gatekeeping function to banks, fining them if they slip up. Banks, however, are for-profit entities with their own risk calculus and appetite. And in the absence of  adequate risk calibration by the government or the bank regulator, what results is the risk-averseness we see today and the wholesale de-risking of whole classes of consumer such as nonprofits. Instead of governments addressing the drivers of financial crime at a societal level, and focusing on disruption, prevention, and education, what stands in for this is compliance, another form of box-ticking.

A revolutionary approach would entail, among other things, a rethinking of the foundational concept of risk as it is imagined within the FATF context, which currently considers only the risk of terrorism and does not take into account that nonprofits mitigate such risks through their daily development, humanitarian, peacebuilding, and rights work. The current understanding of risk also does not account for the risk that an overly-securitized approach such as what FATF promotes, including the misuse and abuse of the financial-integrity standards by governments, poses to legitimate charitable activity and thereby on communities. When using a common FATF-related term, the “risk-based approach,” it is important to ask  “what risk” and “whose risk?”

Questions of Accountability and Transparency of the FATF

There are larger questions, too, about the accountability and transparency of the FATF as a body. As a task force and not a treaty body, the organization is too ambiguous to be held meaningfully or legally accountable. Some have explored the idea of transforming the legal status of the FATF into an international organization, which could provide a way for those affected to take legal action against it. Our interviewees expressed concern that this might impact the organization’s agility and that formalization is not the answer at this stage. This does not, however, preclude the necessity of instituting accountability and redress mechanisms, due to the simple fact that a non-institution creating soft-law standards should not have as much power as the FATF has without the appropriate checks and balances.

Ironically, FATF’s own funding also is opaque, with some countries using their overseas development assistance budgets to support it, citing the U.N.’s Sustainable Development Goal 16 on tackling illicit financial flows. This is problematic, given the FATF framework itself is being deliberately misused in many countries to undercut those and many other development goals.

Conflicts in Ukraine and the Middle East have once again served to harden counterterrorism rhetoric, but it is crucial to remember the lessons of the overreach that followed 9/11 and the need for States to act in a proportionate manner and within the law. Without adherence to international human rights and humanitarian law in response to even egregious acts of violence, States will only help create the conditions that are conducive to further violence, thus perpetuating a never-ending cycle

We live in complex times and in an increasingly multipolar world, but the disproportionate focus on nonprofits and terrorism financing in the last two decades has been to the detriment of  nonprofit/philanthropic/human rights imperatives as well as the financial integrity agenda. A course correction is required, and it should advance coherent policy across the goals of financial integrity, financial inclusion, and efficient and effective delivery by nonprofit organizations of humanitarian assistance, sustainable development, human rights protection, and peacebuilding.

IMAGE: Anti Money Laundering (AML) and Countering the Financing of Terror (CFT) regulations and compliance concept. (Illustration via Getty Images)