How to avoid falling victim to charity fraud

Earlier this month, federal authorities cracked down on four cancer charities that had bilked millions of dollars from donors, and Propublica investigations came down hard on the Red Cross, questioning its use of the half-billion dollars it raised for Haiti relief.

The news comes at a time when the charity sector — which has struggled to recover from the recession — finally reported last week that giving has finally reached prerecession levels.

About 95 percent of households donate to charities, averaging about $3,000 annually per household, according to the National Philanthropic Trust. “Unfortunately, these negative cases can damage the public’s trust in charities,” said Sandra Miniutti, CEO of watchdog group Charity Navigator. “We’re not all shams.”

It’s not hard to find solid, reputable charities that are doing good with donor dollars, say experts from watchdog groups, who offer some wisdom for choosing where your charity dollars go. “Be cautious, do research, and you can find a great charity pretty easily,” said Miniutti.

“Wild West”

When thinking about donating to charity, it’s useful to know the charity sector has looser regulations than some others, and that’s by design. David Callahan, founder and director of Inside Philanthropy, wrote in The New York Times that charities are treated with lax regulation and a “minimum of rules” that are “a bit like the Wild West.”

In many states, the rules governing philanthropy are barely enforced, which is why frauds like the cancer charities — which used high-priced professional fundraisers and then put donations toward exorbitant salaries, vacations, college tuition and shopping trips — can go undetected for years.

“Donors need to understand there is not a lot of regulation from the government,” said Miniutti. There’s no “charity czar” regulating philanthropy, she said, so “for now the IRS is willing to leave the door open to anyone.”

On the upside, this allows people to easily set up organizations to address problems, and nonprofits play a huge rule in the U.S., from feeding the hungry, establishing museums and supporting the arts to founding educational institutions. But it also can foster bad apples.

Most oversight falls on attorneys general from individual states, which can be more lax in some states than others, and cases are complicated to build. In the case of the fraudulent cancer charities, the case took five years to build and involved attorneys general from all 50 states as well as the Federal Trade Commission.

Soft regulation also creates a proliferation of charities that are hard to monitor. Last year alone, Charity Navigator got applications for a dizzying 94,000 new charities. For now, the burden of vetting a charity falls largely on the giver, says Miniutti.

Beware telemarketers

One way to avoid questionable organizations is to avoid giving over the phone. “You don’t know who’s calling; it might not even be a charity,” said Miniutti. Even if it is, telemarketers are usually middlemen who keep a high percentage of what they raise, she said.

Instead of giving charity dollars to random causes that cold call, Miniutti advised, investigate charities that do the kind of work you’re interested in, whether it’s hunger or education. Even if you do like what you hear on the phone, hang up and check them out online before you give.

Look beyond the mail

Responding to a charity that sends a request in the mail can be OK, but it’s really not the most savvy way of thinking about a philanthropic investment.

Art Taylor, president and CEO of the Better Business Bureau Wise Giving Alliance, said too many people open a letter in the mail and decide then and there they are going to give. “I have had people call me more than once and say, ‘Mr. Taylor, I have a whole basket of solicitations and I can’t give to all of them.’” His answer is, “You don’t have to give money to any of them.”

It’s smarter to think about giving as an investment. And you don’t pick a stock out of thin air because someone calls you or sends you a piece of mail, said Miniutti. It’s better to investigate on your own reputable charities you are interested in and budget a certain amount of money to give.

“When you’re asked you’ll feel better saying no, knowing that you’ve already allocated to charity,” she said.

Do the background check

Google seems an obvious place to start — but a lot of people don’t check there. Watchdog groups like Charity Navigator, Better Business Bureau Wise Giving and Guidestar provide charity ratings online. BBB Wise Giving Alliance, for example, asks charities to answer 300 questions — from financial information and annual reports to proof that fundraising is up to standards. It uses 20 standards to rate charities on its site.

In the case of the cancer charities, there were some big red flags, said Taylor. “I tell people that, if nothing else, if they had gone to our website, they would have seen big red warning exclamation points for two of those charities, and the other didn’t meet our standards,” he says.

The cancer charities didn’t have independent boards, and they had board members who were paid insiders, which earned them poor marks on watchdog sites. The problem, Taylor said, is that many donors don’t look before they give.

Charities are also required to provide Form 990 documents, the financial report filed with the federal government with information about programs and fund use, to anyone who requests one.

Be a partner, not an impulse buyer

Miniutti recommended finding a charity you can stick with for years, rather than just giving $5 or $10 here and there in random donations. That allows your research to pay off, and you can grow with and trust an organization over time.

If you’re interested in cancer research, for example, choose a reputable group and stick with it. As charities proliferate, more organizations are fighting over the same pie, because giving hasn’t changed radically, which means there are a lot of duplicate efforts.

“We have 3,000 breast cancer charities in the U.S., and they all have their own overhead,” said Miniutti. “Could we get by with 500 and get closer to the cure?”

Taylor and Miniutti said that while looking at overhead is important, it also shouldn’t be the only gauge of a charity’s success. Businesses, for example, are encouraged to try different solutions, and failure is part of the learning curve. Strict emphasis on financials doesn’t give charities that luxury.

“There are no known solutions for a lot of things,” said Taylor. “Sometimes you have to try and fail.”

Donors want to see quick accomplishments, said Miniutti, but problems get solved faster when givers act like partners.”We advocate finding charities that are doing work that you can stick with over time — just because they had a bad year doesn’t mean you should jettison them,” she said.

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