Non-Profit Legal Matters

The Blog of the Law Firm for Non-Profits®

British Officials Fear Terrorists Hijacking Charities

The Charity Commission, a British government watchdog for charities, is formally investigating 86 British aid organizations to determine whether their charitable funds have been hijacked by terrorists in Iraq and Syria to finance military operations. The Commission fears that extremists are smuggling from the aid groups when the groups are distributing donated cash and equipment in the region.

The number of terrorism-related investigations has almost doubled since February amid growing concerns that charities operating in Iraq and Syria are potential targets for extremists included ISIS. William Shawcross, the chair of the Commission, explained: “Even if extremist and terrorist abuse is rare, which it is, when it happens it does huge damage to public trust in charities. That’s why I take it very seriously.”

The investigations also come at a time when calls for action to cut off terrorist financing are increasingly popular, including The Telegraph’s Stop the Funding of Terror campaign. Globally, experts fear that millions of dollars of charitable donations have already been used to buy weapons and supplies for terrorists in Iraq and Syria.

The Charity Commission has already taken action against charities linked to extremists, with the most serious facing terrorism prosecutions in court. 8 million pounds (about $12,642,000) has recently been given to the Commission to strengthen its ability to tackle abuse of charities. Shawcross is especially concerned about newer charities that are less experienced and often more vulnerable to exploitation.

U.S. charitable organizations are required to determine whether potential international grantees are on terrorist watch lists, among other safeguards. Breaking these rules can lead to criminal charges. If your organization makes grants overseas, do you check grantees and their principles against known terrorist lists?

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Nonprofits Subject to Email Phishing Attacks

phishingOn October 29, many received an email from Christopher Oechsli, president of Atlantic Philanthropies, saying the New York foundation was planning on randomly giving away $1 million. The email stated that recipients should consider themselves to be “lucky individuals.”

Unfortunately for these email recipients, the foundation, which announced plans to stop its operations by 2020, was not just blindly getting rid of its assets. Instead, the foundation was the victim of an email phishing attack, which uses well-known names to trick email recipients into providing personal information such as their social security or bank account numbers. The foundation has been attacked seven times in the past 18 months.

Luckily the foundation was tipped off by some email recipients who contacted the foundation to ask whether the emails were legitimate. The foundation immediately posted a warning on its website regarding the fake emails. The foundation also asked recipients of the phishing emails to report them.

The Anti-Phishing Working Group, a worldwide coalition that aims to unify the global response to cybercrime, reports that 6,271 phishing attacks in the first half of 2014 targeted the “.org” Internet domain name used by nonprofits. World Vision, a nonprofit organization dedicated to tackling the causes of poverty and injustice, has been a consistent victim of phishing attacks. The organization has been attacked at least monthly with attacks spiking during high-profile disasters. The emails have varied, including offering employment or soliciting donations. World Vision recommends that potential donors type the organization’s URL into their web browser to ensure that donations end up in the right place.

Has your organization been the victim of a phishing attack? If so, share with us how it occurred and what steps were taken to combat future phishing attacks.

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Red Cross Responds to Mismanagement Reports

We told you earlier this week about a joint investigation by NPR and ProPublica into the mismanagement of the American Red Cross’ responses to Hurricanes Isaac and Sandy in 2012. In an interview with PBS NewsHour, Suzy DeFrancis, Chief Public Affairs Officer for the Red Cross, responded to that investigation.

DeFrancis explained that the investigation was one-sided, failing to show the good that the Red Cross did during the hurricane responses. She noted that the organization distributed 17.5 million meals and snacks and 7 million relief items such as gloves and hats. DeFrancis also stated that the Red Cross deployed 17,000 people for the response, most of them being volunteers.

In response to the allegations that Red Cross vehicles were driven around empty for show or were otherwise utilized for media purposes, DeFrancis explained that only disaster responders directed the trucks and that all trucks were full of food. As the Chief Public Affairs Officer she explained that she had firsthand knowledge that public relations staff could not tell any emergency response vehicles where to go.

DeFrancis also responded to allegations of wasted food. She said that although some food did go to waste, there was nowhere near the amount of waste cited in the investigative report.

DeFrancis admitted that the organization learned some lessons from the responses, noting that the Red Cross hasn’t been a response organization for 130 years without making changes to get better.

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Media Declares Botched Red Cross Responses

After two major hurricanes hit the east coast in 2012, many responded in a typical fashion – by donating to the American Red Cross. Indeed, the Red Cross received hundreds of millions of dollars in donations to assist with the storm relief. Did the donations go to waste?

