By: Sai Shashank V. (Research Associate: Atharva Legal)

Since the Second half of the 19^th century India has had a history of Non-Governmental Organisations (herein NGOs) playing a major role in bringing about a change in society. This practice continued post-Independence period in India. After independence, the Government of India increased its presence in social welfare and development but recognized the potential for civil society to supplement and complement its efforts. The first Five-Year Plan stated, “Any plan for social and economic regeneration should take into account the services rendered by these agencies and the state should give them maximum cooperation in strengthening their efforts.”[1]  A Central Social Welfare board was established in the year 1953 to promote social welfare activities and support people’s participation programs through the NGO’s. This formal recognition and additional funding led to growing bodies of NGOs. The Government of India decentralized development activities throughout the 1950s. The establishment of the National Community Development Program and the National Extension Service were early steps in this direction. Further decentralization was achieved with the introduction of the three-tier Panchayati Raj system in 1958. Many farmers unions and agricultural cooperatives were founded around this time, and networking became more commonplace in civil society. In 1958, the Association for Voluntary Agencies for Rural Development (AVARD) was founded as a consortium of major voluntary agencies[2]. Around the year of 1965-1967 there was a need for increased aid for agriculture. This is the time where the foreign NGOs started entering India for the first time. From here the participation of Foreign NGOs grew to a very substantial level. India today has about 1.5 million NGOs work in India (i.e., non-profit, voluntary citizens’ groups organized on a local, national, or international level) according to the Asian Development Bank. When in the 1970s a large number of NGOs started developing there was a lot of foreign investment that was flowing into the country for these NGOs. A need was felt to regulate this this inflow of money. There was a need to regulate this money so as to ensure that this money is not used for any illegal purpose such as money laundering.

Objectives:

With the increased rise in the number of NGOs, and foreign funding to these organisations, it becomes important to keep a track of the funding that flows in from across the globe to these NGOs and ensure where this funding is used. It is essential to ensure that such money is not used to fund any activity against the interest of the state and that there is not movement or laundering of black money that happens in the country. FCRA and the AML and CFT guidelines go hand it hand. This act was introduced and the said amendments were relevant to ensure that this foreign funding is not used to fund terrorist activities. It is very easy for such funding to land in the hands of terrorists or people working against the interest of the state. The Anti Money Laundering and Combating Financing Terrorism guidelines provide for the authorities to cross check the source of income and the final destination of where the said amount has reached. The objective of KYC and identification of the key office bearers is to ensure and enable the authorities to understand the sources of income, the parties involved so as to manage the risk factor in an easy way. In accordance to the FATF recommendations, (recommendation 8) the countries should ensure that the non-profit organisations be safe from the terrorist financing abuse. “Countries should review the adequacy of laws and regulations that relate to non-profit organisations which the country has identified as being vulnerable to terrorist financing abuse. Countries should apply focused and proportionate measures, in line with the risk-based approach, to such non-profit organisations to protect them from terrorist financing abuse, including:

(a) by terrorist organisations posing as legitimate entities;

(b) by exploiting legitimate entities as conduits for terrorist financing, including for the purpose of escaping asset-freezing measures; and

(c) by concealing or obscuring the clandestine diversion of funds intended for legitimate purposes to terrorist organisations[3].”

Recommendation 10 of the same recommendations also call for Customer Due Diligence and Record-Keeping.

Financial institutions should be prohibited from keeping anonymous accounts or accounts in obviously fictitious names

Financial institutions should be required to undertake customer due diligence (CDD) measures when:

1. establishing business relations;
2. carrying out occasional transactions:
3. above the applicable designated threshold (USD/EUR 15,000); or
4. that are wire transfers in the circumstances covered by the Interpretive Note to Recommendation 16;
5. there is a suspicion of money laundering or terrorist financing; or
6. the financial institution has doubts about the veracity or adequacy of previously obtained customer identification data.

The principle that financial institutions should conduct CDD should be set out in law. Each country may determine how it imposes specific CDD obligations, either through law or enforceable means. The CDD measures to be taken are as follows:

(a) Identifying the customer and verifying that customer’s identity using reliable, independent source documents, data or information.

(b) Identifying the beneficial owner, and taking reasonable measures to verify the identity of the beneficial owner, such that the financial institution is satisfied that it knows who the beneficial owner is. For legal persons and arrangements this should include financial institutions understanding the ownership and control structure of the customer.

(c) Understanding and, as appropriate, obtaining information on the purpose and intended nature of the business relationship. (d) Conducting ongoing due diligence on the business relationship and scrutiny of transactions undertaken throughout the course of that relationship to ensure that the transactions being conducted are consistent with the institution’s knowledge of the customer, their business and risk profile, including, where necessary, the source of funds[4].

Recommendation 13 of the FATF recommendations state that

The AML/CFT guidelines are framed keeping in mind these regulations. The FCRA amendment act also goes hand in hand along with these regulations.

