A charitable foundation’s worst fear is that its grant will be used for non-charitable purposes. The U.S. Internal Revenue Service (IRS) stresses that this risk increases drastically when dealing with foreign grant making and expenditures.[1] The U.S. Department of the Treasury released its third and final version of its “Anti-Terrorist Financing Guidelines: Voluntary Best Practices for U.S. Based Charities” (VBP) in September of 2006 to help charities implement procedures that will reduce the risk of unintended diversions of funds to terrorist causes.

As the name suggests, the VBP is exactly that, voluntary; the VBP has neither the force of law nor can compliance “constitute a legal defense against any civil or criminal liability.”[2] However, the document’s legality should not detract from its importance. Firstly, the VBP provides insight into how law enforcement officials view the responsibilities of the nonprofit sector in the new, post 9/11 environment. Simply put, the Treasury Department wants to see the nonprofit sector enlisted directly in its efforts to combat terrorism.[3]Secondly, other government agencies are adopting the recommendations put forth in the VBP (the Combined Federal Campaign stated as such in a 2006 memorandum).This is important for two reasons. One, nonprofit advocates fear this is a signal that the VBP will become de facto law.  Two, the Treasury maintains that this speaks to the “usefulness and practical advice”[4] of the VBP and “encourages consistency across the U.S. Government.”[5]

The message of the VBP is clear: any support for terrorist activity, irrespective of an organization’s intentions, can have potential enforcement consequences. The Treasury hopes the VBP will reduce the chance (a) that an organization unwittingly makes problematic expenditures or (b) that an organization will be found liable if it does so unwittingly.[6] The hard line adopted by the Treasury department seems to be a combination of two things: one, intelligence information hinting “to the effect that international charities are the second principal source of money that underwrites terrorist activity”[7] and ; two, a general feeling by the U.S. Governmnet that nonprofits need to provide more oversight for their funding.[8] Punishments can include fees, civil and/or criminal prosecution; and revocation of tax-exempt status.

The “Voluntary Best Practices” offers many new suggestions covering topics such as: fundamental principles; governance accountability and transparency; financial accountability and transparency; programmatic verification; and practices to protect against misdirection of funds to terrorist persons. While the exact guidelines are beyond the scope of this article, it is important to note that the VBP:

• Holds the governing board of a charitable organization legally responsible for the charity.
• Believes that charities should maintain records identifying all board members and influential personal of any subsidiaries, affiliates or grantees. This includes checking all pertinent bodies against known terrorist lists.
• Maintains that charities should account for all domestic and international funds received and disbursed; salaries paid; and expenses incurred. This includes knowing all the sources of income and commercial activities of the grantee.
• Prefers all disbursements to be made by check or wire transfer rather than in cash.
• Asserts that the terms of the grant should be reduced to a written agreement signed by both the charity and the grantee. In addition to requiring periodic reports, charities should perform routine, on-site audits of grantees.
• Insists that charities must demonstrate that it exercised an independent decision about the use of its donations and that the funds sent abroad further the charities’ own purposes.[9]

The due diligence described in the VBP is tedious and costly. Many have therefore argued that this extra screening will funnel money away from legitimate programs and into excessive administrative costs. The Treasury Department is standing by its suggestions, thus, signaling to all that “life is simply more expensive and inconvenient as a result of global terrorism, and everyone is expected to bear a share of the new costs of doing business.”[10]In short, the Treasury Departments “Voluntary Best Practices” aims to equate the due diligence required of nonprofits to that recently put inplace at financial institutions and companies with dealings abroad.

As these “voluntary” guidelines become more accepted, U.S. based charities and donors will need to adopt practical steps to ensure the transparency and compliance.  With the writing on the wall, nonprofit organizations can take preemptive measures to ensure that their charity continues to operate full-speed-ahead during these times of increased scrutiny, skepticism, and change.

Tizku Lemitzvot,

Shuey

Author’s Note:  As we have been seeing the I.R.S. and other governmental agencies stepping up their scrutiny of US charities (not necessarily a bad thing), I decided to repost the above article that I had written originally in 2007.  A quick look at The Independent Sector will show the reader that the post is still relevant and up-to-date.

Disclaimer: This blog houses my personal opinions and is for informational purposes only – not advice. As charity laws can be quite complex, please refer all questions to qualified and licensed professionals. Read the full disclaimer.

[1] Day, Berry & Howard Foundation Handbook on Counter-Terrorism Measures: What U.S. Nonprofits Need to Know (2004): pg. 18.

[2] U.S. Department of the Treasury U.S. Department of the Treasury Anti-Terrorist Financing Guidelines: Voluntary Best Practices for U.S.-Based Charities (September 29, 2006): pg. 2.

[3] Handbook: pg. 21.

[4] U.S. Department of the Treasury Response to Comments Submitted on the U.S. Department of the Treasury Anti-Terrorist Financing Guidelines: Voluntary Best Practices for U.S.-Based Charities (September 29, 2006): pg 3.

[5] Ibid.

[6] Handbook: pg. 21.

[7] Ibid: pg. 22.

[8] As described in a letter dated June 28, 2007, by the IRS to Senator Charles Grassley, ranking member of the Senate Committee on Finance.

[9] Handbook: pgs 18-19.

[10] Handbook: pg. 22