The Impending Threat
to the Charitable Sector
To those who toil in the lonely fight to secure a better society
The fate of the charitable sector is not a matter of what we do; it is a matter of what we do not do.
It would be a shame if the charitable sector lost its dignity because of indifference.
My sole objective in writing this book is to strengthen the charitable sector.
I hope that reading this book will make you feel as outraged as I am. I hope that you will use my suggestions to improve and strengthen the agency that you govern or staff, or in your donor decision-making. I hope that you will join me in changing the direction of the nonprofit sector so it will survive and flourish in benefiting those to which it is intended to serve.
I have an ongoing concern about the charitable sector—its direction and future. Two simultaneous things are happening—an explosion in malfeasance coupled with a decrease in trust. This is an elixir for alarm.
Silence: The Impending Threat to the Charitable Sector is an attempt to bring honesty and integrity, trust, and confidence in transforming the status quo.
I am disturbed that fraud is reaching a point where the ultimate threat may be realized . . . a sabotaging of the underpinnings of giving. Despite empirical evidence that fraud is omnipresent within the nonprofit world, the term “fraud” is unmentionable in the same sentence as charity or nonprofit. The seldom-used word “fraud” at nonprofit sector conferences is disquieting. Just the acknowledgment of colossal fraud would be a significant improvement in the honesty of the nonprofit world.
The story of malfeasance has been central to recent American charity history. With no well-defined owners or overseers, there has been no interest in developing countermeasures to abuse. Because of so few outside constraints, charities tend to believe that they are only accountable to themselves. This has proven to be a recipe for disaster.
Charity should not be about risk. However, it is all too often becoming the transference of a communal good into a risky venture. There is a misalignment of those in positions of trust and those that play on that trust to take advantage of those in need. These people are using the mission of the agency, and its resources, as a tool of self-interest. The charitable sector has lost its soul. Its leaders and boards are apathetic, and its managers seriously compromised. The interest in resurrecting a credible charitable sector devoid of fraud is dwindled in size, ambition, and scope.
This denial can be best illustrated by the request of a top administrator of a state nonprofit association gathering at which I was a guest speaker. She said that she wanted me back to conduct seminars and webcams on the subject of nonprofit fraud “when there is a problem in the state.” This offer was in spite of multimillions of dollars of documented fraud and countless articles condemning the practice in that state, of which she was aware. With nonprofit leadership maintaining the appearance that all is okay, there is no impetus for change. But now, it is increasingly hard to put a good face on a troubled nonprofit sector. In the absence of any progress in stopping this nonprofit contagion, a culture of malfeasance acceptance will be created. Until now, no one has written an entire book that fully investigates the circumstances of charity fraud. Silence attempts to bring the overwhelming evidence of shady practices—a subject that insiders have shunned—into sunlight. Nonprofits: On the Brink, my previous attempt at developing a roadmap for nonprofit change, sought systemic transformation with hundreds of best practices that can improve nonprofit performance. The emphasis was on poorly functioning boards. Silence is a five-year endeavor to bring to light painful facts that could lead to an imminent catastrophe. And that’s not hyperbole—it’s validated on virtually every page of this book. The revelation of how massive the potential undoing of the sector led me to suggestions as to how to make sure such a calamity does not happen. My interest in fraud has come with a number of obstacles as well as opportunities. Charity fraud is not a “eureka” topic. Since the publication’s calling attention to the seismic-sized philanthropic fraud in my widely circulated (two-hundred-page-per-year) newsletter--Nonprofit Imperative—and book--Nonprofits: On the Brink—unrepentant insiders treated the subject with scorn. There has been every attempt to make sure that the problem ends up in a black hole. Social change can be nasty. Calls and e-mails by me to charitable insiders were not responded to, and articles that were requested by various publications were shelved. It is not a coincidence that many find fraud a topic not discussed. No one wants to ignite the necessary charity reform. It reflects a fear of exposure that leadership must address. Conversely, when glare was put on this troubling issue, public appearances went up, media contacts surged, inquiries from concerned board members and private citizens skyrocketed, and readership of Nonprofit Imperative leaped. Even skeptics have seen the vast amount of data as useful while others, such as Congress, found it fodder for inquiry, debate, and public policy. Silence is an attempt to understand what the charitable sector can learn and how it can do better. It is an opportunity for all to learn from the current crisis where a foundation of sustainability can be built. Silence offers teachable moments that suggest ways to convert bad habits into best practices. The book continues to focus on incompetent boards but also speaks to the denial of charity leadership, disengagement of board members, disinterest by law enforcement, and indifference from government officials who pay little attention to what is arguably the one issue that may end the ethic-challenged charitable sector, as we know it. This book is the result of mining vast amounts of data, reviewing tens of thousands of fraud cases and selecting only about 300 that are included in the book, which includes 247 exhibits. The areas of focus in the book were chosen after trends emerged in the collection of the data. Silence is not seeking a short transitory glance at the sector, but a deep, honest look into philanthropy and its practices. It seeks a broad and demonstrable change in beliefs and thinking as well as policies and practice. Silence seeks to produces a new commitment to honesty—both intellectually and behaviorally. It is my hope that charity decision-makers will look favorably upon this book and use it is a catalyst for change. Let us hope that this large shout won’t be silenced.
