[co-author: Wendy Hernandez]
Charitable grantmaking organizations should pay close attention to the White House’s unfolding assessment on domestic terrorism in light of their due diligence compliance efforts with grantees. Given last month’s attack on the U.S. Capitol, President Biden ordered the Office of the Director of National Intelligence, FBI, and the Department of Homeland Security to conduct a comprehensive assessment of the threat from domestic violent extremism.
Since ties between domestic nonprofit organizations and the capitol attack have already surfaced, it is not unlikely the federal government will continue to investigate domestic organizations that funded these events. In addition to the risk of tax-exempt revocation status, funding violence or terrorism (both foreign and domestic) subjects charitable grantmaking organizations to civil, criminal, and financial liabilities under the 2001 U.S. Patriot Act (the “Act”). The following is designed to help grantmaking organizations investigate and protect themselves from potential liability or adverse consequences in connection with their funding.
What is Domestic Terrorism?
Domestic terrorism includes activities that occur in U.S. territory that involve acts dangerous to human life that are a violation of the criminal law of the U.S. or of any State, appear to be intended to intimidate or coerce a civilian population; influence the policy of a government by intimidation or coercion; or to affect the conduct of a government by mass destruction, assassination, or kidnapping.
Executive Order 13224
EO 13224 was signed by Then-President Bush on September 23, 2001 in response to the 9/11 terrorist attacks. EO 13224 provides the U.S. government with the broad authority to freeze the assets of individuals and entities that provide support to terrorists and terrorists organizations designated in the EO, including their subsidiaries and associates. Importantly, and quite timely, EO 13224 provides the Secretary of State, in consultation with the Secretary of the Treasury and the Attorney General, with the authority to designate and freeze the assets of additional individuals or entities they determine pose a significant risk of committing acts of terrorism that threaten the security of U.S. nationals, the national security, or the economy of the U.S.
U.S. Patriot Act
The Patriot Act provides significant fines and criminal penalties and private civil actions against those who provide material support or resources to terrorists and those who finance terrorism. “Material support or resources” includes currency of monetary instruments or financial securities, well within the scope of grantmaking activities. The criminal penalties for providing material support or resources to a terrorist includes a maximum prison term of 15 years (or a life sentence if the death of a person results). The crime of financing terrorism punishes individuals or organizations that “directly or indirectly, willfully, knowingly, and intentionally” provide or collect funds to carry out acts of terrorism, is punishable for up to twenty years, and provides for private civil suits.
In one exemplary prosecution, the U.S. sentenced a domestic nonprofit corporation, now defunct, and five of its leaders to a cumulative of 65 years for providing material support to a designated foreign terrorist organization. In a related civil suit brought by parents of victim killed by terrorists outside United States where defendants donated money to organization allegedly responsible for murder, the Court found for the victim even though defendants had earmarked money for organization’s ongoing social welfare activities, reasoning that the donations of money were fungible and the organization’s social welfare activities reinforced its terrorist activities.
Though terrorism has historically arisen in an international context, the Patriot Act and EO 13224 apply to domestic terrorism and violence with equal force as international terrorism. Grantmaking charities should take care to avoid funding terrorist organizations (domestic and foreign) or organizations that engage in violent activities and which are intended to intimidate populations, subpopulations, or governments.
Internal Investigations and List-Checking Can Help Protect Grantmaking Organizations
By conducting internal investigations, charities can vet the risk, if any, of their grantmaking activity. The U.S. Voluntary Guidelines encourage charities to employ all reasonably available resources when engaging in vetting procedures, including checking the grantees and their affiliates against governmental Lists of organizations involved with violence or terrorism.
Mere recognition by the IRS as a 501(c)(3) organization does not provide sufficient (or really any) protection against the possible consequences of funding an organization with terrorist connections. As stated in the Voluntary Guidelines, there is no provision of law that entitles the donors or the grantmaking charities to rely on the Internal Revenue Service for the purpose of List checking.
To arrive at a generally appropriate due diligence standard, the investigation should address:
- Exposure to criminal penalties under the Patriot Act;
- Exposure to asset-blocking by the federal government under EO 13224;
- Exposure to civil actions by those injured by terrorists, and
- Possible revocation of Tax Exempt status.
