By Edgardo Ramos and Clifford E. Nichols III
Day, Berry and Howard, LLP

With the passage of the USA PATRIOT Improvement and Reauthorization Act of 2005 (the “Reauthorization Act” or the “Act”) grantmakers should take the opportunity to reevaluate their policies and procedures intended to ensure compliance with the original USA PATRIOT Act (the “Patriot Act”) [1] and other counter-terrorism regulations and enforcement programs enacted in response to the attacks of September 11, 2001. If grantmakers currently do not have such procedures in place, they should carefully review compliance requirements, especially if they have transferred any funds outside of the United States. The intent of this article is to provide both a summary overview of the changes created by the Reauthorization Act, as well as a review of the implications of other counter-terrorism measures such as Executive Order 13224 (the “Executive Order”) [2] and the revised U.S. Department of the Treasury Anti-Terrorist Financing Guidelines (the “Guidelines) issued in late 2005. [3] 

Essentially, the Reauthorization Act:

• Makes permanent many provisions of the original Patriot Act that were due to expire.
• Enhances certain criminal penalties.
• Expands the reach of asset seizures.   
• Increases the penalties associated with certain presidential orders such as the Executive Order.

USA PATRIOT Act

Although federal law provided criminal sanctions for persons providing assistance to terrorists prior to the attacks of September 11, 2001, the Patriot Act greatly strengthened the federal government’s ability to prevent future support of terrorism. The Patriot Act is a comprehensive remedy that, among other things, eases restrictions on the government’s ability to investigate suspected terrorists, encourages or mandates information sharing among federal law enforcement agencies and private industry, requires financial institutions to take affirmative steps to identify and root out money laundering, and strengthens existing laws which prohibit the provision of material or financial support to terrorists and terrorist organizations. [4] 

Many of the programs authorized by the Patriot Act do not substantially affect the manner in which nonprofits and grantmakers conduct business. However, sections of the act that expand criminal liability and enhance penalties for providing material or financial support for terrorism should be at the forefront of grantmakers’ decision making, especially grantmakers that are  involved with organizations abroad or are themselves conducting foreign activities.

It is important to remember that the charitable nature of the work of nonprofits does not shield them from criminal liability. Federal law imposes significant fines and terms of imprisonment for any entity that provides material support or resources knowing or intending that such material support or resources are to be used in terrorist acts.  “Material support” encompasses an exceptionally broad range of assistance, and would appear to include grants, microfinance services and many types of technical assistance. Clearly, most nonprofits and grantmakers lack the affirmative intention of supporting terrorism. However, whether a grantmaker can be claimed to have “known” that the support or resources it provided would be used to support terrorist acts is not so clear cut.

In addition to criminal sanctions, the Patriot Act also provides private parties with a civil cause of action against those who provide material support for terrorism.  Civil liability is a real threat to nonprofits and grantmakers should their grants or other types of assistance end up in the hands of terrorists.

Executive Order 13224

In immediate response to the terrorist attacks of September 11th, President Bush issued an extremely broad Executive Order that prohibits transactions with individuals and organizations deemed by the federal government to be associated with terrorism. It also allows the government to freeze all assets controlled by or in the possession of these entities and those who support them. The Executive Order was issued under the authority given to the president pursuant to the International Emergency Economic Powers Act [5] (“IEEPA”), which authorizes the president to impose economic restrictions “to deal with any unusual and extraordinary [external] threat to the national security, foreign policy, or economy of the United States.” [6] Prohibited types of transactions include financial support, in-kind support and technical assistance.  Humanitarian assistance is also covered, if it is rendered to persons associated with terrorists or acts of terrorism. Importantly, an organization can violate the Executive Order, and could consequently have its assets frozen (or face other unspecified enforcement action), even if it does not know it is providing support to parties associated with terrorism.

Before providing support to any organization, nonprofits and grantmakers should consult the various lists maintained by the State Department and the Department of the Treasury to determine whether an entity is a listed terrorist. [7]  The various lists of individuals and entities affected by the Executive Order are constantly changing. However, merely checking the federal lists is not sufficient to avoid negative consequences.

The reach of the Executive Order is clearly broader than the individuals and entities appearing on the lists, and could extend to others that could be listed in the future because of presently unknown associations with terrorists or acts of terrorism.  The federal government has taken the position that the Executive Order authorizes it to freeze assets while investigating whether an organization is associated with terrorism. However, enforcement action against nonprofits and grantmakers for a transaction with an unlisted party seems extremely unlikely, presuming no other circumstances surrounding the transaction had signaled caution.

