Money Laundering Red Flags for Nonprofits

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Even the most well-intentioned nonprofit can become an unwitting vehicle for money launderers. With law enforcement agencies at the state and federal level focusing on money laundering by criminal gangs, international mafia organizations, and even terrorist groups, nonprofits need to take a moment to consider how they can avoid becoming victims of bad actors.

Know your donors

Knowing where major donations come from is one of the important ways a nonprofit can protect itself. A know-your-donor policy should be thought of as a form of risk management. A due diligence process should take into account how much risk is involved in each gift. Risk is measured by answering questions such as:

  • Who is the donor, and is that identity verifiable? Corporate donors can be especially tricky due to the private nature of most corporate ownership. Among other things, it’s a good practice to verify that the donor’s name is not on the Office of Foreign Assets Control’s list of sanctioned parties.
  • Where is the donor located? Special scrutiny needs to be given to donors from overseas.
  • How much money is involved? A sudden, out-of-the-blue offer of a huge donation should raise the same concerns as an email phishing scheme.
  • Is the donor part of a larger picture? Donors who write large checks tend to become part of the nonprofit’s fabric in ways beyond matters of finance. An unknown donor may have unsavory connections that the nonprofit may not wish to associate with, even if the gift itself is clean.

Adopt policies to address money laundering risk

Every organization needs to evaluate what policies and procedures it will adopt to take stock of its donor relationships. A good policy strikes a balance between the organization’s need to know who its large donors are and the donors’ rightful expectations of respect and privacy. Policies might include elements like these:

  • A form of due diligence checklist staff can rely upon when “onboarding” a new major donor.
  • Procedures for placing large gifts in a separate holding account while the donor’s merits are verified, so that the funds do not comingle with other funds.
  • Ongoing procedures for monitoring large donors’ reputation and legal status.

Talk to a California nonprofit attorney

The Church Law Center of California provides legal assistance to religious and secular nonprofits. We can help your organization craft governance policies to manage the risk that comes with doing business in the nonprofit world. Call us at (949) 892-1221 or reach out to us through our contact page.

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