The FATF also released a set of guidelines for the NPO sector so as to save them from and prevent terrorist financing abuse.

The FATF also released interpretative notes to their recommendations and in accordance to the recommendation to the interpretative note to the recommendation 8, it is stated that there have been multiple cases identified where terrorist organisations have used NPO’s to get or transfer funding for their illegal activities as well, there have been cases where terrorists create sham charities or engage in fraudulent fundraising for these purposes. It is important for a nation to ensure that such funding does not cause any harm to the nation at the same time does not undermine the donor confidence and the integrity of the NPOs.

According to the interpretative note of the FATF of recommendation 8, some NPOs may be vulnerable to terrorist financing abuse by terrorists for a variety of reasons. NPOs enjoy the public trust, have access to considerable sources of funds, and are often cash-intensive. Furthermore, some NPOs have a global presence that provides a framework for national and international operations and financial transactions, often within or near those areas that are most exposed to terrorist activity. In some cases, terrorist organisations have taken advantage of these and other characteristics to infiltrate some NPOs and misuse funds and operations to cover for, or support, terrorist activity.[5]

As noted in the Interpretive Note to Recommendation 8, terrorists and terrorist organisations may exploit some NPOs in the sector to raise and move funds, provide logistical support, encourage terrorist recruitment, or otherwise support terrorist organisations and operations. This misuse not only facilitates terrorist activity, but also undermines donor confidence and jeopardises the very integrity of NPOs. Therefore, protecting the NPO sector from terrorist abuse is both a critical component of the global fight against terrorism and a necessary step to preserve the integrity of the NPO sector and donor community.

These reasons call for the recent amendment made to the FCRA so as to ensure that both the NGO/NPO sector remains safe of any misuse and at the same time nothing works against the interest of the nation.

Amendments introduced

1. Certain people are prohibited to the accept foreign contribution: Earlier act had the following people prohibited: election candidates, editor or publisher of a newspaper, judges, government servants, members of any legislature, and political parties, The amendment adds another category of persons to this ‘Public servants’ – defined as in the IPC.
2. Transfer of foreign contribution: In the earlier act foreign contributions were prohibited unless the said individual was registered under the act to receive those funds. This amendment prohibited any form of transfer of the foreign contributions that are received.
3. Aadhar for registration: The Act states that a person may accept foreign contribution if they have: (i) obtained a certificate of registration from central government, or (ii) not registered, but obtained prior permission from the government to accept foreign contribution.  Any person seeking registration (or renewal of such registration) or prior permission for receiving foreign contribution must make an application to the central government in the prescribed manner.  The Amendment Act adds that any person seeking prior permission, registration or renewal of registration must provide the Aadhaar number of all its office bearers, directors or key functionaries, as an identification document.  In case of a foreigner, they must provide a copy of the passport or the Overseas Citizen of India card for identification.  
4. FCRA account: Under the Act, a registered person must accept foreign contribution only in a single branch of a scheduled bank specified by them.  However, they may open more accounts in other banks for utilisation of the contribution.  The Amendment Act amends this to state that foreign contribution must be received only in an account designated by the bank as “FCRA account” in such branch of the State Bank of India, New Delhi, as notified by the central government.  No funds other than the foreign contribution should be received or deposited in this account.  The person may open another FCRA account in any scheduled bank of their choice for keeping or utilising the received contribution. 
5. Restriction in utilisation of foreign contribution:. Under the Act, if a person accepting foreign contribution is found guilty of violating any provisions of the Act or the Foreign Contribution (Regulation) Act, 1976, the unutilised or unreceived foreign contribution may be utilised or received, only with the prior approval of the central government.  The Amendment Act adds that the government may also restrict usage of unutilised foreign contribution for persons who have been granted prior permission to receive such contribution.  This may be done if, based on a summary inquiry, and pending any further inquiry, the government believes that such person has contravened provisions of the Act. 
6.  Renewal of license: Under the Act, every person who has been given a certificate of registration must renew the certificate within six months of expiration.  The Amendment Act provides that the government may conduct an inquiry before renewing the certificate to ensure that the person making the application: (i) is not fictitious or benami, (ii) has not been prosecuted or convicted for creating communal tension or indulging in activities aimed at religious conversion, and (iii) has not been found guilty of diversion or misutilisation of funds, among others conditions.
7. Reduction in use of foreign contribution for administrative purposes: Under the Act, a person who receives foreign contribution must use it only for the purpose for which the contribution is received.  Further, they must not use more than 50% of the contribution for meeting administrative expenses.  The Amendment Act reduces this limit to 20%.
8. Surrender of certificate: The Amendment Act adds a provision allowing the central government to permit a person to surrender their registration certificate.  The government may do so if, post an inquiry, it is satisfied that such person has not contravened any provisions of the Act, and the management of its foreign contribution (and related assets) has been vested in an authority prescribed by the government.
    
