“Why or why not should one be incorporated?” is the question American lawyer Don Kramer asked in his Weekly E-Newsletter back in 2010.

For Mr. Kramer, the question is a legal one. The pros and cons that he outlines deal with personal liability and procedural/substantive questions.  His fantastically succinct answer refers to state statute and case law.

For some, incorporation is relevant not because of legal concerns but rather taxation benefits.  Others might contemplate incorporation through the lense of fundraising and its effects on donors.  And yet to others, the act of incorporation or registration is simply a question of time and money — lacking either of the two might automatically render incorporation as an unwarranted expense.

As a banker, and more specifically, as a banker that deals with international nonprofits, I’m interested in easing a charity’s ability to open and manage a bank account.

So like any good Jew, I’ll answer a question with a question.  When seeking to solve the riddle of “Should I incorporate?” I ask the following: Will your charity operate internationally?

If the answer is yes, then incorporate.  It will make banking abroad much easier.

WHAT IS INCORPORATION

The definition of Incorporation as listed on Investopedia.com:

The process of legally declaring a corporate entity as separate from its owners.  Incorporation has many advantages for a business and its owners, including:

1)   Protects the owner’s assets against the company’s liabilities
2)   Allows for easy transfer of ownership to another party
3)   Achieves a lower tax rate than on personal income
4)   Receives more lenient tax restrictions on loss carry forwards
5)   Can raise capital through the sale of stock

A founder might consider incorporating his project or program for any of the reasons listed above, to allow donations to be tax-deductible or just to seem more legitimate in the eyes of donors, to name just a few reasons.

(Again, Don Kramer very nicely summarizes two benefits of incorporation in the article referenced above.)

The regulatory requirements demanded of Charities, as can be expected, vary from country to country; some governments give nonprofits the option to incorporate, others force it, while other deny it outright.

INCORPORATION: THE COMMON DENOMINATOR

The question whether to incorporate is not one of right or wrong, but rather, one of priorities and circumstance.

The United States, among other countries, does not force incorporation upon charities. As Mr. Kramer points out, a U.S. nonprofit can be formed as a Trust or an Unincorporated Association.

Since not all legal entities are internationally recognized (or even exist overseas), problems may arise when organizations that are not incorporated do business abroad.

As a general rule, when choosing to operate internationally it is best to fit into preexisting or predefined conceptions.  This is true for bank accounts and other institutional processes where there is a need to define the legal entity of the account owner.

Corporations, in contrast to entities like a Trust or an Association, exist in most countries — albeit with different legal and tax ramifications — and are generally listed with some governmental registry and/or monitoring system. As such, for-profit and nonprofit corporations can generally rely on the somewhat universal concept of incorporation to become recognized and establish an official presence abroad.

Israeli institutions are sometimes unsure — and rightfully so — how to categorize charities that are unincorporated abroad, created as legal entities that have no local equivalent.  This confusion may delay or hamper a nonprofit’s operations.

In conclusion: while a nonprofit doesn’t have to incorporate to do business abroad, it is definitely worth considering.

What has been your experience?

Tizku Lemitzvot,

Shuey

I was hesitant to write this piece as it touches on many legal issues, and I am not a lawyer.  However, after helping a few unincorporated charities open accounts, I believe that spreading the lessons learned from these experiences is important.  As always, please refer questions to the appropriate experts.

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

Photo Credit: “Registration Desk Sign” by NHS Confederation

The fiscal responsibilities of an American charity have become more complicated in recent years. Increased scrutiny from the IRS, more intricate tax documentation, the recent economic crisis, and donors’ need for transparency, are just a few of the challenges facing the sector. When a charity operates internationally these difficulties are only exacerbated. These global organizations are expected to be familiar with regional and global charity regulations, comfortable working in foreign languages and cultures, able to cope with inherent increased expenses, and capable of forging new relationships – all while maintaining a high level of accountability.

A powerful tool in helping a “Friends of” organization cope is an additional account abroad in the country in which it operates. When used to its potential, this kind of account is invaluable.

(For this purposes of this article, I’ll be using Israel as my example, as American fiscal support for Israel is wide-spread and well documented.)

The Benefits of Maintaining an Account in Israel

1. Deposit Checks in Israel

Checks designated for the U.S. charity that are received in Israel can be deposited locally. Because the account in Israel is owned by the American charitable organization any check deposited in the account can receive an IRS tax-deductible receipt. Donors can write the check while the feeling is hot, as opposed to waiting until they return back home to the United States. The organization can save: (1) money by not using postal or delivery companies; (2) time as checks can be deposited immediately in the Israel account, and; (3) hassle as there is no need to hold on to checks to mail them in bulk, photocopy and catalog mailed checks, worry about lost mail, etc.

