Together, adherence to the 40 Recommendations of the Financial Action Task Force (FATF) should ensure that countries are well-positioned to guard against the threats of money laundering and the financing of terrorism and nuclear proliferation. And yet, not all FATF Recommendations are made equal. Among its many standards intended to preserve the integrity of the global financial system by ridding it of dirty money, the FATF’s Recommendation 8 on preventing terrorism financing abuse in the not-for-profit organisations (NPO) sector stands out from the crowd. Recommendation 8 has arguably received more policy attention than any of the FATF’s other standards, having been revised twice in less than a decade.
Why so?
NPOs have been thought to be uniquely susceptible to abuse for terrorism financing ever since it became clear how Al-Qaeda both infiltrated and established numerous charities to funnel donations to its coffers before its coordinated attack on the World Trade Center in New York. Responding to this lucrative terrorism financing vehicle at the time, the FATF established a standalone recommendation on NPOs in its IX Special Recommendations, passed just a few short weeks following 9/11. Early iterations of Recommendation 8 emphasised the NPO sector as being “particularly vulnerable” to terrorism financing, prompting a wave of stringent government regulations that quickly showed themselves to be disproportionate with the actual level of risk.
This left the sector in a stranglehold: facing severe restrictions to its freedom of operations, as well as access to banking services due to the sector’s undeserved reputation for being a hotbed for terrorism financing. In the most worrying cases, some states have undoubtedly implemented Recommendation 8 in bad faith, using it as cover to deliberately suppress advocacy groups, watchdogs and other civil society members.
Having been made aware of such unintended consequences of its standard, the FATF, to its credit, has responded by diligently curtailing ambiguities in the phrasing of Recommendation 8, its Interpretive Note and an accompanying Best Practices Paper, ambiguities which have had severe consequences for the healthy functioning of civil society groups globally. In redrafting these resources, the FATF has offered for the first time “bad practices” alongside good ones, making explicit various kinds of measures and approaches which are inexplicably contrary to its intentions. This most recent raft of changes were approved by the FATF plenary in November 2023, just in time for the initiation of its 5th round of Mutual Evaluations. Largely, these reforms are underpinned by five principles which states should keep in mind when embarking on their mission to implement Recommendation 8 in its new form.
(1) Protecting NPOs from Terrorism Financing
Though it may seem obvious, the reformed Recommendation 8 reemphasises the need for states to investigate and prosecute cases against NPOs that are exploited by or support terrorist organisations or movements. To do this effectively entails an important two-step process. First, states must determine the distinct terrorism financing threats that its NPO sector is exposed to. Then, countering the financing of terrorism (CFT) measures must be developed which are based on evidenced, as opposed to merely theoretical, terrorism financing risks.
(2) Measures that are Focused, Proportionate and Risk-Based
Readers of the reformed Recommendation 8 will notice how often the phrase “focused, proportionate and risk-based” is repeated, underlining the FATF’s insistence on this principle which has been insufficiently embodied by states to date. In sum, the Recommendation calls on states to devise CFT measures that are focused (limited in scope to the issue of mitigating TF risk within the NPO sector), proportionate (corresponding in magnitude to the degree of risk), and risk-based (corresponding to only relevant risks).
The Recommendation, its Interpretive Note and accompanying Best Practices Paper leave no room for misunderstanding on this point: any measure carried out in furtherance of satisfying Recommendation 8 must be in-line with the degree of known risk of terrorism financing abuse. This required specificity ensures scarce resources will be most effectively deployed against only the most at-risk NPOs in the sector. For the group of less at-risk NPOs, the Interpretive Note signals how, oftentimes, it is sufficient for states to provide outreach and educational programmes to raise awareness of terrorism financing vulnerabilities and the means NPOs have to protect themselves from such abuse, leaving them to continue operations without being needlessly implicated in unnecessary CFT procedures.
States should also take note of the FATF’s unequivocal declaration that NPOs “are not reporting entities and should not be required to conduct customer due diligence”, thus providing states with certainty that subjecting NPOs to the same requirements as so-called “obliged entities” (including financial institutions and the designated non-financial businesses and professions [DNFBPs]) does not align with the FATF’s intentions. This distinction is further emphasised throughout the reformed Recommendation, Interpretive Note and Best Practices Paper by repeated use of the phrase “oversight and monitoring” to describe the relationship between the NPO sector and the state’s CFT obligations. This means, plainly, that while obliged entities are treated with “supervision”, the NPO sector ought to be treated with “oversight and monitoring”, indicating an entirely different quality of relationship, one that is preventative and enriching, not punitive or controlling.
