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