Fraud by Nick Youngson CC BY-SA 3.0 Alpha Stock Images.

Last week, in preparation for Giving Tuesday, the office of New York Attorney General Letitia James released a report cautioning donors and nonprofits about certain kinds of fundraising practices. Not to put too fine a point on it, the annual report is called Pennies for Charity, and each year it treats the public to a reexamination of the scourge of extractive third-party fundraising firms—or as this report puts it, “professional” fundraising firms.

Of course, not all third-party fundraising is fraudulent or overpriced, but far too much of it still is—enough so we need not wait until fundraising season is upon us to be reminded of the problems that pop up in those venues. Throughout the year, we see one legal action after another launched by an AG’s office to constrain fraud and abuse in this realm.

In any case, this year’s report out of New York looks at data from 824 fundraising campaigns conducted in that state over 2019. Altogether, these campaigns raised more than $1.2 billion dollars, of which $364 million, or 28 percent of the funds raised, were retained by fundraisers to cover their own costs. The charities in question netted more than $918 million overall, but the results were very uneven. In 31 percent of the cases, charities received less than 50 percent of funds raised, and in 17 percent of cases, the fundraising expenses exceeded revenue raised to the cumulative cost of $17 million. Still, this overall take by professional fundraisers has declined as a proportion of the whole, possibly due to the scrutiny this report heralds.

Under a program the AG’s office picturesquely dubbed “Operation Bottomfeeder,” fundraising firms that represent “sham” charities in particular are pursued in an attempt to close down those operations altogether.

[Mark] Gelvan, through a network of companies he owned or controlled, teamed with and, at times, assisted in creating sham charities that claimed to support causes such as help for breast cancer survivors and homeless veterans. However, typically Gelvan’s fundraising companies, which largely relied on telemarketing, retained close to 90 percent of all funds raised. The fundraising pitches tugged heartstrings, and donors gave generously, but little money went to actually provide the services promised. In one instance, a Gelvan-controlled company, Outreach Calling, aided the National Vietnam Veterans Foundation in raising some $8 million in contributions, but only $35,104 went directly to veterans or their families. Nevertheless, the pitches to potential donors painted a dramatic picture of homeless veterans’ needs and falsely claimed the organization had aided them.

In their settlement with the FTC and the Attorneys General, Gelvan and his associates agreed to a $56 million financial judgment, which will be partly suspended contingent upon certain terms. Gelvan must pay an $800,000 fine and sell his stake in two properties. Those proceeds and others from the settlement will go to support charities that actually provide the services and support that Gelvan’s fundraising companies touted. Further, Gelvan and his associates are permanently barred from working in the charitable sector.

These kinds of phony setups are unfortunately common. Many operate in multiple states, wearing out their welcome in one only to move their endeavor to another. In recent years, the attorneys general of all 50 states and the Federal Trade Commission have teamed up to try to put some of the worst offenders out of business, but the punishments—fines and restrictions on their work with charities—are very rarely equal to the damage done to the faith and goodwill of the public and to the credibility of charities more generally. This damage can leave deep scars, because many professional fraudster fundraisers choose to raise money for causes the public experiences as emotional obligations: first responders, disaster victims, sick children, veterans, and cancer survivors.

But con artists never stop innovating, and when one door closes, another opens. Over 2019, some groups purporting to raise money for human needs were actually redirecting the dollars to PACs [political action committees], combining sets of objectionable practices. The study reports:

In its pitches to donors, Put Vets First purported to raise money to help veterans. The Charities Bureau’s investigation revealed telemarketing pitches in which Put Vets First claimed to provide direct services to veterans such as food and shelter, causing potential donors to believe that they were donating to a veterans’ charity. In fact, Put Vets First was technically a political action committee. Contributions to PACs are not tax deductible. Typically, PACs support political efforts such as legislation, but bad actors like Put Vets First abuse the PAC structure to raise money in the name of popular causes. Their pitches to donors make the organization sound charitable, but they do not conduct charitable activity and generally conduct minimal, if any, political activity.

The report’s good news is that legitimate charities appear to be using third-party fundraisers—and telemarketers in particular—less over time, and they are acting as more educated consumers with regards to the percentage of funds retained by the firm.

Telemarketers’ share in charities’ fundraising campaigns in New York State declined in 2019 for the fourth consecutive year. In 2018, some 550 campaigns used telemarketing. In 2019, that number dropped to 504. Further, the percentage of funds that went directly to charities continued to rise. In 2018, some 230 fundraisers retained more than 50 percent of funds raised. In 2019, that had dropped to 196 fundraisers.

The report also references online giving as an area in need of continuous monitoring because it’s relatively new and still developing. Here is an example of the problems that have popped up in this realm.

In 2020, PayPal Giving Fund reached a settlement with 22 states, including New York, that established some best practices for online platforms. The PayPal settlement addressed common issues with platforms that have a charitable partner, usually a donor-advised fund. The fund in turn directs the gift to a charitable recipient, though donors retain an advisory role. PayPal, through its charitable platform partner PayPal Giving Fund, had offered users an opportunity to give to the charity of their choice during the 2016 holiday season. However, the donors were not informed that their gift went to the PayPal Giving Fund rather than the charity they selected, nor that the PayPal Giving Fund was a donor-advised fund, and their gifts could be redirected if the charity they chose did not meet PayPal’s criteria. Further, donors were not informed of how long it could take before their chosen charity received their gift.

In a gift to us all, the report also attempts to predict where real promise in fundraising may next pop up, giving nonprofits a heads-up on the need to explore the potential of virtual fundraisers as less costly yet engaging.

In general, although it may not be a fashionable point of view, nonprofits should always express gratitude and support for their intrepid and dedicated regulators. They help nonprofits maintain a credible space in which to ask that donors take a leap of faith with our organizational missions, and that is worth more every day.