According to a joint investigation by ProPublica and NPR, the Red Cross botched its emergency responses to both hurricanes — first to Hurricane Isaac and then to Superstorm Sandy two months later. The investigative reports cite internal Red Cross documents, emails, and interviews with two Red Cross staff members on the ground during the hurricane and reveal mismanaged volunteers and vehicles and supplies diverted for public relations purposes. One Red Cross driver admitted to the investigators that the organization’s supervisors ordered dozens of trucks usually used to deliver aid to be driven around nearly empty just for show.

The reports also show that the Red Cross lacked basic supplies to distribute to victims after the storms. Even when they did have the supplies, they had trouble connecting the supplies to the victims, in one case being forced to throw away tens of thousands of meals.

The Red Cross has denied allocating resources for public relations purposes and defended the charity’s overall responses to the storms. In an official statement to ProPublica and NPR the organization wrote: “While it’s impossible to meet every need in the first chaotic hours and days of a disaster, we are proud that we were able to provide millions of people with hot meals, shelter, relief supplies, and financial support during the 2012 hurricanes.”

These botched jobs follow closely on the heels of the financial mismanagement allegations the organization endured after September 11 and Hurricane Katrina. In that instance a series of the Red Cross’ chief executives were forced to resign and Congress forced an overhaul of the organization.

Will you still donate to the Red Cross? Do you think the Red Cross would improve if there was a competitor charity providing effective disaster relief?

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Court Dismisses Tea Party Suits Against IRS

tea partyHow do you solve a problem like a tea party group lawsuit? The IRS may have just found the answer: give the group tax-exempt status.

In the wake of the Treasury Inspector General report that called out the IRS for using discriminatory labels to sort through exemption applications, such as the term “tea party,” more than 40 conservative groups brought two lawsuits against the IRS for allegedly being singled out for perceived tea party affiliation. Last week U.S. District Court Judge Reggie Walton (who was appointed by President George W. Bush) dismissed almost all of the counts, finding them to be essentially moot as the IRS has now granted almost all of the groups exempt status.

Judge Walton also found that the individual IRS officials named in the suits could not be fined in their individual capacity because it could hurt future tax enforcement.

Finally, Judge Walton denied injunctive relief that would have prevented the IRS from targeting tea party groups in the future. He believed it to be unnecessary, explaining that “there is no reasonable expectation that the alleged conduct will recur, as the defendants have not only suspended the conduct, but have also taken remedial measures to ensure the conduct is not repeated.”

There were mixed reactions to the verdict. Rep. Jim Jordan (R-Ohio), who is heading an investigation into the tea party scandal asked, “You get targeted and harassed for three years but, oh, because you finally get [tax-exempt status], the three years of harassment doesn’t mean anything?”

Paul Ryan, senior counsel at The Campaign Legal Center, a nonpartisan, nonprofit organization that works in the areas of campaign finance and elections, political communication and government ethics, countered: “Judge Walton got it right — there is no ongoing injury to these groups . . . The IRS needs to enforce tax law with respect to nonprofit political groups more aggressively.”

Unsurprisingly, many of the tea party groups are planning to appeal the decision.

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IRS Catches Up on Exemption Application Processing

exemptionHas your organization been waiting a long time for its IRS exemption? If so, you may be hearing back soon. Last week Matthew Weir, director for the IRS Tax-Exempt and Government Entities Division, reported that this year the unit has closed 117,000 exemption applications, a 121% increase from last year. Weir pointed out that everyone should be especially impressed given that the IRS’s budget for 2014 was $1 billion less than it was in fiscal year 2012.

Weir also stated that the IRS believes that the new streamlined exemption application (Form 1023-EZ) has been a success. He reported that the IRS has closed most of the streamlined applications in about 11 days with 95% of the applications being approved.

It’s unclear though whether or not this should actually be considered a success. There are ongoing concerns in the exempt organizations sector that the streamlined application may be allowing undeserving organizations to obtain recognition of exemption. Acknowledging these concerns, Weir said that the IRS is planning to use a “pre- and post-determination process” involving correspondence exams to more closely review a sample of applications.

Did your organization file a Form 1023-EZ? What do you think of the new form?

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Ex-Charity Head Faces Allegations of $3.8M Embezzlement

Embezzlement AllegationsRussell Brace, the former head of United Mid-Coast Charities Inc, a social services organization located in Maine, is facing allegations in a civil lawsuit of embezzling $3.8 million from the organization. The organization alleges that over 13 years Brace deposited millions of dollars in donations intended for the charity into bank accounts he controlled.

The allegations claim that Brace acknowledged the long-term embezzlement after being confronted by officials from the organization, who became suspicious after being unable to find records in the charity’s financial files of $75,000 in donations from a major donor.

Brace has now also become the target of a federal criminal investigation, which can take a year or more to complete. In the meantime, the civil suit will have to what as the judge agreed with Brace’s attorney that moving forward could put Brace at a disadvantage in the criminal case.

