Charities play a vital part in society by supporting communities, funding healthcare entities, and providing emergency relief during crises. Millions of individuals give to charity, hopeful that their donations will be received by the people who need them. Unfortunately, this generosity has also been exploited in cases where donations never reached the people they were meant to help.

In one of the biggest charity scam cases in American history, four cancer charities were caught embezzling over $187 million in donations. The donors believed that their donations were going to cancer patients, but the funds actually went to money for vacations, vehicles, and paychecks. The Federal Trade Commission (FTC) dubbed it one of the most egregious charity scams in history. Now the question arises, how safe are the donations we trust with our generosity?

For banks and financial institutions, such cases are a reminder that transactions involving charities need to be screened closely, with further scrutiny of individuals or organizations when necessary.

What is Charity Fraud and How Does it Operate?

Charity fraud occurs when funds intended for charitable purposes are deliberately misused or misappropriated. This ranges from setting up fake non-profity organizations to redirecting donations from legitimate charities through embezzlement. Some fraudsters use a shell charity as a cover for money laundering, concealing illicit funds in the disguise of real charitable contributions.

“The fact that you are giving money to charity does not mean that you need

not try to find out whether that charity is a fraud or not.” ~ C.S. Lewis

This is not the only way fraudsters operate. Sometimes, they exploit disasters or conflicts with the help of online platforms by using emotional stories and striking images. These scams can spread around the world in no time. The public’s trust is broken, and so is their loss of finances.

Charity fraud is not limited to one type of organization or region. When there is a lack of oversight, weak governance, or anti-fraud controls, the donation will be at risk.

Why Are Some Charities Vulnerable to Financial Crime Risks?

Charities rely on public trust, but the very trust makes them vulnerable to financial crime threats. Donations that cross borders travel through several jurisdictions in seconds, creating gaps in monitoring and enforcement that criminals can take advantage of. Small or newly established charities are even more vulnerable. In their absence, effective governance, periodic audits, or sound accounting practices, well-intentioned donations can be hijacked. Most often, it can result in charity embezzlement.

The advent of online charity has only made matters worse. The internet facilitates the fast transfer of money and, in most cases, anonymously. Criminals take advantage by creating sham campaigns or channeling illicit funds through appearing legitimate charities.

This is exactly why FATF Recommendation 8 considers nonprofit organizations a sector at risk of being exploited for money laundering and even terrorist financing. It is a clear red flag for banks and financial institutions: transactions related to charities, especially cross-border transactions, shall keep their guard up and deal with such transactions as high-risk transactions where necessary.

What Are the Most Common Methods of Charity Fraud?

Scammers become more innovative when it comes to exploiting individuals’ acts of kindness. There are some who establish fake charities with names and profiles that are replicas of well-known agencies, so similar to actual ones that even donors cannot distinguish between the two.

Others take it a step further by establishing shell charities whose only purpose is to funnel criminal funds. Online fundraising, such as crowdfunding sites and social media campaigns, opened doors for scammers as well. Fraudsters often use emotional storytelling and urgent appeals to pressure donors into transferring money quickly without giving them enough time to verify it.

FATF 2025 Update of Terrorist Financing Risks warns that social media, messaging services, and crowdfunding platforms are being increasingly utilized to fund terrorism. The risk escalates when end-to-end payment services avoid due diligence, such that it becomes more difficult to track fraudulent charity appeals.

Now imagine donating to a memorial of fallen police officers in Las Vegas, instead of being used for the actual purpose it was being used for personal luxuries. That’s exactly what happened when Michele Fiore, who is a former City Councilwoman, raised donations for the funding of a memorial. The donation was diverted for her own personal use, including her daughter’s wedding expenses. So, what looked like a simple donation turned out to be another fraudulent charity case!

These schemes raise a critical question for both donors and organizations: are their contributions actually reaching those in need or not?

How Do Criminals Use Charities for Money Laundering?

The dark side of giving is that charities can sometimes be exploited as vehicles for charity money laundering. While most nonprofits operate with good intentions, criminals know that charitable donations often receive less scrutiny than commercial transactions.

Charity Fraud can happen in several ways, such as large donations from criminal sources, cross-border transfers justified as “aid,” or even layering illicit money through multiple small contributions. In fact, there have been instances in the real world where fraudulent nonprofits in Europe were used to launder millions of dollars of dirty money into charities through small donations, making charity funds look clean. Even micro-donations, when distributed on charity networks, can be used to launder illegal proceeds.

Banks typically support charities through wire transfers, credit card donations, and digital payment platforms. But these same channels are sometimes misused by fraudsters through anonymous transfers, prepaid cards, or correspondent banking to mask the movement of illicit funds.

