By Michael Green (Executive Director and Senior Vice President – North America, Seamless Global) and Kshiti Gala (Head of Research and Consulting Practice – Seamless Global).
Why Regulatory Developments in the Global South are crucial to keep a tab on
Be it localisation, decolonising foreign assistance, community ownership, locally led development, or any other term, the global catalyst to empower local communities continues to be strong. International nonprofits are progressing on their aid localisation journeys, leveraging local expertise to achieve critical development objectives. COVID-19 has accelerated this trend as local management teams continued to drive inGO missions.
In November 2021, USAID Administrator Samantha Power mandated – by 2025, 25% of USAID’s funding would directly go to local organisations, driving a ‘transition of power’ from the Global North to the Global South. By directly funding local organisations, donors recognise the significance of local knowledge, and indigenous practices in shaping development outcomes.
Here, we take a look at how another, perhaps less discussed within the Humentum community, factor is driving localisation: that is, action taken by foreign jurisdictions in the Global South to have more oversight, control, and autonomy within their nonprofit sector. At times, actions from governments are bound by legislation and sometimes, they come in the form of pressures from regulatory officials, leaving the iNGO community in a particularly difficult position to make compliance and governance decisions. In either case, we notice more stringent requirements regarding local governance and control measures. We highlight three jurisdictions where government action is essentially forcing the localisation of the nonprofit sector.
The case of India: Legislation making inflow of foreign funds extremely difficult
In India, there is a special Act to regulate foreign contributions to nonprofit organisations which mandates the government to approve, disapprove and scrutinise foreign funding to such organisations. The Foreign Contribution and Regulation Act (FCRA) has been regulating the nonprofit landscape in India since 1976. The amendment of the Act in 2020 was a turning point in the evolution of Indian nonprofits. The Amendment has impacted how foundations and corporations make grants to Indian NGOs, in several important ways. Key changes under FCRA are:
- Prohibition on sub-granting of funds: Previously, nonprofits were allowed to sub-grant foreign funds they received to other FCRA-registered nonprofits. The amended sub-granting clause now prohibits any onward sub-granting. This means that smaller NGOs receiving grants and funds indirectly from larger NGOs is no longer possible.
- Cap on administrative expenditure: The Act also mandates all administrative expenses to be incurred from foreign funding be reduced from 50% to 20%. This leaves organisations with little flexibility with respect to project-specific fund allocation.
- Uphill task of licence renewals: The ease of applying for and renewing FCRA licences has been reduced significantly. Licence renewals (that enable local nonprofits to apply for and access foreign grants) are at the mercy and complete discretion of the Ministry of Home Affairs.
- Cancellation of licences: The government has cancelled over 6,600 FCRA licences of local NGOs from 2017-2021. Organisations whose FCRA licences have been cancelled in India include Missionaries of Charity, Oxfam, Greenpeace, India Islamic Cultural Centre, Nehru Memorial Museum, Lady Shri Ram College for Women, Delhi College of Engineering, Tuberculosis Association Of India and Medical Council of India. The exact reasons for the cancellation of FCRA licences remain at the discretion of the Ministry of Home Affairs, the equivalent of the Department of Homeland Security in the US.
Overall, FCRA Amendments have redefined the terms of acceptance, transfer, and utilisation of foreign funds. Non-compliance has been treated with utmost severity, credible non-profits have had their licence suspended and bank accounts of nonprofits have been frozen. Drastic measures to scrutinise foreign aid have resulted in nonprofits having no choice but to fundraise at a national level.
The case of Indonesia: Inching Further Forward towards greater regulation of iNGOs
If we look at Indonesia – it has three primary forms of nonprofits, collectively classified under the law as ‘societal organisations’. These are either (a) Foundations (b) Associations, or (c) Societal Organisations without a legal entity status. Only foundations can be founded by foreign entities. To regulate the permits and validation of NGOs established by foreign parties, the Indonesian Government has issued further regulations:
(I) Foreign organisations regulated further: The regulation applies to organisations established by foreigners that are formed as:
- Foreign Foundations, or similar designations, headquartered in a country that has diplomatic relations with Indonesia. These may either manage their funds independently or serve as Implementing Agencies to implement programmes on behalf of a foreign donor.
- Indonesian foundations established by foreign citizens or foreign citizens together with Indonesian citizens.
- Indonesian foundations established by foreign entities.
