The Securities and Exchange Commission (“SEC”) has issued Memorandum Circular No. 25, Series of 2019, or the “2019 Guidelines for the Protection of SEC Registered Non-Profit Organizations from Money Laundering and Terrorist Financing Abuse (“2019 NPO Guidelines”). The 2019 NPO Guidelines took effect on 28 December 2019 regarding the following matters:
Internal Audit System (Chapter V)
Under the 2019 NPO Guidelines, non-profit organizations (“NPOs”) at risk, or those NPOs or subset of NPOs identified as at risk of money laundering (“ML”) or terrorist financing (“TF”) abuse based on a risk assessment of the NPO Sector conducted by the Anti-Money Laundering Council and/or the SEC, are required to establish an audit committee or to appoint a responsible officer or employee, whose responsibility is to perform the audit functions. Preferably, such committee/officer/employee shall have accounting and/or finance backgrounds and/or with audit experience. (Section 5.1)
The audit committee or the officer or employee appointed to perform the audit functions shall, among others:
a) Assist the board of trustees in the performance of its oversight responsibility for the financial reporting process, system of internal control, audit process, and monitoring of compliance with applicable laws, rules and regulations, including but not limited to registration requirements, compliance requirements, record-keeping requirements, monitoring system controls, procedures for investigating infractions, and sanctions for violations;
b) Provide oversight over management’s activities in managing credit, liquidity, operational, legal and other risks of the NPO, whereby it shall regularly endeavor to receive information on risk exposures and risk management activities;
c) Perform oversight functions over the NPO’s internal auditors and effectively coordinate with its external auditors and ensure that the internal and external auditors act independently from each other, whereby both auditors are given unrestricted access to all records, properties and personnel to enable them to perform their respective audit functions;
d) Review the annual internal audit plan to ensure its conformity with the purpose of the NPO, whereby such plan shall include the budget necessary to implement it;
e) Discuss with the external auditor the nature, scope and expenses of the audit, prior to commencement of the audit;
f) Monitor and evaluate the adequacy and effectiveness of the NPO’s internal control system, including financial reporting control and information technology security;
g) Review the reports submitted by the internal auditors, including the audited financial statements of the NPO that should have been written and reviewed by an external auditor accredited by the Board of Accountancy;
h) Review the quarterly, half-year and annual financial statements before their submission to the board of trustees, with particular focus on compliance with accepted accounting standards, tax, legal and regulatory requirements; and
i) Coordinate, monitor and facilitate compliance with applicable laws, rules and regulations. (Section 5.2)
Compliance Requirements (Chapter VI)
NPOs at risk shall be subject to the following:
“6.1.1 Existing minimum requirements based on laws, SEC rules and other requirements as may be prescribed by the Commission.
6.1.2 Annual Financial Statements audited by an independent Certified Public Accountant accredited by the Board of Accountancy.
6.1.3 Conduct of mandatory background checks of the officers and trustees.
6.1.4 Mandatory audit by the Commission of the NPO concerned.
6.1.5 Establishment of an internal audit system.
6.1.6 Attendance in sustained outreach program of the Commission.”
Preventive Measures (Chapter VIII)
NPOs at Risk shall establish and record the true and full identity of their donors/sources of funds identified as a Politically Exposed Person (“PEP”). (Section 8.1)
PEPs refer to an individual who is or has been entrusted with a prominent public position/function in:
a) the Philippines with substantial authority over policy, operations or the use or allocation of government-owned resources;
b) a foreign state, or
c) an international organization.
It shall be presumed that a person who has been entrusted with a prominent public position/function as referenced above shall continue to be considered a PEP, even if he or she no longer holds such a position, unless it is clearly shown otherwise.
The term “PEP” shall include immediate family members, and close relationships and associates that are reputedly known to have:
a) joint beneficial ownership of a legal entity or legal arrangement with the main/principal PEP, or;
b) sole beneficial ownership of a legal entity or legal arrangement that is known to exist for the benefit of the main/ principal PEP. (Section 1.4.7)
Preventive measures which NPOs at Risk, in relation to their donors/sources, are required to undertake are:
In case of domestic PEPs or persons who have been entrusted with a prominent function by an international organization, such NPOs shall:
a) Take reasonable measures to determine whether the donor is a PEP; and
b) In cases when there is a higher risk relationship, adopt measures (b) to (e) below.
In relation to foreign PEPs, such NPOs shall:
a) Put in place risk management systems to determine whether the donor is a PEP;
b) Obtain senior management approval before establishing (or continuing, for existing donors) such relationship;
c) Take reasonable measures to establish the source of wealth and the source of funds of donors identified as PEPs;
d) Conduct enhanced ongoing monitoring on that relationship; and
e) Institute reasonable measures to ensure that the NPO’s funds are disbursed to the declared beneficiaries and/or used for the project/s stated in the SS and COEP. (Section 8.1)
NPOs at Risk shall adopt the following preventive measures for protection against ML and TF:
- Maintain information on their activities and those who control or direct their activities;
- Have controls in place to ensure that funds are fully accounted for and spent in a manner consistent with the NPO’s stated activities;
- Follow a “know your beneficiaries and associate NPOs” rule; and
- Report to the Commission any fact within its knowledge that gives rise to a suspicion that such NPO is being exploited for ML and/or TF purposes. (Section 8.3)
Mandatory Disclosures for all SEC Registered Non-Stock Corporations (Chapter IX)
All SEC registered Non-Stock Corporations are required to accomplish the revised Mandatory Disclosure Form (“MDF”), a copy of which is attached to the 2019 NPO Guidelines, and to submit the same to the SEC through the Anti-Money Laundering Division of the Enforcement and Investor Protection Department or the nearest SEC Extension Office within sixty (60) days from the effective date of this Circular. (Section 9.1)
All non-stock corporations registered after the effectivity of this Circular shall submit the required information in the MDF, as may be applicable, within six (6) months from date of registration. (Section 9.3)
Failure to comply with the requirements of this Chapter is a cause for revocation of the Certificate of Incorporation of the non-complying Non-Stock Corporation. (Section 9.5)