2. Wire Monies to Israel when Convenient for the U.S. Charity

Similarly, because the account is owned by the American entity, money sitting in the account in Israel still shows in the American organization’s books. This allows the nonprofit to transfer funds according to their own schedule and not just when Israel charities need support. With this flexibility, the U.S. nonprofit can cut costs by transferring funds in bulk and increase feelings of control, while at the same time reducing the hassles of constantly operating on someone else’s timetable.

3. Transfer Funds Immediately to Israeli Nonprofits

As money can, theoretically, already be in the U.S. charity’s account in Israel, when support is approved, money (converted and) transferred the same day. No longer are groups on both sides of the ocean dependent on anonymous, ambiguous banks to make sure that money is transferred in a timely manner.

4. U.S. Nonprofit’s Israel Account can Act as Collateral

Should an Israeli organization connected to or supported by the U.S. charity need credit – whether in the form or a loan or line of credit – the American account can act as collateral. This allows money that the “Friends of” organization prefers stay under its ownership do so while still providing the necessary credit to a worthy Israeli nonprofit. (ex: This can prevent the undesirable situation when an American organization would have to “loan” funds.)

5. Pay Expenses Directly from Israel

Any type of expense can be paid locally – whether flights, hotels, or travel expenses – from the “Friends of” account in Israel. This allows for payment in local currency (i.e. shekel), as opposed to dollar, which can be cheaper both in terms of actual cost and associated fees. Additionally, an account abroad provides a variety of payment options to the American charity; such as check, wire transfer or credit card. Furthermore, the American entity can opt to pay for certain expenses directly instead of the Israeli recipients to minimize Israeli tax or charity regulatory complications that might occasionally surface.

6. Greater Oversight in the Eyes of the IRS

While the United States Government acknowledges the need for international charity, it is concerned that US based nonprofits might not exercise adequate control over its funds or be subservient to foreign organizations. Maintaining an account overseas where the American entity operates – providing that the Foundation and the Keren avoid overlaps in its board membership and authorized account signatories, among other things – is a hands-on management approach that demonstrates to the IRS a high level of budgetary control and transparency.

Closing Words…

Please note that, as said before, an account managed in Israel by the American tax-exempt organization is still considered under the ownership of the “Friends of” charity and should be treated as such. Additionally, many of the tips raised in this article are not simply about banking and require the consultation of a charity’s Board of Director and its accountant/lawyer.

Tizku Lemitzvot,

Shuey

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 professional. Read the full disclaimer.

A collection of links to the great articles covering the nonprofit sector that I have reviewed and posted to Twitter between December 1 – December 12.  This week’s topics include: U.S. Tax & Law •  Israeli & Jewish Nonprofits  •  Strategy & Governance  •  Marketing & Fundraising  •  Potpourri.

You can stay up-to-date with these links and more like them by following me on Twitter or subscribing to the blog.

Tizku Lemitzvot,

Shuey

U.S. Tax & Law

• CharityNav: Liberal Deficit-Cutting Plan Proposes New Charitable Tax Credit 
• Status update on potentially game changing L3C (U.S. registered low-profit co.) on CharityLawyer http://ow.ly/1rMmeZ
• Debating turning a struggling NGO into a for-profit? DonKramer talks legality & raises good points http://ow.ly/1rMk2X
• DonKramer: Is tuition payment to a nonprofit school tax deductible? http://ow.ly/1rSGQ3 >> very applicable for parents whose kids are studying in Israel post high school
• Tough questions >> GTak: Highly unlikely now, but later…? PndBlog: Eliminating the Charitable Deduction http://ow.ly/1rP58X

Jewish & Israeli Nonprofits

• NonProfitBanker: New post: “The Carmel Fire & Haiti: No Need to Reinvent the Wheel” http://ow.ly/3lzmP
• NPQuarterly: Holiday shopping at the Mitzvah Mall in Anchorage. Merry Chanukah! http://ow.ly/1rThG3

