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Update: The details of the Charities (Protection and Social Investment) Bill are now available, as is the text of the Queen’s Speech. From these documents, it seems that the new powers in the Charities Bill are limited to sensible fixes to known loopholes. There is no mention of the Charities Commission in the part of the Queens Speech related to the Extremism Bill, though we do not yet know the contents of the draft bill. There is no sign of the extended powers for the Charities Commission to ‘root out charities who misappropriate funds towards extremism and terrorism’ that were promised earlier by Number 10. While we welcome this step back from overregulation, we stand by our suggestions for improvements to the regulation of charities in the UK.

During the Queen’s Speech, newly re-elected British Prime Minister David Cameron proposed an extended counter-extremism bill in order to confront “head-on the poisonous Islamist extremist ideology.” A press release from the Prime Minister’s office said that the Bill would give new powers to the UK’s Charity Commission to identify charities that use their income to fund extremism and terrorism.

This could have disastrous consequences around the world.

It is unclear what exactly will be proposed in the Counter-Extremism Bill.  It seems more likely that the powers for the Charities Commission will instead be included in the Charities (Protection and Social Investment) Bill, formerly discussed as the draft Protection of Charities Bill. However, Cameron’s language suggests that the new powers for the Charity Commission will be much broader than those contained in the old Protection of Charities Bill. In the non-profit community, there is concern that the Commission already struggles with its current caseload.  Many have cautioned that any additional responsibilities would need to be adequately sourced.

There is no doubt that the UK, the US, and other rich countries must do everything possible to fight terrorist threats. And it is true that there are cases (albeit very few) where non-profit organizations have funded terrorism. At the same time, there is evidence that perception of risk has a tenuous connection to reality.

According to a consultation by the Overseas Development Institute, charities complain that UK counterterrorism legislation is already harming legitimate activities in several ways. We share this assessment: increasingly stringent policy measures are resulting in unintended consequences that hurt poor people, refugees, and those displaced by natural disasters. These may even undermine efforts to fight terrorism by weakening and alienating the charities that are often key allies in that fight.

Unintended Consequences of Counterterrorism Actions

How might non-profits and banks react to the increased powers of the Charity Commission? Banks might accelerate their existing tendency toward de-risking. In other words, they may become even more reluctant to do business with non-profits, especially those working in the Middle East or the Horn of Africa. Recently, the UK’s Charities Finance Group conducted a survey which found that nearly one-third of charities consider banks to have become “substantially more risk averse.”

For example, the Cordoba Foundation, a UK think tank, was told by HSBC in summer 2014 that it had two months to find alternative banking services. “Provision of banking services…now falls outside of our risk appetite,” the letter read. The account was closed despite the fact that the Cordoba Foundation received UK government funding to fight extremism through thePrevent (pdf) scheme. (HSBC’s chairman remarked that there was an observable and growing danger of disproportionate risk aversion creeping into the decision-making of their organization.)

Already, Somali communities in the UK and the US are severely hampered in sending money to relatives back home as a result of money transfer organisations being ‘de-risked’ by banks put off by anti-terror legislation.

De-risking also affects donations to charities.  The Norwegian Refugee Council observed that some banks will not transfer funds to non-profits that they perceive to be ‘Islamic,’ even if the transfers do not involve sanctioned countries or organisations and the non-profits do not appear on any lists of designated terror groups. 

Finally, there is some anecdotal evidence that non-profits are removing themselves from locations and activities that might be perceived in a negative light by regulators.

Why It matters

According to the World Bank, the ultimate aim of counterterrorism measures is to protect civilian populations from organized harm. “Thus, allowing civilians to suffer would constitute an odd confusion between means and ends,” the Bank concludes.

To fight terrorism effectively, regulation of the charity sector must prevent terrorist abuse and foster the good work of charities that work to reduce violence. As the UK Home Office acknowledges (pdf), non-profits’ work often addresses the underlying causes of disaffection that can lead people to turn to extremism or terrorism. The international standards setter for counterterrorist (and anti-money laundering) financial regulation, the Financial Action Task Force, agrees (pdf) that non-profits are integral to preventing the causes of radical ideology from taking hold and therefore can be allies in the fight against terrorism.

What Should Be Done?

To best fight terrorism, the UK Charity Commission and other relevant UK agencies should do the following:

Collect data on the incidence of terrorist abuse of non-profits, disaggregated from fraud, and make these publicly available.  This will enable regulators to refine laws, allow non-profits to adopt preventative strategies, and enable financial institutions to conduct more informed risk assessments.

Encourage collaboration between non-profits, financial institutions and regulators to develop best practice guidance. This would be immediately useful for non-profits trying to navigate the complex web of due diligence and “know your customer” requirements. In addition, if charities can be certified to be compliant with best practices, financial institutions can use this information to do business with them.

Help non-profits, especially smaller ones, to improve compliance procedures and penalize those that do not show a willingness to do so.

Over-regulating charities hurts the world’s most vulnerable people and undermines the fight against terrorism. That’s not the job of the UK Charity Commission, and Prime Minister Cameron needs to ensure it does not become so.

Disclaimer

CGD blog posts reflect the views of the authors drawing on prior research and experience in their areas of expertise. CGD does not take institutional positions.