Commission Communication to the Council, the European Parliament and the European Economic and Social Committee - The Prevention of and Fight against Terrorist Financing through enhanced national level coordination and greater transparency of the non-profit sector
Date: 2005-11-29
Institutions: European Commission
Subjects: banking supervision, exchange of information, fight against crime, financial legislation, financing, non-profit organisation, terrorism

COMMISSION OF THE EUROPEAN COMMUNITIES 

Brussels, 29.11.2005 
COM(2005) 620 final 

COMMISSION COMMUNICATION TO THE COUNCIL, THE EUROPEAN 
PARLIAMENT AND THE EUROPEAN ECONOMIC AND SOCIAL COMMITTEE 

The Prevention of and Fight against Terrorist Financing through enhanced national 
level coordination and greater transparency of the non-profit sector. 

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INTRODUCTION 

Preventing terrorists from gaining access to financial resources is one of the cornerstones of 
the  EU’s  fight  against  terrorism.  This  is  highlighted  in  the  Action  Plan  on  Combating 
Terrorism1  and  the  Council  Declarations  following  the  attacks  in  Madrid  and  London2.  EU 
policy in this area was further set out in the Commission Communication of October 20043 
and the EU Counter Terrorist Financing Strategy of December 20044. These make clear that 
the importance of this work is not only to prevent terrorists from gaining access to funding but 
also to maximise the use of financial intelligence in all aspects of counter terrorist work.  

In its Declaration on Combating Terrorism of 25th March 2004 the European Council called 
on Member States “to increase cooperation between national competent authorities, Financial 
Intelligence  Units,  and  private  financial  institutions  to  facilitate  improved  exchange  of 
information  on  terrorist  financing”5.  The  Declaration  also  called  on  the  Commission  to 
consider  improvements  in  the  regulation  and  transparency  of  non-profit  organisations 
(“NPOs”)  which  may  be  used  by  terrorists  to  acquire  funding  for  their  activities.  This 
Communication  addresses  these  core  elements  in  the  fight  against  terrorist  financing.  Part  I 
assesses national level coordination issues. Part II deals with vulnerabilities of the non-profit 
sector  to  terrorist  financing  and  outlines  a  Recommendation  for  Member  States  and  a 
Framework for a Code of Conduct for NPOs contained in the Annex to this Communication. 

PART I - NATIONAL COORDINATION STRUCTURES  

The  Peer  Evaluation  on  terrorism  (“National  anti-terrorist  arrangements:  improving  national 
machinery  and  capability  for  the  fight  against  terrorism”)6  has  proved  a  valuable  tool  in 
helping  Member  States  to  assess  their  national  counter-terrorism  arrangements.  The  fight 
against the financing of terrorism was within the scope of the Peer Evaluation. The enormity 
of  the  task  has  meant  that  country  reports  and  recommendations  have  not  always  addressed 
the  financing  of  terrorism  in  particular  detail.  Consideration  should  therefore  be  given  to 
focusing  on  national  machinery  addressing  the  fight  against  the  financing  of  terrorism  and 
drawing  on  findings  set  out  in this  Communication  as  a  possible  topic  for  a  follow-up  Peer 
Evaluation.  

1 
2 

3 

4 

5 

6 

Plan of Action on Combating Terrorism 10586/04 of 15th June 2004 (Council Document) 
Declaration  on  Combating  Terrorism  adopted  by  European  Council  25th  March  2004;  Council 
Declaration on EU Response to London Bombings adopted by Extraordinary Council meeting (Justice 
and Home Affairs) 13th July 2005. 
Commission  Communication  on  Prevention  of  and  Fight  against  Terrorist  Financing  20.10.2004 
COM(2004) 700  
« The  fight  against  terrorist  financing »  presented  by  Secretary  General/High  Representative  and 
Commission to European Council. 16089/04 of 14th December 2004 (Council Document) 
Recommendation 31 of the Financial Action Task Force Forty Recommendations calls on countries to 
ensure  that  “policy  makers,  the  FIU,  law  enforcement  and  supervisors  have  effective  mechanisms  in 
place which enable them to co-operate, and where appropriate coordinate domestically with each other 
concerning the development and implementation of policies and activities to combat money laundering 
and terrorist financing”. 
Following the 11th September 2001 attacks the JHA Council of September 2001 launched an assessment 
of national anti-terrorist arrangements.  

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The  Hague  Programme  states  that  the  mere  fact  that  information  crosses  borders  should  no 
longer  be  relevant  in  the  EU7.  An  effective  exchange  of  information  between  competent 
authorities  in  the  EU  is,  however,  dependent  on  comprehensive  and  effective  national  level 
coordination to identify, cross reference and analyse relevant information and produce reliable 
high  quality  criminal  intelligence.  Well  coordinated  national  level  information  exchange  is 
essential  if  the  “principle  of  availability”  8  is  to  operate  effectively  since,  in  the  absence  of 
appropriate  national  level  coordination  and  generation  of  high  quality  criminal  intelligence, 
information/intelligence sought at EU level may not be available. 

The  EU  Counter  Terrorist  Financing  Strategy  invited  the  Commission  to  assess  national 
coordination  structures  between  different  Ministries,  agencies  and  other  actors  engaged  in 
counter financing of terrorism (“CFT”) work. It invited the Commission to consider possible 
additional cooperation methods between law enforcement/intelligence services and the private 
sector.  The  Commission’s  analysis  is  largely  based  on  Member  State  answers  to  a 
questionnaire sent to the EU 25 in mid-March 2005 as well as discussions with Europol and 
industry representatives. 

