I found this document entitled NPO Sector Review that had been obtained through access to information. It is from 2015 and deals with CRA‘s review of the NPO sector which includes both nonprofit organizations and registered charities. The document provides CRA’s argument that Canadian oversight over registered charities is enough and there is no need to worry about regulation of non-profits in regards to terrorism.
For those who are normal and don’t know about the Financial Action Task Force or FATF, it is an important international organization working to stop terrorism and money laundering. FATF is a very important organization because if they make a determination that your country is not pulling its weight in complying with certain requirements, they can blacklist your financial services industries and create huge problems for a country.
The FATF definition of an NPO is “A legal person or arrangement or organisation that primarily engages in raising or disbursing funds for purposes such as charitable, religious, cultural, educational, social or fraternal purposes, or for the carrying out of other types of “good works”.”
This definition is important and we will get back to it.
The CRA divides the NPO sector into “Service Organizations” and “Expressive Organizations”.
Service Organizations include housing, health, education, and social services.
Expressive Organizations include advocacy, interest representation, sports and recreation, arts and culture, and religion.
The report notes on page 7:
According to CRA data from 2010, charities represent a significant portion of the financial resources of the overall NPO sector in Canada, accounting for 68% of all revenues in the sector and nearly 96% of all donations. In addition, they account for a substantial share of the sector’s foreign activities, as 75% of international not-for-profit organizations in Canada are registered charities.
If 68% of the broader NPO sector revenue goes to registered charities, then presumably the remainder (32%) goes to nonprofit organizations that are not registered charities. If 32% of the broader NPO sector’s revenue is non-profits, that is not a small amount of money. Remember that in 2015 the registered charity sector alone had revenue of about $251 billion. So, while I disagree with the CRA minimizing the importance of the NPO part of the sector, this estimate of the breakdown between charity sector and NPO sector is interesting and important.
The CRA notes:
The activities conducted by service organizations, including education and social services, are consistent with those outlined in the FATF’s functional definition of NPO. As indicated in the previous section of this document, the majority of organizations involved in such activities in Canada, are registered charities.
It is probably fair to say that “the majority of organizations” that are “service organizations” are registered charities.
CRA notes:
In the course of conducting its national risk assessment, the CRA conducted an analysis of 30 Canadian case studies to determine whether the findings of the FATF Typologies Report held true domestically. The cases of abuse or risk observed by the CRA in the Canadian charitable sector generally corresponded to the findings of the FATF Typologies Report. In a sample of 30 cases where CRA identified abuse or substantial risk related to terrorism in the Canadian charity sector, all the charities involved fell under the ‘service’ classification.
CRA also notes:
NPO Sector Review
A large portion of organizations in Canada – including charities focused on health and housing and NPOs engaged in activities such as advocacy, interest representation and sports and recreation – do not fall within the scope of the FATF definition of NPO (see Figure 3 above). This is due to the fact that the majority of these organizations either heavily rely on the government for funding, or obtain the funds they need to conduct their activities through the sales of goods and services, membership fees, donations from households and corporate donations. They are not, in other words, “primarily engaged in the raising or disbursing of funds”, and are therefore not inherently vulnerable to terrorist financing abuse. That said, it should be noted that the heavy reliance of some of these organizations on public funds means they are extensively regulated by the government, which maintains some authority to dissolve, amalgamate or prevent their dissolution.CONCLUSION
The aim of Recommendation 8 is to address only those NPOs falling within the FATF definition (i.e., those primarily engaged in raising or disbursing funds for the carrying out of good works). Such NPOs are a subset of the broader NPO sector that, by virtue of the activities it undertakes, faces a greater risk. One of the inherent challenges in assessing the risk of terrorist abuse in the sector is defining what constitutes a non-profit organization under Recommendation 8. This sector review establishes that in the Canadian context, registered charities are the organizations that fall within the FATF definition of NPO.
Such organizations must be established and operated for charitable purposes, such as the relief of poverty, advancement of education, advancement of religion, or other purposes beneficial to the community. Registered charities are well positioned to raise and disburse funds for these purposes, due to their ability to issue donation receipts, and to receive and accept gifts and from other qualified donees. Since they are required to abide by rules and regulations to maintain their status, registration further provides charities with credibility in the community, thereby increasing their appeal to potential donors.
It is important to note, however, that not all registered charities meet the FA TF’s functional definition. As noted earlier in this document, while being registered as charities, service organizations such as those focused on health receive the majority of their financing from the government and have limited involvement in the ‘raising or disbursing’ of funds, a key component of the FATF’s definition of NPO. While they may not fall within the FATF definition, the CRA still regulates these and many other organizations, and has the ability to access the information it collects should the need ever arise. In other words, the CRA maintains detailed information on portion of the NPO sector that encompasses more than those organizations falling within the FATF definition of NPO. Canada has reviewed existing studies and analyses of its NPO sector, and obtained a good understanding of the types of organizations operating within it. The cases of abuse or risk observed domestically supported the FATF Typologies Report’s finding that service organizations were the ones most at risk of terrorist financing abuse. As previously noted, service organizations, in Canada, are registered charities. Having identified this group as the subset of NPOs falling with the FATF definition,
Canada has been able to apply mitigating measures accordingly, and in so doing has been able to further protect its NPO sector from terrorist financing abuse.
