Legal practitioners, charity executives, and directors and other officers of charities registered under the Australian Charities and Not-for-profits Commission Act 2012 (Cth) should be aware of whether or not the ‘external conduct standards’ (ECS) apply to the registered entity if engaging in overseas activities.
Minimum governance standards
For context, to maintain the charitable endorsement by the Australian Charities and Not-for-profits Commission (ACNC) – upon which charitable tax and other regulatory concessions and exemptions depend – ACNC-registered entities (excluding ‘basic religious charities’) must comply with the five minimum ‘governance standards’ provided under the Australian Charities and Not-for-profits Commission Regulations 2013 (Cth) (ACNC regulations):
- Purposes and not-for-profit nature
- Accountability to members
- Compliance with Australian laws
- Suitability of responsible persons
- Duties of ‘responsible persons’ (for example, charity directors, management committee members, trustees, etc.).
External conduct standards
In addition, all ACNC-registered entities (including ‘basic religious charities’) must also adhere to the ECS provided for under the ACNC regulations if they are operating outside of Australia:
- Activities and control of resources (including funds)
- Annual review of overseas activities and record-keeping
- Anti-fraud and anti-corruption
- Protection of vulnerable individuals.
The ECS are intended to “support registered entities in fulfilling their objectives, by providing a minimum level of assurance that they meet public expectations in relation to their conduct when they undertake activities (including providing funds), or otherwise support activities, outside Australia”.1
Application of ECS
The ECS apply to an ACNC-registered entity where it is either “operating outside of Australia” or in circumstances where it is “working with third parties that are operating outside Australia”.2
An ACNC-registered entity, or a third party, “operates outside Australia” if it operates outside Australia in whole or in part.3 However, the relevant entity does not operate outside Australia only because it carries out activities outside Australia that are directly related to the pursuit of the registered entity’s purposes in Australia and merely incidental to its operations in Australia.4
ECS 1 – Activities and control of resources
ECS 1 requires an ACNC-registered entity to take reasonable steps to ensure any activity outside of Australia is consistent with the not-for-profit purpose and character, to maintain reasonable internal control procedures to ensure that funds, equipment, suppliers, and other resources used outside of Australia are consistent with the purpose and character.5
The entity must also take reasonable steps to ensure resources provided to third parties outside Australia are applied in accordance with the purpose and character and with reasonable controls and risk management processes in place.6
Finally, the entity must comply with Australian laws involving the following areas while operating overseas:7
- money laundering
- financing of terrorism
- sexual offences against children
- slavery and slavery-like conditions
- human trafficking and debt bondage
- people smuggling
- international sanctions
ECS 2 – Annual review of overseas activities and record keeping
Under ECS 2, an ACNC-registered entity must obtain and keep records for its operations outside Australia. The records must include information necessary to be able to prepare a summary of its activities and related expenditure outside Australia on a country-by-country basis.
The records must be kept for each financial year in which a charity operates outside Australia or gives funds or other resources to third parties for use outside Australia.8
ECS 3 – Anti-fraud and anti-corruption
ECS 3 requires an ACNC-registered entity to take reasonable steps to minimise any risk of corruption, fraud, bribery and other financial impropriety by its responsible persons, employees, volunteers and third parties outside Australia.9
The entity also needs to take reasonable steps to identify and document any perceived or actual material conflicts of interests for its employees, volunteers, third parties and ‘responsible persons’ (for example, charity directors, management committee members, trustees, etc.) outside Australia.10
ECS 4 – Protection of vulnerable individuals
Finally, ECS 4 requires an ACNC-registered entity to take reasonable steps to ensure the safety of vulnerable individuals overseas, including where the individuals are (in general terms):11
- provided with services and accessing benefits under programs by the charity (whether directly or through collaboration with a third party), or
- engaged by the charity, or a third party in collaboration with the charity, to provide services or benefits on behalf of the charity or third party.
When is an entity ‘operating outside Australia’?
