Disclosure for Charitable Solicitors

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  • 1. Disclosure for Charitable Solicitors The FTC and state attorneys general pursue fundraising miscreants, but the sector hasn’t stepped up to the task of honesty and accountability By Naomi T. Tacuyan If you found out that only $15 out of the $100 May 2003, the Supreme Court ruled in favor of you donated to a charity would ultimately make the Illinois attorney general—that the First it to the charity, would you still donate? More Amendment did not protect telemarketers or importantly, wouldn’t you want to know before fundraisers from being pursued for potentially making the decision to donate? How do you fraudulent activities. really know if your donation is being used the Telemarketing Associates in its fundraising for way telemarketers said it would be used? the nonprofit group VietNow, an organization Charitable telemarketing has been an issue over servicing Vietnam veterans, had failed to tell the past several years. Not only are these cases telephone donors that more than 85 percent of of charity-hired solicitors deliberately mislead- their donations were pocketed by the telemar- ing donors, but the media and state govern- keters themselves. ments have raised concerns about scandalously The Supreme Court subsequently ruled that low return rates for the charities themselves. A Telemarketing Associates deliberately deceived case that exemplified many charitable soliciting potential donors. According to the American scenarios and that is a benchmark for this Institute of Philanthropy (AIP), a nonprofit’s debate is Madigan v. Telemarketing Associates. fundraising expense should not exceed $35 for every $100 raised. AIP records indicate that Madigan v. Telemarketing Associates: Free VietNow spent $91 to raise $100.1 Only 3 per- Speech or Fraud? cent of the revenue that VietNow did keep was First Amendment rights versus fraud. That was spent on the organization’s program activities.2 the battle fought in the U.S. Supreme Court BBB Wise Giving Alliance’s review of VietNow almost two years ago in the case Madigan v. activities in 2000 revealed that only 2 percent of Telemarketing Associates. The Illinois attorney VietNow’s income went to program services, the general filed a case against a telemarketing other 98 percent going to overhead and company that would remove the company from fundraising costs.3 the blanket of the First Amendment and make it The primary basis for the case wasn’t neces- liable for fraud, if it was found that the compa- sarily the low return rates for the donor but ny deliberately misled or deceived donors. In rather, as described by the Supreme Court, “when nondisclosure is accompanied by inten- tionally misleading statements designed to deceive the listener.” Nevertheless, the low return rates and the low percentage spent on actual programs—and the fact that they do not pass charity fundraising standards such as AIP’s, BBB Wise Giving Alliance’s, or Charity Navigator’s— yield suspicion and the potential for charitable fraud, is a grave cause for trans- parency and accountability concerns. Transparency and the Treasury But beyond the individual donor, there is also the larger issue of overinflated tax write-offs and its effect on the Treasury. If the donor writes a $100 check, and deducts it from his taxes, and the charity only receives only $15 with which to run their programs, there are millions of dollars deducted for charitable purposes that ultimately 12 Spring 2005 Responsive Philanthropy
  • 2. aren’t used for charity and that the Treasury transparent manner that would win and sustain never collects. These dollars, tax-exempt the trust of individual donors. because of a donors’ tax deductions, become revenue for for-profit organizations like telemar- Charitable Solicitation as Telemarketing: The keters. In this case, charitable tax deductions, Federal Trade Commission meant to funnel dollars to the charitable sector The Federal Trade Commission introduced a and its services, don’t wind up in either the national “Do-Not-Call Registry” in 2003, Treasury or with a charity. Telemarketers are the intended to cut down on commercial telemar- ones profiting from donor tax write-offs—under keting (under the rule, telemarketers are pro- the guise of charity and philanthropy. hibited from calling registered numbers). The But beyond the individual donor, there is the FTC amended the definition of telemarketing macro issue of revenue loss from tax write-offs. to include interstate calls that solicited chari- The donor writes a $100 check, and deducts it table contributions. However, charitable tele- from his or her taxes. In the end, if the charity marketers did not have to comply with the reg- only receives $9 of the $100, considering the istry rule, though telemarketers have to com- millions of dollars raised this way, there are mil- ply if donors specifically ask the telemarketer lions of tax-exempt dollars from which telemar- not to call again.5 Telemarketers soliciting keters are profiting—a great loss for the charitable contributions must also state the Treasury’s now-bleeding coffers—under the name of the organization as well as the pur- guise of charity and philanthropy. pose of the call immediately, as required by It is vital that the nonprofit sector be honest the USA Patriot Act. with its donors. However, that has not always The same year, along with 38 states, the FTC, been the case for some nonprofits. along with 34 state attorney general offices, For national nonprofit organizations purport- launched “Operation Phoney Philanthropy,” a law edly concerned about charity accountability enforcement and education campaign designed to and transparency, hiding behind the First crack down on fraudulent