Brian Stauffer for Reader's DigestAmericans are a giving people. Last year, we donated more than $358 billion to charity. The overwhelming majority of American charities are responsible, efficient, and passionate about their missions. But sometimes, our donations are wasted through poor management or, worse, fraud. When that happens, everybody loses: The needy are deprived of funds that otherwise would have helped them, the government misses out on money that should have been taxed, legitimate charities are bypassed, and donors become hesitant to give.
Most of the charities mentioned in this article have not preyed on the kindness of the charitable. But to a one, their actions have raised real questions about how some organizations operate. Here are four practices that need changing.
Money Mugged: Cancer Fund of America
Until recently, you might have received a telemarketing call on behalf of the Knoxville, Tennessee–based Cancer Fund of America (or one of its three affiliates: Cancer Support Services, the Breast Cancer Society, and Children’s Cancer Fund of America), boasting of the organization’s work “in the forefront of the fight against cancer.” The charity provided “direct aid,” the pitch continued, to people “anywhere in the United States” suffering from “over 240 types of cancer.” Its charter includes driving cancer victims to chemo appointments, paying for their groceries, and providing pain medication to suffering children.
So you wouldn’t know, then, had you donated money to the group, that only 3 percent of your gift would have gone to “direct aid,” according to the Federal Trade Commission. And, according to a fraud case filed by the FTC and law enforcement partners from all 50 states, none of that direct aid consisted of driving people to chemo or doling out pain meds.
Instead, Cancer Fund of America distributed “gift boxes” filled with Little Debbie’s snack cakes, hotel-size shampoo samples, and batteries. The only drugs the charities distributed were those they received as gifts in kind, which were shipped to developing countries and were often not cancer meds; in fact, some were inappropriate for cancer patients, according to the complaint.
What happened to the other 97 percent of the donations? According to the FTC, much of the money was spent on the charity’s staff—principally the founder, James T. Reynolds Sr., and his extended family and friends. A trip to Disney World (with a paid babysitter in tow). A trip to Vegas. College tuition for several employees. Ten cars. Dues for a dating website. A luxury cruise. Apart from the perks, more than twice the amount that was spent on children with cancer went to pay the salaries of Reynolds’s children, in-laws, fellow churchgoers, and friends, who were hired without regard to their qualifications, says the FTC. Reynolds’s son, for example, received nearly $371,000 in 2010 as CEO of the spin-off group Breast Cancer Services.
[pullquote]”There is no federal law that prohibits a charity from lying to consumers to get money.”[/pullquote]
According to the FTC’s complaint, the groups “operated as personal fiefdoms characterized by rampant nepotism, flagrant conflicts of interest, and excessive insider compensation, with none of the financial and governance controls that any bona fide charity would have adopted.” The fraud allegations pertain to the activities of the defendants from 2008 to 2012—a four-year run in which they raised $187 million from unsuspecting donors. How did they get away with it for so long?
Tracy Thorleifson, the FTC’s lead attorney on the case, points out that the federal government’s hands are tied when it comes to charities fraud. “There is no federal law that prohibits a charity from lying to consumers to get money,” she says. Cracking down on fraud is generally left up to the states and their patchwork of laws.
Because it lacks jurisdiction over charities, the FTC sought to prove that Cancer Fund of America and its affiliates were not charities at all but rather corporations whose real purpose was to enrich their leaders. In June, without admitting wrongdoing, two of Cancer Fund of America’s affiliates agreed to a settlement in which the organizations would be shuttered and their executives would pay restitution. (Reynolds declined to comment on the case, and litigation pertaining to Cancer Fund of America itself, and Reynolds personally, continues.) But that might not be the last we hear of the Reynolds clan. “They could set up shop again tomorrow,” says Sandra Miniutti, CFO of the watchdog organization Charity Navigator. “It’s pretty scary.”
In 2011, Reynolds’s estranged wife’s daughter-in-law, Jula Connatser, who once worked for Cancer Fund of America, founded her own nonprofit, called the American Association for Cancer Support. It was not named in the FTC’s suit but is reportedly under investigation by the state of Tennessee. As of now, it has not been accused of wrongdoing and is operating freely in Knoxville.