Guidelines for List-Checking
A number of governmental agencies maintain lists of terrorists and terrorist organizations that charities can utilize in their due diligence. Commercially available software also enables organizations to search 22 different governmental lists of known or suspected terrorists, which currently includes, among others, the “Specially Designated Nationals” list maintained by the Office of Foreign Assets Control, the Terrorist Exclusion list maintained by the Department of Justice, the United Nations list pursuant to U.N. Security Council Resolutions 1267 and 1390, and the European Union list pursuant to EU Regulation 2580. Charities that make international grants are also required to confirm that the country in which foreign grantee operates is not boycotted or otherwise subject to U.S. sanctions.
The Voluntary Guidelines state a best practice is to list check all of the following with respect to each grant: 1) the grantee; 2) key staff at the principal place of business; and 3) senior employees at the grantee’s other locations. Additionally, depending upon the circumstances, a grantor may determine that it is appropriate to List-Check names of persons that are not described in the Voluntary Guidelines. Given the unfolding domestic extremism assessment, a grantor may also consider checking the names of individuals who are on the FBI’s Most Wanted List for the U.S. Capitol Violence.
The following are categories and considerations that a grantmaking foundation may use in determining the extent of List-checking that it will require, and what action should be taken in the event of a “hit”:
- Foundation Donors and Fund Advisors. Grantmakers that operate donor-advised funds may have less information about grantees than have its donors and advisors.
For All Grantees, Foreign and Domestic (*unless the listed category applies to well-known, nationally recognized charities):
- *Grantee’s Founder.
- *Grantee Governing Body Members and Executive Directors.
- *Grantee “Affiliates”. The Voluntary Guidelines do not suggest that affiliated organizations must be checked against the Lists. However, if a grant proposal indicates that the grant will be used to fund a related organization or for a project involving related organizations, each related organization should also be List-Checked.
- *Grantee’s Grantees. Many grants are made domestically and internationally to organizations that may or will re-grant funds. If the grantmaking organization requires all foreign grantees to promise that the grant funds will not be used to fund terrorist or violent activities, the grantmaking charity may not need to List-Check the re-grantees. However, for domestic grantees that are not well-known, nationally recognized charities, if the charity knows its grantee will re-grant the funds, the charity should confirm that the grantee will List-Check. If the charity knows that the grantee will be re-granting the funds and knows that the grantee will not List-Check, then the charity should either (a) List-Check the re-grantees, or (b) include in the grant agreement a prohibition on funding violence or terrorist activities.
- Fiscal Sponsored Organizations. Due diligence should include the founder, governing body and executive director of the fiscal sponsor on the same basis as outlined above for all grantees (domestic and foreign).
For Foreign Grantees Only:
- Grantee Executive Staff. At a minimum, the charity should List-Check the name of the executive officer and the person who is identified in the grant proposal or request as the person who will be the contact person or administrator of the grant. Senior employees at other locations may be checked, but unless the grant proposal indicates a significant role for such persons in administering the grant, obtaining and List-Checking such names appears unduly burdensome. In the case of a grant to a foreign grantee that describes a fiscal sponsorship arrangement, the project director (or equivalent) should also be List-Checked.
- Grantee Financial Institutions. The Voluntary Guidelines state that the grantmaking foundation should determine the identity of the financial institution with which the foreign grantee maintains accounts. The Voluntary Guidelines suggest that the grantmaker determine whether the institution is:
- a shell bank;
- operating under an offshore license;
- licensed in a jurisdiction that has been determined to be non-cooperative in the international fight against money laundering;
- licensed in a jurisdiction that has been designated by the Secretary of the Treasury to be a primary money-laundering concern; and
- licensed in a jurisdiction that lacks adequate anti-money laundering controls and regulatory oversight.
If a charity is asked to make a grant to an unfamiliar foreign financial institutions which could be a shell, licensed offshore, or otherwise suspect based upon the Voluntary Guidelines the charity should consult with counsel.
Some commentators have suggested List-Checking for volunteers, employees, subcontractors, principal suppliers and others with tangential relationships to foreign grantees. However, this level of diligence appears excessive in our view and may not be required unless the grant application, or other facts known to the grantmaking administrator reviewing the particular grant, suggest the potential for diversion of grant funds to support violence.
In the Event of a Positive Hit on any Name During List Checking Process:
In many cases, the “hits” on names will be false positives. Staff should take reasonable steps to determine whether the individual identified on the Lists is the same person as involved with the proposed grant, and should maintain in the file documentation that shows that it is not the same person. If the person does appear to be the same, staff should not approve the grant. If the identification of the person on the List appears to be an error, staff should consult with legal counsel to determine whether any further action is necessary or appropriate.