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December 22, 2016

The voluntary sector plays an important role in building a strong, caring, and well-functioning society, as well as contributing to employment, welfare, and economic growth. Recognizing this, most countries have relaxed the norms for organizations operating in this space. However, some charities may be targeted by criminals for terror financing, i.e. to launder the proceeds of tax crimes and other serious offences.

Tax evasion and fraud through the abuse of charities is a serious crime that has increased economic risk in several countries, although its impact is variable. There have been instances where charities have been used (rather, abused) to launder money to the tune of some hundreds of millions of dollars this figure is moving upward by the day.

The abuse of social welfare institutions for terror financing is becoming more and more organized and sophisticated. Regulatory authorities across the globe have detected several methods and schemes that are employed by unscrupulous entities to facilitate tax evasion and orchestrate crime related money laundering. Some examples are:

  • An organization poses as a registered charity to perpetrate tax fraud
  • A registered charity that willfully participates in a tax evasion scheme for the personal benefit of its organizers, directors, or donors
  • A taxpayer or a third party abusing a charitable organization by presenting false invoices and receipts
  • Salaried employees concealed as volunteer workers
  • A criminal or terrorism financing scheme that uses charities to raise or transfer funds
  • Misuse of grants and funds through the manipulation of the value of donated assets

These are not hypothetical scenarios; they are very much a reality. Lets take a peek:

  • A couple of years back, a Canadian charity was found to have disbursed funds to a terrorist organization from another country. The charity had, over a period of five years, made numerous wire transfers to several overseas-based persons and entities, including a charity that was later revealed to be operating as the front-face of the terrorist group. During the same period, large sums of cash were deposited into, and multiple credits were made to the charitys bank accounts. The source of these funds was unknown, as was the identity of the remitter for the credits. Cash deposits into the charitys accounts were immediately followed by the purchase of bank drafts or electronic transfers to overseas accounts.
  • A similar case was that of a company in Russia that received numerous cash deposits from several charities, supposedly for consultancy services. One account, in particular, received regular deposits, just barely below the limit; these funds were coming from unknown sources. A charity that was functioning in an area of unrest was depositing this money, before it was transferred to other, possibly legitimate charities, including a so-called welfare unit that was later found to be linked to a militant group. This welfare unit was later shut down.

The abuse of charities has left most countries baffled since detecting cases of tax fraud and money laundering in the voluntary sector is not an easy task. Moreover, quantifying the risks associated with such activities is even tougher. It is therefore essential for tax authorities to refine their strategy to effectively address the risks associated with the abuse of charities. Some points worth consideration are:

  • Making it mandatory for charities to appoint a compliance officer responsible for administering systems and controls, to enable organizations to establish the identities of donors, beneficiaries, and partners, and continually monitor those relationships.
  • Identifying international transactions separately from domestic ones and reporting suspicious transactions to the Financial Intelligence Agency.
  • Conducting a stringent background check of all charity officials in order to weed out people that may have been involved in unscrupulous activities previously.

Bindhya Balan is a Domain Consultant with the Banking and Financial Services (BFS) business unit at Tata Consultancy Services (TCS). She has more than five years of experience in investment banking and has worked with various global banks including the Royal Bank of Scotland and the Australia and New Zealand Banking Group, prior to joining TCS. Balan is part of the Regulatory CoE within TCS BFS unit and her areas of specialization include trade finance, AML, sanctions, and reconciliations. She has an MBA degree in Finance from Calicut University, Calicut, India.


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