The Role of the State in the Financial Inclusion of NGOs: Why are commercial banks removing NGOs from the list of clients?

Author: Dren Puka- Kosovar Civil Society Foundation-KCSF

Almost half of the active NGOs in Kosovo operate with zero annual revenues (45%), while the cost of maintaining a bank account for an organization goes up to 200 euros per year. Although the vast majority of NGO funding comes from foreign donors, led by the European Union with member states and the United States, and also public funds, NGOs are considered entities in risk of terrorist financing.

 

 

There were some important and unprecedented developments within the commitments for countering terrorism during 2014 and 2015, regarding restrictions on the work of NGOs in Kosovo, and direct interference of state bodies and commercial banks in their work.

Initially, in 2014, at the request of the security authorities, the Department for NGOs suspended the work of 14 civil society organizations, with justification that there is a reasonable suspicion that the activity of suspended NGOs does not comply with the legal and constitutional order of the Republic of Kosovo. This decision of the Government was very general in reasoning, and contrary to the basic legal framework governing the functioning of NGOs in Kosovo. Certainly, the activity of an NGO can only be terminated if its members decide on such a thing, or with a final court decision and in no way by a government body. However, in order to precede this decision, the Government made sure that through a sub-legal act, drafted away from the public eye, include the possibility of suspending the work of NGOs by government bodies. Anyhow, this provision was contrary to the basic law which was later removed.

In September of 2015 TEB Bank froze bank accounts of few NGOs. Similar to the 2014 Government decision, freezing of bank accounts was accompanied by a general notification through which NGOs were notified of the temporary suspension of bank accounts and whereby required to submit a number of documents and information for the organization. Most of the documents were either impossible to complete or the purpose for which they were required was ridiculous. Depending on the outcome of review of the submitted documents, the Bank would decide whether to continue providing financial services to the relevant NGOs or to eventually close their bank accounts. Furthermore, the banks took the role of prosecutor and judge at the same time.

All these actions, which were largely unfounded and built on various prejudices and stigmatizations, contributed to creation of a difficult environment for NGOs, and further on in the assessment by Commercial Banks, NGOs were unwanted clients. In addition of not being attractive customer in the commercial sense, they already posed a constant risk of damaging the bank's reputation and increasing the costs of managing such customers. Faced with strict requirements for tracing and identifying cases of terrorist financing, Banks began to pursue highly exclusive and unfavorable policies for NGOs. They materialized mainly in two forms; closing NGOs bank accounts, and increasing reporting requirements and bank account management costs - policies known as bank de-risking policies.

De-risking policies and their impact on the work of NGOs

To reduce the risk for banks coming from the work with NGOs, whether in terms of reputation or increasing the cost of managing clients at risk for terrorist financing, banks in Kosovo mainly implement two policies that as such are restrictive for NGOs and in some cases inapplicable.

The first form is through increasing the cost of maintaining a bank account. Currently, an NGO in Kosovo pays up to 20 euros per month for administrative expenses for bank account maintenance and use of services provided by the bank, without calculating the costs for execution of payments. On the other hand, due to transparency and accountability standards and good practices, most NGOs in Kosovo have more than one bank account. An NGO that during the year implements three different projects, on behalf of banking services pays up to 600 euros per year. For a legal entity, prohibited from generating profit, such costs in addition to being extremely high, in certain cases it becomes unaffordable.

For institutions responsible for security and commercial banks in Kosovo, all NGOs are considered entities/clients with risk for terrorist financing - however, this conclusion is based on theoretical rather than empirical assessment. Due to such categorization, NGOs are subject to continuous control strict procedures that banks perform for their clients. One of them is the updating organization's data, which in principle should not be problematic at all, but nevertheless in the form that it is implemented by banks, it often turns out to be a complicated procedure with requirements that are inapplicable in practice.

More specifically, to verify the controlling structure of the organization, it is required the data of the founders of the organization, a practice that is applicable and meaningful for businesses where the founders are the owners/shareholders and decision-makers in the company. Unlike businesses, for NGOs, the founders as such have only a ceremonial and historical role and do not take part anywhere in the decision-making or controlling structure of the organization. For associations it is the Assembly of Members, and for Foundations and Institutes is the Board that have the main role and the highest responsibility in the organizational structure of the NGO. Such a request, where banks insist on the data of the founders of the organization, in addition to not serving the main purpose of banks and security authorities, it is often impossible to achieve. For example, for completely obvious and natural reasons, founders of various NGOs may have died over the past 20 years, and updating their personal information on an annual basis is absurd and virtually impossible. As a result of these requests, many NGOs have been forced to close their bank accounts and many of them continue to face these same problems.

The role of the state

Since 2019, the Government of Kosovo through Law on NGOs has obliged all NGOs to carry out their financial transactions only through CBK licensed banking institutions. In addition to serving the state on information about funding sources entering Kosovo, this requirement also contributes to greater financial regularity of NGOs. However, if this obligation for NGOs is not accompanied by respective policies and continuous state supervision over the institutions that provide banking services, it becomes a major and serious obstacle for NGOs to conduct their works. More specifically, the Government of Kosovo should implement the recommendations derived from Assessment Report on Compliance of Kosovo with International Anti-Money Laundering and Combating Terrorist Financing Standards by using targeted approaches to identify the risk of terrorist financing by NGOs and categorize organizations that pose such a risk. This would enable the state to take measures that directly contribute to the overall security of the country, enabling NGOs to continue their work in socio-economic development and advancement of democracy in the country. Furthermore, the state should recognize the risk coming as a result of de-risking policies that banks implement and take affirmative measures that enable all NGOs fair and easy access to banking services, by prohibiting commercial banks to use discriminatory policies against NGOs and by promoting approaches and measures that would facilitate the use of banking services by NGOs.

 

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