In  replies  to  this  questionnaire  Member  States  confirmed  that  State  bodies  engaged  in 
the  fight  against  financing  of  terrorism  include  Finance,  Justice,  Interior  and  Foreign 
Ministries,  Treasury  Department  as  well  as  the  Financial  Intelligence  Unit,  specialised 
financial police, Public Prosecutor’s Office, Customs Authorities, Tax Revenue Services, 
intelligence services, financial regulators and the Central Bank (“Relevant Actors”).  

The advantages of ensuring coordination among Relevant Actors were highlighted by many 
Member States: 

“…representatives  of  the  majority  of  competent  bodies  meet  in  one  place  and 
directly exchange  relevant information, assess it and elaborate the final product for 
the  decision-makers  based  on  consensus.  The  brain-storming  that  evolves  during 
such direct meetings of experts is particularly useful as well as the possibility to deal 
with individual issues in an all-encompassing manner.”9  

Coordination  and  information  sharing  among  national  agencies  were  highlighted  in  the 
Council’s  best  practices  paper  on  financial  restrictive  measures  targeting  terrorism10.  The 
analysis  set  out  in  this  Communication  is  compatible  with  and  should  supplement  this 
approach. 

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8 

9 

10 

The  Hague  Programme:  strengthening  freedom,  security  and 
the  EU.  Brussels 
13th December 2004  16054/04  (Council  Document).  See  also  the  Proposal  for  a  Council  Framework 
Decision  on  the  exchange  of  information  under  the  principle  of  availability  COM(2005)490 
of 12.10.2005 
See The Hague Programme Section 2 on improving the exchange of information for law enforcement 
purposes.  
Reply to Commission questionnaire provided by Permanent Representation of the Republic of Slovenia 
to the European Union  
Council document 13851/4/04 rev 4 

justice 

in 

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Analysis  of  Member  States’  coordination  structures  reveals  (i)  a  number  of  horizontal  best 
practices to strengthen coordination among all Relevant Actors and (ii) areas where measures 
specific to certain Relevant Actors may enhance coordination and information exchange. The 
former is addressed in Section 1 while coordination issues specific to certain Relevant Actors 
are set out in Sections 2. Section 3 addresses issues relevant to coordination between Relevant 
Actors and the private sector. In all cases particular attention should be paid to data protection 
rules, including safeguards on the accuracy of information held in relevant databases.  

1. 

HORIZONTAL COORDINATION STRUCTURES INVOLVING ALL RELEVANT ACTORS 

Analysis of national coordination structures reveals a number of horizontal best practices to 
strengthen  information  sharing  at  national  level  among  all  Relevant  Actors  and  from  which 
the following can be deduced:  

1.1. 

1.2. 

1.3. 

To help address policy coordination, consideration may be given to establishing 
a  national  framework  comprising  all  Relevant  Actors.  This  will  help  build 
consensus  around  a  national  CFT  strategy.  It  should  promote  confidence  building, 
understanding and trust between agencies. Core tasks should include production of a 
Joint  Counter  Terrorism  Action  Plan,  joint  CFT  risk  and  threat  analyses  and  other 
joint CFT research11. Structures should be put in place to ensure that Relevant Actors 
are  consulted,  contribute  to  and  have  to  sign  off  joint  analysis  of  intelligence  on 
methods  used  by  terrorists  to  finance  their  activities.  The  benefits  of  including 
appropriate private sector representatives in this work should also be considered.  

To help address operational issues, consideration may be given to bring together 
Relevant  Actors  from  intelligence  services,  law  enforcement,  Prosecutors’ 
Office,  FIU,  tax  revenue  services  and  financial  regulators.  Such  a  group  could 
have  a  mandate  to  review  investigation  files  from  a  range  of  angles.  Operational 
benefits  could  include:  (i)  revealing  leads  that  may  otherwise  go  undetected;  (ii) 
recommending  changes  in  the  way  investigations  are  carried  out  and  ensure 
investigations are intelligence based; (iii) avoid duplication; (iv) help establish links 
between suspects (v) facilitate joint assessment of related investigations. 

Operational  coordination  could  be  further  enhanced  by  national  networks, 
connecting  in  each  Member  State  the  respective  FIU  with,  on  the  one  hand, 
reporting bodies and, on the other hand the Relevant Actors. This would create 
an  automated  yet  secure  electronic  environment  for  the  receipt,  processing  and 
dissemination  of  financial  intelligence.  It  would  enable  the  direct  transfer  of 
information from financial institutions into special databases in the FIU, support the 
computer-assisted production of  financial intelligence  within the  FIU and allow for 
the automated exchange of information between FIU and Relevant Actors. This work 
is currently being assessed in the FIU NET project. 

11 

One  Member  State  highlighted  the  value  of  joint  analysis  of  regular  thematic  investigations  such  as 
underground financial movements connected with the financing of terrorism. 

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1.4.  Minimum  standards  for  collection,  analysis  and  dissemination  of  intelligence. 
This would facilitate intelligence generation and sharing and promote an intelligence 
driven  and  risk  based  approach.  Standards  should  emphasise  the  need  to  derive 
meaning  and  value  from  collected  information  and  a  common  commitment  to 
disseminate that information rapidly to authorised persons in other Relevant Actors. 