Similar to the FCRA regime in India, both Independent Foreign Foundations and Implementing Agencies are required to be registered under the Ministry of Foreign Affairs (MOFA).
(II) Requirement of obtaining multiple permits: In order to operate in Indonesia, Foreign Foundations must obtain:
- A principal licence issued by MOFA after obtaining consideration from the Permit Team, which consists of various ministries and government institutions. A principal licence is valid for up to three years and can be extended; and
- An operational licence based on a Memorandum of Understanding (MOU) between a Foreign Foundation and the technical ministry/institution designated by the Permit Team and an annual work plan with the local government.
Indonesian foundations formed by foreign citizens (with or without Indonesian citizens) or by foreign legal entities must obtain consideration from the Permit Team (headquartered in Jakarta and part of the MOFA) before being registered as legal entities with the Ministry of Law and Human Rights. The point of requesting the consideration is to ensure that the organisation’s purpose and objectives align with the welfare of Indonesians and social good.
(III) Limitations on Personnel to Localise Talent: A Foreign Foundation may assign a maximum of three foreign national staff members to support its activities in Indonesia. Before the assignment, the Foreign Foundation must submit an application for assignment of foreign staff to the ministry/government institution designated by the MOFA. The assignment of foreign staff will not exceed five years, which may be extended, subject to the provisions of prevailing laws and regulations on human capital and immigration.
Various Indonesian iNGOs have reported enormous government ‘pressure’ not to stir controversy. In September 2022, on account of iNGOs critically evaluating the palm oil industry and conflict in Papua, a House of Representatives member suggested the involvement of the State Intelligence Agency and the National Police to investigate the activities of foreign NGOs.
Additionally, the task of obtaining an MoU with the government (a requirement for iNGOs to conduct research and development work), has become increasingly difficult. It may take months – there may be a 20-person evaluation team from ministries of intelligence, finance and foreign affairs, before agreeing upon a MoU with the iNGO.
Lastly, international development organisations that receive funding from both public (e.g. USAID) and private (e.g. Ford Foundation) donors to do work in Indonesia are being pressured to open two separate entities; one for each source-type of funding. While there is no piece of legislation to point to, the development leads to the trend that foreign jurisdictions increasingly want oversight, visibility and control.
The case of Kenya: Legislation mandating iNGOs to be led by locals
In January 2013, Kenya approved the Public Benefits Organisations (PBO) legislation to promote localisation of nonprofits. Some headline components of PBO include:
- The iNGO would have to demonstrate an ‘act of public good’ – that it will benefit and improve the lives of the population and the citizens of Kenya.
- There should be a Kenyan among the 3 top three officials when registering an iNGO. A Kenyan must hold one of the key positions of chairman or treasurer.
- At least one-third of all the board members must be Kenyan for all foreign-based NGOs
- Fifteen per cent foreign funding cap for NGOs: The legislation restricts the amount of funds Kenyan PBOs can receive from external sources to just 15 percent of their budget. The provision also allows for greater government monitoring of PBO finances. Organisations, particularly those focused on strengthening democracy and human rights, and combating corruption, receive substantial funding from outside Kenya. It is precisely these organisations that challenge human rights violations, identify environmental destruction and question government action are sought to be monitored and controlled through such regulations (a striking similarity with the Indian FCRA)
Seamless Global making sense of localisation
To sum up, a complex set of questions determines whether and how iNGOs are allowed to operate in a country if they can access funding. There is an underlying thread of national governments not wanting to be criticised, held accountable and challenged by iNGOs. Hence, national governments ask questions including:
- What monies are entering through nonprofit channels?
- What type of legal entities and structures are funds allowed to flow into?
- What type of work is being undertaken by the iNGO? Does it fall under ‘national interest’ – as defined by government regimes and national regulatory bodies?
- Does the iNGO’s work suit the government’s agenda or critically challenge its policies?
There are many moving parts when we talk about the localisation of aid. The action – formal or informal, from foreign and national governments, is a critical factor to consider when discussing the topic. At Seamless, our technical experts are attuned to both legal and quasi-legal developments impacting the international nonprofit sector. We undertake extensive research and unravel the latest regulatory changes on paper and on the ground. We work with organisations to develop creative and compliant solutions. We aim to enable iNGOs to continue their missions despite the increasingly opaque operating environment in various developing countries.