How international rules on countering the financing of terrorism impact civil society

CFT vs. CSO?[1]

The Arab uprisings galvanised ‘pro-democracy’ governments in the West into a reaffirmation of their commitment to supporting civil society organisations (CSOs) working under repressive and authoritarian regimes. A Strategic Dialogue with Civil Society was launched by the US State Department in 2011[2] and in 2012 the European Union (EU) set up the European Endowment for Democracy.[3] Leaving aside debates about their methods and motives, these commitments expose a schism in Western foreign policy landscape still dominated by the ‘war on terror’, which has adversely impacted on the legitimate activities of many charities and CSOs worldwide since 2001.

In the years since 9/11, international agencies and states have established an intricate and largely opaque framework for countering the financing of terrorism (CFT). The principle architects of this increasingly global system are the United Nations (UN) and the Financial Action Task Force (FATF), guided in no small part by the US Treasury. The FATF is an international consortium of governments mandated to combat money laundering.[4] Despite its global standard-setting role, there is no intergovernmental convention underpinning or regulating its activities.[5] In 2001, the FATF was, logically tasked with applying the framework it had developed to combat money laundering and other financial crimes to the pursuit of terrorist funds.

This chapter describes some of the ways in which the work of CSOs continues to be constrained by the global CFT framework. Although many of these effects may be described as unintended consequences, they are also the outcome of a culture of suspicion in which links between charities and terrorist organisations have been exaggerated while measures to protect freedom of association and expression have been disregarded.

9/11 and the globalisation of CFT

In the immediate aftermath of 9/11, upon request of the US government, the UN and Financial Action Task Force adopted a series of measures that would tie the international community to the global ‘war on terror’. On 24 September 2001, George W Bush signed Executive Order 13224, empowering the US Departments of State and Treasury to freeze the assets of individuals and organisations deemed to be engaged in terrorist activities and criminalising the provision of any financial or material support to those so designated. The US PATRIOT Act, adopted two days later, increased criminal penalties for knowingly providing support or resources to terrorists; neither it nor the Executive Order require intent on the part of those accused of material support.[6]

The substance of the two US acts was replicated and effectively outsourced to all UN states via Security Council Resolution (UNSCR) 1373 (adopted 28 September 2011), which requires countries to freeze the assets of suspected terrorists and criminalise their supporters. Whereas previous UN sanctions regimes had targeted individuals and groups proscribed by the UN, UNSCR 1373 left states free to decide unilaterally who were the terrorists based on their national interest and in the absence of a commonly agreed definition of terrorism.

The Financial Action Task Force Special Recommendations’ on terrorist financing were adopted at the end of October 2001 (another was added in 2004). These codified and expanded UNSCR 1373, requiring states to:

• Ratify and implement all UN measures relevant to terrorist financing;
• Criminalise the financing of terrorism; enact measures to freeze and confiscate terrorist assets;
• Establish reporting mechanisms for suspicious financial transactions related to terrorism;
• Enhance international cooperation on CFT;
• Establish disclosure regimes around alternative remittance and ‘wire transfer’ systems;
• Review the adequacy of laws and regulations that relate to entities that can be abused for the financing of terrorism, particularly non-profit organisations.

So within just six weeks of 9/11, the UN and FATF had extended the global framework devised to combat money laundering to terrorist financing, mandated an elaborate global terrorist blacklisting system and put the surveillance of the not-for-profit sector firmly onto the counter-terrorism agenda. There was neither time nor appetite for democratic oversight, an omission that would have significant implications for the work of CSOs and their ability to fulfil their mandates. All but a handful of the 193 UN member states are now committed at the ministerial level to implementing the FATF standards.

