Money / Moyan Brenn

November 21, 2016; Wall Street Journal

Some charities that help refugees from Syria and the Middle East are having a hard time finding banks that will work with them. Due to federal regulations designed to stop money laundering and covert financing of terrorism, banks are finding it more beneficial to close accounts than to work with some charities. In some cases, banks are severing ties without warning or giving the charity a chance to appeal.

The founder of a small, Texas-based charity opened a letter from J.P. Morgan Chase & Co. last July and was stunned by what she read.

“After a recent review of your account, we have decided to end our relationship with you,” the letter informed Watan USA, which funded a school in Turkey for about 400 Syrian refugees. The letter gave no reason for the decision…

“There’s no explanation…no opportunity given to appeal, no willingness to discuss,” said James Warren, a lawyer representing four charities whose accounts have been shut.

That nonprofits are at the point where they find it too prohibitive to operate is troubling. Some organizations have had accounts at multiple banks closed. Others have begun to try to anticipate delays or blockages if the funds are going to or mention Syria.

These delays are having significant impacts on ground operations abroad. A hospital mentioned in the article saw its employees go four months without pay. Another nonprofit was unable to fund a shelter for children and lost local support. It is clear that these bank interventions are preventing organizations from fulfilling their missions, undermining the good name in the regions they seek to serve.

The uncertainty created by restrictions placed on banks is problematic, but hardly unexpected. The net cast by the regulations designed to prevent money laundering and terrorism is sure to catch some non-terrorist fish, largely because it is difficult to tell what groups are funding terrorists. If it weren’t, banks would surely prefer to do business with these nonprofits.

There are a number of factors at play here:

  1. If a bank helps fund a terrorist group by transferring money from the U.S. overseas, it faces a very stiff financial penalty, and possibly criminal charges.
  2. It is hard to tell the difference between a financier of a terrorist group and a nonprofit. While a bank could certainly perform a rigorous analysis of each international nonprofit organization, it is probably cheaper just to look at behavior and decide to cut ties if it looks close enough that federal sanctions seem likely.
  3. It is costly for a nonprofit to defend itself against accusations of aiding terrorist groups, even if innocent. Ignoring the fines and potential criminal charges, court costs can be prohibitive.
  4. Banks cannot tell nonprofits what triggered the termination of their account. If they did, that could give the wrong people ways to work around their catches. Nor can they just ask the nonprofit, “Are you a terrorist?”

With that, it is hard to blame banks for their reticence. It is not as though they are going out of their way to deny financial transfers. They are simply protecting themselves, as the article states:

In the U.S. fight against terrorism, the attention to charities stems in part from allegations that al Qaeda and Osama bin Laden used a global charitable network in their fundraising efforts. At least eight charities with U.S. offices have been accused since 2001 of financing terrorists.

Until it either becomes less costly (or less likely) to fund money launderers and terrorist groups, it does not seem that banks will see the need to change their operations. That means the costs of anti-criminal measures fall on charities. Organizations will need to transfer money in ways that do not set off alarms.

There does seem to be an opening for a third-party certification group that vets international nonprofit groups for banks. If they were able to assume all risks associated with these transfers, it could simplify and speed up the process—for a nominal fee, of course. Nevertheless, so long as these restrictions remain, nonprofits will either have to create work-around solutions or face further delays and account closings.—Sean Watterson