Challenges Facing Global Grantmakers Get Increased Attention
Already, 2023 has seen significant global activity related to how civil society is regulated globally. The U.S. Department of the Treasury, the U.N., and the Financial Action Task Force (FATF) have each issued new guidance for governments and financial institutions, and these developments represent progress in civil society’s fight against overregulation, misperceptions of their operations, and, in some cases, threats to their very existence.
For global funders, the constant push and pull of the closing space for civil society persists as a barrier for making international grants – with these developments, there are some bright spots in an otherwise downward trend towards increased restrictions.
Common Regulatory Challenges
Several regulatory challenges impact how U.S. foundations can support civil society around the world. These include:
- Compliance Burden: Grantmakers must comply with stringent anti-money laundering (AML) and counter-terrorism financing regulations, which involves conducting thorough due diligence on recipients and implementing robust internal controls. The compliance process can be time-consuming, resource-intensive, and complex, particularly when dealing with cross-border transactions and varying regulatory frameworks.
- Overregulation and Restrictions: Although appropriate safeguards are needed to prevent bad actors and actions like financing terrorism, a common challenge for civil society is overregulation and overreach of restrictions that some countries have implemented in the name of countering terrorism financing. These measures can impose undue burdens on grantmakers, hindering their ability to transfer funds across borders and support organizations operating in high-risk regions. Excessive regulation can also stifle innovation and collaboration.
- FATF Recommendations and National Government Interpretations: FATF sets global standards and recommendations to combat money laundering and terrorism financing. Grantmakers must navigate and comply with these recommendations, which can vary in interpretation and implementation across jurisdictions. Divergent interpretations from national governments can result in inconsistent compliance requirements, making it difficult for grantmakers to navigate the regulatory landscape effectively.
- Foreign Funding Restrictions: National governments across the world continue to place barriers on the inflow of foreign funding, most often in the form of administrative burdens or specific legal registration requirements. Unfortunately, these national laws, with very few exceptions, show no sign of easing.
The challenges related to AML, counter-terrorism, foreign funding, and FATF recommendations can have detrimental impacts on civil society organizations. Grantmakers may face increased costs and staff time when making international grants and encounter delays in disbursing funds to organizations. However, the biggest impact is often on the grantees and nonprofits themselves, who must navigate not only complex regulatory environments but other considerations like domestic politics, fundraising challenges, and social/economic concerns.
Bright Spots for Civil Society
Earlier this year, the U.S. Treasury department released its first-ever De-Risking Strategy. Overall, the document marks a significant departure from Treasury’s previous approach and acknowledges the need for greater transparency, better communication, and improvements in due diligence to effectively address de-risking. Importantly, it recognizes the impact that government regulations can have on encouraging de-risking rather than solely blaming profitability of banking operations on their desire to avoid high-risk, or perceived high-risk clientele. We recommend reading Scott Paul’s analysis in Just Security for a deeper take on the strategy.
More recently, the U.N. Special Rapporteur on the Rights to Freedom of Peaceful Assembly and of Association released a report titled “General principles and guidelines on ensuring the right of civil society organizations to have access to resources.” The report includes recommendations for governments, donors, multilaterals, banks, and civil society organizations. Among these many recommendations, the report suggests governments should:
- Create an enabling environment that allows associations to freely seek, receive, and use resources without discrimination or undue interference.
- Revise laws that restrict associations' access to resources and ensure compliance with international human rights standards.
- Simplify the process for legal formation of associations and allow for the existence of unregistered associations.
- Respect and facilitate associations' right to freely seek, receive, and use foreign funding.
- Ensure measures targeting harmful activities like terrorist financing do not restrict associations' access to resources.
Relatedly, the FATF’s Public Consultation on the FATF Best Practice Paper to Combat the Abuse of Non Profit Organisations provided an opportunity for civil society to weigh in on the future of FATF’s Recommendation 8, which has been used by governments to justify overregulation of nonprofits. The draft includes acknowledgements from FATF that Recommendation 8, despite its revisions and interpretative notes, continues to be misused, noting that:
In order to comply with R.8, some countries implement overburdensome requirements without any thresholds or regard to the risk category of a particular NPO, without justification based on the FATF standards and the risk-based approach.
In some cases, risks of NPOs were not assessed, in other case risks of NPOs were assessed to be at different levels, but the same measures were applied to all NPOs, nonetheless. In most cases, such measures were excessive, more suitable for high risk NPOs than those at lower risk levels. The overreach of measures is commonly observed, which leads to unnecessary administrative burdens to competent authorities and limits the operational space of NPOs.
In some countries, disproportionally heavy measures were taken, despite being environments with a low terrorism and terrorist financing threat, that have made it impossible for NPOs to remain operational.
As a principle, it is outside the scope of R.8 for the country to apply the same nature, frequency and intensity of mitigating measures to the subset of NPOs that the risk assessment has identified as facing low risk of TF abuse and to the subset of NPOs that the sectoral risk assessment has identified as facing medium or high risk of TF abuse.
Many countries have erroneously adopted legislation that classifies NPOs as reporting entities, as though they were financial institutions or DNFBPs, thereby wrongly subjecting NPOs to legal obligations regarding entity level risk assessment, AML/CFT preventative measures, identification of suspicious transactions and reporting obligations and record keeping requirements. This is not the intention nor the purpose of R.8.
Some will consider this message a case of “too little, too late,” as damage has already been done. However, like Treasury's acknowledgement that government policies have encouraged de-risking, FATF’s acknowledgement that Recommendation 8 has been severely misapplied is equally welcome.
Why This All Matters
Civil society has long advocated for, at the minimum, acknowledgement of how government policies impact the ability of nonprofits across the world to freely raise funds and achieve their missions. These policies have a direct impact on foundations who operate internationally and their capacities to make grants across borders to support healthy nonprofit sectors across the world. However, funders need not just be bystanders in this ongoing struggle. The Special Rapporteur included specific recommendations for the donor community, summarized below:
- Donors should create an enabling environment for civil society by implementing policies that value and promote an inclusive and independent civil society. They should engage in dialogue with governments, support initiatives that protect civic space, and prevent unintended consequences of anti-money laundering and counter-terrorism financing standards.
- Donors should invest in the development of a strong and resilient civil society sector by providing flexible and multi-year funding. They should cover the full indirect costs of project grants, promote collaborations and pooled funding mechanisms, and provide flexibility for organizations to adapt to change and seize opportunities.
- Donors should support local civil society by recognizing them as co-creators of development programs, engaging in meaningful consultations, providing longer-term and adaptive core support, and empowering them to diversify their financial base. They should also simplify application and reporting requirements, endorse local organizations' own assessment of risks, and ensure that funding reaches marginalized and discriminated groups.
- Donors should adopt specific measures to facilitate funding access in restrictive environments. This includes understanding the nature of civic space restrictions, conducting risk assessments, reallocating funding priorities, providing emergency assistance and legal defense, supporting relocated or exiled civil society actors, and exploring innovative mechanisms to navigate restrictions.
Foundations and other observers will note the similarities between the Special Rapporteur’s recommendations and the Pledge that more than 800 grantmakers adopted in the wake of the pandemic. As government regulation makes it harder for nonprofits across the world to access resources and achieve their missions, foundations can make operational changes that enable their grantees to better navigate these complex systems. Funders can also join collective efforts, similar to those that have brought about these bright spots, and lend their voices to pushing back against trends toward overregulation. Organizations like WINGS, the Council on Foundations, the Global NPO Coalition on FATF, and FICS are all engaging grantmakers in these collective advocacy efforts.