1.5. 

1.6. 

Developing minimum standards for handling information such as confidentiality 
levels,  security  clearances,  document  handling  codes  would  facilitate  and  expand 
rapid and effective information exchange among Relevant Actors. 

Financial  intelligence  should  support  and  supplement  overall  counter  terrorist 
activity.  Integration  within  general  counter  terrorist  activity  of  input  from  a  body 
responsible for CFT coordination would help ensure that financial intelligence is an 
integral part of counter terrorist activity. This should also produce value in bridging 
the gap that may exist between specialised CFT police, Counter Terrorist police and 
intelligence services.  

2. 

COORDINATION STRUCTURES SPECIFIC TO CERTAIN RELEVANT ACTORS 

2.1. 

2.2. 

2.3. 

2.4. 

A  number  of  Member  States  said  they  had  formalised  terrorist  financing 
information  exchange  structures  between  the  Finance,  Interior  and  Justice 
Ministries  and  described  how  this  process  had  given  a  new  impetus  to  the  fight 
against terrorist financing by bringing together the intelligence services, specialised 
police and FIU. 

Some  Member  States  indicated  the  benefits  of  an  inter-departmental  body 
dedicated to identification, tracing and freezing of criminal/terrorist assets. Such 
“Asset  Investigation  Bodies”  with  highly  developed  financial  investigation  skills, 
should be able to draw on complementary skills of police, Prosecutors, Tax Revenue 
services, customs and other relevant services and provide a source of expertise for all 
terrorist (and other serious criminal) investigations.  

Member States should promote awareness among law enforcement of the role the 
FIU  can  play  in  assisting  their  fight  against  terrorism  financing  and  other 
criminality.  The  use  of  Memoranda  of  Understanding  between  the  FIU  and  other 
agencies  may  help  to  provide  the  framework  for  efficient  access  to  financial 
information. 

CFT  experts  within  the  FIU  should  have  appropriate  security  clearance  to  allow 
them to receive, transmit and jointly analyse financial intelligence with intelligence 
services  or  other  Relevant  Actors  handling  security  coded  data.  The  need  for 
appropriate  security  clearances  within  other  Relevant  Actors  should  also  be 
considered  so  that  classified  information  can  be  shared  and  jointly  analysed  where 
necessary. 

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2.5. 

2.6. 

2.7. 

2.8. 

2.9. 

Enhance mutual understanding among Relevant Actors 

Coordination in  the fight against terrorist financing is likely to  be facilitated where 
the  FIU  includes  a  dedicated  CFT  unit  facilitating  closer  coordination  with  CFT 
and CT experts in other Relevant Actors. Focused CFT experts within the FIU also 
ensure  a  greater  awareness  of  CFT  typologies  and  so  facilitate  identification  and 
prioritisation  of  high  risk  cases.  These  expert  units  should  ensure  a  multi-agency 
approach  through  structured  coordination  with  police,  prosecutors  and  intelligence 
services.  Such  units  should  be  encouraged  to  compare  approaches  with  their 
counterparts in other Member States. 

To  enhance  mutual  understanding,  particularly  where  no  formal  structures  exist, 
Member  States  should  encourage  secondment  of  investigative  magistrates, 
prosecutors, financial investigators, analysts and others to the FIU as well as to 
and from other Relevant Actors.  

Relevant  Actors  must  clearly  understand  each  other’s  roles  and  ensure  that 
systems are in place to allow information to move quickly to those best placed to 
act  on  it.  This  would  ensure,  for  example,  that  police  or  judicial  information  on 
known  suspects  is  rapidly  transmitted  to  Foreign  Ministry  officials  responsible  for 
requesting  designation  by  the  Council  or  the  UN  Security  Council  so  as  to  have 
preventive financial restrictive measures (sanctions) applied to their funds and assets. 
Investigating authorities should consider whether the requirements for administrative 
freezing measures are met and whether such freezing is opportune, and in appropriate 
cases,  formulate  request  for  application  of  such  measures.  Similarly  where  cash  is 
seized, whether at the border by customs or elsewhere, and there is a suspicion that 
this may be associated with terrorism, the FIU should be informed to raise prospects 
of finding linked information. 

Ensure optimal use of Financial Intelligence 

Use  of  key  words,  key  names  and  other  identifiers  to  encourage  immediate 
identification  of  terrorist  related  suspicious  transaction  reports.  Appropriate 
forms  of  co-operation  should  be  established  between  FIUs  and  operational 
information  on  suspicious 
specialised  services, 
transactions for intelligence purposes and possible disruption of terrorist acts. 

the  exchange  of 

including 

Combine skill sets  

The  complexity  of  CFT  work  is  such  that  know  how  and  expertise  must 
frequently  be  combined,  for  example,  by  allowing  experts  with  complementary 
skills  to  be  seconded  on  an  ad  hoc  basis  for  a  given  project,  investigation  or 
prosecution. One Member State illustrated this citing structures created which allow 
and  facilitate  a  prosecutor  with  expertise  in  financial  crime  to  act  jointly  with  a 
prosecutor with an anti-terrorism background in connection with CFT cases. 