Strategy & Governance

• CharityLawyer touts virtues of testing waters through fiscal sponsor b4 starting a new NGO http://ow.ly/1rM1dw
• ABACtrProBono: Top 10 Legal Risks 2 NGO Boards (BoardSource Forum summary by NonprofitLawyer) http://ow.ly/1rMl8G
• NPQuarterly: Watchdog CharityNav adjusts nonprofit ratings system for recession http://ow.ly/3nUHX
• Starting a nonprofit? Nice overview of relevant questions, challenges & strategyhttp://ow.ly/1rPl90 via GTak
• NAFund attacks recent Nonprofits & Social Enterprise study. A must for those following recent articles http://ow.ly/1rQ5pn
• Avoid “mission creep”: Dont chase the money; passionately pursue your missionhttp://ow.ly/1rSFlZ via CharityLawyer
• FundraisingNews: A Checklist to Gauge the Strength of a Nonprofit Organizations http://ow.ly/1rSM8m

Fundraising & Marketing

• Nonprofit_Mo: Great advantages to small nonprofits! KiviLM: 3 Fundraising Lessons from 365-Day Experiment http://ow.ly/1rUciP
• AFPIHQ creates site FULL of tools and media to help donors with their giving http://ow.ly/1rXJzR via Dan_Blakemore & KirstenBuloock
• Nice! Create personal campaigns w/FirstGiving’s “Bring Back the Giving” http://ow.ly/1rXJsR via AskDebra & CoreWebInc
• YeahService: 3 common PREVENTABLE grant proposal mistakes http://ow.ly/1vnFU >> Short & to the point!
• BTalisman summarizes the GuideStarUSA Fall ’10 Nonprofit Fundraising Survey http://ow.ly/3j3M1
• Nonprofits angry over Apple’s recent ban on donations through iPhone apps. Kanter starts a petition http://ow.ly/1rUhX6 via eJPhil
• Unraveling the mystery of the biological drive that motivates the body to give http://ow.ly/1rPkoW via CharityNav

Potpourri

• It hurts me to say, but life IS possible w/out big banks http://ow.ly/1rNsWs via Umairh & HildyGottlieb >> trust & ingenuity go a long way

Chana Mason was born in Colombia and grew up in South Florida. She has a degree in Theatrical Directing and Engineering from Dartmouth College. She has worked in management consulting, high school education, and high-tech. Since moving to Israel in 2003, she has been involved in a number of Israeli non-profits.

Recently, within a matter of months, I opened and then proceeded to close a amutah [Hebrew referring to a registered charity in Israel] here in Israel.  I wanted to open up a seminary [school focusing on religious studies] and, with the advisement of experts in the field, decided it would be best for the seminary to run under its own administrative body.  Unfortunately, we did not come to this understanding until late into the process of developing the seminary, which meant that we were rushed to register the amutah, file in the tax authorities, and open a bank account.  I learned many things in this process that perhaps can help others looking to start their own non-profit organizations.

1.  Work Through a Fiscal Sponsor

Though it can be an administrative hassle, I recommend working under the auspices of another charity until you have your organization strongly in order.  Opening up an amutah and all it comes with can cost up to 2000 shekels (around $550) and takes a lot of your energies away from creating a strong organization and getting to know how the various government bureaucracies work.

2.  Foundations for Success: A Good Lawyer & Accountant

Having a great accountant and lawyer make a huge difference.  They can explain the process along the way.  A smart accountant will prepare you ahead of time for tax issues you could have never imagined in your wildest dreams.  My accountant wanted to read every contract I signed and wanted to know about every person I had an interaction with in regards to the amutah.  He is incredibly sharp and honest and let me know what was legal and what was illegal but unnoticeable.  A good lawyer wont charge you for every little thing and will charge an honest fee for his work.  When opening a charity in Israel, a lawyer in mainly just a notary, so getting a notary you know for a small amount of money is a great place to save.

3.  Never Underestimate the Importance of Your Banker

I never thought that in Israel my bank would be my greatest ally and asset, but it truly has been.   In a process where the learning curve is steep, having good advisement and support means a great deal.

While having staff that is pleasure and helpful is a definite plus (maybe even a must), there were other aspects of the bank’s service that were important to my small non-profit: (1) explained the types of accounts available; (2) provided a minimal-hassle process for opening and closing the amutah’s bank account; (3) worked openly with my accountant; (4) negotiated an appropriate fee structure; and (5) agreed to meet at a convenient location (outside the bank) for the charity’s signatories to sign the paperwork.

4. Budgeting: Reduce Costs and Seek Advice

Make sure you have squeezed every shekel you can out of your budget.  Fundraising in this economic climate, especially for a novice like me, can turn out to be a disappointment.  Reducing costs to an absolute minimum can make a huge difference.  This is where getting advice from people in the know and having lots of people analyse and churn through your budget is also useful.  For my non-profit it is clear looking back that my fundraising expectations were too high and my budget was also too high.  We relied quite heavily on one main donor, who in the end could not afford to support the institution and we also budgeted to offer the best to our students.  It would have been better to offer lower salaries, smaller spaces and a smaller scale program at the beginning to create a safer budget.

