Know Your Friends: Researching Donors and Supporters
April 2012
IN THIS ISSUE
— No Good Deed Goes Unpunished: Why Vetting Donors Matters
— Setting Limits and Digging Deep: How to Investigate Donors
GREETINGS!
Welcome to the April edition of our newsletter! In this issue, we;ll examine the perils of failing to vet donors and supporters as you might an adversary party, and also look at methods to strengthen the due diligence effort so as to mitigate risk and unwelcome surprises.
NO GOOD DEED GOES UNPUNISHED: WHY VETTING DONORS MATTERS
Nearly every business in every industry, at some point, relies on the support of others — whether a bank loan officer providing credit to a small business or a supplier assuring an anxious owner that a needed shipment will arrive on time. While any such transaction carries a modicum of risk, the difficulties of not fully knowing the party on the other end of a transaction are enhanced when the support is a more public matter, such as a large charitable donation to a university or philanthropic cause, or a sizable donation to a political organization or civic group.
Many such transactions are consummated with nary an eyebrow being raised to question the source of the donation, but missteps in the process of handling donations, while relatively rare (compared to the sheer number of donations overall) are high-profile incidents, the tenor of which can cause long-lasting negative public relations effects if the situation is not detected first on a private basis, and also if not handled sufficiently once in the public sphere. The recent case of John Mazzuto, who had contributed $1.7 million worth of shares in a company that he victimized in a “pump and dump” scheme to Yale University, his alma mater — only to have the school settle with the now-bankrupt company for $1 million — illustrates the financial damage of not doing homework on donors. After Mazzuto was charged, a Yale publication noted that vetting done by the school’s fundraising office focused not on a donor’s background but on their ability to contribute.
SETTING LIMITS AND DIGGING DEEP: HOW TO INVESTIGATE DONORS
When considering donor due diligence, one of the more difficult tasks for an organization is simply to have the desire to ask difficult questions of persons or group which have been an ally, or are perceived as being one in the future. An independent fraud examiner can be key to overcoming the coziness that can exist between an entity and those who support it; to be effective, every due diligence assignment must be thoroughly and impartially undertaken, with no “blind spots” existing because of prior or current relationships between parties.
One measure of difficulty for an organization is to understand that while donor research is generally defensive in nature — it doesn’t generate financial gain — the value of the public image protection it can provide is nearly priceless, and even returning tainted donations after the fact has a positive spin, as Sen. John McCain found in 2006 after returning $20,000 contributed by the families of Sam and Charles Wyly, who were under investigation by the U.S. Securities and Exchange Commission at the time. While not every donor to a given cause can be vetted, setting a threshold for the top tiers of donors and making due diligence on them a regular part of an organization’s duties in the fundraising process can pay significant long-term dividends in terms of positive opinion and the prevention of possibly devastating opinion that can be unleashed when a group is tied — fairly or not — to a supporter whose dealings in other areas were questionable or fraudulent.