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Outreach to wider Public  

2.10.  As  well  as  ensuring  that  employees  of  reporting  bodies  are  informed  of  typologies 
and  threats,  Member  States  in  conjunction  with  financial  and  other  institutions 
should  ensure  that  users  of  financial  services  are  informed  about  how  they  can 
assist both public and private sector efforts to combat the financing of terrorism 
and other financial crime. 

3. 

RELEVANT ACTORS AND THE PRIVATE SECTOR 

In  many  cases  it  is  not  so  much  the  financial  information  per  se  held  by  banks  and  others 
which is of vital importance to law enforcement efforts, but rather the intelligence which that 
information can provide. For this reason it is essential to ensure good coordination between 
Relevant Actors and  financial  institutions (and other money laundering reporting bodies) so 
that necessary information can be obtained easily and rapidly and with appropriate guidance 
from Relevant Actors.12 Public sector intelligence can be enhanced by financial institution 
input.  For  example,  in  some  Member  States  important  lead  information  has  been  obtained 
where sensitive information, such as data on forged identity documents, has been shared with 
financial institutions to identify and locate suspects. 

Access to Private Sector financial information 

3.1.  Measures  to  allow  competent  authorities  to  know  whether  a  person  subject  to 
investigation  has  or  has  had  a  bank  account  and  to  obtain  particulars  of 
accounts  and  banking  operations  according  to  Article  32  of  the  third  Anti-
Money  Laundering  (“AML”)  Directive13.  Some  Member  States  indicated  in 
answer to the above-mentioned questionnaire benefits of a national register of bank 
accounts  in  ensuring  rapid  identification  of  suspect  funds  and  accounts.  Such 
“registers”  may  range  from  a  single  central  (constantly  updated)  database  to 
encrypted  customer  lists  held  and  controlled  by  financial  institutions.  Financial 
Intelligence Unit (“FIU”) access on the basis of a suspicious disclosure report, would 
reveal on a hit/no hit basis whether a suspected person has or has had a bank account 
with  a  specified  institution.  An  alternative  model  would  allow  law  enforcement 
services investigating suspicion of terrorist financing to ask the FIU to enquire from 
financial  institutions  whether  the  suspect  holds  or  has  held  an  account.  The 
Commission will undertake further work in conjunction with Member States and the 
private sector to assess models to implement Article 32 of the above Directive. 

12 

13 

As  regards  international  cooperation  between  Relevant  Actors,  this  should  be  in  compliance  with 
Article  28  of  the  third  AML  Directive  and  should  enhance  and  not  reduce  exchange  of  intelligence 
between FIUs.  
Article 32 of the third Anti-Money Laundering Directive says “Member States shall require that their 
credit and financial institutions have systems in place that enable them to respond fully and rapidly to 
enquiries from the financial intelligence unit, or from other authorities in accordance with their national 
law,  as  to  whether  they  maintain  or  have  maintained  during  the  previous  five  years  a  business 
relationship with specified natural or legal persons and on the nature of the business relationship”  

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3.2. 

3.3. 

3.4. 

3.5. 

3.6. 

Intelligence  indicates  that  terrorists  have  used  well  known  money  transmission 
businesses  with  branches  in  different  Member  States  to  make  a  series  of  small 
transfers  destined  to persons associated with  extremist groups. Individually each of 
these  transfers  may  appear  legitimate.  Looked  at  collectively  they  may  raise 
suspicions.  Money  transmission  and  remittance  businesses  should  ensure  they 
have systems allowing them to comply with international standards on originator’s 
information  as  well  as  with  the  risk  based  approach  to  AML/CFT  measures, 
including appropriate monitoring of suspicions.  

Good practice indicates that suspicious activity should be reported to the FIU even 
where it does  not  relate to a transaction, such  as where strong  enough suspicion 
surrounds  a  financial  institution  rejection  of  an  application  to  open  an  account  for 
example where the person fails to provide adequate identifying information. 

Promoting Cooperation with Private Sector 

Encourage effective operation of liaison committees between one or more Relevant 
Actors  and  representatives  of  financial  and  credit  institutions  and  other 
reporting  bodies.  Regular  meetings  of  liaison  committees,  chaired  by  the  national 
CFT  coordinating  body  and/or  the  FIU,  are  an  essential  means  of  mobilising  and 
providing  outreach  to  the  private  sector,  informing  it  of  developing  typologies  in 
terrorist  financing  and  updating  risk  indicators.  In  addition  to  structured  liaison 
committees,  dedicated  CFT  contact  points  should  exist  in  financial  institutions  to 
facilitate  rapid  contact  by  FIU  and  other  Relevant  Actors.  Regular  feedback  to 
reporting bodies will help ensure high quality reports to FIUs.  

Reporting  bodies  operating  in  more  than  one  Member  State  should  aim  to  ensure 
coordination  among  national  compliance  officers,  for  example  through  a  “Europe 
compliance  function”.  This  would  seek  both  to  establish  links  between  suspicious 
transactions  identified  in  two  or  more  Member  States  and  to  establish  or  reinforce 
suspicions in the case of related transactions to or from two or more Member States. 

Secondment even for a short period, of financial police / FIU staff / intelligence 
personnel  to  private  sector  data  holders  should  be  encouraged.  This  enhances 
public sector understanding of how private sector data are managed and the ease or 
difficulty involved in retrieving certain types of information. 

PART  II  -  VULNERABILITIES  OF  NPOS  TO  TERRORIST  FINANCING  AND  OTHER  

CRIMINAL ABUSE 

1. 

