January 24, 2002 | Read Time: 5 minutes
Terrorists and their sympathizers may be using one of America’s greatest strengths — its tradition of philanthropy — to undermine peace and security.
The weapons are not airplanes or shoe bombs, but charitable dollars. The methods appear to involve exploitation of nonprofit laws and abuse of the permissive rules governing commercially related donor-advised funds — charities associated with brokerage houses that allow people to make deposits into special charitable accounts, get an immediate tax deduction on the gifts, and then recommend which nonprofit groups should receive grants from the accounts.
The problem has come to light in the wake of the September 11 attacks, as the Bush administration has declared that it suspects several Muslim nonprofit groups operating in the United States, including the Benevolence International Foundation, Global Relief Foundation, and Holy Land Foundation for Relief and Development, of being fronts for terrorists.
Those allegations, if proved true, raise serious questions about the way the government oversees charitable organizations. If the groups in question are indeed terrorist organizations masquerading as charities, how did they manage to get charters, tax exemptions, and, in at least one case, a church designation from the Internal Revenue Service? Did the IRS simply take at face value the groups’ descriptions of themselves as legitimate charities? If so, post-September 11 realities may require that we think differently about the way we charter nonprofit groups and exempt them from taxation.
A related issue is whether the donor-advised funds run by investment houses have done a good job of checking out nonprofit organizations that receive grants from their contributors. As charities, donor-advised funds are not subject to the stricter reporting requirements and other regulatory controls that apply to private foundations, and therein lies the funds’ vulnerability.
One reason the issue is so important is that donors use these funds to funnel billions of dollars to charities each year, often anonymously. Fidelity’s Charitable Gift Fund, with $2.6-billion in assets in 2001, now raises more in private funds than any group other than the Salvation Army, according to The Chronicle‘s annual Philanthropy 400 ranking. It distributed $574-million in grants to charities in 2000.
The size and clout of the commercially associated donor-advised funds have put them under the national media spotlight in the wake of the September attacks and the administration’s subsequent scrutiny of Islamic charities.
Fidelity announced that it would not distribute grants to organizations that the government identifies as suspect. Fidelity’s move was no surprise, considering that the brokerage company lists some of the suspect charities, including the Global Relief Foundation and Benevolence International Foundation, as grant recipients.
Nothing malicious has gone on, as far as the funds themselves are concerned. With tens of thousands of donors and a vast number of recommended charities, Fidelity’s Charitable Gift Fund, Schwab’s Fund for Charitable Giving, Vanguard’s Charitable Endowment Program, and other such funds would face an enormous challenge if they tried to verify the legitimacy of every charity favored by donors. Certainly the investment houses could not have been expected to screen charities against government lists of suspected terrorist fronts before the lists themselves were issued.
Still, the vulnerability of donor-advised funds to potential abuse is significant. The funds have provided only modest direction to donors regarding available information about recommended grant recipients. They haven’t followed up thoroughly on the uses made of their charitable grants. Nor have they offered much aid to unwitting supporters of alleged terrorist groups by helping them identify inappropriate grant recipients.
In explaining their operating style, the commercially run donor-advised funds have always emphasized the virtues of promoting the free flow of charitable dollars. But such freedom can come at the expense of thorough monitoring.
The fact that Fidelity had to develop a post hoc policy regarding the suspected terrorist fronts is consistent with that approach. For instance, the Justice Department froze assets of the Quranic Literacy Institute in 1998 following a very public allegation that the group was connected to the Palestinian terrorist group Hamas. Yet two years later, in 2000, Fidelity listed the group as one of its grant recipients.
Despite assertions to the contrary, it does not unfairly limit donors’ freedom of choice to argue that the funds should take greater responsibility for their giving and exercise more control over disbursing the gifts they receive. Donors who want to avoid a fund’s scrutinizing actions should donate directly to the tax-exempt organization of their choice — and incur the risk that the IRS may withdraw the tax deductibility of their gift if the recipient turns out to be a terrorist group.
The fact that groups like Fidelity have begun monitoring government lists of suspected terrorist organizations is a positive development. But using these lists alone could turn out to be unfair to nonprofit groups that are subsequently cleared of wrongdoing. And the lists would not reflect the fact that information about misconduct by groups often becomes available before formal government action is appropriate.
Indeed, relying exclusively on the government watch lists is not a substitute for exercising precautionary diligence.
Outside the context of terrorism, observers have expressed fears that the funds’ failure to monitor the use of grants may have allowed some donors to subvert the law by directing gifts to groups that benefited them personally, including their own private foundations.
While it is unreasonable to assume that funds affiliated with brokerage houses can prevent every instance of wrongdoing by donors or grant recipients, the funds could — and should — be doing more to prevent abuses.
They should routinely provide research findings to donors about the integrity and financial efficiency of the organizations they are supporting.
In addition, they should more aggressively assess donors’ recommendations, using the best possible information on charities’ operations. They should discourage donors from giving anonymously. And, to the extent they have not already done so, the funds should make the names of their donors available to law-enforcement officials.
Many have argued that brokerage-affiliated donor-advised funds serve their commercial self-interest better than they serve charities, donors, or the public interest. As long as the problem seemed limited to self-dealing by some donors and mismanagement by some funds at the fringes of the nonprofit world, it was not a matter of extraordinary concern.
Now that the problem of terrorist-front organizations has arisen, the stakes are higher.
Norman I. Silber teaches nonprofit law at Hofstra Law School. He is the author of A Corporate Form of Freedom: The Emergence of the Nonprofit Sector.