In 2012, the FATF concluded a three-year review of its 40 Recommendations on money laundering and nine Special Recommendations on CFT by merging the two regimes into a single set of anti-money laundering and countering the financing of terrorism (AML-CFT) requirements (countering the ‘financing of proliferation’ was also amalgamated into the AML-CFT framework, reflecting the sanctions adopted against Iran by some but not all FATF members).  In doing so, the FATF made permanent a regime developed in exceptional circumstances.[7]

‘Material support’ continues to promote climate of fear

UNSCR 1373 has resulted in the proliferation of ‘terrorist’ designations, both by nation states and intergovernmental bodies such as the UN and EU. By 2010 there were more than 200 different ‘terrorist’ lists across the world.[8] The US alone has at least four.[9] Complex historical struggles and protracted regional conflicts have been lumped together under the banner of ‘terrorism’, undermining the rights to self-determination set out in the UN Charter and paralysing peace-making and conflict resolution initiatives.[10]

Statutes criminalising the provision of financial services to designated entities are supplemented in many jurisdictions by provisions on ‘material support’ provisions that criminalise other forms of alleged support for terrorism. Draconian application of these laws have had a chilling effect on charities, grant-making foundations, aid and development organisations – particularly in the peace-building and conflict resolution communities. For example, in 2012, the US Supreme Court refused to hear an appeal by the Directors of the Holy Land Foundation – for many years the largest Muslim charity in the US – who had received sentences in 2008 ranging from 15 to 65 years for providing material support to Hamas via local Zakat (charity) Committees in the Occupied Palestine Territories. These committees were not on any terrorist list and there was no evidence that the Holy Land Foundation provided funds directly to Hamas or that its funds were used, or intended to be used, to support violence.[11] The charity itself was shut down without any recourse to legal representation.

In 2010, the US Supreme Court had upheld a ruling that the Humanitarian Law Project and others would be guilty of material support if they assisted the blacklisted Kurdistan Workers Party with conflict resolution and human rights monitoring activities in Turkey.[12] This ruling confirmed that CSOs wishing to engage with proscribed organisations – even to advocate peaceful conflict resolution – face prosecution. Professor David Cole, who was part of the HLP’s legal team, suggested last year that the material support provisions are being applied selectively after prominent ex-US government officials led a successful campaign for the de-proscription of the People’s Mujahedin of Iran (PEK/PMOI).[13]

In 2012 British citizens Babar Ahmad and Talha Ahsan were extradited to the US to face material support charges relating to a so-called ‘Jihadi’ website. All of the allegedly criminal conduct took place in the UK where prosecutors had decided that there was insufficient evidence to charge the men under UK law. But, with the website’s servers located in the USA, the two were transferred to US custody, having already spent six to eight years in British jails pending the conclusion of the extradition proceedings.[14] The trial date has been set for October 201Whereas the US has expanded the concept of material support to activities many people had assumed were protected under the constitution’s First Amendment (which guarantees free speech), the EU has opened the door to the criminalisation of speech that implies support for terrorism. Under a binding 2008 EU Framework Decision, member states were given two years to criminalise “public provocation to commit a terrorist offence.”[15] Crucially, such conduct does not have to directly advocate terrorist offences; rather, it is sufficient that the message “causes a danger that [terrorist] offences may be committed.”[16] The UK Charities Commission has issued guidance covering the UK’s version of the law (on ‘encouragement of terrorism’), advising charity trustees that their organisations must not “promote or support extremist views or activities that promote terrorism or terrorist ideology through the charities work.”[17] They are advised to vet proposed speakers for extremist views and links to banned organisations and assess the risks associated with events, meetings and publications in respect to the possible dissemination of extremist messages.

Exporting restrictive laws

Laws designed to criminalise support for terrorist organisations are increasingly linked to regulations governing charities and non-profits. The hypothesis promoted by the FATF is that terrorists hide behind CSOs or use them to funnel money, requiring states to enact a range of counter measures. The FATF’s standards now represent an essential element of the global good governance agenda promoted by the UN, EU, International Monetary Fund (IMF), World Bank and regional development banks. They even made it into the 2011 Busan Declaration on aid effectiveness.[18]

According to FATF Recommendation 8 (R8):

Countries should review the adequacy of laws and regulations that relate to entities that can be abused for the financing of terrorism. Non-profit organisations are particularly vulnerable, and countries should ensure that they cannot be misused:

1. by terrorist organisations posing as legitimate entities;
2. to exploit legitimate entities as conduits for terrorist financing, including for the purpose of escaping asset freezing measures; and
3. to conceal or obscure the clandestine diversion of funds intended for legitimate purposes to terrorist organisations.