EUROPEAN AND INTERNATIONAL CONTEXT 

The Commission’s October 2004 Communication on terrorist financing raised the possibility 
of  a  Code  of  Conduct  to  reduce  the  risk  of  abuse  of  the  non-profit  sector14.  The 
Recommendation and the Framework for a Code of Conduct presented in this document are 
therefore a follow-up to that Communication. While the focus of the present Communication 
is  to  prevent  abuse  of  NPOs  by  terrorist  financing,  the  enhanced  transparency  and 

14 

COM(2004) 700 of 20.10.2004 see Section 5.2 

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accountability measures will also help to protect organisations from other forms of criminal 
abuse.  The  Recommendation  and  the  Framework  for  a  Code  of  Conduct  should  therefore 
enhance donor confidence, encourage more giving, while preventing or at least reducing the 
risk of criminal abuse. 

Following  the  9/11  terrorist  attacks,  the  Financial  Action  Task  Force  (“FATF”)  adopted  a 
series  of  “Special  Recommendations”  specific  to  terrorist  financing.  These  included  a 
Recommendation15  that  countries  should  address  the  vulnerabilities  of  the  non-profit  sector. 
In  practice  Member  States  and  third  countries  have  found  it  difficult  to  implement  this 
element of the Special Recommendations. Significant discussions have taken place within the 
FATF on possible approaches. To date FATF members have been unable to agree a common 
approach to implementation of Special Recommendation VIII.  

The importance of the area has also been acknowledged by EU Member State Governments 
and other international bodies16. The EU Joint Strategy Paper17 on Terrorist Financing and the 
European Council Conclusions of 16-17 December 2004 asked the Commission to address the 
misuse of NPOs for terrorist financing purposes. The Council Declaration on the EU response 
to the London bombings of 13th July 2005 calls on the Council to “agree a Code of Conduct to 
prevent the misuse of charities by terrorists”.  

Taking  account  of  the  potential  vulnerabilities  of  the  non-profit  sector  to  terrorist  financing 
and  other  criminal  abuse,  the  Commission  addresses  a  Recommendation  to  Member  States 
and a Framework for a Code of Conduct for NPOs acting in the European Union. 

The  Commission  has  extensively  consulted  with  Member  States  and  the  non-profit  sector 
during  the  preparation  of  the  Recommendation  and  Framework  for  a  Code  of  Conduct 
including an eight week internet-based public consultation. 

2. 

IMPLEMENTATION AT THE EUROPEAN LEVEL 

The Commission should assure further dialogue with the non-profit sector on the follow up 
to  the  Recommendation  and  Framework  for  a  Code  of  Conduct  presented  in  this 
Communication.  

In particular, during the course of first half of 2006, the Commission will set up an informal 
contact  group  and  organise  a  conference  with  representatives  of  the  non-profit  sector  and 
relevant  authorities  to  consider  possible  ways  of  further  implementation  of  principles  laid 
down in the Recommendation and Framework for a Code of Conduct.  

15 

16 

17 

Special  Recommendation  VIII  states:  « …Non-profit  organisations  are  particularly  vulnerable,  and 
countries should ensure that they cannot be misused (i) by terrorist organisations posing as legitimate 
entities;  (ii)  to  exploit  legitimate  entities  as  conduits  for  terrorist  financing…and  (iii)  to  conceal  or 
obscure the clandestine diversion of funds intended for legitimate purposes to terrorist organisations.” 
The Financial Action Task Force in its Special Recommendation VIII; G8 Finance Ministers, “Finance 
Ministers’  Statement”  of  Deauville,  17  May  2003;  G8  Justice  and  Home  Affairs  Ministers, 
“Recommendations  for  Enhancing  the  Legal  Framework  to  Prevent  Terrorist  Attacks”,  Washington,  
11 May 2004. 
ibid 

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It should be further discussed with relevant stakeholders how partnership between NPOs and 
state  authorities  could  be  developed  to  find  an  appropriate  balance  between  statutory  and 
self-regulation for the non-profit sector. 

The  European  Commission  will  further  consider  whether  in  certain  circumstances, 
Community funding of NPOs could be linked to compliance with enhanced transparency and 
accountability measures. 

The Commission will assess the results achieved by the Recommendation and Framework 
for a Code of Conduct three years from its date of adoption. 

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ANNEX 

Recommendation for Member States and a Framework for a Code of Conduct for NPOs 
to Enhance Transparency and Accountability in the Non-profit Sector to Prevent 
Terrorist Financing and other Types of Criminal Abuse 

1. 

INTRODUCTION 

The  non-profit  sector  carries  out  vital  humanitarian  and  other  much  needed  public  work, 
where  citizens  benefit  from  their  indispensable  services  in  fundamental  areas  of  life.  NPOs 
are  essential  parts  of  democratic  societies  that  often  fulfil  crucial  tasks  that  other  types  of 
organisations or public bodies cannot achieve. 

