Operational and Financial Risk in International Development: A Living Case Study

By its very nature, international development takes place in extremely complex environments where situations range from civil conflict to natural disasters or political changes.

Industry professionals working in international NGOs must adapt to these evolving circumstances quickly and effectively.

In aid of this, we recently hosted a workshop, in partnership with Bond, to bring together those at the forefront of international development and work through operational and financial risk scenarios. The goal was to encourage participants to discuss common issues and consider alternative approaches.

Every sector professional has had a project impacted by complex challenges and each holds an awareness of the vital interrelations between their ability to deliver projects and the management of organisational finances and banking relationships. This is why the event was built around hosted simulations, to test how theory converts into practice, exploring a range of issues including FX volatility, managing in low-liquidity environments, sanction compliance, counterparty risk, aid diversion, fraud risk and cyber security.

Our VP of IDO Global Markets, Mark Tait, began the session by challenging organisations to take a risk appreciative approach, rather than a risk ‘management’ or ‘mitigation’ approach, to turn challenges into opportunities for progress. Tackling risk from the outset and in partnership with banking providers, is essential to managing challenges and being transparent in this heavily regulated environment.

With this overarching view, we had three very productive scenarios with important lessons learned.

Simulation 1: Counterparty risk

For the first scenario, we looked at the counterparty risk, with NGOs facing the possibility the other party will not fulfil their obligations. We were able to draw some interesting conclusions.

Firstly, holding funds in a weakening currency can have a material effect on the financial viability of a country’s operation. Providing funding to country offices on a just-in-time basis can help mitigate risks. However, this approach creates a significant dependency on your banking partner’s ability to deliver funds promptly. So whilst bank selection should prioritise financial security and stability, never underestimate the critical support and influence national banks can provide in times of crisis.

Simulation 2: Sanctions

The second scenario looked at preparing for sanctions. The first key takeaway from the session was the importance of preparedness. Engage with your existing banks. Understand their compliance requirements and how you can develop processes and reporting protocols to satisfy those requirements.

Engaging with OFSI (HM Government’s Office of Financial Sanctions Implementation) to ensure complete sanction compliance is an essential step. Finally, engaging with other banks is a great way to understand varying risk appetites and their offers of different solutions for operations in challenging regions.

Simulation 3: No banks

In the scenario where there are no banks – ensure you have a robust method of verification, which has been agreed with the agent/implementing partner to record cash payments received by registered individuals. Make sure to protect yourself by performing enhanced due diligence checks on local cash agents and intermediaries to understand financial crime risk.

While Most cash agent services are legitimate businesses that support their communities, enable financial inclusion, and facilitate many humanitarian projects in regions without banking access. Try to avoid mechanisms that might support or facilitate terrorist financing or money laundering. For payment terms in service agreements, try to secure payment in arrears. Whilst you may pay a slight premium for this, it increases accountability and therefore is likely to improve service delivery and control mechanisms.

Overall, the event was a great success and produced key actionable insight for those working for international NGOs. We were thrilled to receive very positive feedback, particularly the thoughtful conversations and relevance of the event for a whole host of different job roles including finance roles, programmatic roles and risk roles – ensuring everyone is working effectively to appreciate the risks involved in international development.

Cornelius Clarke,
International Development Client Coverage and Global Markets VP - cornelius.clarke@crownagentsbank.com