As part of their responsibility to protect against financial crime, fraud and money laundering, banks have a regulatory requirement to ensure they hold up-to-date information regarding their customers’ accounts – including knowing who their customers are, what they do, where they trade and where money comes from and goes to – and that is no different for charity clients.

However, due to the unique nature of how a charity operates, this can create a whole host of hurdles that need to be overcome. For a charity, often working with limited resources compared to a trading business, this can be prohibitively problematic.

From an Anti-Money Laundering (AML) perspective, charities are more likely to be deemed by banks as facing a greater threat from financial crime and corruption owning to the activities they undertake, the structure they operate, the countries they are present in and who they receive donations from.

As a result, banks will treat charities as high-risk clients, meaning: 

1. A greater level of due diligence is performed during the establishment of a banking relationship
2. They are subject to more frequent due diligence monitoring and review

Unfortunately, many national and small local charities find themselves caught up in the ‘high-risk’ classification, despite it being apparent they are providing vital support services to their local communities and not accepting donations from overseas, for example.

Many banks don’t understand how charities operate or the nuances of their structures. As a result, rather than seeking to apply a common-sense risk-based approach, they will often seek to shoehorn the opening of a bank account into their existing business account onboarding processes.

For many charities, this leads to a prolonged sequence of information being exchanged back and forth, without it being clear if the bank will be able to offer them a service. This can be an incredibly frustrating experience.

Due diligence considers many aspects of the organisation applying for banking services:

• The ‘Know Your’ principles. Here the bank is seeking to understand and verify who the trustees are, establishing from the charity’s structure who the key account and controlling parties are.
• Source of funds and source of wealth. Banks will seek to establish where the initial funds to be received into the bank account are coming from – is this a one-off large donation or funds from the sale of an asset, for example? They will also want to understand the type of payments going into the accounts on an ongoing basis (e.g. repeat donations or recurring grants).
• Trading and operating locations. Charities operating in countries subject to sanctions or deemed as high risk are more likely to find it harder to open a bank account than those purely based domestically. This is particularly the case for smaller charities less likely to have a Relationship Manager able to perform the initial and ongoing risk assessment.
• PEPs, sanctions and adverse media screening. There is heightened risk associated with supporting politically exposed persons (PEPs) and no bank will support someone subject to sanctions or where they might have been convicted of a crime.

Once an account is open, charities are subject to ongoing monitoring through trigger events and a yearly periodic review. For example, a bank will need to revisit its original due diligence where there has been a change in trustees, evidence of suspicious transactional activity or adverse media checks through its daily screening activities.

Against the backdrop of it getting harder for charities to access banking that’s bespoke and suited to their needs, here are some key tips that might help make establishing and maintaining a relationship just that little bit easier:

1. Do some research and don’t be afraid to ask questions. It’s important to understand how the bank or financial services provider operates. For example, who does it support, what are its ethical boundaries and how does it measure its social impact? While deposits under FCA regulated banks are covered up to £85,000 by the Financial Services Compensation Scheme, that’s not always the case with non-bank financial institutions. Certain protections are still afforded but ‘how safe is our money?’ should be an important question for all trustees to ask.
2. Focus on what matters for your circumstances. Each charity will have different financial needs and goals. If you are holding high levels of surplus cash, then the focus might be on finding an account that pays a high savings interest rate, or a fee-free bank account could be more important. Each bank will have different eligibility criteria and offer varying services for you to explore.
3. Keep a KYC pack ready and always up to date. Understandably, one of the biggest challenges and frustrations for a charity is finding its accounts being frozen, or worse, being issued with a notice to close because the bank no longer holds up-to-date information. Ensuring you are always able to respond proactively to any information requests and on the front foot when it comes to communicating any changes will help avoid the panic of one person hanging onto the bank mandate.
4. Keep banking under review and run regular benchmarking exercises. It can take so long to establish a banking relationship and get an account opened that often the last thing the charity wants to do is go back through another onboarding process. However, it’s important to continually evaluate whether you are getting the value, service and support needed to successfully operate, acknowledging that a bank’s appetite is continually evolving and new entrants are joining the market all the time.

Click here to watch our recent ICAEW webinar:

• Banking challenges for charities – presented by Allica Bank

^{*The views expressed are the author’s and not ICAEW’s}