Charitable Fraud

Written by Kylie Kaspar

Definition

The Wex Legal Dictionary defines “fraud” as the deliberate deceit of someone else with the intent of causing damage, particularly financial damage (Fraud n.d.).

The legal definition and methods of prosecution vary by states and countries. To make it more confusing, the internet allows criminals to reach even more victims around the world, not just in their own town or even country. The lack of a universal definition of fraud and a common understanding of what constitutes fraud makes it particularly challenging to detect schemes, identify perpetrators and victims, or to understand the extent of monetary losses.

A study found that 22% of all embezzlement and fraud cases in the United States happened in nonprofit organizations, resulting in an average loss of $118,000 (Hiscox 2017). Some common forms of fraud include skimming, purchasing fraud, and financial statement fraud (Zack 2015). It is worth noting that these types of fraud occur in the for-profit sector as well.

• Skimming happens when some portion of payment is stolen before it is recorded as “on-the-books.” It is especially difficult to prove when money is given as a donation rather than in return for goods or services.

• Purchasing fraud is most common in both for-profit and nonprofit organizations. In this situation, someone misuses funds like the organization credit card or check book. Once the fraud is discovered, there is often a “paper trail,” or receipts for purchased goods or services, which may allow investigators to more easily understand the extent of the financial losses.

• Billing schemes, or financial statement fraud, can be found in both for-profit and nonprofit organizations. This occurs when the cost of a good or service is purposely recorded as higher than the actual cost, or when misclassifying expenses. However, because there has recently been increased pressure on nonprofits to explain and justify their expenses, financial statement fraud is often caught.

Historic Roots

Although we typically think of “philanthropy” as a positive concept, this was not always the case. In the late 19th and early 20th centuries, the term “philanthropist” actually had a negative connotation as the Industrial Revolution created immense gaps between the upper and lower classes in the United States. Though not fraud, the public was often skeptical of the massive gifts made by millionaires like Andrew Carnegie and John D. Rockefeller, sometimes outright refusing donations for fear it was “tainted” money. In fact, at the time, the term "philanthropist" was only used for people who were proven “frauds and grifters” (Hammack 2015).

Further criticism of philanthropy developed after World War II as there were calls for greater regulations and restrictions on the definition of “foundations” as well as qualifications for tax-exempt status. Many politicians, including President Harry Truman, felt organizations were claiming tax exemptions as philanthropies without actually doing anything “philanthropic” (Hammack 2015). The Social Service Review noted in 1954 that $120,000 was lost due to “charitable rackets,” and argued that even this relatively small sum has a “destructive effect upon the efforts of the thousands of devoted people who are seeking to achieve improved organization of the community” (McM. 1954). At this time, there were already calls for more thorough oversight and licensing of nonprofits, arguing that licensing needed to take “into account such questions as percentage of income spent for overhead, methods and costs of fund-raising, soundness of organizational structure, and quality of program” (McM. 1954). Lacking adequate licensing standards, endorsements or publically approving of an organization provided the best method of accountability.

Importance

Today, “philanthropy” is often associated with “good works” and social progress. Still, there have been notable cases of individuals taking advantage of well-intentioned organizations and their donors, either misrepresenting how the money helps people or stealing the money altogether.

Charitable fraud is especially damaging to the nonprofit sector because it undermines public trust in charitable institutions and may deter them from giving anything (Kummer 2015; Snyder 2016). Unfortunately, the internet has made charitable fraud easier to commit, and the elderly or those who aren't tech savvy are particularly vulnerable because it can be difficult to tell which sites are legitimate and which are scams.

It is necessary to recognize the vulnerability of any type of organization, for-profit as well as nonprofit, to fraud. By recognizing this and putting in place appropriate measures to mitigate risks, as well as by instilling a culture of accountability, transparency, and ethical practices, fraud can be avoided (Grippo 2012). Poor internal structure and controls has shown to be the most likely contributing factor to fraud (Grippo 2012).

As a donor, it is extremely important to do your research on an organization before giving. People tend to give on an impulse without thoroughly vetting a cause, which is how many fraudulent organizations make their money.
 