Money on Mute: The American Red Cross
Even the best nonprofits can fail the public by not being up-front about how they’ve spent donors’ money. When a 7.0-magnitude earthquake struck Haiti in 2010, killing some 100,000 people and leaving more than a million homeless, Americans were quick to open their wallets, many reaching for their favorite charity, the American Red Cross, in the same way they’d reach for Coca-Cola when they wanted a soda. After the acute phase of the disaster, other groups whose coffers were full began turning away money, but the Red Cross continued fund-raising aggressively, ultimately pulling in $488 million worth of donations, more than any other organization. A year after the disaster, as part of its Haiti relief, the charity announced that it expected to spend $100 million on “construction of permanent homes and community development projects.”
Four years later, NPR and ProPublica made this stunning accusation: Despite having spent nearly half a billion dollars, the American Red Cross had built a grand total of six new homes in Haiti. The Red Cross has since explained that those six homes were a modest pilot project and that when faced with the on-the-ground realities—a cholera outbreak, the nation’s confounding land-title system, corruption, security issues—the group had changed its plans. But by now, donors and the public were demanding details about exactly what had gone on in Haiti—and the American Red Cross was not satisfying the clamor.
Instead of opening its books, the charity has disclosed its spending only in broad categories, without getting down to the specifics (a spokesperson told Reader’s Digest that it hasn’t provided a more granular breakdown because of lack of public appetite for such detail).
Much of the group’s spending on shelter in Haiti was on projects carried out by distributing funds to nearly 50 partner aid groups (including Habitat for Humanity and Save the Children), each of which took a cut for administrative costs. As ProPublica and NPR reported, in one case, the American Red Cross forwarded $6 million to the International Federation of the Red Cross (IFRC) to subsidize rent for people who had been living in tents. IFRC took out 26 percent for “administration,” and on top of that, the American Red Cross took its standard 9 percent for “program management.” In another case, the American Red Cross took a full 24 percent for costs incurred while managing another group’s efforts.
So was all this money well spent? Misspent? Who knows? Under tough questioning from Sen. Charles Grassley, the organization has reportedly offered some specifics about its Haiti programs but requested that its testimony not be made public, citing contractual obligations with its partner organizations. Grassley has complied with the request but noted, “It’s hard to see how disclosing the dollar amounts given from the Red Cross to the individual organizations and how those organizations spent the money would harm anyone.” Still unknown is how much money the Red Cross transferred to other organizations, how much was budgeted to each project, and the number of people those projects assisted.
“One of the things with charities that you hope for is transparency,” says Eileen Heisman, CEO of the National Philanthropic Trust. “I think the Red Cross is basically a good organization, but in this particular situation, it very much looks like they need to answer more questions.”
Money Morass: Community Charity Advancement
Operating costs are an expensive fact of life for charities. But some try to hide the real price. Community Charity Advancement, a Pompano Beach, Florida–based charity, says its mission is “to provide health-care services, products, and related assistance to those in need in the U.S. and Central and South America and to provide support to breast cancer research; also assisting victims who have lost their homes to fire.” (It does business under several names to accommodate such versatility.) Its 2013 tax filing shows that a staggering 91 percent of its spending went to overhead—administrative and fund-raising costs—and that a meager 9 percent went to its actual programs, according to Charity Watch.
But at least Community Charity Advancement is open about how inefficient it is. Other groups are more subtle. Accounting rules allow them to bundle certain fund-raising expenses in with program costs—if the fund-raising efforts can be somehow construed as supporting their missions.
“It can get kind of funny,” says Daniel Borochoff, president of Charity Watch. A charity might “say the fund-raising that interrupted your dinner is a program service because they ask you to pray for people who are suffering in the Sudan, or ask you to fly a flag and show you’re patriotic. Then they can magically turn the cost of that solicitation call into a program service.”
Such techniques can have a major impact on how effectual charities appear to be. The Police Protective Fund claims to spend 48 percent of its expenses on its mission (“to promote officer safety through education”). But according to Charity Watch, when you move the joint fund-raising and program costs into the overhead category, you see that only 7 percent goes to that cost. The rest is operating cost.