5. Make the Tough Decisions Earlier Rather Than Later

We also saw that though many people were to be disappointed by our closing the amutah, it was better to close the organization as early as possible.  Otherwise higher debts would have been incurred over the long run.  Looking back, we are incredibly happy with our decision.  Accruing debt is no small matter and is counter to the mitzvah of tzedakah [charity] that we are aiming for when creating a non-profit institution.

Wishing all of us much success in working to improve the lives of people everywhere!

Chana Mason

A list of great articles from around the web that I posted to Twitter from May 2 – May 15, 2010.  This week’s topics include: Strategy & Governance; Social Media & Internet >> Fundraising; Social Media & Internet >> Recreation; Israel; Banking & Economy; and Potpourri.

I didn’t have so much time last week, forcing me to combine 2 weeks worth of links. Man, oh man. I hope you’ve got some time, there are some great articles below.  Not to mention some really funny ones, as well. Enjoy them both.

Tizku Lemitzvot,

Shuey (@nonprofitbanker)

<br>

Strategy & Governance

Protect your #Nonprofit: 3 critical manuals all NPOs should create http://ow.ly/1JQRl via @NonprofitSRQ @npa_online @PamelaGrow

IRS interim report “Exempt Organizations – Universities Compliance Project” http://ow.ly/1Jdeq – focus on unrelated income & executive comp

4 Reasons Why IRS Interim Report “Exempt Orgs – Universities Compliance Project” is an Important Read http://ow.ly/1JheM

RT @socialcitizen: Is the $5 Donor a Philanthropist? http://ow.ly/1Grmq >> Great question raised. I weighed in, interested in your feedback

Koret CEO Jeff Farber shares: “It’s time #Jewish #philanthropy stop operating like a charity” http://ow.ly/1GN3Z

Well said! >> RT @nptechblogs: With great market share comes great responsibilityhttp://bit.ly/c5QwgE (via @socialsignal)

How to tell if your brand is useless (2 min VIDEO) on @jeffbrooks http://ow.ly/1KJmA // @CharlieKalech reminds me of speech you gave @ GBN

Great resource for boards >> RT @HeidiEKMassey: RT @npmaven: Creating online ‘readings’ handout 4 #nonprofit boards.http://is.gd/c2Lsh

<br>

Social Media & Internet >> Fundraising

Dan Brown of @eJPhil gives highlights from 2010 eNonprofit Benchmarks Study.http://bit.ly/94DYxy >> important numbers for email campaigns

NPTimes: Charity apps combine education & fun & translate into $ w/o limits of text-2-give-campaigns http://ow.ly/1GNor

To Mama With Love: Social Network Fundraising succeeding in Engagement & Conversation, by @askdebra http://bit.ly/cqNwuz via @shoshanak

Social Media is NOT about jumping on the bandwagon >> 10 Trends in SUSTAINABLE Social Media, by @askdebra http://ow.ly/1Lxm8 via @lblumenthal

Crucial Message! >> RT @PaulDunay: Social media is not a campaign: It’s your customerhttp://ff.im/-k6khS by @travismurdock

RT @nonprofitorgs & @askdebra How@EnvDefenseFund created its social media guidelines, by @kiramarch http://is.gd/c4D6v

RT @PaulDunay: 7 Things Your Organization/Company Must Do Because Of Social Media, by @augieray http://ff.im/-kif9L

Holy smart-bomb Batman! US Airforce has awesome Social Media Response Plan flowchart! http://ow.ly/1JQiP via @nptechblogs @wildapricot

It’s all about making it personal! >> RT@askdebra @bfholmes: NGO thinks outside-the-box to give homeless a voice (VIDEO) http://ow.ly/1Jidw

<br>

Social Media & Internet >> Recreation

RT @GuyKawasaki: How to make your Facebook profile more private [2 min VIDEO]http://is.gd/c8eNj // Facebook privacy settings are in 5 dif places!