Although there have certainly been the occasional cases of front or sham charities and CSOs that have been found guilty of terrorist financing, instances remain extremely rare relative to the overall size of civil society.[19] In 2009, a UN Counter Terrorism Implementation Task Force working party called on states to “avoid rhetoric that ties [non-profits] to terrorism financing in general terms, because it overstates the threat and unduly damages the [non-profit] sector as a whole.”[20]

Whereas FATF R8 simply calls on states to review the adequacy of their laws and regulations as far as they relate to non-profits, the FATF’s interpretative note, ‘best practice’ and assessment methodology significantly expand the requirements stemming from the recommendations, calling inter alia for the licensing or registration of non-profits,[21] encouraging increased police scrutiny of the non-profit sector,[22] and introducing onerous reporting and vetting requirements including a ‘know your beneficiaries and associates’ principle.[23]

The obvious danger in exporting this approach to less democratic and repressive states is that it encourages such regimes to restrict the legitimate activities of CSOs when transposing the requirements. FATF country assessments play a crucial role. Every seven years, all states committed to the FATF’s standards are peer-reviewed, and those that refuse to adopt the FATF standards or submit to a review face blacklisting.[24] Teams of inspectors comprised of officials from neighbouring states, FATF regional bodies,[25] the World Bank or IMF visit and analyse the laws and practices of each country, awarding a grade – ranging from compliant, largely compliant, partially compliant to non-compliant – for each of the 40 Recommendations.[26] Good ratings are seen as crucial for developing countries as they are a green light for aid, trade and investment. In 2012, the FATF completed its third round of evaluations.

In April 2012 Statewatch and the Transnational Institute published research examining the mutual evaluation reports on 159 countries with respect to R8.[27] It found that 85% were rated as non-compliant or partially compliant, fuelling concerns that these countries will come under pressure to introduce new regulations that threaten civil society space. The report highlighted that the FATF and its regional formations have already endorsed or encouraged restrictive non-profit regulations in countries such as Burma/Myanmar, Cambodia, Colombia, Egypt, India, Indonesia, Paraguay, Russia, Saudi Arabia, Sierra Leone, Tunisia and Uzbekistan. At the FATF plenary in October 2012, the US, Canada, France, Italy, Japan and the UK circulated a statement endorsed by the World Bank expressing concern that R8 “is being used as justification to suppress the activities of legitimate NPOs [not-for-profit organisations] and charitable and civil society organisations” and clarifying that this is not the intention of the Recommendation.

Diplomatic cables released by Wikileaks show that the US government had hitherto encouraged strict R8 compliance in (among others) Azerbaijan,[28] Bahrain,[29] India,[30] Kuwait,[31] Morocco,[32] Nigeria,[33] Russia,[34] Saudi Arabia,[35] the United Arab Emirates[36] and Yemen,[37] none of which are known for maintaining a favourable climate for non-profits favouring freedom of association. In India, for example, CSOs can only receive foreign funding with prior permission from the Home Ministry, in accordance with the Foreign Contributions Regulation Act (FCRA). In 2010, the Act was amended to allow the government to withdraw the permits of CSOs designated as “organisations of a political nature.”[38] US Treasury officials welcomed the Act in that it reflected “considerable thinking” on CFT that “would provide an excellent example to other countries in South Asia region.”[39] In August 2012 more than 4,000 Indian CSOs had their FCRA permits suspended at a stroke, including almost 800 in Tamil Nadu, location of massive protests against the Kudankulam nuclear site.[40]