Ties to the Philanthropic Sector

Because of the accessibility the internet offers, as well as the ease of creating convincing fake websites, many more people are susceptible to becoming victims of fraud. Schemes are not limited by borders and can go worldwide. The internet also makes it nearly impossible to track how much money is lost to these types of crimes and where exactly the money goes (Durkin 2009).

Typically, legal action is difficult to pursue against nonprofits for many reasons. For one, legal regulation of nonprofits is dispersed across multiple offices, and fraud that crosses state or even national lines becomes much more challenging and costly to prosecute (Cooper 2015).

While government oversight is lacking, there are many independent nonprofit “watchdogs” that track the activities and spending of nonprofit organizations. Watchdog agencies are more formal, organized versions of endorsements mentioned later in the Social Service Review article, cited in the Historical Roots section. These organizations provide public endorsements of charities they consider to be effective both in regards to finance and striving to meet their stated goals. Also with more information about the way nonprofits operate, donors can make smarter choices about where and how they give.

Until new regulations are passed to provide legal accountability, nonprofit organizations can take steps to protect themselves from fraud, such as incorporating risk management into their daily operations, creating accountability structures both internally and for donors or stakeholders, providing ongoing education for employees to be aware of warning signs of fraud, and resources for safely reporting suspicious activity (Cordery 2010; Zack 2015).

Key Related Ideas

• Accountability: In the nonprofit sector, an organization is considered to be accountable if it answers to another authority regarding its actions, in particular, its spending and achievement of goals (Greenlee 2004). In order to be most effective, an organization should have multiple layers of internal and external accountability (Cordery 2011).
• Donor intent: When donors give to charities, they often have a use in mind for their money (intention). When a charity uses funds for something other than what the donor has specified, even if it is for a legitimate cause, it does not respect donor intent (Katz 2004).
• Transparency: Transparency in nonprofits describes “the degree to which the information about an organization’s activities, finances, and goals are available to the public” (Tyler 2013). Greater transparency would allow the public to understand how nonprofits operate and how money is spent. This could prevent organizations from misusing funds.
• Trust: Confidence or faith in a person or thing; care or charge; a legal document stating financial relationships between trustees and their beneficiaries (Learning to Give n.d.)
• Watchdog organizations: Because the legal avenues for accountability are limited, there has been an increase in nonprofit organizations that provide their own standards to assess the accountability of other nonprofits, such as the Better Business Bureau, Charity Navigator, or Guidestar (Greenlee 2004). Many organizations have begun measures of self-regulation, such as increased transparency, to prevent questions of accountability or legitimacy.

Important People Related to the Topic

• William Aramony (b. July 27, 1927; d. November 11, 2011) In the early 1990s, the CEO of the United Way of America, William Aramony, was jailed for six years after it was found that he used more than a million dollars on his own “lavish lifestyle” as well as on “perks” to entice large donors, like expensive condominiums, luxury automobiles, and private travel. Aramony’s case illustrates the blurry boundaries between outright fraud and utilizing an organization’s assets to entice donors to give, as many agree that it was Aramony’s leadership that forged the way for United Way to become synonymous with workplace giving (Cushman 1992; Eisenberg 2011). It is argued that Aramony’s scandal “influenced public perception of charities,” prompting the public to question nonprofit methods and motives, as well as placing a new emphasis on the responsibilities of boards to monitor activities and ensure accountability (Charity Watch 2016).
• Jim and Tammy Faye Bakker (Jim Bakker: b. Jan 2, 1940; Tammy Faye Bakker: b. March 7,  1942, d. July 20, 2007) Religious organizations hold a special place in American society. While many are respected institutions, there are some that may only claim to be religious for the tax exemption, or may misuse donor dollars. One of the most widely covered charitable scandals ended in the conviction of Jim Bakker, a televangelist preacher, on 24 counts of mail and wire fraud and conspiracy to defraud the public in Federal court (Applebome 1989; History.com 2009). Bakker and his wife, Tammy Faye, were accused of misleading followers with promises of “lifetime vacations,” soliciting more than $158 million in donations. The Bakkers stole at least $3.7 million for personal use, as well as hundreds of thousands in bribes to ministry aides (Applebome 1989).
• Bernie Madoff (b. April 29, 1938) was a well-respected Wall Street broker, investor, and financial advisor who was discovered to be running a massive pyramid, or Ponzi, scheme, which cons people into repeatedly investing money with the expectation of high returns, though no profit is being made (Yang 2014). Madoff stole over $65 billion from over 4,800 clients, which included individuals, companies, and nonprofits in the United States and abroad (Biography.com n.d.). Madoff’s crimes had wide-ranging implications, including a push for more regulation of the financial industry and charitable giving. Madoff is currently serving a 150 year jail sentence.

