In the first half of 2015, Nepal was burdened with two back-to-back natural disasters. As media showing the destruction began to circulate, donations from people around the world began to pour in. These donations made it possible for disaster relief and nonprofit organizations (NPOs) to be on the ground, aiding in the recovery of a tarnished land and displaced population. In the midst of chaos, the humanitarian response was overwhelming, as several lifelines were formed to alleviate some of the ruin. But what if the donations never actually made it to Nepal?
With numerous conflicts occurring worldwide, an increasing number of checks and restrictions have been placed on financial institutions around the globe. Banking regulators place financial institutions under strict scrutiny and issue hefty fines to banks found guilty of not doing all they could to prevent money laundering. In response, financial institutions found a way to avoid any penalties by cutting off ties with customers who streamline money into countries classified as "high-risk". This process, known as de-risking, seems to be practical and precautionary "in preventing suspicious activity". However, this process hinders and endangers the work of disaster relief organizations and other NPOs.
The United States Department of Treasury issued a warning on June 23, 2014, which stated that if a financial institution could not ensure that the customer's usage of funds was legitimate and not intended for unethical purposes, the account should be closed. However, when a financial institution undertakes this de-risking, they preemptively close certain accounts that may not actually be partaking in any corrupt practices. Consequently, the bank accounts of several NPOs have been shut down due to the fact that many NPO funds are directed towards helping populations in countries labeled as "high-risk".
This de-risking process, which has been adopted by several major financial institutions, has resulted in several charitable organizations being left without financial or banking services. In developing countries torn apart by conflict, such as Syria, Somalia, and Libya, large segments of the vulnerable population rely on aid from outside sources. Many of the humanitarian organizations that provide relief for these countries are Islamic-based NPOs. Over the past three years, Islamic-based NPOs have dealt with an increasing number of bank account closures in addition to wire transfers being delayed or cancelled.
In February of 2016, 58 NPOs jointly penned a letter explaining how de-risking poses a detrimental threat to not only the functionality of an NPO, but to the people whose welfare relies on its aid. Counterrorism efforts have increased tenfold since the September 11th, 2001 attacks, making financial institutions more risk-averse and leaving many NPOs without access to financial services. As a result, several aid efforts have been minimized or called off due to shortages and lack of necessary funds. The letter called for greater protections for legitimate NPOs and asked the departments of Treasury and State to convene a multi-stakeholder dialogue to search for solutions.
Numerous faith-based NPOs distribute food and supplies to refugee camps, aid in disaster relief through emergency response programs, and provide universal access to health care. Several of these organizations have struggled with maintaining their efforts in conflict-ridden areas because financial institutions have closed their accounts with little to no warning and, oftentimes, cancel transactions that are time-sensitive. Both vulnerable populations abroad and the people who dedicate their time and energy to help those in need feel the impact. Financial institutions are essential to the humanitarian cause, but many of them choose to cut off ties with organizations that are only assumed to carry a risk. In a recent op-ed piece for The New York Times, Congressman Keith Ellison, explained that banks pull the plug on financial accounts far more often than needed. This behavior turns their operations from a measure of risk-management to, rather, risk-avoidance
When determining which clients to accept or keep, financial institutions undergo a risk-benefit calculation. However, the human lives at risk are not factored into this calculus. There are ways that banks could mitigate risk without dropping NPO clients. They could conduct deeper background checks and investigations into the financial histories of NPOs, which would allow banks to see whether or not an NPO doing work in is participating in any illicit practices. Additionally, the United States Department of Treasury could issue a statement proclaiming that NPOs are not classified as high-risk clients. Lastly, government agencies and legislators should develop policies to regulate the process and procedures of de-risking, in order to maintain humanitarian assistance across the globe.
NPOs work hard to remain active and provide efficient aid to vulnerable populations in conflict areas around the world. The ability to transfer funds to these areas overseas is an integral part of getting that job done. The process of de-risking itself carries a heavy risk. The choice remains with financial institutions whether they choose to continue carrying out this deficient process or cooperate with NPOs in backing their efforts to promote global prosperity.
Written by Gihad Salih and Laraib Mughal