The Hidden Risks Behind Big Donations

On 29 June, the UK Government announced additional sanctions on 13 Russian individuals including Said Gutseriev, a Russian-British businessman. These latest sanctions have resulted in calls for Oxford University to reject a 2019 donation from Gutseriev, illustrating that sanctions compliance and its associated reputational risks can also impact fundraising activity.

Charitable sectors and universities are not immune to public scrutiny when it comes to accepting donations. Aside from ensuring donated funds do not originate from criminal or terrorist activity, these institutions may need to understand to what extent donations may have originated from wealthy individuals who have benefited from supporting the Russian government or oligarchs. As international brands continue to pull out or distance themselves from Russia, public scrutiny may soon force educational institutions to do the same.

Conducting source of wealth due diligence on potential donations, especially those from higher risk donors, can be a powerful tool for charities and universities to mitigate reputational risks. Higher-risk donors may include those from jurisdictions prone to bribery and corruption, donors who are politically exposed or have strong links to government, those whose income is derived from high-risk industries like mining, or even those linked to controversial sectors such as legalised marijuana. Universities and charities should not automatically reject donations from higher risk individuals, but they should apply appropriate levels of due diligence to protect themselves.

For universities specifically, high-net worth individuals, may generally present a higher risk as they may be perceived as having unfair influence over certain decisions. In 2019, the United States Department of Justice (DOJ) investigated a series of fraud allegations charging at least 50 wealthy individuals, including celebrities and prominent businesspersons, who “bought” college admissions for their children, which resulted in a series of scandals.

For years, banks and private wealth managers have utilised the concept of source of wealth due diligence to ensure deposits or investments made by individuals do not derive from illegal activity. In addition to trying to “estimate” an individual’s network, source of wealth due diligence attempts to ensure the amount of money being deposited is aligned with the individual’s wealth profile. Charities and universities should adopt the same practice when accepting large donations and should be comfortable they understand the origin of the donor’s wealth.

A proper source of wealth assessment should go beyond verifying an individual’s occupation. A source of wealth assessment is a variation of Enhanced Due Diligence (EDD) that aims to identify and describe all financial activities that contribute to a person, or family’s, net worth. Beyond occupation, source of wealth may include investments, life events such as inheritances, and property holdings. In the case of young adults claiming wealth through family, it is best practice to assess the sources of wealth of a family unit. This information can be gathered through open-source research, public records, registry information and databases of corporate affiliations. In emerging markets, the information is often publicly available but may not be easily accessible. A certain degree of in-country knowledge is required to accurately conduct due diligence in jurisdictions such as Russia, China and the Middle East.

Risk indicators resulting from source of wealth due diligence may include wealth derived from links to high-risk countries (such as Russia and Belarus), links to illegal activity (such as drug trafficking or money laundering), or links to industries that may represent a reputational risk (such as manufacturing in the Xinjiang region of China linked to Uyghur forced labour). Another risk factor may be unexplained indications the individual has used offshore jurisdictions or complex structures to avoid tax obligations. And finally, absence of a source of wealth narrative may also be a risk factor. For example, it may not make sense for a donor to make a multimillion pound donation who has no public profile or is not linked to any obvious forms of wealth generation.

Learn more about the ethixbase Instant Sanctions Risk Questionnaire

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