However,  there  is  evidence  that  in  several  instances  NPOs  have  been  exploited  for  the 
financing  of  terrorism  and  for  other  criminal  ends18  and,  in  some  cases,  administrative 
freezing measures19 have been imposed to prevent such exploitation. Terrorists and terrorist 
organisations can access finance through different sources. Money can be transferred through 
the  financial  sector,  through  wire  transfers,  alternative  remittance  systems  and  via  cash 
courriers,  but  funds  can  also  be  moved  and  raised  under  the  cover  of  NPOs.  The  Financial 
Action  Task  Force  stated  in  its  Report  on  Money  Laundering  and  Terrorist  Financing 
Typologies  2003-2004  that  “The  case  examples  presented  during  this  year’s  typologies 
exercise appeared to show that NPOs can be misused in a variety of ways and for different 
purposes  within  the  framework  of  terrorism  financing.  First  of  all,  NPOs  can  be  used  by 
terrorists and  terrorist organisations  to  raise  funds, as was the case for many of the larger 
NPOs that had their assets frozen on the basis of the UN Security Council Resolution 1373 
(2001)…. A number of the experts noted the importance of informal cash collection in many 
ethnic  or  religious  communities  and  the  difficulties  in  accurately  monitoring  those  funds…. 
NPOs  can  also  be  used  by  terrorists  to  move  funds….  Finally,  NPOs  can  also  be  used  to 
provide direct logistical support to terrorists or serve as a cover for their operations.” 20 

Higher and/or more systematic standards of transparency and accountability applied by NPOs 
will  help  to  strengthen  the  non-profit  sector  against  criminal  abuse.  The  present  document 
aims to find an approach that minimises this risk of abuse without over-burdening the sector. 
The basic principles set out in the Communication should in no way be interpreted so as to 
restrict the freedom of association. Particular attention should be paid to data protection rules. 
Moreover, implementation of the Recommendation to Member States and the Framework for 
a Code of Conduct should not jeopardise the efficient provision of emergency relief and other 
non-profit activity where needed. Care must be taken to ensure that nothing is done that could 

18 

19 

20 

of 

the 

Experts of the FATF analysed cases of misuse of NPOs for terrorist financing for example in the Report 
on  Money  Laundering  and  Terrorist  Financing  Typologies  2003-2004  available  at  http://www.fatf-
gafi.org/dataoecd/19/11/33624379.PDF;  other  examples  can  be  found  at  the  homepage  “Inquiry 
at 
Reports” 
http://www.charitycommission.gov.uk/investigations/inquiryreports/inqreps.asp 
The  freezing  measures  are  based  on  Regulation  (EC)  No  881/2002  of  27  May  2002  (OJ  L  139, 
29.5.2002,  p.9)  as  amended,  or  on  Regulation  (EC)  No  2580/2001  of  27  December  2001  (OJ  L  344, 
28.12.2001, p.70) as amended. 
See pages 8-10 in the Report on Money Laundering and Terrorist Financing Typologies 2003-2004 at 
http://www.fatf-gafi.org/dataoecd/19/11/33624379.PDF 

and  Wales 

Commission 

England 

Charity 

for 

EN 

11 

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undermine  the  work  or  reputation  of  the  vastest  majority  of  NPOs  legitimately  operating  at 
national, EU and international levels. 

NPOs  in  the  European  Union  are  very  heterogeneous  in  size  and  legal  form21.  For  the 
purposes  of  the  Recommendation  to  Member  States  and  the  Framework  for  a  Code  of 
Conduct,  NPOs  are  deemed  to  be  organisations,  legal  persons,  legal  arrangements  whose 
principal  purpose  is  to  “engage  in  the  raising  and/or  disbursing  funds  for  charitable, 
religious22, cultural, educational, social or fraternal purposes, or for the carrying out of other 
types  of  good  works.”23.  For  reasons  of  diversity,  it  would  be  appropriate  to  avoid  a  “one-
size-fits-all” approach24. Furthermore, the Recommendation and the Framework for a Code of 
Conduct  should  not  in  any  way  hinder  legal  cross  border  activities  of  NPOs.  The  aim  of  a 
European approach is thus to establish common principles on which national implementation 
can be based.  

2. 

RECOMMENDATION  TO  MEMBER  STATES  TO  ADDRESS  THE  VULNERABILITIES  OF 
THE  NON-PROFIT  SECTOR  TO  TERRORIST  FINANCING  AND  TO  OTHER  CRIMINAL 
ABUSE 

The following Recommendation is addressed to Member States to help them to assess how far 
progress has been achieved in the fight against the misuse of NPOs for terrorist financing and 
other criminal purposes and to identify what further measures could be taken at the national 
level.  Member  States  should  encourage  NPOs  to  apply  enhanced  transparency  and 
accountability  measures  in  their  daily  management  in  order  to  reduce  the  scope  of  their 
misuse  for  criminal  purposes.  Member  States  should  ensure  that  their  national  non-profit 
sector is fully engaged in implementation at national level. 

2.1. 

Oversight of the non-profit sector  

–  Member  States  should  ensure  that  they  have  oversight  of  their  non-profit  sector.  The 
oversight  role  could  either  be  dedicated  to  a  single  public  body  or  entrusted  to  existing 
authorities or to self-regulatory bodies.  

