Anti-Money Laundering (AML) and Know Your Customer (KYC) are key elements for any organization that handles considerable sums of money, and Non-Governmental Organizations (NGOs) can certainly be among them. Their nature of operations often positions them in or near the financial ecosystem, which makes them vulnerable to several illicit activities. In this post, we will cover the importance of AML and KYC for NGOs.
Why Do NGOs Need AML & KYC Controls?
Terrorism Financing Risks: According to FATF (Financial Action Task Force), global AML and CFT authority, terrorist and criminal groups often target entities that already possess funds, property, personnel, logistical support, and public trust. For these reasons, NGOs are ideal targets for such criminal groups.
Fraud, Corruption, and Misuse of Funds: According to Humanitarian Outcomes, fiduciary risk is one of the major threats to NGOs operating cross-border. Furthermore, the IMF and World Bank underline how weak financial controls increase exposure to money-laundering and corruption in humanitarian programs.
High-risk Counterparties: Their nature of work requires NGOs to collaborate with various actors such as local implementing partners, subcontractors, local suppliers, payment facilitators, and informal money-transfer channels. These relationships can sometimes lack transparency.
Complex donor networks: There are countless sources where NGOs receive funds. These funds may involve transfers across borders and subcontract local actors. The complexity of these networks makes it very hard to trace them and may inadvertently facilitate money-laundering and financing of illicit actors.
What Are the Key AML Requirements for NGOs?
Before listing the key requirements for NGOs, let’s talk about FATF’s recommendations for NGOs. FATF Recommendation 8 is the relevant standard for NGOs, which indicates that these organizations may be abused for terrorist financing or money-laundering, and in response, recommends a risk-based, proportionate, and targeted approach.
Verifying Donors and Partners: Identify and verify their information, assess source of funds, assess risk based on factors such as geography and activity, and apply Enhanced Due Diligence (EDD) when required.
Screening Beneficiaries: Collect appropriate identifying information on beneficiaries and screen them against sanctions lists, national and regional lists, and other relevant watchlists.
Monitoring High-Risk Transactions: Identify high-risk transactions, set red-flag criteria, regularly review bank statements, and escalate when required.
Maintaining Audit-Ready Documentation: Keep all relevant documents for at least five years, and ensure that they are organized and consistent.
Reporting Suspicious Activity When Necessary: Have an internal escalation procedure ready, decide what qualifies as suspicious, file a suspicious transaction report, and document.
What Are NGOs Expected to Check Under KYC?
Identity verification: This is the first and most decisive step when starting a business relationship. NGOs must collect full name, address, contact details for individuals, and legal name, registration status, structure, and beneficial owners for organizations.
Beneficial ownership of partners: FATF also requires identifying the beneficial owner, which means the person who ultimately owns an organization, in order to prevent criminals and sanctioned actors that hide behind opaque structures.
If they turn out to be high-risk: If a partner presents elevated risk, such as being from a high-risk country, being a politically exposed person (PEP), or having a complex ownership, NGOs must perform Enhanced Due Diligence for deeper background checks, more documentation, and verification of the source of funds.
Source of funds: Identifying where donated funds come from is crucial when assessing the risk of a business relationship. Determining whether they come from a high-risk country, sector known for money-laundering and terrorism-financing risk, opaque intermediaries, or politically exposed persons, are very important to prevent misuse.
Assess Risk: As FATF recommends, NGOs should assess the risk of each donor, partner, and transaction depending on the factors like geography, type of activity, transfer frequency, and method of payment.
Sanctions, PEP, and adverse media status: It is very important to screen donors, partners, or organizations against international and national sanctions lists in order to avoid misuse of funds by illicit actors.
Top Reasons NGOs Must Implement AML & KYC Systems
• Protecting Funds From Misuse
• Reducing Terrorism Financing Risks
• Meeting Donor and Grant Requirements
• Ensuring Transparent Aid Distribution
• Strengthening Reputation and Credibility
• Avoiding Legal and Regulatory Penalties
• Operating Safely in High-Risk Regions
How Can NGOs Build an Effective AML/KYC Framework?
Have a Written Compliance Policy: The OFAC’s compliance framework here presents a good reference point for this, even though it is principally designed for companies rather than NGOs. Organizations must have a policy that includes the applicable sanctions regimes (e.g. UN, EU, OFAC, etc.), defines the scope of who must be screened, specifies the timing of screening, and embeds screening into core governance.
Adopt a Risk-Based Approach: According to the FATF’s model for NGOs, organizations must evaluate several factors such as the country, the nature of operations, types of donors, and the complexity of supply chains. On a micro-level, they must also identify high-risk areas such as conflict zones and dual-use goods (such as items with both civilian and military applications).