Failure by CRA to understand that nonprofits can be quite obviously involved in supporting terrorism results in a huge gap in the oversight of the Canadian nonprofit sector.
Do we remember February of 2022. One of the largest challenges to Canada over the last few years was fundraising for the blockade in Ottawa and certain other places across Canada. As we have noted before, the organization that was to receive the vast amount of crowd-sourced and other funds was in fact a Federal nonprofit organization that was not a registered charity. Some would argue that a few of those involved in the blockade were conducting themselves in a way could be labelled terrorism. The Guardian notes: “Itac reported that supporters of the convoy have “advocated civil war”, called for violence against prime minister Justin Trudeau, and said the protest should be “used as Canada’s ‘January 6’”, in a reference to the storming of the US Capitol.”
The Criminal Code provides that terrorism is “an act or omission, in or outside Canada,
(i) that is committed
(A) in whole or in part for a political, religious or ideological purpose, objective or cause, and
(B) in whole or in part with the intention of intimidating the public, or a segment of the public, with regard to its security, including its economic security, or compelling a person, a government or a domestic or an international organization to do or to refrain from doing any act, whether the public or the person, government or organization is inside or outside Canada, and
(ii) that intentionally
(A) causes death or serious bodily harm to a person by the use of violence,
(B) endangers a person’s life,
(C) causes a serious risk to the health or safety of the public or any segment of the public,
(D) causes substantial property damage, whether to public or private property, if causing such damage is likely to result in the conduct or harm referred to in any of clauses (A) to (C), or
(E) causes serious interference with or serious disruption of an essential service, facility or system, whether public or private, other than as a result of advocacy, protest, dissent or stoppage of work that is not intended to result in the conduct or harm referred to in any of clauses (A) to (C),
The blockade ultimately resulted in a state of emergency being declared in Canada. I’m not sure how much more obvious it has to be that nonprofits can be involved in fundraising for nefarious and illegal purposes including but not limited to terrorism.
CRA is relying on its questionable interpretation of the FATF definition of NPO to essentially argue that there should be almost no oversight for nonprofits unless they are registered charities who are service organizations.
Hopefully someone at CRA, and perhaps more importantly at Finance, will be doing some thinking about how, while some terrorists may prefer to use a registered charity because they’re ‘philanthropically minded’ terrorists, there are other terrorists who are fine to have the bank account in the name of a nonprofit that’s not a registered charity. And yes, they understand that when they intimidate people to give funds by threatening their families abroad that they will not be able to issue an official donation receipt for the ‘voluntary contribution’. The statement “Since they [registered charities] are required to abide by rules and regulations to maintain their status, registration further provides charities with credibility in the community, thereby increasing their appeal to potential donors.” comes across as either naïve or a convenient view. BTW, for those who care the credibility of registered charities has declined over the last 20 years!
CRA has an interesting and overly narrow interpretation of the FATF definition. The FATF definition of an NPO is “A legal person or arrangement or organisation that primarily engages in raising or disbursing funds for purposes such as charitable, religious, cultural, educational, social or fraternal purposes, or for the carrying out of other types of “good works”.”
It could be primarily engaged in raising funds OR disbursing funds. Not just raising funds. Not just disbursing funds. The purposes could be “charitable, religious, cultural, educational, social or fraternal purposes, or for the carrying out of other types of “good works”.” Quite clearly this goes far beyond just “charitable” purpose which are our registered charities – social organizations are generally not charitable, the same for fraternal organizations. The definition then goes on even further and describes groups “carrying out of other types of “good works”” which is quite broad. It seems to me that the FATF definition would include both registered charities and non-profit organizations that are not registered charities.
The CRA statement that “As previously noted, service organizations, in Canada, are registered charities.” is absolutely false. There are many service organizations in Canada that are not registered charities and are non-profits. Unfortunately, we have very limited transparency into the NPO sector in Canada but the statement that “service organizations, in Canada, are registered charities.” makes little sense.
It is quite likely that if you declare that the threat from terrorist financing is coming from certain areas of registered charities, you focus tremendous resources only on registered charities that are service organizations, then you will find service organizations involved in terrorist financing. You will have sent a message to certain nefarious actors that there is less regulation and review of NPOs than of registered charities. You probably will not find NPOs involved in terrorist financing if you are not looking, even if there are such groups. Essentially, it becomes a self-fulfilling prophecy!
In summary, the NPO Sector Review is interesting. While it has some interesting information on the nonprofit sector and a reasonably good summary of the regulations relating to the nonprofit sector, it makes the awful determination that the threat of terrorism only lies in a small group of registered charities that are service organizations and therefore CRA or the Canadian government does not really need to have oversight over nonprofits in Canada.