A controversial Terrorism Financing Bill approved by the Turkish Parliament in February 2013 demonstrates the power of the FATF.[41] Critics had long argued that the draft law would be used to further stifle political opposition in a state that has been strongly criticised by the UN Human Rights Committee, among others, for using counter-terrorism laws against politicians, activists, lawyers, journalists and human rights defenders.[42] Yet at its October 2012 plenary, the FATF issued a formal threat to suspend Turkey’s membership by February 2013 unless the Bill was adopted.[43] Prior to the Parliamentary vote, the Turkish Justice Minister warned legislators that if they failed to back the bill “…the Turkish economy may face serious problems… money transfers from and to Turkey would be possible only after checks by the FATF… caus[ing] serious problems for Turkey’s exports, imports and hot money flow.”[44] To underscore the extent of the pressure attached to FATF compliance, the global credit rating agency Fitch issued a written statement welcoming the subsequent adoption of the law.[45]

While the R8 regime has been accused of giving a blank cheque to repressive regimes, excessive regulation may have had little or no impact in terms of disrupting terrorist acts.[46] Many experts believe that the majority of terrorist funding comes not from global networks of ‘Jihadist’ funders but from local organised crime.  They suggest that what is needed to combat the rare instances of charities being used for such purposes is information from the people who work in those organisations and members of the public who come into contact with them.

Financial services and the global compliance industry

CSOs have also been directly affected by the imposition of extensive CFT requirements on banks and other financial service providers. National and international terrorist blacklists, and other sanctions lists, criminalise the provision of any financial support, including financial services to those listed.  Such measures result in huge problems with due process.[47] Because states can and do hold financial institutions and their employees liable for failure to conduct proper due diligence checks on their customers or disclose suspicions about terrorist financing, the financial sector fears litigation and has become extremely risk averse.[48]

This situation compromises the ability of international funders and local charities to fulfil their obligations to their donors and partners. FATF Recommendations set out extensive due diligence requirements,[49] including specific procedures for “politically exposed persons,”[50] wire transfers,[51] “higher-risk countries”[52] and the reporting of “suspicious transactions.”[53] These obligations have become so onerous that the FATF rules permit financial institutions to rely on third parties.[54] In turn the entire process of vetting users of financial services has been outsourced to the private sector, creating a global industry already worth hundreds of millions of US dollars a year.

World-Check is one of the AML/CFT compliance market leaders. Founded in 2000 and bought in 2011 year by Thompson-Reuters for US$530 million, World-Check provides services to more than 4,500 institutions, including 49 of the world’s top 50 banks and 200 law enforcement and regulatory agencies.[55] Depending on the size of the client, the intensity of use and the number of access points, annual fees may be as high as €1 million.[56]

World-Check started out consolidating the names from the multitude of national and international sanctions lists so that their clients wouldn’t break the law by inadvertently providing financial services to blacklisted entities, which are now said to number more than 10,000 worldwide. World-Check then started adding people identified as “Politically Exposed Persons,” people found guilty of money laundering or terrorist offences, and people named in the media in connection with such offences.[57] In 2008, World-Check’s database was reported to number about 750,000 names; by 2010 it was 1.2 million – far, far higher than the number of people who can be expected to have been convicted of actual offences within the FATF mandate.[58] The supplementing of official blacklists with sprawling private sector ones has massively widened the circle of suspicion. More and more organisations and individuals have been denied financial services. Bank accounts have been closed without notice or explanation. Financial transactions have been blocked or held-up for months. As the likes of Wikileaks and their associates have discovered, these experiences are by no means limited to CSOs working with Muslim communities.

International non-profits often have to comply with strict regulatory regimes in both the country in which they collect funds and the countries to which they send them. Many have been forced to spend an inordinate amount of resources complying with cumbersome procedures requiring them to prove their good character and intention (and disprove spurious accusations that may have come from unreliable sources), to obtain references from governmental partners, and to accept strict limitations on their activities as a result. Even when ‘due diligence’ has been completed in both the sending and receiving states, the intermediary organisation transferring the funds from one to the other can stall transactions for months while they fulfil their own compliance procedures. The threat of criminalisation and prosecution for material support or CFT offences has also reportedly had a chilling effect on charitable giving, not least among the Muslim diaspora for whom zakat is a religious duty.[59]

