May 30, 2019; Star Tribune
After reporting on the nonprofit sector for 20 years, some kinds of scams feel all too familiar. A number of these are associated with international relief organizations, involving a pattern of overvalued and mission-inappropriate in-kind donations and the use of the greater part of the available cash for salaries and administration. These operations can run for many years before they are challenged, often by the IRS. But the IRS is now understaffed to the point of paralysis, and state charity offices are picking up the slack.
California State Attorney General Xavier Becerra announced last week that California is suing the charity Aid for Starving Children, alleging the charity has engaged in “misrepresentations in charitable solicitations,” “misrepresentations in reports filed with the Attorney General,” and “breach of fiduciary duty.”
Specifically, the lawsuit alleges that of the $105 million that Aid for Starving Children raised from May 2011 to April 2018, $97.4 million consisted of drugs donated by pharmaceutical firms that were overvalued based on US list prices, not the prices in the countries where the drugs were being shipped and used. In fact, many of the drugs accepted by the charity were for diseases that are not even associated with starving children, including menopause, dementia, and high cholesterol. Aid for Starving Children is also being accused of hiring a for-profit company to acquire the donated pharmaceuticals and then facilitate shipping those drugs to international organizations, while using US drug prices to report the value of these drugs in financial reporting.
When considering the actual cash donations received between 2011 and 2018, these donations constituted only $7.4 million of that $105 million, and of that amount, less than $1.3 million was actually used for the foundation’s stated aim of feeding children. The remaining $6.2 million was spent on “overhead, salaries, consulting contracts and fundraising expenses,” according to the lawsuit. The irony here is that it seems much of the funds were spent on fundraising costs, yet not much actual cash was raised as a result, which makes it appear as though the main effort was behind locating and acquiring pharmaceutical contributions. These “non-cash, gift-in-kind donations” happen to be the recent subject of a legal debate in California, and the subject of Assembly Bill 1181, which has been touted by Attorney General Becerra. Of this issue, Becerra has stated, “California donors and honest charities deserve transparency. Assembly Bill 1181 is a necessary and promising first step to ensure transparency in the reporting and valuation of non-cash donations to protect donors….We will continue to hold unscrupulous charities accountable.”
The subject of what donations to charities actually support has been covered in NPQ in the past, in a variety of contexts. Each year, particularly at the holidays and year’s end, publications make lists of which charities are “best” and “worst” for donations, and Charity Navigator has published quite a bit on this issue. But these articles and lists tend to be centered on individuals giving cash; what about when charities solicit non-cash and in-kind donations? And further, as in the case with Aid for Starving Children, what about when those non-cash gifts are overvalued and result in inflated financial reports that are used to mislead donors?
It is reassuring to see California taking on this issue. Here, a charity is alleged to have manipulated financial information to mislead its donors and the public, and then not even used those in-kind donations to benefit its constituent population it claims to help. Accountability in nonprofits is critical, especially in light of what they receive—substantial tax benefits, eligibility for public and private funding (a competitive space), and limited liability protections for employees and board members.
Also, it’s only natural that clear information about charities will influence which ones donors choose to support, whether that be through individual gifts or grantmaking processes. Donors would of course be wary of supporting a charity that is dishonest in its reporting, or is not using funds as it claims to. All this information is important to have available publicly, and this lawsuit in California, as well as the related Assembly Bill 1181, seem to promote this transparency.—Kristen Munnelly