What Price Charity? Tips for Cautious and Informed Giving
April 2007
IN THIS ISSUE
— Cruel Intentions: A History of Charitable Organization Fraud
— Protecting Yourself Against Charitable Organization Fraud
— In the next issue
GREETINGS!
Welcome to the April edition of our newsletter. In this issue we’ll look at the risks involved with charitable giving, and offer some ways to manage that risk. As the tax filing deadline approaches, many clients may be looking for ways to minimize their tax burden while promoting good works. Giving to lesser-known charities can be very rewarding but can also carry greater risks.
Your clients — whether corporations, charitable endowments, or high net worth individuals — have done well, and now they want to do good for others. Yet not every “charitable organization” is working in the interest of the less fortunate, and money meant to improve the world can go to waste.
CRUEL INTENTIONS: A HISTORY OF CHARITABLE ORGANIZATION FRAUD
When the last member of the royal Hawaiian family passed away in the late 1800s, she left her vast wealth to a foundation she had created to educate the children of Hawaii, which was known as the Bishop Estate. The Estate’s goal was to give every native Hawaiian child an education, regardless of their family’s financial means, that would provide the foundation for success in their future.
As can often happen when vast sums of money are left in the care of a select few, however, the Bishop Estate’s board ultimately lost sight of their noble purpose, instead enriching themselves and their cronies, siphoning off financial largesse meant to better the lives of their state’s indigenous children.
The trustees even sought to move the organizations’ headquarters to a South Dakota Indian reservation, thousands of miles away from its constituents, to avoid Internal Revenue Service oversight. The board desired that lack of oversight because it had, among other items, illegally lobbied Congress and spent thousands of dollars at adult entertainment venues, even investing in an Internet-based adult film directory. Finally, as school budgets were cut, many of the trustees gave themselves lavish raises and appointed friends to nominal, high-paying jobs.
PROTECTING YOURSELF AGAINST CHARITABLE ORGANIZATION FRAUD
For well-intentioned donors, either individuals or corporations, few events carry a sting as strong as being duped by a fraudulent or dishonest charity. When John G. Bennett founded his charity, The Foundation for New Era Philanthropy, in 1989, he immediately became the toast of the town in Philadelphia social circles, widely acclaimed for his charitable efforts. What wasn’t known at the time was that he was running a dressed up Ponzi scheme, using initial donors’ money to secure a sizable loan and draw in new investors, using the new money to pay off the old investors. By the time the scheme unraveled and New Era filed for bankruptcy in 1999, it had accumulated $550 million in debt.
While a thorough and professional vetting of all potential recipients of charitable donations is always best, there are some simple steps you can take to avoid being misled.
• Contact the local Better Business Bureau to determine if others have filed complaints.
• Check county records to determine if there are any unpaid liens in the name of the organization or its principals, and contact the lien holders to assess what happened.
• Check county and federal litigation records to determine if the charity has been the subject of litigation for nonpayment or other abuses of trust.
• Where applicable, analyze the Form 990 filed by the organization with the Internal Revenue Service. Most public charitable organizations which receive less than $25,000 in grant money annually do not have to file reports.
Taking these simple steps can provide some peace of mind before your clients make donations. If the stakes are high and large donations are being considered, however, it is always best to have a professional fraud examiner interview former employees and grant makers in addition to taking the steps above to make sure the charity is a reputable one.
IN THE NEXT ISSUE
Next month, we’ll look at how various financial statement frauds — including mischaracterizing expenses and the use of related party transactions to sweeten the pots of relatives and others — can affect your company’s bottom line, and offer tips on how to detect and prevent these types of frauds.