Money Laundering through Charities: How to Spot It in 2023

Charities aren’t typically associated with terrorist financing or money laundering. However, they can be used by criminals to hide illicit money. In recent years, more and more charities are being implicated in financial scandals. This is particularly the case since the pandemic, which has made 65% of charities in the UK feel at greater risk of fraud. In 2021 alone, UK charities lost £8.6 million due to fraud. 

To stay safe, charities should follow government regulations and verify their senders and recipients of donations. In this article, we provide an overview of how to do this. 

What is charity money laundering?

This is when charities and other non-profit organizations (NPOs) are abused for the purpose of money laundering.

There are several reasons why criminals choose charities to launder money. They’re trusted by the general public and have certain privileges (e.g., tax exemptions). Moreover, some charities work internationally, which means that they may deal with high-risk countries, where it’s difficult to detect criminal activity. This combination of factors makes charities a favorable route for illicit funds. 

How money laundering works in charities

Money laundering through charities can take up various forms. Some of the most common types include: 

Misuse of funds

A charity’s funds can be misused by criminals to make illicit transactions, investments, purchases, etc. 

Misuse of charity resources

A criminal can infiltrate a charity—for instance, as an employee—to gain access to its assets and launder money through the organization. 

Imposter charity

Criminals can pretend to be an existing charity to trick donors and launder money. 

Shell charity 

Criminals can establish a completely new charity that appears to be legitimate but is instead a front for money laundering. 

Examples of charity money laundering

Recently, a charity called the “American Cancer Society of Michigan” applied to the IRS to become tax-exempt. This charity turned out to be fake, yet was still approved by the IRS. The person behind this scheme also founded 76 other fake charities in order to evade taxes. 

In 2019, a UK man was sent to prison for 10 years for selling counterfeit supplements and laundering over £10 million through a charity run by him—Chabad UK. 

These examples show how charities can be overlooked by regulators and why financial institutions need to verify the charities they work with. 

Identifying the signs of charity money laundering

There are several charity-specific signs of money laundering:

• Unusually large one-time donations or a series of small donations from an unidentified source
• Unusual conditions regarding the usage of the donations 

Charities should ask donors to identify themselves and request an explanation in such cases.

How to prevent charity money laundering

The Financial Action Task Force (FATF) has several guidelines on how to combat money laundering in charities. These include: 

• Adopt an information-gathering system about donors 
• Use compliance practices of other companies in the financial sector
• Implement proper due diligence procedures

Compliance with anti-money laundering (AML) laws

This includes appointing a compliance officer to establish a due diligence system, conducting adequate training for staff, and identifying and verifying donors and beneficiaries as part of the due diligence process. 

Monitoring and reporting suspicious activity

Charities need to monitor where the money comes from and where it goes next. In case the suspicion of criminal activity arises, the employee should immediately report to management, which should contact the relevant authorities.

To simplify the identification and verification process, as well as ensure the integrity of donations, companies can implement an automated verification solution. This way, charities can spend fewer resources on manual verification of each donor and beneficiary. 

For example, Sumsub has recently partnered with Carefree, a UK-based charity. One of the issues the organization had was verifying the identity of the carers that would apply to Carefree for help. For unregistered and unrecognized carers, this procedure used to require lots of time and resources. However, with Sumsub’s seamless solution, Carefree has grown its conversion rate to 94%. 

Suggested read: Carefree, a UK-based Charity Helping Unpaid Carers, Onboards Users in Seconds

FAQ

• Are charities used for money laundering?

  Yes, they are. Since charities focus their resources on helping people, they might struggle with establishing proper verification mechanisms to confront money laundering. Besides that, criminals can create fake charities to launder money or avoid taxes.

• How are charities used to launder money?

  There are four main approaches to using charities for money laundering:

  • Misuse of funds
  • Misuse of charity resources
  • Imposter charity
  • Shell charity

• What are the AML policies for charities?

  Charities should establish internal compliance procedures, appoint a compliance officer, and provide relevant training to staff members. Charities should also implement a due diligence procedure to identify and verify their donors and recipients. Besides that, charities should create monitoring and reporting systems to detect suspicious activity and notify authorities in a timely manner.