Use Reliable Screening Tools with Real-time Sanctions & PEP Checks: These organizations are required to screen sanctions lists, Politically Exposed Persons (PEPs) lists, and adverse media. Solution providers such as Sanction Scanner provide consolidated screening for sanctions, PEPs, and adverse media.
Maintain Consistent Onboarding Checks: Every donor, partner, vendor, and beneficiary should go through a standardized onboarding check including identity verification, beneficial ownership checks, source of funds, sanctions screening, PEP screening, and adverse media screening, and risk assessment.
Conduct Ongoing Monitoring: The importance of staying vigilant throughout the operations has been progressively increasing. Situations and risks may change at any time. Therefore, NGOs should opt for ongoing monitoring rather than just one-time screening by screening regularly, continuously monitoring high-risk partners, and configuring alerts to trigger automatic escalation.
Implement Transaction Screening: Just like banks screening NGO transactions, NGOs themselves also implement this practice internally in order to avoid repercussions. A proper transaction screening system must include checking every payment, every incoming donation, vendor invoices, cash transfers, and shipments.
Maintain Audit Trails and Develop a Clear Escalation Procedure: Keeping detailed records of each action for a specified time (often at least 5 years) is incredibly helpful for future audits and investigations. In addition to this, NGOs must know what to do when they spot a positive match. These organizations, therefore, need a clear escalation procedure that should roughly include pausing the transaction, verifying the identity, escalating to compliance, and documenting the final decision.
Regular Mandatory Staff Training: Of course, all of these steps require qualified staff to execute them properly. For that reason, seniors must train their staff on sanctions, screening tools, interpreting results, and escalation paths.
Conduct Annual Reviews and Internal Audits: Due to the dynamic nature of financial crimes, NGOs must reassess risk exposure every year and after every major change. This requires organizations to update the AML and KYC policy annually, conduct internal audits or external compliance reviews, and ensure their framework still aligns with regulatory expectations.
Common Challenges NGOs Face
Limited Compliance Resources: It is true that setting up a solid AML and CTF framework for many NGOs, especially small or local ones, is a very costly process. Therefore, several NGOs are left vulnerable to abuse and fraud due to incompetent compliance practices.
Fragmented Data From Field Operations: NGOs often work in multiple zones, which require them to rely on decentralized operations and local partners. As a consequence, their data often end up fragmented, incomplete, and inconsistent. This leads to reduced transparency and increased risk of misuse of funds.
Manual Verification Delays: Unlike traditional financial institutions, many NGOs rely on manual checks, which make verification a very slow and error-prone process. The rate of these disadvantages increases inversely with the staff capacity due to overburdening.
Lack of Awareness Among local partners: As mentioned before, many NGOs work with local partners. While this improves their local access, many local partners are unfamiliar with AML and CTF practices.
What Happens Without AML & KYC Controls?
Donor Withdrawal: If NGOs cannot prove that they have proper AML frameworks, donors may suspend funding, or even demand repayment. Nowadays, several donors require a strict check before proceeding further.
Regulatory Penalties: Several jurisdictions in the world do not treat charities and NGOs differently than traditional financial institutions in terms of legal penalties. Violations may result in civil monetary penalties or even criminal prosecution.
Institutional Risks: NGOs may get permanently excluded from financial and banking services if they ignore compliance risks, which could even extend beyond one NGO by discouraging new NGOs from forming.
Severe Reputational Damage: The effects of reputational damage are often more costly and long-lasting than legal penalties. There are countless examples of NGOs never recovering from a single major compliance scandal.
Exposure to Fraud, Diversion, Corruption and Terrorist Financing Networks: NGOs with weak AML frameworks are often targeted by fraudulent partners and criminal networks, which can lead to the theft of funds, diverted humanitarian aid, and manipulation of supply chains. There are several FATF case studies that demonstrate how NGOs have been unknowingly used as fronts for terrorist financing.
FAQ's Blog Post
NGOs often operate across borders and handle donor funds, which makes them vulnerable to misuse. AML and KYC controls help us prevent fraud, terrorist financing, and reputational risk.
In many jurisdictions, yes. Even where not directly regulated, banks and payment providers require NGOs to comply with AML and KYC as part of their risk management obligations.
Key risks include anonymous donations, high-risk geographies, weak governance structures, and exposure to sanctioned or politically exposed persons through partners or beneficiaries.
We recommend verifying donors, partners, and key beneficiaries using identity data, organization details, ownership structures, and risk indicators such as PEP or sanctions exposure.
Effective screening helps ensure funds are not diverted to prohibited individuals or entities, protecting donor trust and preventing account closures by financial institutions.
