Tax Client Alert, March 2006

On December 5, 2005, the Treasury Department released its revised proposed Anti-Terrorist Financing Guidelines¹ (the "Revised Guidelines"), which set forth voluntary best practices for charities based in the United States. The original proposed guidelines, released in 2002, were revised to reflect ongoing dialogue with government authorities and the charitable sector. Comments on the Revised Guidelines, which will be considered in the process of finalizing the guidelines, were accepted until February 1, 2006. The Revised Guidelines include guidance for U.S.-based charities regarding:

1. corporate governance, such as the minimum number of board members that a charity should have, and the contents of a charity’s governing instruments,

2. financial practices, such as annual audits, and the form in which a charity should make disbursements,

3. maintenance of records concerning the home addresses, social security numbers, citizenship status, etc. of directors, trustees, and key employees, as well as public disclosure of any affiliated organizations receiving resources from the charity, and

4. anti-terrorist financing, such as collection of detailed information about foreign recipients of charitable funds and in-kind contributions.

The Revised Guidelines have been met with resistance by some members of the nonprofit community, who have called for the Revised Guidelines to be replaced by the Principles of International Charity (the "Principles")², which are alternate anti-terrorist financing guidelines developed by the Treasury Guidelines Working Group of the Charitable Sector Organization and Advisors, a representative group comprised of over forty U.S. charities, foundations, religious organizations, corporations, umbrella associations, watchdog groups, and advisors (the "Working Group"). The Principles represent a less restrictive approach to eliminating inadvertent terrorist support by U.S. charities and allow those charities to tailor anti-terrorist financing procedures to their particular needs with reference to the activities undertaken by each organization.

A letter sent on behalf of the Working Group by the President of the Council on Foundations, a membership organization of more than 2,000 grant-making foundations and giving programs worldwide, to the Treasury Department on February 1, 2006, describes the concerns of some in the nonprofit community with respect to the Revised Guidelines.³ The Working Group concluded that although the Treasury Department emphasized that the Revised Guidelines were intended to assist charities attempting to protect themselves from terrorist abuse, the Revised Guidelines suggested onerous and potentially harmful procedures to charities.

For example, the Revised Guidelines include language that might imply that charitable organizations are agents of the U.S. Government. Because many charities require humanitarian workers to provide services in dangerous parts of the world, any indication that these workers are closely associated with the U.S. Government, rather than independent, could put these workers in jeopardy.

Additionally, the Revised Guidelines indicate that charities should collect an amount of information on individuals and organizations that has been recognized by the Working Group and other organizations as beyond the capacity of many charitable organizations. Information required to be collected under the Revised Guidelines include, for each recipient of the charity’s funds or in-kind contributions, the recipient’s name in English, in the language of origin, and any acronyms or other names used to identify the recipient; jurisdictions in which the recipient maintains a physical presence; any reasonably available historical information about the recipient that assures the charity of the recipient’s identity and integrity; the address and phone number of each place of business of a recipient; a statement of the principal purpose of the recipient; the names and addresses of individuals, entities, or organizations to which the recipient does, or will, provide funding or services; the recipient’s sources of income, such as grants, private endowments, and commercial activities; and the names, nationality, citizenship, country of residence, and place and date of birth for each of the recipient’s board members and key employees.

Some members of the nonprofit community are concerned that the information collection requirements may result in tension between domestic charities and foreign recipients of charitable funds and services, because foreign recipients may not want information about their board members and key employees reported to a U.S. charity.

Finally, the Working Group has expressed concern that, although the Revised Guidelines are described by the Treasury Department as "voluntary," they will evolve into de facto legal requirements through incorporation into other federal programs. For example, under current law, if a domestic private foundation makes a grant to a foreign entity, the IRS will treat the recipient as if it were an organization described in section 501(c)(3) of the Internal Revenue Code ("IRC") if the foundation manager "reasonably believes" the grantee is organized and operated as such.⁴ Some charitable organizations have suggested that the "reasonably believes" standard could be altered such that a foundation manager will be considered to "reasonably believe" that a recipient foreign organization is operated as an organization described in IRC § 501(c)(3) only if the private foundation followed the Revised Guidelines.

Although the Revised Guidelines are ostensibly non-binding "best practices" for domestic charities, some members of the nonprofit community are concerned that they may ultimately become requirements that must be met. The final version of the guidelines have not yet been released and may incorporate changes suggested by the Working Group and charitable organizations. As currently drafted, however, the Revised Guidelines contain provisions with which some nonprofit organization may find it impossible to comply. Thus, because the Revised Guidelines are, at present, considered "voluntary," charitable organizations may want to conduct their own risk-assessment, determine their level of exposure, and then implement those practices that are not too burdensome or that make sense for their organization.

A word of caution, however: charitable organizations are required to comply with both U.S. laws and relevant laws of foreign jurisdictions in which they conduct charitable work. Under U.S. laws, domestic charitable organizations engaged in charitable work abroad are barred from knowingly providing material support for specific acts of terrorism.⁵ U.S. charities are also prohibited from engaging in transactions with individuals and organizations appearing on the Specially Designated Nationals and Blocked Person List⁶ (the "SDN List").⁷ Additionally, under current law, certain charitable organizations that make contributions to foreign organizations are subject to expenditure responsibility and other monitoring and due diligence requirements.

In sum, charitable organizations may choose to adopt certain practices, in addition to those required by the law, to ensure that their grantmaking does not raise concerns. To that extent, the Revised Guidelines and/or the Principles are sources of "best practices" that may help reduce the risk of inadvertently financing terrorist activities.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.