These allegations of embezzlement are unusual only in that they made the news. Embezzlement is, in fact, a huge problem in the nonprofit sector.

How many incidents of embezzlement will you have to read about before reviewing your organization’s checks and balances to ensure it doesn’t happen to your organization?

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Detroit Museum Defends Executive Salaries

During a year in which the Detroit Institute of Arts Museum (DIA) campaigned for a property-tax increase to help with its shaky finances, it also awarded double-digit pay hikes to its top two executive staff. This is not sitting well in the suburban counties where voters approved the tax increase, which will result in $23 million to support the DIA.

The Institute’s executive director saw a pay increase of 13% to $514,000 and its chief operating officer saw a pay increase of 36% to $369,000. The Institute’s board chair, Gene Gargaro, explained away the COO increase, saying that her increase included retroactive payments as she worked several months at an old salary after being promoted to COO. Gargaro also stated that both officers had been paid less than the average for peers at comparable institutions and these increases were just bringing them up to be closer to that average. He stated, “I would not deny that the compensation they receive is significant, but I would also say that they’ve earned it.”

Rep. Eileen Kowall (R-White Lake) responded that “[t]his is money that should have gone toward protecting the city’s art, not lining the pockets of top officials at the DIA.” Not helping is that the DIA started collecting the tax money in January 2013 and the city filed for bankruptcy just 6 months later.

Gargaro pledged to “keep the elected officials in Macomb, Oakland and Wayne Counties informed on a current basis as we make executive compensation decisions in the future.” But Oakland County Commissioner David Woodward said that he would continue to push for greater public accountability and oversight of the DIA’s executive compensation given the voter-approved tax to fund the museum.

Do you think the raises were insensitive given the efforts made by the state government and the voters to support the museum?

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Donations to Ebola Fight Trickling In

EbolaHave you donated to efforts working to halt the Ebola epidemic? If not, you’re not alone. The Washington Postreports that charitable giving to such efforts has been far less than that for other major disasters. For example, almost all of the funding received by the American Red Cross to date for its Ebola efforts has come from one donor and the International Federation of Red Cross and Red Crescent Societies has only raised 24% of its appeal target for fighting Ebola.

Jeremy Konyndyk, director of the U.S. Agency for International Development’s (USAID) Office of U.S. Foreign Disaster Assistance explains that “the kind of disasters that garner a lot of public support are the ones that are fast-moving and tend to look visually spectacular.” But Konyndyk points out that for this type of disaster, involving events such as typhoons, tsunamis, and earthquakes, all the damage is done before the media starts reporting, so there aren’t many lives left to be saved. But for the Ebola outbreak, there is still much to be done to save lives.

Margaret Aguirre, head of global initiatives for International Medical Corps, thinks that the problem may also be competition with other scary news, such as the Islamic State’s spread into Syria and Iraq and a bloody rebellion in the Ukraine.

A few big donations have been announced. The Bill and Melinda Gates Foundation has committed $50 million to the fight and Mark Zuckerberg and his wife announced a $25 million donation to the Centers for Disease Control Foundation.

If you want to donate but aren’t sure which organizations are involved with the fight, the USAID’s Center for International Disaster Information has provided lists of trusted and experienced organizations conducting relief operations in West Africa and tips on how to help.

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Ongoing Debate Over Political Pulpit Preaching

Political campaign intervention by 501(c)(3) organizations is absolutely prohibited. Yet earlier this month, nearly 1,500 preachers nationwide banned together for the election-season ritual of political pulpit preaching that has been taking place since 2008.

Alliance Defending Freedom is a 501(c)(3) conservative group that “advocates for the right of people to freely live out their faith” that organizes the event, which is aptly named “Pulpit Freedom Sunday.” The participating preachers and other backers of the event argue the ban on political campaign intervention violates churches’ freedom of speech. They also argue that the law is vague and that unequal enforcement has led to preachers pulling back on their social commentary in case it is construed as political. One preacher explained, “[Church leaders] have an obligation to influence the government.”

Churches, along with all exempt organizations, should remember the Supreme Court’s admonition that exemption is granted as a matter of legislative grace. Thus, as opponents argue, if pastors want to endorse candidates, they can simply give up their tax exemption. As put by a representative from the Freedom From Religion Foundation, a 501(c)(3) that “protects the constitutional principle of the separation of state and church,” said churches that also want to engage in politics want to “have their cake and eat it too.”

The Freedom from Religion Foundation brought a federal lawsuit earlier this year over the lack of IRS action on church politicking. The group dismissed the lawsuit after the IRS assured the group that it has a procedure in place to investigate such issues. The IRS has not yet taken action against churches participating in Pulpit Freedom Sunday.

Do you think pastors should be able to preach their political views from the pulpit without giving up the church’s exemption? (Try saying that five times fast.)

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