(3) Not Disrupting Legitimate Activity
Similar to “focused, proportionate and risk-based”, the reformed Recommendation makes frequent use of the qualifier that all efforts to implement Recommendation 8 must not “unduly disrupt or discourage legitimate NPO activity”. The entrenchment of this principle in the reformed Recommendation 8 is clearly FATF’s effort to make good on the findings of its stocktake on the unintended consequences of the incorrect implementation of its standards. The stocktake emphasised the negative impacts CFT measures had had on legitimate NPO activity, acknowledging that its mutual evaluations had not sufficiently assessed whether measures applied by jurisdictions were proportionate to the terrorism financing risk present, or whether they were focused on only higher-risk NPOs. In recognition of these past failings, the FATF makes itself clear that under the reformed Recommendation 8 CFT measures must not unduly disrupt or discourage the activity of those NPOs deemed to be less at-risk, in addition to any organisation that does not meet the FATF’s functional definition of an NPO.
Put plainly in the Interpretive Note, the FATF warns that measures which disrupt or discourage legitimate NPO activity are not in compliance with Recommendation 8. For example, in the realm of access to financial services, the Best Practices Paper (p. 40) lays bare several bad practices that are not in line with the risk-based approach avowed by the FATF, including the mis-categorisation of all NPOs as high-risk clients requiring enhanced due diligence checks, as well as applying customer due diligence checks on the beneficiaries of NPO activities, like the recipients of humanitarian assistance. Repeated insistence on this point, found across the reformed Recommendation 8, closes off any tolerance for unintended consequences of CFT measures on legitimate NPO activity, going so far as to denote such measures as non-compliant with the Recommendation.
(4) Respecting Rule of Law and Human Rights
The reformed Recommendation 8 reinforces a principle that underpins the entirely of the FATF system, namely that no matter how states implement its standards through laws and measures, this must be done in a manner that is consistent with the UN Charter and international law, including international human rights, refugee and humanitarian law. This is to say that any FATF-inspired measures which contravene these international law and human rights instruments are not in compliance with Recommendation 8.
Crucially, the reformed recommendation makes note of this obligation in relation to UN Security Council Resolution (UNSCR) 2664 (2022), para 1, which affords humanitarian actors an exemption to UN sanctions regimes (this exemption was made permanent through UNSCR 2671 [2024]). By this exemption, or so-called humanitarian carve out, the UN Security Council affirmed that “the provision, processing or payment of funds, other financial assets, or economic resources, or the provision of goods and services necessary to ensure the timely delivery of humanitarian assistance or to support other activities that support basic human needs [by select humanitarian actors] are permitted and not a violation of the asset freezes imposed by the Council or its Sanctions Committees”. In practice, this ensures that measures aimed at preventing terrorism financing abuse of NPOs in accordance with FATF’s Recommendation 8 must not impinge upon the work of NPOs whose activity is covered under this broad-based humanitarian exemption to UN sanctions.
(5) Cooperation
Across several dimensions, the revised Recommendation maintains that reaching compliance is not within the gift of public sector authorities alone, that attempts to do so are unlikely to secure a passing grade from the FATF in a mutual evaluation. The FATF Methodology (p. 49) for assessing compliance with its standards states that jurisdictions should engage with NPOs when conducting sectoral risk assessments to identify the nature of terrorism financing risks and in devising measures to address those risks. This is sensible, as only NPOs themselves can truly speak to their own vulnerabilities and risk mitigation strategies and approaches.
Further, the Best Practices Paper emphasises numerous “tri-sectoral dialogues” involving public authorities, NPOs and the financial sector convened to tackle challenges like bank de-risking, another key unintended consequence of past iterations of Recommendation 8. Given the current FATF presidency’s focus on enhancing financial inclusion through a heartened embrace of the risk-based approach, it can be expected that states demonstrating sincere cooperation between public, private and NPO sectors will fare well in their mutual evaluations.
Putting it to Work
The most recent tranche of amendments to Recommendation 8, its Interpretive Note and the accompanying Best Practices Paper are a hard-won achievement for concerned states, civil society organisations, and key leaders within the FATF, many of whom contribute to the work of the EU Global Facility on AML/CFT. The reformed Recommendation is a product of the FATF’s earnest introspection into the unintended consequences of its standards on civil society, and a close reading of it illustrates the FATF’s expectation for tangible change to result. Indeed, these five principles of the reformed Recommendation 8 all appear to be non-negotiable approaches, with virtually no room remaining for unintended consequences, and certainly not for bad faith implementation.
With this context in mind, it is imperative for states to appreciate the letter as well as the spirit of the reformed Recommendation 8 as they begin to prepare for their upcoming assessments, which according to the FATF will place even greater emphasis on effectiveness, risk awareness and context.
This project is funded by the European Union.