Overhead alone is not a sufficient basis on which to evaluate a charity. A number of oversight groups point out that for a charity to be effective, it must invest in its people and its infrastructure—after all, nonprofits compete for executive talent against the private sector, and no one believes that a choice to work for a nonprofit should be a vow of poverty. Instead, judge groups by how much work they get done: Did they feed 10,000 homeless people last year? Did they counsel 500 pregnant teens?
But even the “overhead myth” busters concede there are reasonable limits to how much it should cost to operate a charity. “For organizations that deliver services, whether those services are provided by a for-profit or a nonprofit, the norm for overhead is 25 to 35 percent,” says Tim Delaney, president of the National Council of Nonprofits.
Money to the Middleman: Optimal Medical Foundation
When a nonprofit fund-raising caller interrupts your dinner, even though he or she may speak of “our mission” and “our work,” there’s a strong chance that that person has never even met anyone from the charity he or she is asking you to give to. In fact, the person you’re talking to most likely works for a decidedly for-profit enterprise: a third-party fund-raising firm that skims a hefty cut off every dollar raised for the charity that hired it. Thousands of charities use third-party solicitors, and their commissions can be so exorbitant—from 65 to 95 cents of every dollar raised—that they leave very little for the nonprofits to apply to their actual work.
Take the Association for Firefighters and Paramedics, which paid a fund-raising firm nearly 90 cents for every dollar it raised in 2012. Or Optimal Medical Foundation, which also does business as the Association for Breast Cancer Research and the Childhood Disease Research Foundation. According to an investigation by the Tampa Bay Times and the Center for Investigative Reporting, the Michigan-based group raised $7.8 million from 2003 to 2012 through solicitors—and paid the third-party solicitors who raised it $7.6 million over the same period. As a result, only 3 percent of funds went toward the organization’s stated mission of supporting research into cancer and childhood diseases. Even the National Rifle Association of America paid a fund-raising firm called InfoCision $59 for every $100 it raised on its behalf in 2013, according to New York State’s attorney general.
Third-party fund-raising is perfectly legal, and many legitimate charities use it simply because it’s cheaper than having full-time fund-raisers on staff. Still, most of us would be reluctant to give if we knew that the lion’s share of our donation was being diverted to a for-profit business. For that matter, the charity itself would rather have you donate directly instead of having the telemarketer siphon off the bulk of it. “That cost,” concedes Michael Gamboa, president of the Association for Firefighters and Paramedics, “is a difficult thing to deal with.”
States can require telemarketers to disclose that they work for a third party—but not all states do. And some telemarketers will lie. Unfortunately, the only way to know how big a cut the third party gets is to dig up the nonprofit’s records—something few of us are going to do. But that point is largely academic anyway. “More of the money is going to the telemarketing firm than to the charity itself,” says Charity Navigator’s Miniutti. What more do you need to know?
Giving to charity should not be fraught with such pitfalls. Still, it would be irresponsible to stop donating just because some groups are corrupt or inept. As Delaney of the National Council of Nonprofits says, legitimate charities are “the first responders for our nation’s most challenging and critical social ills.”
So give … but carefully.
How to Donate to Charities Wisely
1. Be proactive. Identify the causes you care most about, then do research to find the best charities carrying out that type of work. This keeps you on the offensive rather than in a defensive “point of sale” posture in the face of heart-tugging pitches.
2. Give a few large gifts instead of many small ones. Don’t be guilt-tripped into giving to every worthy cause. Developing your own “portfolio” of charities gives you more sway within the organizations and makes you more inclined to give carefully.
3. Never give over the phone in cold-call situations. Instead, if you’re interested, keep your donations out of the hands of telemarketers by donating via the group’s website or mailing a check.
4. Perform due diligence. Look into the group’s finances, and once you give, follow up to find out how the money was spent.
5. Take advantage of these watchdog groups. Before making a donation, check out the charity at these websites: Charity Navigator, Charity Watch, and the National Association of State Charity Officials.