KYC Risk Paradoxes when working with NGOs and NPOs

More and more in a world where society is focusing on "doing good", there are Non Governmental Organizations (NGOs) and Non Profit Organizations (NPOs) of all types and sizes throughout the world - ranging from a small local NPO to a huge multi-billion international NPO. (To keep the writing less repetitive, we'll use the term NPO in this article to be reflective of both NGOs and NPOs.)

But regardless of the type of NPO and their focus, sadly, even though these groups and their teams work so hard everyday to make people's lives better, they are actually so exposed to harder KYC requirements from banks and the financial institutions they work with. So much so, that it actually often hinders their efforts significantly.

It's problem for the industry stemming from broad assumptions that banks make - the first being that even with the differences between all the NPOs, they all seem to be treated as one when it comes to banks: the high risk type.

This is a key fallacy that's made, but due in part to the paradoxes within the overall business model of NPOs.

The Business Model of NPOs

Regardless of the size of the NPO, in principle, a NPO has a simple business model.

They collect funds through donations - that is, fundraising from donors - with the promise to distribute these funds to specific or non-specific projects.

Some of the donations can come from an underlying business model, such as selling upcycled clothes or furniture in their own second hand stores, where the proceeds from the sale become donations.

Other parts of the donation come directly from donors wanting to simply help a specific cause in the form of a direct financial donation.

Taking a deeper look

Where do these donations go? With any donations - especially when it's to an international NPO, the funds can be distributed to international projects around the world. And conversely, certain parts of the donations can be directed only to local or domestic projects - this part making any international NPOs resemble more of a local NPO. However, in either case of an international or a local NPO, most individual donors have no ability to determine how the funds are routed.

Also, the vast majority of the fundraising comes from richer countries around the world, which often equals low-risk countries - as seen from a Financial Crime Prevention (FCP) point of view. At the same time, the vast majority of the distribution of funds goes to less rich countries, which in turn often equals high-risk countries from an FCP point of view. A bit of a paradox.

One other area to look into is the methods by which the fundraising is done and then distributed. Collection of the fundraised donations is typically via cash and electronic funds - and sometimes even crypto currency, but then the distribution can go through multiple means - so not only cash and electronic funds, but also in the form of food, housing, medical support, etc. So this distribution is very much dependent on a network of individuals: employees, volunteers, suppliers, partners, public officials, etc.

Actual inherent risks with NPOs

The above questions we ask is a dynamic within the business model that’s crucial to understand when evaluating the inherent risk of an international NPO.

Many assume that NPOs would be high risk with money laundering and tax evasion, but that is a fallacy. Because it's very hard for a donor to decide specifically where the donation should end up, it's also very hard to get hold of the funds again at the distribution point. In other words, if someone donates €100 Euros to an NPO, they will most likely never see these monies again, and they will most likely not be able to control where the money ends up.

This makes the NPO business model actually ill-designed for both money laundering and tax evasion.

Conversely, many don't focus on the risk of terrorist financing, bribery and corruption and sanctions breaches with NPOs. But because the distribution of the donations is very much dependent on a network of individuals: employees, volunteers, suppliers, partners, public officials, etc. and very often they are within less rich, higher risk countries, the risk of terrorist financing, bribery and corruption and sanctions breaches is significantly raised. And herein lies the biggest exposure within the business model of an NPO.

A more realistic Financial Crime Prevention risk profile for NPOs

To start with what we believe is a more precise approach, we believe that a more realistic, simplified inherent FCP risk profile of an international NPO that properly addresses common fallacies and paradoxes would be:

- Risk for money laundering and tax evasion within NPOs is low.
- Risk of terrorist financing, bribery and corruption and sanctions breaches within NPOs is very high.

Applying the insights

Armed with this information, teams within NPOs and banks can focus their KYC efforts - particularly when doing screening to mitigate the biggest area of risk.

NPOs can perform their own KYC, focusing where PEP screenings might be especially useful - on those whowork with the distribution and output of their hard work and make sure that they are not susceptible to bribery, corruption and the like.

How can technology help?

A comprehensive tool that lets NPOs, NGOs and banks following these key principles -
to take a systematic, thoughtful approach and target areas that are most vulnerable - can ensure that everyone is better able to serve society with doing good and preventing crimes.

For this critical work, Avallone is a 360o platform that can help you with this and more.

Contact us to get a demo from one of our in-house KYC and FCP experts, and see how you can ensure that your time is spent mitigate the biggest risks and finding the best solutions for your Non Profit / Non Governmental Organization.

Relevant products

Avallone products and services that can help you

Immediate, secure and easy management of all your KYC efforts including built-in organization.
KYC Collector
Collect KYC - including information and documentation - from anyone outside of your organization.
KYC Responder
Quickly and easily respond to KYC questionnaires coming in from your counterparties - such as banks, law firms, auditors and more.