In general, most activities undertaken by an ACNC-registered entity outside of Australia will be considered as ‘operating outside Australia’. These include (for example):12
- sending money or resources overseas
- sending staff, volunteers, members, or beneficiaries overseas for purposes outside Australia
- conducting activities or working overseas
- buying goods and services from overseas suppliers (including online purchases), or
- working with individuals or organisations located overseas.
When do the ECS not apply?
However, the ECS may not apply in all circumstances. For example, if the overseas activities are ‘directly’ related to a purpose intended for beneficiaries in Australia (and the activities are merely an ‘incidental’ part of its operations), then the ECS may not strictly apply.13
The ACNC’s regulatory guidance has provided the following examples where the ECS do not apply:14
- sending Australia-based beneficiaries overseas for the purposes of obtaining treatment (for example, sending Australian patients overseas);
- sending Australia-based staff to a conference for training overseas (for example, staff of a university attending training conference is directly related to a purpose in Australia and students will ultimately benefit), or
- obtaining goods from outside Australia for a purpose in Australia (for example, a charity purchases a small amount of irrigation system supplies from a company based in South Africa to benefit people in remote Australian communities).
Working with third parties
Furthermore, the ECS are likely to apply in respect of the ACNC-registered entity’s work or projects that involve third parties overseas.
For example, where an ACNC-registered entity raises funds which are given to a related entity based overseas to be subsequently distributed for charitable purposes, then the ACNC-registered entity must comply with the ECS for the initial transfer of the funds to the related entity, along with the related entity’s subsequent distributions.
Similarly, an ACNC-registered entity must also comply with the ECS in respect of work undertaken overseas with a foreign organisation (for example, a foreign charity not registered with the ACNC). The ACNC-registered entity must comply with the ECS for its own overseas activities, in addition to the activities that relate to the projects where they work together.
General compliance with the ECS
The ACNC does not prescribe the exact nature and type of activities that must be undertaken to satisfy compliance with the ECS, but recommends the measures should consider the following:15
- the nature, scale and complexity of its overseas activities or funding
- the locations in which it operates
- the extent of work with third parties
- its size and number of staff and volunteers
- its experience in managing similar projects or activities
- the effectiveness of current policies and procedures that govern its activities or funding
- any issues or difficulties it has experienced with previous overseas activities or funding.
Importantly, charities are not required to submit anything to the ACNC to provide ongoing ECS compliance. However, if requested by the ACNC, a registered entity must be able to provide appropriately documented evidence to demonstrate that appropriate steps have been taken towards meeting each ECS.
If an organisation is applying for registration as a new charity with the ACNC (or under a new charitable sub-type), then the ACNC will require details on the steps which it intends to take in order to comply with the ECS.
Since ACNC-registered entities are required to strictly comply with the ECS, but are not required to regularly report, it is incumbent upon each registered entity to ensure compliance.
The first step for legal practitioners, charity executives, and directors and other officers of ACNC-registered entities is therefore to familiarise themselves with the regulatory obligations involving the ECS, determine whether an entity is required to comply, and, if so, to then take steps to ensure its operational processes, contractual, and governance arrangements help ensure compliance at an appropriate level.
This article appears courtesy of the Queensland Law Society Not for Profit Law Committee. Richard Hundt is Principal Lawyer at Hundt Law and a member of the committee.
1 ACNC regulations, s50.1.
2 ACNC regulations, s50.20(2); s50.25(2), s50.30(2), and s50.35(2).
3 ACNC regulations, s50.4(1).
4 ACNC regulations, s50.4(2).
5 ACNC regulations, s50.20(3)(a)-(b).
6 ACNC regulations, s50.20(3)(c).
7 ACNC regulations, s50.20(4).
8 ACNC regulations, s50.25(3).
9 ACNC regulations s50.30(3)(a).
10 ACNC regulations, s50.30(3)(b).
11 ACNC regulations, s50.35.
12 ACNC: When do the External Conduct Standards Apply?
13 ACNC regulations, s50.4.
14 ACNC: When do the External Conduct Standards Apply?