How Nonprofits can assimilate Law 976 & 977 – Financial Analysis Unit & Anti-Money Laundering Regulations.

As mentioned in a previous post, Law 976 & 977, denominated Law of the Financial Analysis Unit (UAF for its acronym in Spanish) and Law against Money Laundering, Financing of Terrorism and Financing the Proliferation of Weapons of Mass Destruction (Ley de la Unidad de Analisis Financiero y Ley contra el Lavado de Activos, el Financiamiento al Terrorismo y el Financiamiento a la Proliferacion de Armas de Destrucción Masiva), are the most recent money laundering regulations implemented in Nicaragua. Through the rest of the article the acrononym UAF will be used to refer to the Financial Analysis Unit and the letters ML/FT/PF will be used to refer to Money Laundering, Financing of Terrorism and Financing the Proliferation of Weapons of Mass Destruction.

Nonprofits aren’t left out of these new regulations either. In fact, the laws in mention actually specifically mention and delegate responsibilities to nonprofits.

Even though the UAF does not hold nonprofits as obligated persons, neither is there an article that states that the UAF will supervise directly nonprofits, but the Law 977 does mention in section VI article 37, that the public entities that already regulate will supervise or sanction Nonprofits will now develop specific functions to prevent or identify ML/FT/PF related activities.

This means that now it is ever more important to assure compliance with this new legislation.

What are the responsibilities that Nonprofits have?

As established in law 977 nonprofits have the following obligations:

• Realize financial operations through regulated financial channels;
• Verify all beneficiaries, associated nonprofits and suppliers of the nonprofit;
• Maintain formal accounting records within regulation;
• Fulfill with donation requirements as oriented by supervising entities;
• Maintain complete financial records for at least 10 years;
• When the nonprofit is dissolved, corporate and accounting books need to be deposited with the regulatory entity.

In addition, nonprofits are required to cooperate fully with both supervising and regulatory entities that at any time may request to review documents or specific transactions.

It is interesting to note, that even though nonprofits aren’t specifically designated as obligated persons that have to prevent, detect and report activities that may possibly be linked to ML/FT/PF, the responsibilities of both are almost the same. This is because the only difference is that nonprofits don’t report these suspicious transactions. Instead, they will be under the scrutiny of institutions such as the Ministry of Governance, General Directorate of Revenue (DGI, for its acronym in Spanish) and so on.

How to assimilate these regulations?

The responsibilities that nonprofits have with law 977 are obligatory and even though it may mean significant changes for some nonprofits, with careful planning it can be done.

One of the initial responsibilities is to realize financial operations through regulated financial channels, what does this mean? Well simply put it means that nonprofits need to have a bank account and it will be very important that the account be used for as many, if not all transactions. Cash transactions are very difficult to audit and when they are too frequent it is a warning sign that the nonprofit’s funds may be mismanaged.

Improved internal controls will have to be designed and implemented. Of course, the same controls can’t be applied to each nonprofit, this is because the size, purpose and location of the nonprofit all effect the needs of each organization.

What are some practical examples of internal controls that can be implemented?

• Responsibilities in key financial, procurement and asset custody processes are separated among several employees rather than entrusted to one employee.
• Signatures are required by the originator, approver and financial reviewer at several stages in any financial transaction process in order to avoid unauthorized transactions. Moreover, the organization maintains a document which outlines the key transactions and functions for which approval must be sought and who has the authority to approve the transaction and up to what level.
• Regular checks are done to verify the existence of assets. These checks include regular and surprise cash counts and annual physical equipment inventories.
• A system of double-checks or reviews with all financial transactions is used. Every financial transaction is approved by an employee other than the originator, and has a financial review by a separate employee. In addition, when used, checks require two signatures, and all bank transfers require dual signatures.
• Budget versus actual expenditure reports are prepared and reviewed with senior management on a monthly basis.
• Manuals and guidelines which provide procedures for support functions in the areas of finance, procurement, administration and asset management are required to be followed by all of the organization’s field programs.

Internal controls, also includes “knowing who your beneficiaries are”. What does this mean? In direct terms, we’re referring to what in the commercial sector is called Client (Customer) Due Diligence, or CDD as an acronym.

Now when interpolated to the nonprofit sector, what we are looking at is in effect the requirement that nonprofits will have to collect, review and assess information that can vary from being general to very specific, depending on the risk, on each beneficiary, associated nonprofit or suppliers that a nonprofit works with.

How much information has to be collected? Well general information can consist of establishing the identity of the beneficiary, domicile or tax registration information. While specific information can even go into maintaining hard copies of legal documents, origin of funds or use of funds and so on. The difference depends on the inherent risk of the person(s) with whom the nonprofit will be working with, the duration and the type of relationship that will be initiated.

Record keeping also becomes very important. The accounting department of each nonprofit needs to assure that ALL documents that support transactions are correctly filed and safeguarded. This step cannot be overlooked, or worse underestimated, the importance of making sure that all supporting documents are well filed and archived can’t be overstressed. Your supporting documents are the only documents that will be able to prove beyond a doubt that the nonprofit is compliant with ML/FT/PF regulations.

Susceptibility of Nonprofits in ML/FT/PF Schemes

It is unfortunate, but nonetheless very true – nonprofits are prime targets for ML/FT/PF schemes. The ways in which the schemes can be developed vary, but due to factors such as:

• Public trust bestowed on nonprofits;
• Limited funding;
• Diversity in location and services rendered.

Many times, this creates an opportunity for unscrupulous individuals to try and take advantage of such organizations.

As an accounting firm we cannot stress enough the need for nonprofits to take the time to review:

• What weaknesses exist?
• How to improve or remove weaknesses found?
• What will be the process of regulation and measurement of progress?

The sooner plans can be devised the better, for both the nonprofit itself and your collaborators. In this manner nonprofits can assimilate as best as possible the new regulations stipulated by laws 976 and 977

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SAENICSA | Accounting & Tax Services is a CPA firm located in the Central American country of Nicaragua. Since 1995 we have provided accounting, tax and payroll services to our clients. We hope that you have benefitted from this article on money laundering, financing of terrorism and financing the proliferation of weapons of mass destruction regulations that the Nicaraguan National Assembly recently passed. If you have any questions, feel free to CONTACT us.