RT @HilzFuld @Minervity: Top 5 Social Blogging Tools http://su.pr/2QpKQd by @RuhaniRabin

RT @askdebra: Very interesting – FB backlash. Diaspora: an antidote 2 FB? Http://bit.ly/aoubb0 via @pampelmoose

RT @lblumenthal: 8 kinds of websites we need to stop building, by @oatmeal http://ow.ly/1KQj7 // Funny. Hard 2 agree w #6, need of more secure FB

RT @mayerreich: This is funny and why I hate Facebook. http://bit.ly/dbSyHs // Facebook intrudes just a tad, doesn’t it

Are social networks hurting or helping children develop emotionally/socially? http://ow.ly/1GnIg via @power2b @dovemerson @rabbigreen

RT @GuyKawasaki: “How do I delete my Facebook” query growing http://is.gd/c4Iif

<br>

Israel

RT @inwnews: Globes: CITI mulls retail banking in #Israel http://ow.ly/1GnlC >> more competition & lower fees? I hope so

RT @ISRAEL21C: OECD accepts Israel as member http://su.pr/2Joo35 #Israel#economy #business

RT @Israel_News: Euro drops sharply vs Shekel as IMF judged EU’s emergency fund as a temp solution. http://ow.ly/1Js4A

<br>

Banking & Economy

The New Poor: Even w/ rebounding economy, many jobs – tnx to tech advances – won’t be coming back ever http://s.nyt.com/u/wuwm

US Crisis Panel to probe how big banks routinely – and legally – fudge their quarterly books. http://ow.ly/1Hb8q

US Treasury Sec urged Congress 2 impose 10-yr $90 billion bank-tax 2 recoup 2008 bailout-costs http://ow.ly/1Hbbr

As stimulus $ dwindles down, expect States to make deep cuts http://ow.ly/1IQwd via @NAFund @PANONonprofit @robertegger

RT @askdebra: Social media and the banking industry, by @davidfinch http://is.gd/c6YkI // Essential services made easier, free advice & more

Thanks for the referral Debra >> RT @askdebra: Mobile banking set to soar, courtesy of @emarketer http://is.gd/c5ZPJ

<br>

Potpourri

RT @Neil_Hamburger: Another “world’s oldest person” died today. Clearly, a dangerous competition that should be stopped. http://ow.ly/1GUIC

The arrests of 44 individuals–including, 3 mayors, 5 respected community rabbis, a score of government officials, and others–on Thursday of last week (July 23) should highlight the dangers of organizations donating to international causes; and I guarantee you, the I.R.S. is having similar thoughts.

I believe that two reactions can be expected.

1. Greater Scrutiny of Charities

The fear that a charitable donation might not be used for a charitable purpose is not new. The U.S. Department of Treasury has long known the important role that charities play in financing terror and released in 2006 its third version of “Financing Guidelines: Voluntary Best Practices for U.S. Based Charities.”

(For a more detailed analysis, I published an article entitled, “International Charity in the Face of Global Terrorism: The U.S. Department of Treasurys Response.”)

Until now the guidelines produced by the IRS and other groups have been voluntary in nature and not enforced by the U.S. Government. Incidents like the one from last week and the Spinka Hasidim in 2007 are convincing the IRS that terrorists aren’t the only ones abusing the system.

With President Obama’s civic-minded government, we can expect these recommendations to become laws (click here to read more about Obama’s nonprofit agenda). When the Treasury reviews the practices of international organizations they will find that many of them are not following the guidelines that have been suggested. Organizations that are found to be negligent can find themselves facing criminal charges, fines, and revocation of tax-exempt status.

The U.S. government has already invested the time. The literature exists. In just a few short weeks, we can theoretically find these voluntary principles mandatory, so read the letter of the law and obey even the spirit of the law. Remember, the Patriot Act of 2002 allows the IRS to freeze accounts first, and ask questions later.

2. Restriction of 501(c)3 Tax-Exempt Status

The general locker-room talk, as one accountant put it, is that the easiest way to prevent future international fraud is to restrict the organizations that can gain tax-exempt status. Many Israeli organizations currently have or are thinking of opening “Friends of” organizations in the States to help fundraise from American citizens. Donations to these American-based organizations are exempt from United States federal taxes and are channeled to the final destination in Israel.

The U.S. Department of Treasury has only enough manpower to audit between 2 – 3% of registered charities in America. Scrutiny of organizations that already have 501(c)3, then, seems almost like an impossibility. However, as every new organization that wants tax exempt status needs approval from the IRS, it would be a relatively simple procedure to restrict approval to new charities; more specifically, to new charities that donate to international causes.

This could be done simply by requiring additional paperwork or by imposing a minimum existence period, as is the case in Israel.

(More about the difference between USA and Israeli charities can be found in my article entitled “Defining an Israeli Nonprofit Organization.”)