Reauthorization of the Patriot Act

According to the White House, the Reauthorization Act tackles terrorism financing by increasing existing penalties and closing loopholes “concerning terrorist financing through ‘hawalas’ (informal money transfer networks) rather than traditional financial institutions.” [8]

Violations of presidential orders issued pursuant to IEEPA (such as Executive Order 13224) are now subject to a monetary penalty of up to $50,000 and by imprisonment for not more than 20 years. [9]  Before the Reauthorization Act, the penalties capped out at $10,000 and 10 years respectively.  The Reauthorization Act also adds the operation of an unlicensed money transmitting business [10] to the list of offenses subject to the federal Racketeer Influenced and Corrupt Organizations (“RICO”) law. [11] This subjects the perpetrators of such offenses to the severe penalties available under RICO including imprisonment of not more than 20 years and property forfeiture. [12]   

The Reauthorization Act extends the reach of certain civil forfeiture powers to include all property of any individual or entity planning or committing an act of international terrorism against a foreign nation or international organization. [13] Prior law only allowed confiscation of property possessed by entities planning or committing acts of terror against the United States.  It is important to note that the current confiscation laws do not require any nexus between the property and the terrorist act, all property is subject to confiscation. [14] The Reauthorization Act expands the government’s authority to freeze the assets of U.S. entities prior to trial by expanding the reach of money laundering penalties under 18 U.S.C. § 1956(b) (previously limited to foreign entities) to include U.S. entities.  The procedures necessary to freeze assets prior to trial under § 1956 are less stringent than other pretrial freezes available for drug crimes and civil forfeitures. [15]

Prior to the Reauthorization Act, federal law prohibited money laundering transactions that involved the proceeds of certain crimes [16] and the international transportation, transmittal or transfer of such funds. [17] The Reauthorization Act targets a type of money transmittal service known as hawalas. Hawalas act as informal banks and money transfer brokers and are not effectively regulated by governments. In the most basic form of the hawala system, money is transferred via a network of brokers. Usually, no promissory instruments are exchanged between the brokers who rely entirely on the honor system. Hawalas can operate outside of the authority of governments and no records are produced of individual transactions because brokers simply maintain a running tally of the total amount owed to each other.

Because of the associated anonymity, hawalas are often used by terrorist organizations and other money launderers. [18] In order to combat hawalas, Section 405 of the Reauthorization Act extends the prohibition of financial transactions to include transactions or transmissions related to or parallel to prohibited transactions. By prohibiting transactions related to or parallel to already prohibited transactions, the Reauthorization Act intends to reach all brokers within a hawala network that participates in terrorism financing, not just the broker dealing directly with the terrorists. Grantmakers should take steps to ensure that they are not being used as an unwitting hawala by individuals seeking to fund acts of terror. Should a donor supply a grantmaker with illegal proceeds intending that the grantmaker supply the funds to another party associated with terrorist activities, the grantmaker could become part of an arrangement to fund terrorism even if it had no legal obligation to transfer the funds to the intended recipient.

The Reauthorization Act also extends the investigatory power of the Department of Homeland Security to include the money laundering offenses described above.  Prior to the Act, such offenses were investigated by the Departments of the Treasury, Justice and the U.S. Postal Service. [19]

The Reauthorization Act does limit the reach of the original Patriot Act in one important way: it changes the definition of terrorism as it relates to certain asset seizures.  Under the original Patriot Act, the property of those planning or engaged in acts of domestic or international terrorism could be seized. [20] For the purposes of this federal power, terrorism was defined as acts dangerous to human life in violation of state or federal law and committed to influence the policy of a government or civilian population by intimidation or coercion. [21] Terrorism is now defined as a violation of a very long but very specific list of federal offenses defined in 18 U.S.C. § 2332b(g)(5)(B).  Congress was concerned that fairly benign actions, such as protesters engaging in a fracas armed with signs and posters, could be punished as acts of terrorism. The change effectively limited the reach of the act to specific and well-defined acts of terrorism, such as airplane high jacking and computer hacking.

Section 125 of the Reauthorization Act grants immunity from civil liability to certain entities who donate fire suppression equipment to volunteer fire organizations.

Treasury Guidelines

On December 5, 2005, the Department of the Treasury released a revised version of its November 2002 Anti-Terrorist Financing Guidelines: Voluntary Best Practices for U.S.-Based Charities. The revised Guidelines immediately replaced the 2002 version.  As with the previous version, and as their title suggests, the revised Guidelines are voluntary; they do not mandate that a charity adopt any particular policy or compliance regime to prevent the diversion of its funds for terrorist financing. Unlike the previous version, the revised Guidelines are explicitly risk-based, and acknowledge that “certain aspects [of the Guidelines] will not be applicable to every charity, charitable activity, or circumstance.”

The revised Guidelines removed some of the 2002 requirements, but also added new ones. The expanded introduction expressly states that the revised Guidelines are intended “to assist charities that attempt in good faith to protect themselves….” It also includes a footnote recognizing that terrorists have abused charitable organizations both in the United States and worldwide.

Many of the revisions address nonprofit governance and accountability measures but Part VI of the document, entitled Anti-Terrorist Financing Best Practices, specifically expands the due diligence and investigative steps recommended in the 2002 documents when vetting grantees for terrorist associations.  The Guidelines present these steps as voluntary, but they are described as actions grantmakers “should” take. Failure to comply could become the basis for an unwanted investigation even if, standing alone, such a failure does not constitute malfeasance.