In 2012 Islamic Relief, a UK-based charity with an annual turnover of £80 million, told international regulators that it has incoming and outgoing transactions “stopped on a daily basis either temporarily or permanently,” affecting both donations to the organisation and its projects on the ground.[60] Needless to say, the blocking of transactions or denial of financial services to humanitarian organisations working across borders can have devastating consequences: it can mean that aid doesn’t arrive to those who need it and local projects collapse because of funding shortfalls. The 2010 floods in Pakistan and the 2011 famine in Somalia were particularly challenging in the context of restrictive counter-terrorism regimes.[61]

Suspicion, regulation and risk aversion – breaking the cycle

When officials put pen to paper on Security Council Resolutions and FATF Recommendations in 2001, they could not have envisaged that the framework they had created would develop a momentum all of its own. As more and more entities have been designated as ‘terrorist’, more and more of their associates have been tarred with the ‘terrorist’ brush, and put on file by companies such as World Check. The wider the suspect community has grown, the more risk averse financial institutions and CSOs have become. Because foundations and CSOs fear irreparable damage to their reputations from even the slightest association with ‘terrorist financing’, few are willing to speak out about the problems they encounter with CFT regulations. This is as surprising as it is problematic: no other sector has been singled out as being vulnerable to terrorist financing in the same way, despite the myriad obvious ways in which terrorists might raise and move monies.

Making banks and non-profits liable for the acts and social networks of their customers and beneficiaries while holding charities and CSOs responsible for the ‘extremist’ views and actions of their associates stifles freedom of association and expression and promotes self-censorship. The fear of guilt by association that underpins ‘material support’ and CFT provisions now hangs over all grant-making foundations and charities, discouraging them from engaging with what might be seen as suspect communities or from working in what are considered high-risk countries.

The export of these regulations to countries where CSOs already operate in a restrictive political climate can provide repressive governments with new tools for surveillance and control and encourage people and money underground. This effectively undermines the entire counter-terrorism rationale and raises fresh risks. Unaccountable means of donating or transferring funds to charities are sought and found. Armed groups fill the void left by aid agencies unable to operate in conflict zones. Local communities are sandwiched between the violence of the state and the violence of insurgents. CSOs are viewed with suspicion and hostility by all sides. Mediation and humanitarian access is hamstrung because no one is allowed to talk to the ‘terrorists’. The space for supporting the conditions conducive to addressing root causes of conflict – such as political, economic and social inclusion, human rights protection, and conflict prevention – is closed off. All of this contributes to a climate of insecurity in which radicalisation and political violence flourishes.

The Arab uprisings reminded the US and EU why protecting and defending civil society in repressive regimes is a good idea. They have exposed a fundamental contradiction that has opened the space for critical discussion and debate about the unintended consequences of counter-terrorism measures. Banks have expressed concerns about the fundamental rights of their customers. Foundations and CSOs have come together internationally to initiate a dialogue with the UN and FATF on how best to protect the legitimate activities of civil society.

Among the demands for change are:

1. the R8 regime be relaxed and only applied to states in which there is a demonstrable problem with CSOs and terrorist financing;
2. the protection of freedom of association and expression and other fundamental rights enshrined in the UN’s Universal Declaration are incorporated into the FATF mandate;
3. the international community take urgent steps to guarantee the free movement of aid and humanitarian relief;
4. states regulate the activities of the FATF through an intergovernmental convention that enhances openness, accountability and democratic control;
5. the AML-CFT compliance sector is properly regulated so that innocent people and organisations are removed from the databases of private sector intelligence agencies such as World-Check.

It must be hoped that 2012 marked the beginning of a change in mind-set among the international community and that these nascent dialogues develop into a full appraisal of the harms caused by domestic and international CFT rules. Such appraisals will require CSOs, financial institutions, regulators, governments and law enforcement agencies to come together to properly assess the effectiveness and proportionality of CFT measures in the context of their impact upon freedom of association and expression. CSOs will also need to demonstrate that their own best practices are sufficient to mitigate risk and more large foundations must speak out to defend the political space of CSOs and other non-profits.

Find the full State of Civil Society 2013 report here.