When Good Intentions Aren’t Enough: Detecting Charity Fraud

July 2016

IN THIS ISSUE

— No Good Deed Goes Unexploited: Types of Charity Fraud
— Detecting Fraudulent Activity in Non-Profit Groups

GREETINGS!

Welcome to the July 2016 edition of our newsletter! In this issue, we’ll examine fraud involving charitable organizations and look for ways to detect and prevent it.

NO GOOD DEED GOES UNEXPLOITED: TYPES OF CHARITY FRAUD

In recent months, numerous headlines have appeared alleging that different types of parties — from executives to member of Congress — have used seemingly innocuous, federally tax-exempt charitable organizations to launder money, or to support extravagant lifestyles, without making grants to actual recipients as required by federal law.

In some instances, non-profit groups have been alleged to be used as “slush funds” for the founders or officers, while soliciting donations for items such as scholarship funds which were never established. Other groups avoid complying with various Internal Revenue Service requirements, including routine audits of its finances by outside auditors. These audits can also reveal other information relevant to potential donors, including conflicts of interest between officers and donors or the groups to which the foundation contributes funds.

DETECTING FRAUDULENT ACTIVITY IN NON-PROFIT GROUPS

If a high-net worth client, or organization, is considering giving to a charity, some due diligence techniques can be effective in identifying “red flags” of concern. Has the group had its federal tax-exempt status revoked? Has it registered with the appropriate agency (often under the attorney general) in the state where it was formed? Were there any consumer complaints filed with the relevant state agency, and has it been sued in civil courts on any level? Also, groups that receive federal funding can be scrutinized by the inspector general of the federal agency which makes such a grant. Each of these avenue can lead to better understanding an entity’s operations, and could start to develop indicators of fraud.

If fraudulent activity is suspected based on research like that described above, several other steps should be considered. Former employees of a non-profit — often under-staffed and possibly using limited resources — can be a useful resource but care is also required as some such employees may have been parties to any improper activity. If a review of regulatory files identifies complaints, or litigation, interviews with opposing parties may also prove fruitful. In some instances, non-profit groups compete with one another for specific funds, and reaching out to a competitor – while remaining aware of that party’s own interest and agenda — could also be useful. If public records indicate that fraud may be present, but a contribution or other support is still being considered, careful interviews may help better inform a decision or change a client’s course of action altogether.