Research reveals unintended consequences of financial regulations on South Africa’s NPO sector

By Inyathelo

Photo Credit Ivan Shilov

A landmark study commissioned by Inyathelo, the South African Institute for Advancement has uncovered significant "unintended consequences" of global financial regulations on South Africa’s non-profit organisation (NPO) sector. 

The report, Mitigating the Unintended Consequences of FATF Recommendations, and authored by Dr Michael Cosser, Dr Maxwell Maseko and Adv Gary Pienaar, highlights how measures designed to combat money laundering (ML) and terrorist financing (TF) are inadvertently stifling legitimate work through increased administrative burdens and financial exclusion.

“The research, which used a mixed-methods approach including a national survey, focus groups, and expert interviews, reveals a sector under intense pressure,” said Dr Cosser during a recent webinar with the sector.

Key findings include:

• Financial stress and de-risking: Nearly one in five NPOs (18.4%) is currently unbanked. Furthermore, 62% of organisations that experienced account closures or freezing, cited poverty as the primary reason, reflecting the extreme financial stress many NPOs face.

  
  

• Capacity gaps: Small organisations are the hardest hit; 51.9% of NPOs are micro-enterprises with only 1 to 5 staff members. It is a further concern that 37.5% of surveyed organisations reported having no human capacity in essential areas such as finance, tax compliance, or governance.

  
  

• Low risk, high burden: While the sector’s risk for ML or TF is generally considered medium to low, NPOs face a regulatory overreach. Almost 30% of organisations reported that increased reporting requirements have directly reduced their ability to access funding.

  
  

• Awareness deficit: Despite the significant impact of the Financial Action Task Force (FATF) Recommendations, only 4.5% of respondents claimed to have significant knowledge of FATF’s work.

  
  

Dr Maxwell Maseko, unpacking the implications for the sector, warned that current regulations may be driving NPOs toward informality. 

“Fear and confusion regarding stricter rules are leading some organisations to avoid formal registration altogether, which paradoxically increases the very ML and TF risks the regulations aim to mitigate,” he said.

Focus group participants expressed deep frustration over the digital divide, noting that digitised reporting systems often exclude rural and under-resourced NPOs. There is also a widespread perception of a weak partnership between the government and the sector, characterised by a lack of genuine consultation.

Adv Gary Pienaar reflected on the way forward, with specific pathways to mitigation.

“To safeguard NPOs, our report offers several urgent recommendations that will require multidisciplinary action between government and the NPO sector,” he said.

1. Streamline regulation: Review and simplify the registration system to provide clarity for all stakeholders.

   
   

2. Incentivise self-regulation: Establish an independent statutory body to provide credibility through accreditation for NPOs meeting high governance standards.

   
   

3. Enhance support: The Department of Social Development (DSD) must urgently update the NPO database and provide dedicated training to improve risk literacy.

   
   

4. Financial inclusion: Foster closer collaboration between the NPO and banking sectors to prevent the arbitrary de-risking of legitimate organisations.

   
   

Inyathelo’s Acting Executive Director, Feryal Domingo, reiterated that there is a critical need to balance security with enabling legitimate and socially vital NPO operations.

"Without targeted, risk-based oversight that is sensitive to the realities of the sector, South Africa’s most vulnerable communities, who rely on the NPO sector for social services and education, stand to lose the most,” said Domingo.

This research, which was fully funded by the Ford Foundation, is of cardinal importance to the NPO sector and its ability to render critical services to vulnerable communities. It is however only the start of a conversation and Inyathelo remains committed to continue its role of strengthening and supporting the sector to navigate this challenging space.