Caribbean Techies Snare Innocent Bystander in Charity Wealth Scam

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I can’t say it was my friend Marijo’s fault, though she was the one that recruited me for the fundraising committee for St. L___’s Primary School in Santa Lucía Cotamalguapa, Guatemala. St. L___’s has 130 very poor students and seven highly motivated teachers but almost no books or materials, so even a small amount of money would make a huge difference. Marijo asked if I knew how contributions were made from the charitable gift funds at the big companies like Fidelity, and that’s how the whole mess started.

I knew that community foundations and regular fundraisers have almost been left in the dust since Fidelity, Vanguard, Merrill Lynch, PNC Bank, American Guarantee & Trust, Consolidated Mammon, and other banks’ charitable gift funds amassed $12 billion in assets—with no signs of stopping. I told Marijo that the money has to go somewhere, and that I would try to find out how to get some contributions for St. L___’s.

The IRS Form 990 filed by the Consolidated Mammon Gift Fund (180 MB from the GuideStar Web site and 4,040 pages) took 30 minutes to download and slowed my puny computer to a crawl. (Small wonder no one at the IRS or the Attorney General’s office ever reads them). As I tried to figure out the strange list of “charitable grantees,” I posted some questions at a Web Site chat room for international fundraisers, which led me to an interesting and candid e-mail relationship with a former Consolidated Mammon Gift Fund program officer. Big mistake.

This earnest young woman (or man—who knows—she signed her name Luminita) was a former AmeriCorps volunteer also interested in raising money for Latin American projects. She gave me some good ideas to pass along to Marijo about funding sources, and said that she knew a lot of other people in the U.S. and Latin America raising funds for groups in Guatemala.

Luminita confessed her frustrations and conflicts at Consolidated Mammon—of excitement and idealism at the beginning, followed by disillusionment at what she saw as self-serving behavior by high net worth clients and a “wink-wink” attitude of corporate perfidy.

According to Luminita, she discovered that over 20 percent of the “charitable gift funds” at Consolidated Mammon were actually used by gift fund clients for their own benefit:

• family member’s prep school tuition,

• tickets to gala fundraisers,

• center parterre box opera subscriptions,

• private parties at the donor’s homes (elaborate catering, flowers and valet service as a benefit for [fill in the blank] charity),

• wildlife preserves known only to the donor and their hunting buddies,

• conservation and eco-reclamation for lands adjacent to second and third homes,

• equipment and expenses for Junior’s documentary filmmaking project,

• commissioning and rigging yachts for sporting competitions,

• capital contributions for polo fields and stables,

• deductible college “scholarships” for family members of friends, who reciprocated with “scholarships” for the donor’s family members.

• pricey travel to exotic locales to review projects for small donor advised fund contributions, and

• their adult children’s travel and lodging expenses while on missionary or other volunteer assignments around the world, etc.

The sheer breadth and creativity of these transactions was amazing—none of them legitimate charitable activities or permissible uses of tax exempt funds. Why would wealthy people risk this kind of petty tax fraud, and even if Consolidated Mammon lets its gift funds be used this way, why would the receiving organizations accommodate them? The money, I guess.

So why not expose it? I asked Luminita. She pleaded and begged me to keep quiet for at least six months, and now I know why.

I shouldn’t be surprised that the chat room and the Web site are gone, and the Internet host no longer exists, and now I have private detectives from giant gift funds looking through my garbage, my e-mail, and my bank accounts. They camp outside my apartment and job in their black Lincoln Navigators with incredibly dark tinted windows.

It is depressing and unfair that this is happening to me. I had nothing to do with the money taken from the gift funds. I didn’t know anything was being planned. I don’t know who did it, and most likely “Luminita” is not her real name. But somehow the e-mail trail leads to only me, and now I’m the center of attention for the bank dicks. At least the government isn’t investigating—or is it? (And how they’ve kept this out of the media I’ll never know).

Turns out “Luminita” (and whoever she was working with) was engineering an intricate charitable grift, which I only learned about from one of the more talkative detectives I get to see every day. After five years of placing programmers in financial institutions throughout the US and the Caribbean, Luminita’s group executed massive electronic funds transfers—taking money from some 61,000 accounts at nine of the largest bank and mutual fund online gift funds—maybe $130 million in all.

Given their past “contributions,” it’s reasonable to assume that some of the gift fund owners would not have chosen reducing poverty and improving living conditions in Latin America as their charitable choice, but that’s where their money went.

The whole scheme was made possible by three key vulnerabilities in the robust charitable gift industry:

• Extraordinary profitability for gift fund companies encourages fast growth, and a desire to avoid negative publicity;

• The gift funds are essentially opaque to outside inspection, since the holders of donor advised funds routinely ignore the instructions to IRS Form 990 that they identify the recipients of grants and allocations by “(a) each (specific) class of activity; (b) grantee’s name, address, and the amount and (c) (in the case of grants to individuals) relationship of grantee if related by blood, marriage, adoption, or employment” and;

• They defeated legislation that would have required that donor advised funds disclose their existence on Form 990 and show satisfaction of minimum payout and other requirements.

Despite appropriate internal controls, computer programs execute whatever operations they are programmed to—and never doubt that a small group of thoughtful, committed programmers inside a company can change the world.

So where did the money end up? From what the one detective who is not a complete jerk told me, this Cayman Island group created a program, which made hundreds of thousands of individual contributions and transfers to US nonprofit organizations and NGOs in other countries, all under $200 per transaction. About 1200 new US tax exempt organizations had been formed over five years as part of the plan, all over the country, but amazingly by only seven people (who—of course—cannot be located—nor their organizations). These small organizations’ accounts were used as conduits, which over the course of a couple hours transferred all of the funds through banks in the Bahamas and eleven other Caribbean countries to thousands of religious and charitable organizations in hundreds of cities and towns in Central and South America.

Apparently, rather than expose the charitable gift industry’s seedy side by going to the authorities (too much money at stake for that!), the banks must have replaced the money and changed their systems (and their programmers, you can bet). Of course they would like to get their hands on whoever did it—and get back whatever money they can—but making my life miserable isn’t going to help that.

Two weeks ago one of the beefy security guys roughly bumped into me in my apartment hallway and growled at me, “The community foundations put you up to this, didn’t they?” Good grief. I was an online witness, not a participant, and besides, as far as I could see, they brought it on themselves. I didn’t say a thing and just closed my door.

Back in Santa Lucía Cotamalguapa, St. L___’s Primary School is still trying to raise funds, but I have nothing more to do with it. Marijo told me that somehow St. L___’s had some unusual cash donations at the end of the year, which paid for three new teachers, a nurse, indoor plumbing and a new roof, a small kitchen and a splendid little library with skylights and reading nooks.

Phil Anthrop is a consultant to foundations in G-8 countries.