Blog written by Eastside People Consultant, Simon Hinks.
Charities are vital to society, providing essential services, support, and hope to millions. But sadly, their trusted status can make them attractive targets for criminals trying to launder money or finance terrorism.
If you’re a trustee, senior staff member, or anyone involved in charity operations, understanding how anti-money laundering (AML) laws apply to your charity is crucial. So, why are charities at risk, what are your legal responsibilities, and how can you protect your charity from exploitation?
Why charities are at risk
Charities handle significant sums of money and often rely on public trust, which makes them vulnerable to exploitation. Criminals may try to use donations to disguise illicit funds or funnel money through charitable channels to support illegal activities.
They may even create fake charities—shell organisations that look legitimate but exist only to move funds. Unfortunately, smaller charities with limited resources are often the most vulnerable to such tactics.
The risks increase if your charity operates internationally, especially in areas with weak governance or conflict zones. Criminals might target charities working in these regions to launder money or fund illegal activities under the guise of humanitarian aid. Even seemingly innocuous donations can be part of a broader money laundering scheme, making vigilance essential.
What laws apply to charities?
Even though charities aren’t directly regulated by the Money Laundering Regulations 2017, several UK laws still apply.
The Proceeds of Crime Act 2002 makes dealing with criminal funds a crime, which means your charity could be implicated if it knowingly or unknowingly handles illicit donations.
Similarly, the Terrorism Act 2000 criminalises the use of charity funds for terrorist activities, an important consideration for charities involved in international work.
The Charities Act 2011 requires trustees to ensure that charity assets are used for legitimate charitable purposes. The Bribery Act 2010 and the Sanctions and Anti-Money Laundering Act 2018 also apply, as charities must ensure they do not facilitate corruption or work with prohibited organisations.
All these laws place significant responsibilities on charity trustees to prevent financial crime. Failing to meet these obligations can result in severe penalties and damage your charity’s reputation.
Trustee responsibilities – protecting your charity
As a charity trustee, you are legally obligated to protect the charity’s assets and ensure they are not misused for financial crime. This means actively overseeing how the charity raises and spends money. You are also responsible for ensuring the charity’s financial activities comply with AML regulations.
Trustees must conduct thorough due diligence on donors, partners, and beneficiaries. It’s essential to be vigilant about the sources of donations, particularly large sums or funds coming from international sources.
You should also ensure that proper financial controls are in place and followed, such as separating financial duties so that no one person has full control over a transaction. Any suspicious activity should be promptly reported to the National Crime Agency (NCA).
Failing to act on suspicions or neglecting these responsibilities could lead to personal liability for trustees. Trustees must stay informed about AML risks and act when necessary to protect the charity.
Due diligence – know your donors and partners
Due diligence is the cornerstone of protecting your charity from financial crime. It’s essential to know your donor, partner, and beneficiary. This means verifying the identity of donors, especially those donating large sums or based overseas.
You should understand where the money comes from. For example, a charity accepting international donations should check whether a donor is politically exposed or listed on the sanctions lists.
It’s also crucial to understand your partners, particularly when working in high-risk areas. If you partner with another organisation or send funds abroad, you should vet them thoroughly to ensure they are legitimate. When handling large or international donations, consulting sanctions lists or politically exposed persons (PEP) databases is a good practice.
For example, a UK-based charity working on international development might have a policy that any donation over £5,000 triggers enhanced due diligence, ensuring the donor’s background and intentions are clear. This extra step helps reduce the risk of inadvertently accepting illicit funds.
Internal controls – safeguarding charity funds
Strong internal controls are essential for keeping your charity’s funds safe and reducing the risk of money laundering. Every charity, no matter its size, should have clear financial procedures that ensure accountability.
Regularly reviewing financial activities, such as comparing income and expenditure with the budget, can help spot discrepancies early. A robust audit trail should be maintained to track where funds are coming from and where they are going.
Smaller charities may not have the resources for a complex financial system, but even basic measures like requiring dual approval for large payments and conducting annual reviews of financial procedures can make a big difference. Larger charities, or those operating in high-risk areas, should implement more extensive risk management strategies, possibly appointing a Money Laundering Reporting Officer (MLRO) to oversee compliance.
Regular training for trustees and staff is also critical. They should know how to identify red flags, such as unusually large cash donations, donors’ reluctance to provide identification or donations with unusual conditions attached. Your team will be better prepared to spot suspicious activity and act appropriately by staying educated on these issues.
Red flags – what to look out for
While not every odd transaction indicates criminal activity, certain warning signs should trigger further investigation. Watch out for substantial cash donations, particularly if they come with little or no background information.
Donors who insist on remaining anonymous or reluctant to provide details should raise red flags. Donations made in ways that don’t align with your usual procedures, such as through untraceable channels or requests to move funds quickly, are also cause for concern.
Multiple donations just below reporting thresholds can indicate an attempt to avoid scrutiny, and donations with unusual conditions or restrictions should be carefully examined. If you notice any of these signs, it’s time to dig deeper and possibly file a Suspicious Activity Report (SAR).
Filing a Suspicious Activity Report (SAR)
If you suspect your charity is being used for money laundering or terrorist financing, you must report it. A Suspicious Activity Report (SAR) is filed with the National Crime Aagency (NCA), and it should contain as much detail as possible about why the activity seems suspicious. You mustn’t tip off the person involved, as doing so is a criminal offence.
While filing a SAR might seem daunting, it’s better to report a concern than to ignore it. If you’re unsure whether to file a SAR, consult your charity’s financial team, trustees, or even the Charity Commission for advice.
Special risks for charities with international operations
International work increases your charity’s exposure to financial crime. Charities operating in conflict zones or regions with weak governance should be particularly cautious.
It’s important to ensure funds are transferred via formal banking channels, and large sums of cash should be avoided whenever possible. Partner organisations in high-risk regions should undergo thorough vetting, and you should keep a clear record of where your funds are going.
Understanding local laws, cultural practices, and geopolitical risks can help ensure your charity remains compliant. For example, a UK charity working in a sanctioned country may need a special license to operate there. Staying informed about these complexities ensures you don’t inadvertently break the law.
How technology can help with compliance
Technology can be a valuable tool in helping charities stay compliant with AML regulations. Tools like customer relationship management (CRM) systems can track donor information, while compliance software can automatically screen for sanctions or politically exposed persons.
Digital payment platforms that create clear audit trails can help charities maintain transparency and reduce the risk of illicit funds entering the system.
What can you do to help
Here are some practical steps your charity can take to stay AML-compliant:
- Review internal financial controls and ensure due diligence procedures are in place for donors, partners, and beneficiaries
- Train trustees and staff to recognise red flags and know how to report suspicious activity
- Monitor your charity’s financial activities, including where donations come from and how funds are used
- File a Suspicious Activity Report (SAR) if you spot any suspicious behaviour
- Stay up to date with regulations and seek advice when necessary, particularly if your charity operates internationally.
Stay in control and safeguard your charity
AML regulations do not just apply to banks or large businesses but also to charities. By staying vigilant, conducting due diligence, and implementing strong internal controls, your charity can continue its good work without falling victim to exploitation. Protecting your charity from financial crime ensures your mission focuses on helping those in need, not dealing with legal issues or reputational damage.
By taking proactive steps to safeguard against money laundering, you ensure that your charity’s reputation, resources, and mission remain protected. Stay informed and compliant, and you’ll help ensure that your charity can continue making a positive impact.
Find out more about Eastside People’s charity governance services and our values-based charity recruitment.