Those that are worried about obtaining this status should forget about waiting for the “right” time and apply now. For those organizations that do not set up a “Friends of” charities, organizations such as the PEF, Central Fund, FJC, One Israel Fund and others can provide receipts to donors and forward the money to the intended Israeli causes.

Tizku LeMitzvot [May you continue to merit doing good deeds],

Shuey

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Related Posts:

The New Jersey Scandal, Pt. 1: The Facts

The New Jersey Scandal, Pt. 2: The Israel Fallout

Even before the dust settles in the States, Israel and her charities will already start to feel the effects from last week’s scandal.

First, we can expect that donors’ skepticism of Israeli charities will increase, which is understandable. The current proliferation of nonprofits already casts doubt on their authenticity: Israeli charity-representatives hound communities weekly; American Friend organizations exist in abundance; internet and email advertisements appear on every Jewish website broadcasting Israel’s fight for its physical and spiritual survival. In short, this scandal has cast a shadow on a situation already wrought with suspicion, doubt, and misconception.

Second, we can expect the relationship that exists between Israeli amutot [nonprofits] and money changers to come under fire. Charities need their donation-checks to clear as soon as possible. As opposed to banks, “cash houses,” or money changers, can exchange cash for checks (for a one to two percent fee) with a wait time of zero to two days. Thus, Israeli charities regularly deposit large sums of cash received from money changers into their bank accounts.

Depositing cash in a bank account (or not even reporting it) is not a good idea. It has never been a good idea. Recently, with the changes in American and Israeli oversight, it is an even worse idea yet, plenty of organizations still do it. Due to recent events, those charities that continue to do this are essentially taping a “kick me” sign to their backs. Don’t be surprised when the Rasham Ha’amutot [Israeli Registrar of Charities] comes a knocking to inquire about the large deposits of cash. Also, banks are required to report out-of-the-ordinary transactions to the Bank of Israel. An organization can bet that some or all of those below-the-radar cash deposits have been reported.

Third, we can expect that the Israeli police will become involved. Maybe not this week. Maybe not next month. But it is only a matter of time. For those who are not aware of it yet, the world is a small place and the United States has a very big reach. Just ask the banks in Switzerland, which until recently were known for their very discreet and private banking. That is until the US government came along and asked them nicely to give over the names of those American citizens who are hiding their assets from the IRS. Either due to U.S. initiative or common sense, it is only a matter of time before the Israeli authorities pick up where their American counterparts have left off.

Fourth, as mentioned above, we can expect that the Israeli Registrar of Charities will take a microscope to charities that receive money from abroad, specifically, in cash. In my experience I have seen nonprofit banking procedures boil down to one thing: convenience (not compliance). In addition to cash deposits, many nonprofit directors and employees use their own private bank accounts instead of opening/using an account under the organization’s name. In Israel, nonprofits are checked about once in every five years. The chance for an Israeli nonprofit to pull one over the governmental oversight committee is slim and only getting slimmer.

Fifth, we can expect that Israeli banks will introduce internal regulations to alert themselves of charity wrongdoing in accounts they manage. Israel was relatively late in getting approved as a country free of money laundering. Like any latecomer, the banks make up for lost time in their zealousness in adhering to the law.

Tizku LeMitzvot [May you continue to merit doing good deeds],

Shuey

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Related Posts:

The New Jersey Scandal, Pt. 1: The Facts

The New Jersey Scandal, Pt. 3: The IRS Expected Response

Last week (July 23) in New Jersey, an undercover police operation revealed a rainbow of criminal dealings. The implications of the scandal vis-à-vis charities are too vast and far-reaching to be dealt with in one post.  Over the next day or two I will address the pertinent issues.  Questions and comments are welcome.

The Facts

Among the myriad accusations is the charge of the laundering of charitable donations totaling approximately 3 million dollars. The Jerusalem Post quotes sources saying that “at least some of the millions came from Israel” while the New York Times notes “much of the cash they provided him [the informant] came from Israel.” The Post explains that one of the rabbis detained “used a source in Israel to supply money through ‘cash houses’ [money changer].” The Post also quotes former Jerusalem Police Chief Mickey Levy who said Israeli authorities weren’t involved yet but didn’t rule out their involvement a later stage of the investigation.

To review:

• Money donated to a US based charity that operates internationally was not used for charitable purposes
• Some of this money was funneled through Israel
• In Israel, some or all of the money was handled by a money changer
• The Israeli police might become involved

What is Money Laundering?

