Accountants on the frontline protecting charities against terrorism and fraud

A child at a refugee camp near the Bab al-Salameh border crossing on the Turkey-Syria border.

A regional assessment has ranked not-for-profits as the second-highest risk for raising terrorist funds. How can accountants guard charities against both terrorism and embezzlement?

By James Dunn

It’s a sad fact of life that charities can be vulnerable to fraud and nefarious activities, including becoming entangled in money laundering and financing terrorism.

The potential susceptibility of Australia’s 54,000 charities to be used for terrorist financing was highlighted in the Terrorism Financing in Australia 2014 report by Australia’s financial intelligence unit, the Australian Transaction Reports and Analysis Centre (AUSTRAC). It identified Australian charities as potential channels for raising and distributing funds to finance terrorism.

In 2016, AUSTRAC and its Indonesian counterpart, Pusat Pelaporan dan Analisis Transaksi Keuangan (PPATK), led a regional risk assessment of terrorism financing in South-East Asia and Australia, which ranked non-profit organisations as the second-highest at risk of raising terrorist funds. AUSTRAC said as part of its assessment there had been two cases from the mid-2000s involving community-based non-profit organisations that raised close to A$1 million each, which was funnelled to foreign-based terrorist groups.

In August 2016, the same month the AUSTRAC-PPATK risk assessment report was released, the Department of Foreign Affairs and Trade (DFAT) suspended its funding of World Vision programs in the Palestinian territories. World Vision Gaza manager Mohammed Al-Halabi was charged by Israeli prosecutors with infiltrating the charity on behalf of militant Islamist group Hamas, and allegedly funnelling about US$43 million in funds from Australia, the US and Britain to Hamas’ military wing over six years.

“If there’s poor governance or poor controls in the partner organisation, there’s a potential susceptibility.” David Locke, Australian Charities and Not-for-profits Commission

In correspondence with INTHEBLACK, World Vision stresses that Al-Halabi is a trusted employee, and that it has found no evidence of the diversion of funds. In March, an internal DFAT review into World Vision funding in Gaza found nothing to suggest any diversion of government aid funding to Hamas. In Israel, Al-Halabi’s trial is ongoing.

In another incident, in August 2016 the Australian Federal Police revealed it was investigating whether more than A$27 million in national childcare benefits and rebates had been fraudulently obtained and sent overseas, possibly to fund terrorism. Two men with links to Dar al Quran wa Sunnah, a Sydney-based Lebanese charity established to raise money for Syrian refugees, were arrested on fraud charges: one pleaded guilty and was jailed. This charity was already under investigation by AUSTRAC and the Australian Charities and Not-for-profits Commission (ACNC) for possible terrorism financing.

David Locke, assistant commissioner at the ACNC, says there are several factors that can make charities, not-for-profit (NFP) organisations and non-government organisations (NGOs) “a bit vulnerable” to being used for terrorism financing.

Protestors in Gaza City in March 2017 called for Israel to release Mohammed Al-Halabi, World Vision’s Gaza manager, who was arrested for allegedly funnelling funds to militant Islamist group Hamas.“One is that the big charities can have a global presence, with legitimate reasons to operate internationally, and to make financial transactions overseas. Many charities are working in areas which are most exposed to terrorist activity. 

"If charities are delivering humanitarian relief in areas where there aren’t banks, or the financial infrastructure that we have in the West, then actually some of the ways in which cash is transferred – by using cash or alternative remittance systems – can make them vulnerable,” says Locke.

Charities can also have a high volume of small transactions going through, often quickly, he says. 

“There can be a humanitarian need to raise funds quickly, and move [money] quickly. Charities and NFPs have a high degree of public trust – people often give money as a result of an emotional response, and there’s a tendency to think, ‘it’s for good and of course it will get to the right place’,” says Locke.

“Also, there might be a need to work with partner organisations on the ground, in which case the charities and NFPs may be working with one or two key individuals. Often the charity or NFP can be a victim as well: it may be perfectly sound and have good processes and procedures, but if the overseas partner organisation has vulnerabilities, money can be siphoned off. If there’s poor governance or poor controls in the partner organisation, there’s a potential susceptibility.”

Guarding against terror funding

Since the establishment of the ACNC in December 2012, oversight of the Australian charity and NFP sector has combined elements of government- and self-regulation – but the onus is on charities and NFPs to protect themselves  from exploitation. The ACNC has a Protecting Your Charity Against The Risk of Terrorism Financing checklist, against which charities can measure their operations. 

“Our role is firstly to make sure that we’re only registering organisations that are genuine charities and, secondly, to ensure that they understand their obligations, and they have proper governance processes in place to ensure that the organisation is not going to be vulnerable,” says Locke.