–  Bodies that have oversight of the non-profit sector, or a part of it, should ensure efficient 

national cooperation. In this role, they should: 

21 

22 

23 

24 

The diversity of the sector has already been described by the Commission Communication “Promoting 
the role of voluntary organisations and foundations in Europe” COM(1997) 241. 
Declaration 11 in the Annex to the Amsterdam Treaty states “The European Union respects and does 
not prejudice  the  status under  national  law  of  churches  and  religious associations or communities  in 
the  Member  States.  The  European  Union  equally  respects  the  status  of  philosophical  and  non-
confessional organisations.” 
Based on the definition given by the Financial Action Task Force Special Recommendation VIII Best 
Practices Paper. 
To  avoid  such  an  approach,  the  registration  of  those  NPOs  is  suggested  that  are  wishing  to  take 
advantage  of  special  tax  treatment,  access  to  public  grants,  the  right  to  public  fundraising;  the 
Framework  for  a  Code of  Conduct  emphasises  the  application  of  simplified  accounting  and reporting 
rules for NPOs under a certain size. 

EN 

12 

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•  Operate  publicly  accessible  registration  systems  for  all  NPOs  operating  on  their 
territory and wishing to take advantage of preferential tax treatment, the right to 
public  fundraising  and  access  to  public  sector  grants.  These  registration  systems 
might be operated at national, regional or municipal level. Special attention has to 
be given that the registration fully respects the principle of freedom of association. 
Thus,  registration  would  take  the  form  of  a  notice  of  constitution  rather  than  a 
prior approval for constitution; 

•  identify  existing  requirements  on  NPOs  to  avoid  duplication  of  registration/ 

reporting obligations;  

•  Identify  any  categories  of  NPOs  that  fall  outside  the  limit  of  their  registration 

systems and mitigate the risk that these gaps might pose; 

•  Provide guidance to NPOs on financial transparency and on vulnerabilities of the 

sector; 

•  There  should  be  coordination  among  competent  bodies  with  regard 

to 
investigation of abuse of NPOs. Investigation should follow existing criminal law 
procedures.  Competent  bodies  should  also  have  the  capacity  to  assess  risk  of 
abuse of individual NPOs; 

•  Tax  Authorities  should  be  encouraged  to  carry  out  reviews  of  NPOs  receiving 
special  tax  treatment,  with  due  consideration  of  the  size  and  activity  of  the 
organisation. 

2.2. 

Encourage compliance with Code of Conduct 

To promote compliance, Member States should consider the following issues: 

–  Registration, enhanced transparency and accountability standards confirm a visible status 
for NPOs and help to acquire and maintain public trust and credibility of non- profit work; 

–  Privileged  Tax  Status,  the  award  of  public  grants  and  the  right  to  public  fundraising 
could  be  offered  to  all  NPOs  fulfilling  the  registration  requirement  and  complying  with 
transparency  and  accountability  measures.  A  mechanism  to  ensure  compliance  may  be  a 
certification model as described below;  

–  It  may  be  appropriate  in  the  future  to  consider  including  the  transparency  and 
accountability  principles  proposed  in  the  Framework  for  a  Code  of  Conduct  in  existing 
labels or in labels to be developed. Such systems could be run by public or private bodies 
and  would  examine  compliance  of  NPOs  with  the  transparency  and  accountability 
measures;  

–  Private monitoring bodies or non-profit umbrella organisations should be encouraged to 
establish  seals  of  approval  or  other  similar  mechanisms  for  NPOs  compliant  with  the 
principles of the Framework for a Code of Conduct.  

EN 

13 

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2.3. 

Outreach  and  Vulnerabilities  of  NPOs  to  Terrorist  Financing  and  other 
Criminal Purposes 

Intelligence continues to indicate25 that misuse of the non-profit sector remains to be one of 
the methods used by terrorists to raise funds to finance their activities. It is therefore of key 
importance  that  Member  States  and  NPOs  are  fully  aware  of  how  organisations  may  be 
misused for terrorist financing and other criminal purposes.  

–  NPOs should be encouraged to assess their existing good practices to strengthen further 

the prevention of their misuse for terrorist financing and other criminal purposes; 

–  With the involvement of key actors of the non-profit sector, Member States should initiate 

awareness programmes for NPOs on risks/vulnerabilities of the sector to abuse; 

–  Guidance should be provided for the private sector (financial institutions, accountants, 
auditors and lawyers dealing with the non-profit sector) to facilitate detection of suspicious 
activity/transactions,  including  techniques  notably  used  for  infiltration  of  NPOs  by 
terrorists. 

2.4. 

Investigation of abuse of NPOs 

The investigation should be proportionate to the weight of identified risk and follow existing 
criminal law procedures.  

–  Co-operation/information  exchange  at  national  level  should  be  led  and  coordinated,  if 
possible, by one of the competent authorities with responsibility for overseeing NPOs and 
include  Tax  Authorities,  Financial  Intelligence  Unit,  and  law  enforcement  services.  To 
facilitate  national  level  information  exchange,  a  person  should  be  nominated  in  each  of 
these entities representing the single point of contact for information exchange purposes in 
cases  related  to  misuse  of  NPOs  for  terrorist  financing.  Dedicated  information  gateways 
should be established among these entities to ensure rapid and effective exchange.  

–  Co-operation/information  exchange at  EU/international level should comprise a network 
made up of law enforcement single contact points with expertise in terrorist financing and 
knowledge of the NPO sector. The Commission will promote the use of existing EU level 
co-operation/information  exchange  networks  among  law-enforcement  authorities  and, 
where  appropriate,  other  bodies  competent  to  investigate  possible  abuse  of  NPOs.  The 
European Anti Fraud Office (OLAF) could fulfil a particular role in this co-operation and 
information exchange. The role of CEPOL (European Police College) could be crucial in 
training  senior  police  officers  in  highlighting  vulnerabilities  of  the  sector,  typologies  of 
abuse, promoting cooperation/information exchange. 

