Terrorism is the national obsession du jour, and its costs are high and rising rapidly. Our fears of terrorism are real and justified, but if we allow ourselves to be obsessed with them, we will inevitably do stupid things that will likely make matters worse, not better.

Next up for scrutiny through a terrorism-obsessed lens is international philanthropy, a $4 billion endeavor comprising grants from public charities, private foundations and corporations to provide an endless array of goods and services around the world, from sewer construction to democracy training, from micro-lending to research, treatment and counseling for victims of the global AIDS pandemic. Suddenly, international philanthropy has come to be suspected as a major source of hidden funding for terrorist organizations.

The U.S. Treasury Department has proposed “Anti-Terrorist Financing Guidelines” that would impose substantial data collection and vetting responsibilities upon every grant-maker for every grant to a foreign recipient organization. These responsibilities include obtaining information in English that may not even exist, and determining whether any bank with which the grantee does business is “a shell bank,” “operates under an offshore license” or has “adequate money laundering controls.”

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Compliance with these new Treasury Department rules is sometimes impossible and, at best, would be complex and costly. At worst, they would effectively turn funders into intelligence gathering agencies. This, according to Ruth Messinger of American Jewish World Service, compromises the independence, impartiality and even security of grant-makers, as well as the relationship of trust with grantees that is the basis of good grant-making.

Simply asking some of the required questions has caused grantees to view funders as arms of the American government. According to Josh Mintz of the MacArthur Foundation, larger foundations have the capacity to absorb the costs and adapt to the new rules. Some smaller ones, however, may reduce or eliminate their international grant making, and others will be discouraged from entering the field. Several American corporations have already suspended their matching gift programs until the status of the guidelines is clarified, according to Barnett Baron, vice president of the Asia Foundation.

Is the aggressive stance of the Treasury Department justified by evidence of the magnitude of the problem? Whatever supporting evidence the Treasury Department may have has not been publicly disclosed, beyond a September 2003 Office of Foreign Assets Control report stating that only 23 charities worldwide, including three in the United States, have had their assets frozen since September 11, 2001. The largest of the three charities in the United States, The Holy Land Foundation, had little more than $6 million in assets.

Driving some international funders out of business, seen by some as an unintended consequence of the onerous guidelines, might in fact be deliberate. David Aufhauser, the Treasury Department’s then-general counsel, testified in September 2003 before a House subcommittee regarding the underlying strategy of regulating grant-makers: “Only a small measure of success in the campaign is counted in the dollars of frozen accounts. The larger balance is found in the wariness, caution and apprehension of donors.”

If heavy-handed regulation of international grant-making shrinks the business, does it really matter? Isn’t the war on terrorism more important than a few hundreds of millions of dollars in international grants?

Here is where we bump directly into the costs of obsession: The truth is that grant-making should be seen as part of the war on terrorism. American military might, imposing as it is, will never by itself be enough to defeat terrorism. Recruiters for terrorism will find slim pickings where there is economic security and real hope for a peaceful future. Creating such societies is the goal of most international grant-making. How foolish and shortsighted to restrict their capacity to participate in this effort or to squeeze them out entirely.

Is there a better way to ensure that tax-exempt dollars do not fund terrorism? There is, according to the organizations that represent most public charities and private foundations, including InterAction, Independent Sector, the Council on Foundations and the American Bar Association. Some of them suggest that an added layer of due diligence to ferret out “terrorist” recipients is reasonable if it applies to “high risk” grants rather than to all grants.

Others suggest that even this is misguided because it is the government’s responsibility to develop lists of “blocked” (terrorist) organizations; the responsibility of the funder should be limited to not making grants to entities so identified. Why, after all, should it fall to the foundations to gather “intelligence” and make judgments as to who is to be deemed a “terrorist”?

Despite disagreement regarding the best way to ensure that funds do not flow to any terrorist enterprise, most grant-makers agree that the Treasury Department guidelines as written are counterproductive. Alas, they also predict that the guidelines are likely to become mandatory in more or less their present form. This would be a serious blow to international grant-making, forcing the war on terrorism into a military straightjacket while ignoring its essential companion — the war on ignorance, disease and intolerance.

Kathleen Peratis, counsel to the New York law firm Outten & Golden LLP, is a board member of Human Rights Watch.

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