Related Nonprofit Organizations

• Association of Certified Fraud Examiners (ACFE): Often cited in research regarding fraud, the Association of Certified Fraud Examiners (ACFE) is a nonprofit organization with 80,000 members worldwide. The ACFE views itself as “protecting the global economy” by detecting fraud in both for-profit and nonprofit organizations, as well as by providing measures to prevent fraud from happening in the first place (Association of Certified Fraud Examiners n.d.) (www.acfe.com/)
• Guidestar: Utilizing data gathered from the IRS and other publicly disclosed information, Guidestar provides a database of over 2.4 million 501(c)(3) organizations and is an excellent resource for potential donors (Guidestar ) (www.guidestar.org).
• Institute for Fraud Prevention (IFP): Based out of West Virginia University, The Institute for Fraud Prevention is “dedicated to multidisciplinary research and education regarding the prevention of fraud, corruption and other white-collar crime” (The Institute for Fraud Prevention n.d.) (www.theifp.org/about.html).
• National Committee for Responsive Philanthropy (NCRP): The National Committee for Responsive Philanthropy (NCRP) is an independent watchdog organization based out of Washington, DC. Formed in 1976, NCRP focuses on advocacy, social justice, and meeting the needs of marginalized communities. (Our History n.d.) (www.ncrp.org/).

Reflection Question - If you were to consider donating to a charity, how would you decide what kind of organization you would like to donate to? If an organization is successful in achieving its stated goals, does the amount that organization spends on overhead versus the amount that goes directly to charitable programming matter to you?

Bibliography

• Applebome, P. (1989 October 6). Bakker is convicted on all counts; first felon among TV evangelists. The New York Times. http://www.nytimes.com/1989/10/06/us/bakker-is-convicted-on-all-counts-first-felon-among-tv-evangelists.html
• Association of Certified Fraud Examiners. (n.d.). ACFE Leadership. https://www.acfe.com/bio-jwells.aspx
• Biography.com. (n.d.). Bernard Madoff. https://www.biography.com/people/bernard-madoff-466366
• Charity Watch. (2016 September 9). CharityWatch Hall of Shame. https://www.charitywatch.org/charitywatch-articles/charitywatch-hall-of-shame/63
• Cooper, R.E., Jr. (2015 July 23). Why Taking Legal Action Against Charity Fraud is So Hard. Retrieved from The Chronicle of Philanthropy. https://www.philanthropy.com/article/opinion-Why-Taking-Legal/231853
• Cordery, C., & Baskerville, R. (2011). Charity transgressions, trust and accountability. In Voluntas: International Journal of Voluntary & Nonprofit Organizations, 22(2), 197-213. doi:10.1007/s11266-010-9132-x
• Cushman, J.H. (1992 February 28). Charity leader’s success was also his undoing. New York Times. http://www.nytimes.com/1992/02/28/us/charity-leader-s-success-was-also-his-undoing.html
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• Eisenberg, P. (2011 November 22). The death of a flamboyant charity wrongdoer sends a reminder to regulators. The Chronicle of Philanthropy. https://www.philanthropy.com/article/A-Charity-Scoundrel-s-Death/157497
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• Greenlee, J., Fischer, M., Gordon, T., & Keating, E. (2006). An Investigation of Fraud in Nonprofit Organizations: Occurrences and Deterrents. The Hauser Center for Nonprofit Organizations. https://cpl.hks.harvard.edu/files/cpl/files/workingpaper_35.pdf
• Grippo, F. (2012). How to Prevent, Deter, and Uncover Fraud. Nonprofit World. https://www.snpo.org/publications/sendpdf.php?id=1873
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