United States

Risky business: Education institutions must know source of donor funds


Benjamin Franklin was attributed with the quote, “It takes many good deeds to build a good reputation, and only one bad one to lose it.” Unfortunately, a number of private secondary schools, colleges and universities have learned this the hard way due to scandals related to faculty abuse, sexual assault and cheating. In addition, one reputational risk factor for many institutions that may be overlooked is the source of funds from donors and even families paying tuition. Prestigious private schools, colleges and universities have always attracted the wealthy and powerful, and more than ever, U.S. institutions are attracting the children of economic and political elites from around the world. Furthermore, wealthy and powerful individuals often use philanthropy as a way to burnish their image and deflect scrutiny of their activities. This trend could increase educational institutions’ risk of reputational damage or even violation of government sanctions if funds and donors are not sufficiently vetted.

Regulatory clamp down

In the last several years, there has been a continued focus concerning international and domestic corruption and donations. The U.S. Department of Justice has aggressively prosecuted cases involving foreign corruption, as seen in the recent charges against Fédération Internationale de Football Associatio executives and the department’s use of the Foreign Corrupt Practices Act (FDCPA) against domestic and multinational firms. Likewise, the Department of Justice’s Asset Forfeiture and Money Laundering Section in 2010 created the Kleptocracy Asset Recovery Initiative with the specific goal of identifying and recovering assets derived from foreign official corruption.

Furthermore, the U.S. government along with the European Union and other governments have become increasingly aggressive in their use of financial sanctions to achieve foreign policy goals, with recent emphasis on Iran, Syria, Sudan, Russia and Ukraine. The U.S. Treasury Department’s Office of Foreign Assets Control (OFAC) is tasked with administrating and enforcing U.S. economic sanctions programs, which are comprised of a wide variety of sanctions against foreign states, terrorists, narcotics traffickers, and other targeted individuals. As a result there is increasing inquiry of foreign wealth transfers, in particular by governments and financial institutions. This inevitably trickles down to organizations and individuals with potential exposure to these risks.

Financial institutions bear the brunt of the increased scrutiny and are primary targets of regulatory actions. However, the FDCPA and OFAC sanctions apply to all U.S. persons and entities and there have been a number of recent actions taken against non-bank entities and individuals. The trickle-down effect of enhanced regulatory expectations and scrutiny placed on financial institutions manifests itself in several ways:

  • Initial due diligence: Bank customers are required to provide increasing amounts of information when opening an account, including the purpose and expected use, account owners and common counterparties
  • Ongoing due diligence: Customers are required to provide documentation to support transaction activity and additional information on transaction counterparties to clear potential matches to sanctions lists
  • De-risking: Financial institutions may shy away from new relationships or close existing relationships if they present excessive risk to an institution or if it is no longer cost effective to maintain the relationship because of increasing monitoring and due diligence requirements

Mitigating risks

Educational institutions with significant international student or donor populations may be facing additional clerical burdens providing information to their banks, or potentially the loss of their banking relationship due to de-risking.

Unlike banks, educational institutions do not have a long list of due diligence or sanctions screening requirements. Nonetheless, they could take a page from the banks’ customer due diligence and sanctions screening playbook. Here are a few ways educational institutions can develop a program to address their reputational and possible legal risks:

  • Perform a risk assessment of the student and donor population focusing on geographic risk factors and develop a risk rating methodology that allows the institution to identify and focus due diligence efforts on high risk individuals
  • Develop a policy that clearly defines the institution’s risk tolerance, due diligence requirements and if necessary, identifies prohibited parties or jurisdictions
  • Conduct initial and ongoing due diligence that may include collection of financial information, negative news searches and sanctions screening using public sources and/or subscription databases

Furthermore, an institution’s board of directors or an appropriate board committee should have an appreciation of the risk factors related to be involved in the approval of high risk donors.

A robust, risk-based due diligence program can serve to mitigate the reputational risks faced by an educational institution, while also providing the information needed to satisfy due diligence inquiries from banking partners and avoid being the victim of a bank’s de-risking efforts. In today’s environment of heightened risks and scrutiny, and the ability of technology to instantly spread negative news that can destroy a carefully groomed reputation, these few prudent steps to understand students and donors better are more important than ever.


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