Imagine a good restaurant that hires a new cook who starts to steal. The restaurant ends up going bankrupt. There’s an important lesson here about internal controls for restaurants.
Now imagine a couple of crooks setting up a sham restaurant in order to launder money. This isn’t about lack of controls in restaurants. It’s about illegal activity using a restaurant as a front.
Somehow the lawyers and regulators of the nonprofit sector haven’t figured out this difference. They frequently point to a sham nonprofit that’s been set up by crooks, and use it as an example of a problem in the nonprofit sector, and to warn boards about oversight or conflict of interest. Wrong. Crooks (that’s the legal term) will use any framework that makes sense: nonprofit, LLC, Delaware corporation, etc. There’s a difference between a church being swindled, and a fake church being set up by swindlers.
Fake nonprofits are a problem, but they’re not a symptom of dysfunction in the nonprofit sector, nor are their crimes possible because of inattention from the board. Fake nonprofits set up to defraud the public are a problem for society, and we rely on law enforcement, our district attorneys and charity officials to stop fraud on our behalf. Yet over and over we hear stories of fake nonprofits told to us in seminars about legal issues for nonprofits. We don’t call upon restaurant owners to stop setting up fake restaurants. Let’s stop telling legitimate nonprofits that the crimes of fake nonprofits are a nonprofit issue.
And while I think this over, I think I’ll go have a glass of wine at my favorite Italian restaurant. I hope Michael Corleone isn’t there. –Jan Masaoka
* Two different takes on disabilities in this issue: Ask Rita looks at whether a disabled employee can be fired, and disabilities activist Mary Lester offers simple, nearly-free ways to make your nonprofit more accessible. Micromanagement — the battle ground between boards and executives — gets a fresh analysis in this issue. Finally, we ask your help by participating in an important study, clue you into a 3-Minute Vacation making pop art, and announce a potluck contest.
Regarding the article about "crooks" in the nonprofit sector reminds me of how "Capitalism" gets a bad rap sometimes, when it is the users of "Capitalism" who are the problem. If a car kills someone we don’t normally go after the manufacturer, but the driver.
Excellent point re: better nonprofit management will not solve the problem of crooks who set up nonprofits to further their own goals/ I think you have touched on the reason that those Chronicle of Philanthropy articles by Pablo Eisenberg (see Nov 4 issue) are so misleading. He seems to lump both kinds of nonprofits together/ thank you for the insight!
I too am a state charity regulator and I am passing along points shared by a colleague of mine that I thought could add to the conversation with the sector we regulate:
Thanks for forwarding this article. Yes, sham nonprofits are run by crooks and are a problem for law enforcement. But what the article doesn’t point out is that how you distinguish a sham nonprofit from a legitimate one is a problem for both law enforcement and the nonprofit sector generally. The difference is not obvious between a sham nonprofit that gives away just enough dollars to real charitable programs to look/appear legit, and keeps every other penny raised to spend on other things, and a “legitimate” nonprofit with high start-up costs or a failed solicitation campaign, which also gives very small dollars to charitable programming and spends the rest on things like salaries and overhead. How do you distinguish venality from stupidity for legal purposes? One of the ways we tell is by looking at whether the nonprofit follows best practices – does it have a functioning board without conflicts of interest, that has regular meetings and reviews and approves a budget, and is there an articulated program and a plan to meet program needs?
But good shams look or sound legitimate, and when we go after them, the legitimate folks worry that we will get it wrong, or say that we shouldn’t judge the sham based on factors like percentages of dollars to programs because sometimes a legitimate nonprofit will have bad percentages. So we need to tell the industry about the crooks, about why we think they’re crooks, and what the legitimate folks can do to keep us from thinking that they’re crooks. (If you’re in the legit end of the nonprofit world and you don’t want to look like a crook (and have a well-run and effective nonprofit to boot) you should follow these best practices.)
I can sort of understand the author’s frustration with always being told about/lumped in with the bad apples, but I am equally frustrated by the bad apples always being lumped in with the good apples, and hidden from view by them. And to continue the metaphor, we all know that one bad apple can spoil the barrel…
As a regulator and a person involved in law enforcement actions involving assorted activities occuring both within legitimate non-profits and fake front organizations, I don’t find that we’re terribly confused about this issue. Obviously, the sector has no control over groups of criminals or individual criminals who seek to commit crimes in the name of charity or religion. Surely, real organizations can take steps to protect themselves from hiring predators and/or identifing those individuals exploiting weaknesses in internal controls. However, there is no way to prevent or curtail a criminal enterprise from exploiting the exemption system or embarking on an affinity fraud enterprise. That said, I am familiar with your sentiment.
What I have noticed is that the sector is very sensitive to being discussed in the same conversation involving criminal activity. I think it’s fare to say that the sector is generally uncomfortable with the notion of crimes committed in the name of charity or religion. On more then one occasion, I have sat at tables in non-profit conferences where the entire table went from jovial lunch time conversation to complete silence when I was asked about my work and some examples of my work in practice. It sometimes feels like the entire table is preparing to exit as quickly as possible. As if by denying an association between criminal activity and the sector it somehow makes the problem go away and–on the flip side–by talking about it, it somehow makes the entire sector seem generally “corrupt”. The reality is that the sector is exploited by certain criminal elements and individual predators, and that there are certain inherent characteristics of the sector that do in fact attract criminals.
I don’t know what seminars you have attended that seem to blame the sector for organized criminal activity, but I would agree that is certainly a confused message. Maybe the better message is that LE and regulators could use the sector’s active support in rooting out bad actors and assisting where they can to insure that such actors are brought to justice.
Thank you. I agree that regulators are not confused about this issue. But I just attended a seminar last week sponsored by Boardsource at which an attorney — who described himself as working closely with Boardsource — was very confused about this and as a result inadvertently passed a good deal of misguided cautionaries.
Who IS confused about this is philanthropy and nonprofits . . . because we tend to buy the idea that "there is a lot of corruption in the nonprofit sector." Rather, many crooks use the nonprofit sector as their vehicle.
My direct experience with charity regulators has been almost uniformly positive. They are smart, well-informed, relatively able to steer clear of political pressures, and, shockingly understaffed and underfunded.
fare? how about fair?
I love you, Jan!! I wish everyone was as brilliant, logical and obviously fun, too as you! You said it perfectly.
I wish blue avocado came every day.
Heather
Amen! I couldn’t agree more…. great article!
Applause! Bravo and Thank You.