A U.K. Parliament website defines money laundering as:

“The process by which the source of ownership of criminally derived wealth and property is changed to confer on it a perception of legitimacy. From the point of the criminal there seem to be three requirements:

• The need to conceal the true ownership and origin of the proceeds;
• The need to maintain control of the proceeds; and
• The need to change the form of the proceeds.”

Articles about the Recent New Jersey Scandal

44 Charged by U.S. in New Jersey Corruption Sweep (New York Times)

Syrian Sephardic Communities Shaken by Charges Against a Leading Rabbi (New York Times)

Millionaire, Patron and Now Informant (New York Times)

How the corruption case unfolded (New York Times)

Laundered cash may be from Israel (Jerusalem Post)

Life Can Imitate Art: Indictments Describe Deals More Fit for a Crime Movie (New York Times)

Hoboken Mayor’s Fall From Reformer to Defendant (New York Times)

Israel Likely to Probe Alleged Money-Laundering Network (Jerusalem Post)

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Related Posts:

The New Jersey Scandal, Pt. 2: The Israel Fallout

The New Jersey Scandal, Pt. 3: The IRS Expected Response

In a previous post, I mentioned that a loan and a line of credit serve the same purpose.  While that may be true in a broad sense, they actually can be quite different.  Hence, the different names.  The bank will look at both types of credit the same way, evaluating the amount of credit requested against the amount and type of collateral offered.  The customer, however, only cares about one thing, which option is cheaper.

Loan

Credit, as we all know, is money the bank gives you as a short term gift, so to speak.   A loan, then, can be viewed as a lump-sum gift.  We are generally familiar with loans when buying cars or homes.  These loans are for relatively long amounts of time where the borrower pays back the credit a little at a time, either monthly or quarterly, until the end of the loan term when — poof — the amount borrowed has all been paid back.

Bridge Loan

A bridge loan is different from the above loan.  The biggest difference between the two types is that a bridge loan is generally for a shorter period and is paid back in one payment, full, at the end of the loan’s term.  These type of loans are usually against an expected income/donation and function similarly to lines of credit.  A bridge loan is advantageous when the customer needs all of his credit limit right away and is expecting to pay it back in one shot.

Line of Credit

A line of credit is not a gift at all, but more of an understanding between the client and the bank.  The bank will allow the account to go into a minus up to a pre-agreed amount.  This type of credit is useful when the length of time that an organization will be in debt is known but the amount is not known.  During this credit period, depending on incomes received and daily activities, the actual amount of credit used could vary.  Some days the account is in minus and some days not.  Some days the entire line is used and other days only a portion.  The advantage of the line of credit is its flexibility; the customer is only charged interest for what is used.  Like the bridge loan, there are no interim payments for the line of credit, just the requirement to repay the credit in full when the period ends.  Assuming an organization knows from the beginning that it will be using all of its line of credit for the entire length of the debt period, a bridge loan is going to be a better option.

Show Me the Money

Built into the flexibility of a line of credit is a higher interest rate than that of a loan.  Over the term of the line of credit, because the full amount is rarely used, this option incurs less interest fees than a loan — despite its higher rate of interest.  Loans have a lower rate of interest but you need to borrow the entire amount from the bank.  If in the end you didn’t need the loan, tough luck and pay up.

Fees Involved

Both options will have two fees attached to them.  First, is the interest on the credit used.  Call it a gift or an understanding, anytime you use money that you technically don’t have, you’re going to pay for it.  Lines of credit will be based on Prime, which is based on the Bank of Israel’s interest rate, thus, subject to change.  Loans may also be based on Prime or fixed.  Second, both options will also have a one-time handling fee, as well.  Lines of credit might call these fees “credit allocation” (amalat haktza’at ashrei) while loans might refer to them as “preparation” (hachanat tefasim) or “folder opening” (petichat tik) fees.  These one-timers are generally based on a percentage of the credit being taken and may be dependant on the lenght of the credit, as well.

Be aware that business customers may get quoted higher rates than individual customers, as stipulated by the new Fee Law that went into effect July 2008.  Unfortunately, any nonprofit that has a yearly cash flow of over one million NIS is considered a business as far as the Bank of Israel is concerned.

Questions to Ask your Banker

• How much is the interest?
• Is the interest variable (based  on Prime) or fixed?
• How much is the handling fee?
• For loans, can you pay them back early? Is there a penalty involved?
• For lines of credit, what fees can I expect if none of the credit is used?  Are there any penalties?
• Are there any additional fees?
• What is the bank using as collateral?
• What promises/commitments have I made to the bank?