This is where an accountant plays a vital role in implementing and executing a series of processes to guard against fraud.

Locke says a charity will reduce its risk of being misused for terrorism financing if it:
  • Has strong governance arrangements (including financial controls, risk management policies and procedures, and appropriate due diligence)
  • Keeps appropriate records and reports annually to the ACNC
  • Has an ongoing practice of reviewing and strengthening its internal controls (for example, policies, procedures, delegations of decision-making powers, record management systems, financial management systems and tools)

In practice, large development charities, which are sending money overseas, go way beyond these requirements. For one thing, they are aware that trust clearly isn’t enough and cannot be considered an internal control. Whether it is the risk of fraud or the risk of money being siphoned off for terrorist funding, NFPs of all sizes need to conduct a formal risk assessment.

“We have a number of steps to ensure our funding goes to places we need it to go,” says Gideon van der Westhuizen, Oxfam Australia’s associate risk director. He adds that in doing what they do, charities must accept certain risks, but protect against them. 

Professional Development: Detecting fraud using data analytics. This course covers the role data analytics has in the identification of uncommercial transactions for later review and, if justified, investigation. It is one of the key ways in which uncommercial transactions can be identified.

“Many of the countries in which we work do not have strong and stable governments, have weaker infrastructure, including banking systems, and have very different governance to what we’re used to in Australia. There are many complicating factors when working in difficult conditions like these, and we need to accept the increased risk that comes with this,” he says. 

“We can’t help anyone, unless we are prepared to take on some of this risk ourselves.”

To counter the risks, van der Westhuizen says Oxfam has implemented “robust” risk, fraud and aid diversion processes, including a strong focus on internal training, to ensure all funds disbursed are received and spent by the intended recipients in the manner that the organisation (and the donors) intended.

“We have contracts in place – for example, with our program partners – that contain the outcomes we want to see from the funding provided. We then ensure ongoing monitoring through regular internal audits to ensure our staff and any related parties follow our policy and procedures,” he says.

“We also have an annual external financial audit, carried out by an independent audit firm, that ensures the integrity of the financials, and we review our practices to ensure funds are disbursed to the areas for which they were intended. 

“This balance of external and internal due diligence and oversight is critical to implementing projects that minimise risk, while still achieving the high goals we set ourselves.”
In addition, Oxfam invests in focused financial management and fraud prevention training programs for the partner organisations that benefit from the funds that are received.

“We participate as a collective with other NGOs through a Not-for-Profits Audit and Risk Forum – comprising international NGOs as well as some smaller NGOs – to share knowledge and best-practice information. This is a key plank in ensuring the maintenance of a resilient NGO sector,” he says.

Help minimise the risk

There are clear areas where accountants can help NFP clients minimise the risk of funds being misused, says Andrea Petersen, managing director of Not-for-Profit Accounting Specialists. Primarily, it’s ensuring that documented policies and procedures are in place and communicated to staff, and that compliance with those procedures is monitored. They can also advise on a sufficient segregation of duties to make it difficult for fraud to occur.

Charities that raise money to help Syrian refugees, such as the 40,000 who camped near the Turkey-Syria border after fleeing Russian airstrikes on Aleppo in 2016, operate in areas without strong, stable government. Fraud prevention training is vital to ensure there is not misuse of funds. Accountants can promote transparent reporting by performing an internal audit function, she says, as well as assisting on any external audits. They can also communicate the importance of ethics within the organisation.

“That being said, the charity sector is now highly regulated, and charities are generally governed by individuals who, by nature, are interested in delivering positive outcomes for the recipients of their services, and full compliance with all laws and regulations,” says Petersen.

“There are strategies in place to manage the risks, for example, in the criteria to register a charity in the first place, education and information available from the regulators, and legislation in place to make these activities illegal.”

Petersen says all registered charities must complete and submit an annual information statement to the ACNC. The statement should address a number of questions relating to international activities, including:
  • Whether the charity conducted international activities
  • Whether the charity helped communities overseas
  • The names of the overseas countries where the charity conducted activities
  • The amount of grants and donations made by the charity for use outside Australia (unless the charity meets the ACNC Act definition of “basic religious charity”)
International aid organisations can become a member of the Australian Council for International Development (ACFID) and adhere to the organisation’s self-regulated code of conduct. ACFID says its code’s aim is to improve the outcomes of international development and increase stakeholder trust by enhancing the transparency and accountability of signatory organisations.

“Having to adhere to the ACFID code of conduct adds an additional sense of legitimacy to the organisation,” says Petersen. It’s hoped that legitimacy, coupled with strong accounting processes, can shield charities against wrongdoing. 

Read next: What you need to know about reporting to the ACNC


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