25 

See  for  example  Europol’s  « Overview  of  the  fight  against  financing  of  terrorism  in  the  European 
Union » Restricted 1st June 2005 

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3. 

CONSIDERATIONS  FOR  THE  NON-PROFIT  SECTOR  -  FRAMEWORK  FOR  A  CODE  OF 
CONDUCT  FOR  NPOS  TO  PROMOTE  TRANSPARENCY  AND  ACCOUNTABILITY  BEST 
PRACTICES 

In a non-profit sector where enhanced levels of transparency and accountability are applied, 
there  is  less  possibility  for  criminal  abuse  to  occur.  A  considerable  part  of  NPOs  already 
follows most of the requirements set out in this document and many have also created their 
own  Codes  of  Conduct.  By  applying  these  rules,  NPOs  demonstrate  their  responsibility 
towards  public  generosity  and  strengthen  themselves  against  criminal  abuse.  The  principal 
aim  of  the  requirements  of  this  Framework  for  a  Code  of  Conduct  is  thus  to  find  common 
general  minimum  transparency  standards  for  NPOs  in  the  European  Union  and  to  promote 
further discussions in this area. 

–  The  NPOs  should  pursue  the  mission  purpose  of  the  organisation  and  should  use  their 

resources for these purposes. 

–  Responsibility  of  legal  compliance  should  lie  with  the  highest  governing  body  of  the 

organisation. 

–  All  NPOs  should  produce  a  document  containing  identification  information  on  the 
organisation.  This  record  should  be  kept  up  to  date  and  available  at  the  NPO’s  office. 
Registered  NPOs  should  send  this  identification  information  to  the  body  responsible  for 
fulfilling  relevant  registration  functions. This  body  should  be  informed  of  changes  in  the 
key  features  of  the  organisation  and  of  winding-up  of  the  organisation  (together  with  a 
statement on how the net assets of the NPO will be distributed). 

The information should clearly identify the NPO. In addition to the formal name of the NPO, 
additional  information  could  include  any  commonly  used  acronym  or  other  informal  name, 
business/working  name  and  registration  number  (if  appropriate).  It  would  further  include 
information on the address of the registered office, telephone/fax number/web site address and 
a  record  of  previous  addresses  and  changes  of  address.  Details  of  sub  branches  of  the 
organisation  would  also  be  included.  A  statement  of  the  General  Objectives,  Policies  and 
Priorities (mission purpose) of the NPO should be further mentioned, including a description 
of  the  NPO’s  organisational  and  decision-making  structure  -  reflecting  the  size  of  the 
organisation and indicating internal financial control systems. The document should identify 
directors/  executive  committee  members  or  other  decision  makers  of  the  organisation  and 
their  responsibilities.  Where  appropriate  the  beneficial  owner  of  the  NPO  would  also  be 
identified. 

List of the bank account numbers under the name of the NPO and any data on personal details 
should be kept confidentially on the register and at the NPO’s office. 

–  NPOs  should  follow  proper  book-keeping  practice  and  produce  annual  financial 
statements  of  income  and  expenditure.  A  report  should  be  prepared  annually  containing 
the  description  and  budget  of  activities,  projects  over  the  previous  financial  year  and 
include a statement of how these have promoted the NPO’s General Objectives. In order to 
avoid  overburdening  NPOs  with  excessive  administrative  requirements,  Simplified 
accounting  and  reporting  requirements  should  apply  to  NPOs  under  a  certain  size26. 

26 

Member  States  might  determine  other  criteria  (e.g.  areas  of  activity)  for  NPOs  subject  to  simplified 
accounting and reporting requirements. 

EN 

15 

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Financial  statements  and  reports  should  be  kept  available  at  the  office  of  the  NPO 
accessible at request of public authorities having oversight responsibility.  

–  Annual financial  statements  and  reports, minutes  of  meetings  of  decision  making  bodies, 
records on audit trails27 should be held for at least 5 years at the registered office of the 
NPO.  

–  NPOs should use formal channels for money flows for all transactions, whenever there is 
a  reasonable  possibility  to  use  the  formal  financial  system.  To  the  extent  practicable,  all 
money  received  should  be  deposited  in  bank  accounts  and  the  disbursement  of  money 
should be performed by means of these bank accounts.  

–  All NPOs should follow the “Know your beneficiaries and associate NPOs” rule, which 
means  that  the  NPO  should  make  best  endeavours  to  verify  the  identity,  credentials  and 
good  faith  of  their  beneficiaries  and  associate  NPOs.  This  could  include  for  example,  in 
advance of payment, the NPO determining that the potential recipient has the ability both 
to accomplish the charitable purpose of the grant and protect the resources from diversion 
to  non-charitable  purposes.  Where  practicable,  the  NPO  should  reduce  the  terms  of  the 
grant to a written agreement and engage in on-going monitoring. 

–  NPOs  should  keep  full  and  accurate  audit  trails  of  funds  transferred  outside  their 
jurisdiction/ country and of funds transferred to any person delivering service on behalf of 
the  originator  NPO.  This  could  include  keeping  appropriate  records  of  all  financial 
transactions to direct intermediary organisations and persons. 

27 

As described at point addressing requirements on audit trails of funds. 

EN 

16 

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