In recent years, even some charity organizations have been sanctioned by regulators for their role in facilitating terrorism financing and other illicit activities. These cases show that not every misuse of charities is about stealing money.

Sometimes the goal is more dangerous, which is to make illegal money look clean. It is different from ordinary charity fraud, where donations are taken for personal gain.

Charity money laundering is about disguising criminal funds. That’s why it is essential to have robust Charity AML regulations and effective monitoring.

What Are the Laws and Regulations Against Charity Fraud?

Charity fraud laws protect both donors and nonprofit organizations, although these rules can differ by region. Here is a brief overview of the situation around the globe:

• United States (US):

Federal non-profit compliance is overseen by the IRS, while charity fraud and deceptive solicitation are investigated and enforced by the FTC. These cases can be prosecuted as tax evasion and wire fraud acts, with trustees or organizers incurring severe penalties, including imprisonment.

• United Kingdom (UK):

The Serious Fraud Office (SFO) and the Charity Commission enforce the Charities Act 2011. Trustees are required by law to make disclosures about transparency and proper financial reporting. Misfraud or mismanagement can lead to criminal prosecution or fines.

• European Union (EU):

Charities and NPOs are not classified as AML-obliged bodies under AMLD5 and AMLD6. They are nonetheless subject to transparency requirements, such as registration and disclosure of beneficial owners. Financial institutions, however, should implement a risk-based approach when dealing with NPO transactions, conducting due diligence, and monitoring suspicious activity.

• Global Standards (FATF):

The Financial Action Task Force (FATF) establishes global standards to protect nonprofits from abuse. Its recommendations note that NGOs and charities are exposed to the risk of money laundering and terrorist financing. And it encourages nations to adopt a proportionate, risk-based method to protect donors and legitimate organizations as well.

Despite these regulations, there remain loopholes in enforcement among smaller charities and online fundraising platforms. This calls for the urgent need for charities to embrace technology and compliance methods that detect and identify suspicious behavior, while strictly following Charity AML regulations.

Above all legal frameworks, donors and organizations must be aware of how to react should they notice any suspicious behavior.

How to Report Charity Fraud?

While laws exist to regulate nonprofits, reporting suspected charity fraud remains a critical first step in stopping abuse. Donors and institutions should promptly raise concerns with the appropriate authority in their country, such as consumer protection agencies, charity regulators, or financial intelligence units (FIUs).

In the US, this typically means the FTC or IRS, in the UK, the Charity Commission, and across the EU, the national FIU. In other regions, cases should be reported to regional regulators or financial monitors. Acting promptly prevents further misuse of donations and supports faith in genuine charities.

How Is Charity Fraud Connected to AML/CFT Compliance?

According to the FATF’s 2025 Update on Terrorist Financing Risks, 69% of jurisdictions globally still possess major weaknesses in terrorist financing prosecution. This leaves an opportunity for charities and nonprofit agencies to become exploited. So, thorough monitoring, AML compliance, and risk-based due diligence are important in protecting both donors and the charitable sector.

Charity fraud is more than just ordinary theft, it is directly linked to money laundering and even the financing of terrorism. Fake charities or shell nonprofits may serve as convenient channels to disguise illicit funds, transfer them internationally, or make suspicious donations appear legitimate.

For the banks, the donors, and the regulators, the message is clear: compliance matters. Enhanced due diligence, watchlist screening, and adverse media screening are among the tools used to reveal risks that may connect charities to sanctioned entities or high-risk areas. Without these controls, donor money could inadvertently be used to fund illicit purposes.

Ultimately, AML Charity compliance isn’t just about regulation. It’s about ensuring financial systems are safeguarded, and the public continues to have faith in legitimate charities.

How AML Watcher Helps Financial Institutions in Detecting Charity Fraud?

Preventing charity fraud takes more than good intentions. It takes smart technology and strong compliance frameworks. That’s where AML Watcher comes in. Through advanced screening and monitoring tools, financial institutions can identify risks masked in charitable transactions before they become regulatory or reputational problems.

AML Watcher is constantly monitoring transactions and related parties against worldwide sanctions lists, watch lists, and politically exposed person (PEP) databases. Its adverse media search engine monitors over 415 risk types. This even ensures that no donation or transfer slips through the cracks if it involves high-risk individuals or organizations. Through these tools, financial institutions  can easily pick up on negative signs linked to donors, campaigns, or even charities.

Beyond static checks, AML Watcher also monitors transaction patterns. Whether it’s a sudden surge in cross-border donations, unusually structured micro-donations, or unexplained large inflows, the system identifies unusual activity that could point to money laundering or terrorist financing.

With these tools working together, financial institutions gain real-time visibility and stronger defenses. They make sure that donations remain legitimate, regulatory compliance is met, and public trust is protected.