The Guidelines now apply to all monetary grants, both foreign and domestic, as well as grants involving services, in-kind contributions and other goods.   In addition to advising grantmakers to check federal terrorist lists, the revised Guidelines recommend that grantmakers should:

• Make reasonable efforts to identify grantees that may have changed names.
• Record certain information regarding grantees’ corporate formation and founding individuals.
• Record the identities of individual recipients and key employees of grantee organizations.
• Conduct reasonable searches of publicly available information to determine if a grantee is suspected of terrorist activities (including the State Department’s Terrorist Exclusion List and the Treasury Department’s website).
• Comply with the Treasury Department’s sanctions programs.
• Obtain certifications from all grantees affirming lack of association with identified and unidentified terrorists.
• Vet their own key employees for terrorist associations. 

Additionally, the revised Guidelines seem to create an affirmative obligation on the part of grantmakers to report information on “suspicious activity” to the Department of the Treasury and to inform the Treasury of any individual they identify during the course of the vetting process as being suspected of activity related to terrorism. 

Resources for anti-terrorism compliance strategies

U.S. International Grantmaking (USIG) Project Anti-Terrorism Compliance Resources: This section of the USIG website provides a brief description of U.S. government anti-terrorism initiatives along with a list of resources made available by the Council on Foundations to provide general guidance to grantmakers responding to federal anti-terrorism initiatives.

Conclusion

Generally, the Reauthorization Act extends the reach of property forfeiture procedures and enhances the civil and criminal penalties available for violations of counter-terrorism financing laws. It does not create new offenses that a generally law-abiding charitable organization must be aware. Indeed, it does limit the definition of terrorism in as much as it relates to certain asset confiscation powers of the federal government. However, given the Patriot Act’s expanded reach and stiff penalties, nonprofits and grantmakers should be on notice. The prohibitions specifically include certain acts that may otherwise be regarded as humanitarian efforts.  Nonprofits and grantmakers who wish to prevent an unfortunate confrontation with federal regulators should become very familiar with the revised Patriot Act, the Treasury Guidelines and other counter-terrorism enforcement programs.

About the Authors and Editor
Edgardo Ramos is a partner in the Stamford, Connecticut, and New York City offices of the firm Day, Berry & Howard LLP.  Cliff Nichols is an Associate working in the Stamford office of the firm.  This article was edited by Janne Gallagher, vice president and general counsel at the Council on Foundations.

[1] “USA PATRIOT ACT” is an acronym which stands for Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism (USA PATRIOT) Act of 2001, Pub. L. No. 107-56, 115 Stat. 272 (2001).

[2] Exec. Order No. 13224, 66 Fed. Reg. 47,079 (Sept. 23, 2001).

[3] U.S. Department of the Treasury Anti-Terrorist Financing Guidelines: Voluntary Best Practices for U.S.-Based Charities (Revised Dec. 5, 2005) available at http://www.treasury.gov/offices/enforcement/key-issues/protecting/charities-intro.shtml.

[4] For more information on the Patriot Act please see Part III of the Council on Foundations’ Handbook on Counter-Terrorism Measures:  What U.S. Nonprofits and Grantmakers Need to Know. [pdf]

[5] 50 U.S.C. §§ 1701-1706.

[6] 50 U.S.C. § 1701(a).

[7] For more information on the Executive Order and the list checking procedures please see Part II of the Council on Foundations’ Handbook on Counter-Terrorism Measures:  What U.S. Nonprofits and Grantmakers Need to Know[pdf].

[8] White House Press Release, Fact Sheet: Safeguarding America: President Bush Signs Patriot Act Reauthorization (March 9, 2006).

[9] USA Patriot Act Improvement and Reauthorization Act of 2002, P.L. No. 109-177, Title IV, § 402, 120 Stat. 243 (2006), amending 50 U.S.C. § 1705.

[10] 18 U.S.C. § 1960 prohibits the knowing operation of an unlicensed money transmitting business.

[11] Racketeer Influenced and Corrupt Organizations Act, 18 U.S.C. §§ 1961-1968.

[12] 18 U.S.C. § 1963.

[13] USA Patriot Act Improvement and Reauthorization Act of 2002, P.L. No. 109-177, Title IV, § 404, 120 Stat. 243 (2006).

[14] 18 U.S.C. 981(a)(1)(G)(i).

[15] See 21 U.S.C. § 853(e), 18 U.S.C. § 983(j).

[16] 18 U.S.C. § 1956(a)(1).

[17] 18 U.S.C. § 1956(a)(2).

[18] H.R. 3199, H. Rep. No. 109-333, at 107 (2005) (Conf. Rep.).

[19] 18 U.S.C. § 1956(e), 18 U.S.C. § 1957(e).

[20] 18 U.S.C. § 981(a)(1)(G).

[21] 18 U.S.C. § 2331(5).