SEEDS OF DOUBTWhen the Cancer Charities fraud case broke in 2015, donors began to ask how this kind of egregious fraud could go undetected for 28 years. “Can we depend on the IRS or the FTC or the state attorneys general to keep an eye on the nonprofit sector? Isn’t anyone watching the store?” Even concerned case workers began to wonder how the reaction to this case could have been so painfully slow. Everyone involved in the sector understood immediately that if this kind of doubt is permitted to creep in, nonprofit is in for big trouble.
WHO IS WATCHING THE STORE?The lack of effective nonprofit oversight is a result of murky jurisdictional responsibility.
Charities have traditionally been regulated by the individual State Attorneys General through their consumer protection bureaus where problems are usually identified by whistle-blowers. Only 13 states have formal charity bureaus, and most states charitable solicitation laws involve trusts, corporations, solicitations, governance, criminal conduct, antitrust, transactional, conservation easements, etc., etc., etc. Most states can’t afford to staff this complex enforcement environment.
On the federal level, the vaunted investigative powers of the IRS are rarely brought-to-bare on nonprofits because the proper payment of taxes is not at issue once an organization qualifies for nonprofit status. IRS enforcement exists in parallel with state charitable regulation but with a lack of information sharing between the two. States can refer a case to the Feds, but the Feds can’t go the other way. Information is not free flowing and jurisdiction is often unclear. For the most part, therefore, the States are not able and the Feds are not interested.
Donors, who are interested in outcomes and administrative overhead, rarely have professional investigative skills. Unscrupulous nonprofit executives have traditionally obscured misappropriation-of-funds in opaque accounting techniques. As long as administrative expenses do not get out of hand, theft can go undetected for many years.
In other words, NO ONE is watching the store.
NEW REGULATION INITIATIVES FOR 2017A lot of money flows through the nonprofit sector, and where there is money you’re going to have a certain percentage of fraud. The more the public, the media, academic researchers, and the regulatory community know about the nonprofit sector, the more patterns can be analyzed, correlations made, thoughtful and consistent regulation developed, and enforcement actions effectively and efficiently undertaken.
- Recently, State Attorneys General have collectively created a new standing committee on charities regulation and enforcement within the National Association of Attorneys General. They have begun working on what is known as the Single Portal Multi-State Charities Registration Project. The goal is to enable a technological platform that will make it easier for the sector to provide information that is required at the state level. The Single Portal platform will import the 990 data and populate the platform with this data. The 990 is going to remain extraordinarily important as a data source for regulators. The Single Portal Project will help simplify and speed up the data-collection process. All the data will be public, so anybody can take it, mash it up, and do whatever they want.
- States are also undertaking a mapping exercise to try to figure out what information is asked of entities in each state.
- The IRS is doing its own rethinking about the need to create an interlocking jurisdiction, and states are starting to become more aware of what other states are doing. In 2017 these two trajectories will begin to intersect.