One of the best things about America and Americans is that we are spectacularly generous. Charitable giving is one of the most important ways we affirm our communal decency as a nation. Americans donate over $300 billion per year to charities. But when we give, we rely upon the organization to whom we donate our hard-earned funds to match our good intentions. Many have failed our trust. As you read this page, a significant nonprofit fraud is under way. For years now, the evidence suggests that fraud, abuse, mismanagement, and malfeasance have been widespread, even ubiquitous, among charitable organizations and institutions of all types—both large and prestigious as well as smaller and less prominent groups. This is often dismissed as a “few rotten apples.” Unfortunately, due to lack of oversight and a feeling among executives and board members of the charities that they are entitled, the reality is that abuse and outright thievery have become so widespread and overt that some believe that it is merely a way of doing business. As one of the biggest self-inflicted calamities of our time is occurring, the charitable sector feigns innocence. Those that could institute change are being spectators sitting on the sidelines. Their response to charity malfeasance has been hopelessly inadequate. That lack of interest in fundamental change in the way charitable institutions operate has led to the alchemy where accountability and responsibility are forgotten values. The loss to the sector is big money—upward of $40 billion annually to fraud—it is growing . . . and few guardians care. The raiding of the charitable coffers is at a rate approaching twice that of the for-profit sector. Exposure of some of these scandals has forced prominent institutions like the Smithsonian Institution, the American Red Cross, several universities, United Way affiliates, and hundreds more to undergo changes in operations and leadership and engage in years’ long campaigns to renew public confidence. Moreover, even the most prominent rebuilding campaigns have achieved at best cosmetic changes. The fundamental rot continues. Silence is replete with examples. We have arrived at a crisis: the level of corruption, mismanagement, and overt pillaging and diversion of tens of billions of dollars a year in contributions across the entire spectrum of charitable organizations has reached a level where it threatens to undermine the ability of segments of the nonprofit sector to achieve its stated missions. Philanthropic activities are quickly becoming associated with charity fraud and where thousands of insiders are using the sector as their personal piggy bank. The purpose of Silence is to upset the prevailing social wisdom and promote change. This can be done by informing contributors and prodding leaders in government and within the nonprofit sector to wake up to the massive scale of nonprofit abuse and malfeasance and, at long last, to undertake the genuine and systemic reforms that are needed to restore and justify America’s confidence that their generosity is truly going to a good cause, not simply lining someone else’s pockets.
The Nonprofit Sector
Charitable organizations are estimated to employ more than 7% of the U.S. workforce, while the broader nonprofit sector is estimated to employ 10% of the U.S. workforce. In 2009, the charities filing Form 990 with the Internal Revenue Service reported approximately $1.4 trillion in revenue and reported holding nearly $2.6 trillion in assets. The Bureau of Economic Analysis of the Department of Commerce noted that nonprofits were responsible for generating $751.2 billion worth of output. The charitable sector is an amalgam of institutions and organizations that are neither governmental nor business. It is the backstop for government agencies and religious organizations that fail to provide much-needed services. The sector goes by various names, such as the independent sector, the voluntary sector, the social sector, the third sector, or the philanthropic sector. Frequently, outside of the United States, the nonprofits are referred to as nongovernmental organizations (NGOs) or civil societies. The organizations in the nonprofit sector are dedicated to a mission. The nonprofit sector is large; with over 1.4-1.9 million tax-exempt organizations (we do not know the number of charities because the IRS has no reliable count of those that went out of business) collecting over $300 billion in contributions. According to the IRS, the tax-exempt groups oversee assets that are the equivalent to the combined assets of the retail trade sector, the transportation sector, the non-exempt portion of the health care sector, and the arts, entertainment, and recreation sectors. There are several types of nonprofits:
With over a million charities and foundations, the IRS stated that there was an increase of 4.3% from 2008 to 2009. There was an increase of nearly 90% since 1996. The IRS acknowledges that an unknown number of groups classified under Section 501 (c) (3) of the tax code are still on their books, even though they have shut down. It is currently updating its count.
