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Charity Regulators’ Top 10 Ways to Get Into Trouble


Yesterday, at the annual meeting of the National Association of Attorneys General and the National Association of State Charity Officials, Massachusetts Assistant Attorney General Eric Carriker and Federal Trade Commission Assistant Director for the Northwest David Horn wrapped up the conference with their top ten ways to get into trouble with charity regulators.

The regulators’ list provided qualifiers and disclaimers that this is not the “official” list and that they were not officially speaking on behalf of their respective offices. I’ve provided my commentary to help explain what these charity regulators are advising:

10. Transparency, including registration. Regulators expect charities to know and follow state registration laws, and to provide complete and accurate information on filings. To learn more about registration requirements go here. GuideStar is registered in all states that require it. We use a consultant to keep us current and up-to-date.

9. Do Not Call. The Federal Trade Commission manages the national Do Not Call Registry. Donors can tell a charity or its fundraisers to not call them. Calling folks after they have asked you not to call can get you into trouble.

8. Duty of care. Nonprofit leaders assume certain duties and obligations during the operation of their organizations. One is the duty of care. This duty requires nonprofit leaders to exercise judgment that a reasonable person would use. Nonprofit leaders don’t have to be perfect. They just need to be prudent.

7. Deceptive practices – abusing joint cost allocation. Accounting rules allow for certain allocations of fundraising costs to program under certain circumstances. The rules are explained here. Over the years, regulators have spent a lot of time and focus on the costs of fundraising. The concern is that high fundraising costs are a form of fraud. Joint cost allocations allow a nonprofit to state lower fundraising costs. Regulators are concerned about potential abuse in this area.

6. Excessive compensation. Paying an executive too much can get you into trouble. I wrote about this issue recently on the Trust Blog. You can learn more about executive compensation practices at an upcoming webinar.

5. Deceptive practices – who is calling and what the money is for. The concern here is when professional fundraisers lie about being paid to raise money, when they claim to be volunteers or, even worse, when they claim to be police officer or fire fighters. The other deceptive practice is to lie to the donor about what her gift will fund or about how much of the donation goes to the cause. For example, regulators believe that to state that all the money goes to the cause is deceptive.

4. Charitable trust issues. The most common legal form of a charitable organization is the nonprofit corporation. Nonprofit corporate law is based on the state in which the corporation is formed. Charity regulators often seek to impose a higher standard of conduct on nonprofits. They prefer charitable trust law as a more rigorous set of legal requirements than nonprofit corporate law.

3. Deceptive practices involving badge groups (police and fire fighters) and veterans groups. Last year, 61 Attorneys General and Secretaries of State and other law enforcement entities from 49 states and the District of Columbia joined with the Federal Trade Commission in “Operation False Charity.” Collectively, they took 76 law enforcement actions against 32 fundraisers, 22 nonprofits and 31 individuals. The law enforcement sweep identified three sham charities: American Veterans Relief Foundation, Coalition of Police and Sheriffs, and Disabled Firefighters Fund. These groups are the badge and veterans groups that charity regulators are targeting for enforcement actions.

2. Self-dealing. Self dealing occurs when conflicts of interest policies break down. The new Form 990 places an emphasis on nonprofits have these policies in place and making appropriate disclosures.

1. Deceptive practices – phony charities. There is a definitive pattern of concern from the regulators about deceptive practices. Phony charities are scams that rob donors of the opportunity to give to a legitimate cause. This stuff makes regulators mad. Nonprofits have common purpose with regulators for the regulators to find and punish people who rip off donors.

Trust is the currency that nonprofits need in order to succeed. Anything that diminishes the public’s trust in nonprofits makes it harder for all of us to succeed.

Full disclosure: I am a past charity regulator from the state of New Mexico and a past president of the National Association of State Charity Officials.


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November 8, 2010 at 12:33 am

Number six, executive compensation, will get a charity into trouble faster than anything.

When researching a charity, it’s the first thing I look at. If the salary is more than mine (which is not that difficult), I generally look a little more thoroughly about the efficiency of donated funds.

Topics: Nonprofit Leadership and Practice