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NGO Finances and Social Entrepreneurship

Laws and Regulations Affecting Social Entrepreneurship: Best Practices in Financial Regulation of NGOs. Kareem Elbayar, Legal Advisor - Middle East / North Africa The International Center for Not-for-Profit Law (ICNL). NGO Finances and Social Entrepreneurship.

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NGO Finances and Social Entrepreneurship

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  1. Laws and Regulations Affecting Social Entrepreneurship: Best Practices in Financial Regulation of NGOs Kareem Elbayar, Legal Advisor - Middle East / North Africa The International Center for Not-for-Profit Law (ICNL)

  2. NGO Finances and Social Entrepreneurship • With the exception of registration, NGO finance rules are among the most important issues in the lifecycle of an NGO • Unfortunately NGOs throughout the Arab region and especially in the GCC are hampered by inappropriate restrictions on foreign and domestic fundraising

  3. Why consider NGO finance rules? • Strengthen the independence and effectiveness of the sector • Reduce strain on government budget and infrastructure • Increase innovation • Limit reliance on foreign funding • Increase NGO ability to deliver services • Institutionalize NGO/government partnerships • Improve NGO accountability and connection to society • Further NGO independence

  4. NGO Finance Rules in the Arab World • Foreign and domestic fundraising prohibited without prior government approval • Approval process is time-consuming • Government discretion to approve or deny requests is nearly unlimited • Income-generating activities are of uncertain legality • Severe criminal punishments in NGO laws act as major disincentive – compare to corporate codes

  5. International Law • UN Declaration on Human Rights Defenders (1998): Requires states to provide the “right, individually and in association with others, to solicit, receive, and utilize resources for the express purpose of promoting and protecting human rights and fundamental freedoms” (Article 13). • The UN High Commissioner for Human Rights has explicitly stated that the Declaration’s protections extend to the “receipt of funds from abroad.”

  6. International Law • International Covenant on Civil and Political Rights: “Everyone shall have the right to freedom of association with others…No restrictions shall be placed on the exercise of this right other than those which are prescribed by law and which are necessary in a democratic society in the interests of national security or public safety, public order, the protection of public health or morals, or the protection of the rights and freedoms of others.” (Article 22) • Bilateral Investment Treaties • Example: US-Jordan and US-Bahrain treaties define “company” as including “not-for-profit associations” and require “free transfers of funds” without “unreasonable and discriminatory measures”

  7. International Best Practices • The Financial Action Task Force – Special Recommendation VIII • Does not recommend government pre-approval of foreign funding or other NGO financing. • Instead, FATF suggests Four Elements to Combating Terrorist Financing in NGOs: • Outreach to the sector, • Supervision or monitoring, • Effective investigation and information gathering, and • Effective mechanisms for international cooperation.

  8. FATF Policy Recommendations • According to FATF, States should require NGOs to: • conduct transactions via regulated financial channels; • maintain publicly-available information on the purpose and objectives of their activities and the identities of people who own, control, or direct their activities; • issue annual financial statements that provide detailed breakdowns of incomes and expenditures; • have appropriate controls in place to ensure that funds are accounted for and spent in accordance with the purpose and objectives of the NGO; • make best efforts to confirm the identities of their beneficiaries and partner organizations and document the identity of their significant donors; • maintain, for at least five years, publicly-accessible and detailed records of domestic and international transactions.

  9. Public Policy Considerations • Attracting international capital and expertise • Allocating limited government resources

  10. A Better Approach • Advance permission is generally inappropriate. The government should not be permitted to screen or require approval of specific grants or sources of funds. • Foreign funding should be permitted so long as organizations comply with applicable customs and foreign exchange rules. • Economic Activity: NGOs should be permitted to engage in any lawful economic, business, or commercial activity provided that: • No profits or earnings are distributed to founders, members, officers, directors, or employees; AND • The NGO is organized and operated principally for the purpose of conducting not-for-profit activities. (Principal Purpose Test)

  11. A Better Approach • Special criminal punishments for NGOs should be removed • FATF states that any violations of these recommendations should be remedied by a “range of sanctions” that includes “freezing of accounts, removal of trustees, fines, de-certification, de-licensing, and de-registration…” • Money laundering and terrorist finance should be dealt with in banking laws, sanction and list checking rules, and criminal codes

  12. Banking Laws • Banking laws should provide for: • Currency Transaction Reporting (reporting by banks to government officials of withdrawals or deposits of large sums of cash) , and • Suspicious Activity Reporting (reporting by banks to government officials of suspicious account patterns or customer behavior). • This is superior because • Banks are independent third parties with no stake in the outcome and incentives to obey the law, and • Banks have the best information to identify “red flags” and risk factors.

  13. Other Relevant Laws • Sanctions and list checking laws • Prohibit all individuals, companies, and organizations from doing business with certain designated groups • Criminalization of terrorist acts • Terrorism is best dealt with in the Criminal Code • This is more effective than prior approval because • These laws apply to all persons who might be involved with suspect activities • They directly target the prohibited behavior

  14. Other Issues for NGOs in the Arab World • Mandatory Registration • Difficult Registration • Inappropriate Discretion for Government Actions • Involuntary Dissolution • Criminal Punishments

  15. For more information • Please contact Kareem Elbayar at the International Center for Not-for-Profit Law at • Phone: +1 202 452 8600 x. 229 • Email: kelbayar@icnl.org • Web: http://www.icnl.org/

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