There are over twenty-five different classes of 501 (c) organizations, and all are exempt from taxes under the Tax Code. In 2008, there were one hundred new exempt organizations a day—365 days a year, according to the IRS. These include hospitals, public television and public radio, nursing homes, private schools, and institutions that provide care and services to the needy. A preferential tax code gives individuals and corporations the opportunity to give money to 501 (c) (3) organizations on a tax-deductible basis. Section 501 (d) exempts from taxation certain religious and apostolic associations, while Section 401 (a) similarly exempts certain qualified pension, profit sharing, and stock bonus plans. Public charities range in size, from under $500,000 in annual revenue (about 80% of all charities fall into this category) to $10 million plus (about 4%).
Individual, family, business, and community foundations are also 501 (c) (3) nonprofits. They support causes and programs that benefit society. There are more than 62,000 active independent, corporate, community, and grant-making operating foundations in the U.S. Since 1969, these private foundations have been subject to more stringent regulation and reporting requirements than any other types of nonprofit. There are several forms of foundations:
1. Private foundations. These are either a single source foundation, such as the Ford Foundation or Kresge Foundation, or a corporate foundation, which makes grants on behalf of a corporation. These include Met Life and American Express.
2. Operating foundations. These foundations carry out their mission typically without giving grants. An example of this is the Getty Foundation.
3. Community foundations. These foundations pool their resources from many donors and focus their giving to a specific geographic area. The Community Foundation of Southeastern Michigan and the Cleveland Foundation are examples.
Social Welfare Organizations
These are advocacy organizations and are exempt under Section 504 (c) (4). These organizations have greater latitude to participate in lobbying and political campaign activities. These have come under fire recently for advocating positions that are deemed to be politically sensitive.
Professional and Trade Organizations
These organizations promote business and professional interests of a community, an industry, or a profession under Section 501 (c) (6) of the Tax Code. Contributions are not deductible, but membership dues are, as a business expense. While almost two-thirds of all contributions to nonprofits are from individuals, they represent only about 20% of all nonprofit income. Over 50% of all income of service organizations comes from fees and other charges. Foundation and corporate giving has been diminishing as a percentage of the total nonprofit budget.
The nonprofit world is awash with conflicts. The sector pretends the discord doesn’t exist and is getting in trouble for it. They must recognize that conflicts exist and deal with them thoroughly and openly. Ultimately, people vote with their feet, and if not responded to appropriately, they will find other places to use their money, thus putting the sector at risk. According to Giving USA, individual giving reached a record high in 2007, with donations totaling $314 billion. Giving has since dropped by 2% to 6% in 2008 (the first decline since 1987) and sank another 4.9% in 2009, according to the Center on Wealth and Philanthropy. In 2009, the Evangelical Council for Financial Accountability estimated a decline of 3.7% in gifts to its 1,247 member organizations; the Council for Aid to Education stated that giving by individuals to colleges and universities dropped by 17.8%; the Association for Healthcare Philanthropy saw an 11% decline in donations; and Target Analytics noted that the median gifts under $5,000 made by 38 million individual donors to 79 million charities declined by 17.8%. For the first time in over a decade, America’s charities collectively lost money. In addition, a trend seems to be continuing with giving moving away from centralized or federated organizations, such as the United Way and Jewish federations, to more strategic agencies such as local entities of the same charities. Giving to those groups has decreased by 4.2%. Two-thirds of charities saw drops in charitable giving in 2008. The exceptions were religion, public/society benefit, and international affairs. Fifty-seven percent of charities raised less money in 2007 than in 2008—or had flat returns. Charitable giving accounted for 2.2% of gross domestic product in 2009, according to Giving USA.
-Eighty-nine to ninety-two percent of households give.
-Private foundations endowments shrank by 25% but are turning around (2008).
-Wealthy donors are reconsidering their giving options because they feel disconnected (Center of Philanthropy/Bank of America survey).
-Private giving (individuals, foundations, and corporations) reached $308 billion in 2008, more than double 1996’s $139 billion. -Individuals donated $222.9 billion (75%) in 2006, compared with $107.6 billion in 1996; personal bequests added another $22.9 billion in 2006, up from $12 billion in 1996 (National Center of Charitable Statistics).
-Corporate giving, including grants from corporate foundations, increased substantially by 18.5%, to $13.8 billion.