The Wrong Approach to Stopping Terrorist Financing
March 14, 2007
In November 2002, the Treasury Department issued “Anti-Terrorist Financing Guidelines: Voluntary Best Practices for US-based Charities,” based in large part on Executive Order 13224 (September 2001) and the USA Patriot Act (October 2001). The intent was to ensure that charitable donations intended for humanitarian purposes were not diverted to terrorist organizations, either deliberately or inadvertently. As “Guidelines”, they offered a broad range of “best practice” recommendations related to nonprofit organizational governance, due diligence, financial practices, as well as a new set of anti-terrorist financing procedures.
But the Treasury Guidelines, revised twice after repeated and detailed criticism from the philanthropic community, still prove to be unduly vague, burdensome, (in some cases) inconsistent with existing laws and regulations, and unlikely to accomplish their stated goal of assisting “charities that attempt in good faith to protect themselves from terrorist abuse.”
In March 2005 and again in December 2006, a broadly-representative Working Group organized by the Council on Foundations called for the formal withdrawal of the Treasury Guidelines and for Treasury to endorse the Principles of International Charity ” produced by the Working Group ” instead. Principles is a compendium and commentary on existing U.S. laws and regulations that have effectively guided the international charitable work of American foundations for many years.
Why eliminate the Treasury Guidelines? There are at least three concrete reasons.
First, the Guidelines significantly exaggerate the extent to which U.S. charities have served as a source of terrorist funding. There is documentary evidence that some Middle Eastern charities have been intentionally used as conduits to channel funds to terrorist organizations, but there is no publicly available evidence that U.S. charities have been unwitting victims of criminal efforts to divert funds to terrorist organizations. The notion that American charities were a source of funding for Al Qaeda was specifically debunked by the 9/11 Commission. In every case in which the U.S. Government has brought an anti-terrorist case to trial since 9/11, nonprofit organizational leaders have been accused of deliberately funding or attempting to fund terrorists. Treasury Guidelines are irrelevant in such cases, since diversion of charitable funds constitutes criminal activity under existing U.S. law. Legitimate charitable organizations in the U.S. are already governed by a comprehensive set of laws, regulations, and IRS rulings that effectively prevent the diversion of charitable funds for any criminal purpose, including funding terrorist organizations.
Second, the Guidelines increase the potential legal risk of international grantmaking by imposing onerous and unrealistic information collection and reporting requirements on grantmakers. Treasury has clearly stated that even full adherence to the Guidelines does not provide a “safe harbor” from possible prosecution for even the inadvertent provision of funding to designated persons or organizations. In short, the sweeping scope and vague language of the Guidelines are intended to exercise a deterrent effect on international grantmaking.
Third, the Council on Foundations’ Working Group is concerned that the Guidelines, while officially voluntary, may gradually become mandatory, despite their unrealistic and unworkable provisions. Compliance with the Guidelines has been incorporated into the 2006 Federal Combined Campaign; IRS agents have begun to question nonprofit organizations about their compliance with the Guidelines in the context of financial audits and applications for tax-exempt status; and some banks have reportedly begun to require nonprofit organizations to certify that they are in compliance with the Guidelines in order to open bank accounts.
In a common law society, customary practice matters. As more and more government agencies and private institutions try to behave in accordance with Treasury’s “voluntary” Guidelines, and as lawyers and judges look at “best practice” in the context of specific cases, the distinction between informal guidance and law blurs.
While it is difficult to assess the financial impact of the Guidelines on overall levels of international grantmaking from the US, they have had a devastating impact on Muslim-American and Arab-American philanthropies, most of which have since been shut down or have seen their support base collapse. In addition, the increased administrative costs of Guidelines compliance have impacted the budgets of all grantmakers.
The Asia Foundation operates through 17 resident offices in Asia. We know our grantees and we apply the highest standards of due diligence, but we believe a more effective anti-terrorist policy would be to address directly the factors stimulating terrorism: including the need for better governance, more jobs, more access to justice, and more effective development assistance.
The text of the Treasury Guidelines, Executive Order 13224, Principles of International Charity, and other commentary can be assessed at the website of United States International Grantmaking, a project of the Council on Foundations, www.usig.org. Executive Order 13224, issued on September 23, 2001, raised standards of due diligence by foundations and other charities, while authorizing freezing of their assets if they provided support to listed terrorist organizations, to unlisted others who “assist and support them,” or to anyone “otherwise associated with” listed persons or organizations. In November 2006, a U.S. District Court struck down the “otherwise associated with” provision of the Order because it is “unconstitutionally vague on its face and overbroad.” The USA Patriot Act, signed into law on October 24, 2001, increased criminal penalties for knowingly or intentionally providing material support to terrorist organizations.
Barnett Baron is the Executive Vice President of The Asia Foundation and a member of the Council on Foundations’ Treasury Guidelines Working Group.
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