While I have provided a list of the basics, please, please, please, remember that each bank is slightly different.  Ask your banker any and all questions you think are relevant,  “The only stupid question is the one not asked.”

Tizku LeMitzvot [May you continue to merit doing good deeds],

Shuey

It is logical to assume that if a bank wants to appeal to the nonprofit community then it has to understand the nonprofit organization’s way of thinking (that’s where I come in).  The opposite should also be true.  If a charitable institution wants to appeal to a bank then it must understand the bank’s way of thinking. This is especially the case when using or applying for credit from a bank.

In the past two months alone, four organizations have turned to me trying to understand why their bank was acting a certain way when it came to credit. A few examples:

• One organization had a large line of credit in one account that was guaranteed by cash in a different account. As far as the nonprofit was concerned, this wasn’t credit and should, thus, not be charged any accrued interest fees.
• Another organization didn’t understand why its Israeli bank felt uncomfortable giving a temporary line of credit against a foreign currency check deposited in its account. After all, the bank had the “cash.”
• A charity was upset that a bank didn’t want to approve a mortgage backed by the property that was being purchasing. The institution was convinced that its request was backed by solid collateral.

I wanted to take the opportunity over the next few blogs to review how a bank looks at certain types of credit and what steps an organization can take to make itself more appealing to a bank. First, let’s start with the basics and review the various types of credit available.

Overview

• Checks
• Credit Card
• Line of Credit
• Loan
• Mortgage
• Bank Guarantee / Letter of Credit

Checks

• Checks are promises. Checks are trust. Let us be absolutely clear, checks are not cash.
• Checks can be rejected, bounced, or not honored. Cash can be immediately used, or if you prefer, stored in a mattress or placed in a medium to large size swimming pool.
• In Israel, checks can be bounced for lack of funds only on the day after the check is deposited.
• In America, checks can be rejected up to a half a year or a year later. I have seen cases where a US dollar check cleared and the client used the money only to have the US bank call and bounce the check a month later.
• Banks do not want to put themselves in a position where they or their client will have already used the funds of the check, only to find that the check bounced a few days or weeks later (as seen above).
• Expect to wait at least two days for Israeli checks to clear.
• Foreign currency checks are cleared either through the bank (expect at least 7 business days) or through collection (anywhere from two weeks to two months).

Credit Cards

• A credit card in Israel are different that in the States and other places.
• In Israel, the cards are quasi-debit cards (with only one exception that I know): Debit cards, because the card is created and guaranteed through a bank (see below); Quasi because the payments do not come immediately out of an account, but rather only once a month.
• Credit cards are guaranteed by the bank. In other words, whether or not a client has money in his or her account, the bank is forced to by the bill.
• Credit card bills must be paid IN FULL on their due date.
• Because banks assume full responsibility of a card, the credit line will always be against some sort of security/collateral. Collateral can include expected salary (personal accounts), existing mortgage, or cash.

Line of Credit

• As of a few years ago, the Bank of Israel decreed that no account can have a line of credit without prior approval and request of the client. In short, the client has to sign more forms than before.
• Depending on the bank, this may hamper its ability to release credit on the same day or to cover a minus in the account that was incurred the previous day.
• One does not need to use a line of credit. It is an optional loan, so to speak.
• Banks differ in their fees for establishing a credit line. Some fees are not even based on whether the line is used. Fees can include interest (if line is used) and/or a credit issuance fee (amalat haktza’at ashrei). Speak to your bank to get all the fine print.
• Like credit cards, lines of credit are traditionally issued against expected salary (personal accounts), existing mortgage, or cash.

Loan

• Loans and lines of credit serve the same purpose.
• Loans generally come with a filing or processing fee (pitichat tik). The name can vary, depending on the bank. This fee may or may not be a percentage of the loan (check this out).
• Check with the bank about early repayment fees. Some banks have, others don’t. Prices and conditions vary.
• Loans are traditionally issued against contracts (business/nonprofit accounts), cash, guarantors, stock, property or cash.

Mortgage

• Mortgages are essentially loans, issued only against property.
• Unlike, general collateral, in mortgages, the property is intrinsically linked to the loan. The property cannot be used as security for any other dealings between a client and the bank.  This can only be changed with the bank’s and client’s approval and , of course, subsequent additional paperwork.

This is only the tip of the iceberg. I will be dealing with various nuances and applications in future posts.

Tizku LeMitzvot [May you continue to merit doing good deeds],

Shuey