Yes, you too: Money laundering, terrorism financing, and the nonprofit sector

The vast majority of nonprofits feel worlds away from anything close to money laundering and terrorist financing. And yet, we are seeing this as a significant motivation for new federal policies aimed at the nonprofit sector. The federal government’s lack of data on the sector and history of limited federal oversight of non-charitable nonprofits leaves a question mark, which makes it difficult for regulators to confidently tell international partners that risk is low. 

Below, we will briefly canvas recent developments and what an effective alternative policy response would look like. We will see that the only way to ensure a safer world is to strengthen nonprofits, not overburden them.

Why anti-money laundering and terrorist financing policies should be on your radar

Here are just a few of the significant developments over this past fall that show Anti-Money Laundering and Terrorist Financing (AML/TF) policies are changing and targeting nonprofits: 

• The 2025 federal budget included new funding, new agencies, and a host of AML/TF measures targeting the nonprofit sector. 
• Getting better data to address AML/TF concerns appears to be part of the motivation for the government’s new reporting requirements for all nonprofit organizations (NPOs) under the Income Tax Act starting in 2027. 
• The Canada Revenue Agency (CRA) Charities Directorate received a damning report of systematic flaws and likely Islamophobic biases in its division responsible for terrorist financing concerns. CRA has said this will lead to some changes in CRA’s internal processes. 
• The Department of Finance led a 5-year review of anti-money laundering systems as they relate to nonprofits as part of Canada’s role in the Financial Action Task Force, an international coalition dedicated to AML/TF. This will likely lead to recommendations and further policy proposals.

In short, AML/TF appears to be a significant lens through which the federal government is looking at the nonprofit sector. In the coming years, we will likely continue to see policies that affect all nonprofits, not just organizations that have been traditionally targeted by these systems such as international development organizations or Muslim charities. 

These measures result in increased administrative burden and cumbersome, sometimes completely misdirected, enforcement processes. So we all have an interest in the government getting this area right. But, what would an effective policy response look like? 

What an effective response would look like: Why a stronger sector means a safer world

Fair regulations that are applied consistently and without bias are important tools to combat the misuse of nonprofits for criminal or violent ends. However, when you look at Canada’s own analysis of where the alleged risk in the nonprofit sector is, you start to realize what’s actually needed is a healthy and well-supported sector. 

For example, the Federal Government’s own risk assessment found that most nonprofits involved in AML/TF concerns are not doing so intentionally. Here are a few of the scenarios the analysis presents as most likely: 

• a bad actor either infiltrates the board or acts as a fundraiser to divert funds away from the organization,
• a fake organization uses the name of the nonprofit to fraudulently fundraise,
• organizations receive anonymous donations that are then redirected in some way.

In all these cases the nonprofit is actually the victim in the situation. Regulating and penalizing the nonprofit not only fails to prevent these types of situations, it exacerbates them. 

Let’s look at what creates the opportunity for each of the above scenarios to happen:

• When governments increase administrative burden and pass laws that make directors personally liable, this discourages potential volunteers from joining the board at a time when 42 per cent of organizations are facing volunteer recruitment problems anyway. This makes organizations more desperate for candidates and opens them up to bad actors.
• Nonprofits cannot effectively police the use of their name online due to a lack of digital capacity and human resources for anything outside of program provision. This lack of capacity is reinforced by government funding practices that leave little room for administration costs.
• Nonprofits facing increased demand and costs, flatlined government revenue, and declining individual donations, are less financially able to turn down donations and are actively being encouraged to seek new sources of funding through new avenues like crowdfunding platforms. No amount of regulation addresses this precarity.

By understanding that these are the real underlying systemic and systematic issues that expose the nonprofit sector to being vulnerable to exploitation by bad actors, governments at all levels concerned about money laundering and terrorist financing can take responsibility for strengthening the nonprofit sector by, for example:

• Reducing barriers to volunteering.
• Providing long-term, stable, and flexible operating funding. 
• Include nonprofits at the table when discussing upstream policy solutions, so that demand for services downstream are reduced and social systems aren’t overwhelmed and left vulnerable to exploitation

Desperation cannot be regulated away

At the heart of the vulnerabilities canvassed above are organizations and individuals in increasingly desperate circumstances. Desperation cannot be regulated away. The effectiveness of AML/TF policies is fundamentally limited by the fact that nonprofits themselves have not had a strong voice at the table. Technical reforms to the financial system are important, but taking a step back and seeing the realities on the ground is even more important. Only nonprofits can provide the government with this context.

Next time you hear about a money laundering or terrorist financing consultation and wonder “what does that have to do with me?”, now you know the answer is “quite a bit”.