9. Suspension of registration: Under the Act, the government may suspend the registration of a person for a period not exceeding 180 days.  The Amendment Act adds that such suspension may be extended up to an additional 180 days.

In accordance to Recommendation 1 of the FATF recommendations, it is important to understand and asses the risk factor when to comes to NGO’s and the funding that they receive for the same. There is a risk-based approach that is mentioned in the said recommendation. This risk-based approach should be an essential foundation to efficient allocation of resources across the anti-money laundering and countering the financing of terrorism (AML/CFT) regime and the implementation of measures throughout the FATF Recommendations. Where countries identify higher risks, they should ensure that their AML/CFT regime adequately addresses such risks. Where countries identify lower risks, they may decide to allow simplified measures for some of the FATF Recommendations under certain conditions. Risk can be defined as the ability of a threat. It was recommended that there be a risk analysis done to the entire sector of the NPOs or NGOs in that case there is a higher and better chance of evaluating and preventing the risk factor. This sectoral analysis allows us to understand how many NGOs are a sham and are just a cover to help launder money and finance terrorist organisations and activities and also which NGOs are being used for illegal activities and their funding is misused for activities against the interest of the states. Based on these there are AML/CFT guidelines are framed according to which it is absolutely necessary to have essential information that has to be collected by the respective authorities so as to ensure that there is no loss or risk to the authorities, banks and even the NGOs that are getting the funds from different foreign nations and also at the same time ensure that these funds are not used to funds terrorist activities and no NGOs are exploited for the same.

There have been instances where these funds from the received by these NGOs are used to fund activities that instead of helping public cause hindrance and nuisance for the same. Take for instance the Shaheen Bagh protests for the revocation of the Constitutional Amendment Act ( which in its nature was perfectly constitutional and was not in anyway arbitrary to the citizens of India), which was perceived to be unconstitutional without any logical or legal backing and was based on falsely spread news, became a nuisance for people who were residents of that locality and used the space for their livelihood. Since there was regular funding this so called ‘protest to preserve democracy’ prolonged for such a long time that finally the court had to intervene and order the protesters to leave.

Similarly, a lot of NGOs directly or indirectly fund a lot of extremist activities in the valley of Kashmir. Although these NGOs intend to only help in the rebuilding of the region, they end up sharing this fund with a lot of sham organisations which in turn fund extremist activities. Keeping these scenarios in mind it shows very clearly as to why there is an absolute need to deny the transfer for the funding that the NGO has received to other such organisations or NGOs.

The reason behind adding the clause that makes it mandatory to the NGOs to have a bank account in the Delhi branch of the State Bank of India goes hand in hand with the previous reasonings. Firstly it is easier to regulate as per the FATF, AML,CFT guidelines where the KYC of the parties donating and receiving has to be collected and basic due diligence is to be done and risk is to be assessed as when all the money comes to one particular bank ( run by the state) and these regulations can be followed in a uniform and objective way and the same can be easily traced and kept a check on so as to ensure that none of these funds are used to perform any action against the interests of the state and the public. This KYC due diligence is also followed normally in other activities such as the incorporation of companies under the Companies Act of 2013. The same is regularly complied with while incorporating the Limited Liability Partnership or Limited Liability Corporations.

This code also sets out some penalties for violating this code.

The code has a part that is dedicated to penalties in case of volitation of the code. Sections 33-37 deals specifically with regard to the violations of the code.

As per Section 33 of the Foreign Contribution Regulation act, the punishment of furnishing false information, seeking prior permission by the means of fraud, false representation, concealment of material fact will be liable for imprisonment of 6 months or fine or both.

As per Section 34 of the FCRA act, if  any person with an order that prohibits order is passed by a court under Section 10 of the act, pays, delivers, transfers or otherwise deals with any form of currency, Indian or foreign then in that case such a person is liable to imprisonment for 3 years or fine or both and apart from the said fine, notwithstanding anything mentioned in the CrPC the court can also impose an additional fine to that amount of the market value of the said article or the amount of currency.

As per Section 35 any person who assists any political party or any person under Section 3 of this act via foreign contribution will be liable to 5 years imprisonment or fine or both.

As per Section 36 not withstanding anything mentioned in the CrPC, if any individual who is under trial for doing any act or omitting to do any act that which resulted in the confiscation of any currency or security then a fine shall be imposed which shall not be more than 5 time the amount of the currency or security.

As per Section 37 any person who has committed an act in violation of this code and there is no penalty mentioned under this act then in that case such person shall be liable to prison for one year or fine or both.

Hence these amendments are absolutely essential so as to ensure that there is not threat to national security and at the same time the authorities and the banks and the NGOs are also saved from any such fraud or any activity that hurts the reputation of NGOs.