Amending GLs to the RFGLs in relation to NPOs.pdf

General Information

This document is a final report published in March 2023 by the European Banking Authority (EBA). It is an amended guide of the EBA/2021/02 guidelines on customer due diligence and ML/TF risk factors. The scope covers the assessment of ML/TF risks associated with business relationships with non-profit organizations (NPOs) within the European Union. The guide aims to facilitate NPOs' access to financial services while taking their specificities into account. The document comprises 22 pages and is based on Directive (EU) 2015/849.

Executive Summary

The main subject is the amendment of ML/TF risk factor guidelines to include a specific annex for non-profit organizations (NPOs). This topic is important because NPOs face difficulties accessing financial services, often due to unjustified de-risking practices by financial institutions, which negatively impact their humanitarian activities, notably in crisis contexts such as the war in Ukraine (p. 3-4). The EBA published an Opinion on de-risking in 2022, identifying main causes: complexity of NPO structures, links with high-risk jurisdictions, and difficulties obtaining adequate customer due diligence (CDD) information (p. 4-5). In response to the European Commission's request, the EBA developed these amended guidelines, including an annex detailing factors to consider when assessing ML/TF risks related to NPOs (p. 3, 9-12). The main findings are that specific consideration of NPO characteristics in risk assessment reduces unjustified de-risking, thus facilitating access to essential financial services for their missions (p. 15-16). Recommendations include applying a risk-sensitive approach, thorough understanding of governance, funding, activities, beneficiaries, and operational areas of NPOs, as well as establishing a dedicated NPO contact point within financial institutions to improve sector knowledge and accelerate processes (p. 12, 13). These guidelines will enter into force three months after their publication in all official EU languages, with an obligation for competent authorities to notify their compliance within two months (p. 3, 8-9).

Context and Objectives

The document addresses the issue of de-risking, defined as the decision by financial institutions to refuse or terminate business relationships with clients or client categories perceived as presenting a high ML/TF risk, notably NPOs (p. 3-4). The EBA Opinion of January 2022 highlighted the negative impact of this phenomenon on NPOs, including delays in delivering humanitarian programs and the risk of activity cessation (p. 4). The European Commission requested the EBA to develop guidelines facilitating NPOs' access to financial services, taking into account their specificities and associated risks (p. 4). The objective is to clarify regulatory expectations and improve ML/TF risk management in this sector to avoid disproportionate de-risking measures (p. 5). The scope is limited to NPOs as clients of financial institutions in the EU, excluding NGOs outside this definition and other sectors (p. 9). Limitations concern the need for risk-based application tailored to each NPO, without imposing a uniform approach (p. 18).

Summary of Key Points by Theme

De-risking and impact on NPOs: De-risking is driven by the perception of high ML/TF risks, often linked to the complexity of NPO structures and their operations in high-risk or sanctioned jurisdictions. This phenomenon causes difficulties in accessing financial services, slowing humanitarian activities (p. 3-5, 14-15).

Definition and scope of NPOs: NPOs are defined as legal entities or arrangements primarily engaged in collecting or distributing funds for charitable, religious, cultural, educational, social, or fraternal purposes (p. 9).

ML/TF risk assessment criteria for NPOs: The annex details elements to analyze:

- Governance: identification of control bodies, beneficial owners, and review of legal status and governance documents (p. 9-10).

- Funding: sources of funds (private donations, public funds), collection methods, transparency, and audits (p. 10-11).

- Activities and beneficiaries: objectives, programs, beneficiary categories (e.g., refugees), nature and frequency of transactions, geographic areas of intervention, notably high-risk countries (p. 10-12).

- Third-party relationships: use of intermediaries and supervision capacity (p. 11).

Specific risk factors:

- Absence of legal status or clear governance documents (p. 10-11).

- Difficulties establishing reputation or presence of negative history (p. 11).

- Opaque funding methods, use of cash, crypto-assets, or crowdfunding (p. 11).

- Operations in high-risk areas or sanctioned countries (p. 11-12).

Mitigating factors:

- Clear governance and documented responsibilities (p. 12).

- Legal obligations to publish annual financial reports (p. 12).

- Independent external audits (p. 12).

- Good reputation according to reliable sources (p. 12).

- Funding from governmental or international organizations not associated with high-risk countries (p. 12).

- Risk mitigation measures in high-risk areas (p. 12).

- Activities limited to direct material assistance (p. 12).

Sanctions and humanitarian exemptions: Institutions must verify whether NPOs benefit from exemptions or derogations in EU or UN sanctions regimes, obtaining reasonable evidence of compliance (p. 12).

Practical implementation: Financial institutions are encouraged to designate a dedicated NPO contact point to better understand their specificities and speed up procedures (p. 12-13).

Public consultation and adjustments: The consultation refined the guidelines, notably clarifying that beneficiary information should concern categories rather than individuals, that risk assessment must be context-sensitive, and that some public funding may reduce ML/TF risk (p. 16-21).

Main Findings and Lessons Learned

Established facts:

- De-risking significantly affects NPOs in the EU, limiting their access to financial services and impacting their humanitarian activities (p. 3-5).

- Main causes of de-risking are the complexity of NPO structures, their operations in high-risk jurisdictions, and difficulties for institutions to obtain adequate CDD information (p. 4-5).

- NPOs are not uniformly exposed to ML/TF risks; individualized assessment is necessary (p. 9-10).

Hypotheses:

- Adding a specific annex for NPOs in ML/TF guidelines will improve risk understanding and reduce unjustified de-risking (p. 15-16).

- Designating a dedicated contact point within financial institutions will facilitate managing relationships with NPOs (p. 12-13).

Interpretations:

- A risk-sensitive approach accounting for NPO specificities is essential to reconcile ML/TF prevention and support for humanitarian activities (p. 15-16).

- Additional costs linked to enhanced due diligence are offset by social benefits and positive reputation for institutions (p. 15-16).

Uncertainties:

- Effective implementation of the guidelines will depend on adoption by institutions and competent authorities (p. 8).

- Long-term impact on reducing de-risking and improving access to financial services remains to be observed.

Conclusions and Recommendations

The EBA concludes that adding a specific annex for NPOs in ML/TF guidelines is necessary to improve due diligence and reduce unjustified de-risking (p. 15-16). Financial institutions must apply a risk-sensitive approach, understanding governance, funding, activities, beneficiaries, and operational areas of NPOs (p. 9-12). They must also verify humanitarian exemptions in sanctions regimes (p. 12). Designating a dedicated NPO contact point is recommended to facilitate relationship management (p. 12-13). Competent authorities must notify their compliance within two months after guideline publication, which will apply three months after publication in all official EU languages (p. 3, 8-9). These measures aim to ensure fair and secure access for NPOs to financial services while maintaining effective ML/TF prevention.