charitable fundraising. Amendment in Madigan just sidestepped the The FTC pursued five national high-profile cases, Not only are larger issue of transparency and regulating while 34 states launched individual campaigns. fraud. However, nonprofits lined up behind Sixteen states announced they were pursuing legal these cases of Telemarketing Associates with the battle cry of action against charities and telemarketers, and charity-hired protecting “charities’ rights and responsibilities two states announced new legislation. to educate the public on important issues.” solicitors Attorneys for the Independent Sector (which State Legislation & Enforcement took the lead), Public Citizen, Disabled While nonprofits have been touting the free deliberately American Veterans, Association of Fundraising speech argument, state lawmakers and enforcers misleading Professionals, and others subsequently filed have been the vanguard for regulating actual amici briefs in support of Telemarketing charitable fraud. Forty-eight states6 have rules donors, but the Associates. Their argument was that having to that govern and regulate charitable solicitation. media and state reveal cost and revenue proportions would be The laws vary slightly, but generally have the “forced speech” and “would be an obstacle to same premise. Charities are required to register governments educating the public about nonprofit issues and with the state attorney general’s office and report have raised causes.” IS asserted that it was incorrect “to their finances and fundraising activities. Even assume that there is a nexus between high solic- before Madigan and “Operation Phoney concerns about itation costs and fraud.”4 Philanthropy,” state attorneys general, backed While IS did express concern about telemar- by state legislation governing charitable organi- scandalously low keting fraud, these charities’ support of zations and solicitations, have been actively return rates for Telemarketing Associates, aimed to shield tele- pursuing fundraising miscreants through public marketing from oversight and review, defended reporting and legal action. the charities inefficient telemarketing as just as good as the New York Attorney General Eliot Spitzer has themselves. efficient and ethical telemarketing of others. To been issuing his “Pennies for Charity” report shield fundraising practices such as Tele- since he took office in 1999. The reports reveal marketing Associates’ behind the First that charities on average have received only 30 Amendment does nothing to uphold or strength- percent of revenues raised by telemarketing en the public’s trust in charities. Sector leader- campaigns, and that only one-fourth of fundrais- ship seemed more concerned with being able to ing campaigns gave 50 percent or more of rev- fundraise and educate in any way possible, enues to charity. With the first few “Pennies for rather than being able to fundraise in an ethical, Charity” reports came a four-part initiative: Responsive Philanthropy Spring 2005 13
  • 3. > the ability to issue subpoenas to nonprofits Massachusetts Police and Fire Groups and and commercial telemarketers, which could All Pro Telemarketing Associates lead to legal action—including lawsuits for According to a Boston Globe article, All Pro fraud; Telemarketing Associates of Fairfield, NJ, > preparing new regulations requiring charities “reported raising a total of $3.0 million last to get majority-board approval before signing year from donors in Massachusetts and a telemarketing contract in which they will around the nation.” Only 14 percent went to get only a small percentage of donations, and its ten charities. The clients? Among them to do “comparison shopping” before agree- were Police Protective Fund of Austin, Texas, ing to contracts; and the Firefighters Charitable Foundation of > proposing state legislation that requires tele- Westerly, R.I. According to Charity Navigator, marketers to disclose to donors the percent- the Police Protective Fund spent 90.3 percent age of funds the nonprofit has received in of its income in fundraising, and only 7.4 per- previous telemarketing campaigns cent on actual programs. The Firefighters > proposing federal legislation that requires Charitable Foundation of Westerly, R.I. spent that if the charity receives less than half of 86.3 percent on fundraising, and twelve per- fundraising dollars, only the remitted amount cent on programs. Charity Navigator gave will be tax deductible. both charities zero stars out of four for their (lack of) efficiency. Currently, Oregon profiles the 20 charities that receive the most inquiries and com- The Cancer Fund of America and the Civic plaints, showing their financial statements Development Group and reporting on whether they meet BBB Wise The Cancer Fund of America (CFA) would catch Giving Alliance standards. In the 2003 the eye of any casual observer in California’s Oregon report, only two out of 20 charities 2002 report on charitable solicitations by com- met these standards.7 mercial fundraisers. CFA’s mission is to provide The California attorney general issues a simi- support and services to cancer and hospice lar yearly report on charitable solicitation by patients. They boast about their 26,000 sq. ft. commercial fundraisers, but specifically lists storage space for products for distribution, but those charities, and their fundraisers, that make have no clear listing of how often, where, and to 15 percent or less in their campaigns, 15 per- whom exactly these products are distributed. cent being significantly below the $35/$100 AIP Out of two telemarketing campaigns CFA standard. ran, 90 percent of revenues went to its for- Connecticut’s 2003 report revealed in-state profit fundraiser, the Civic Development campaigns having a 35.5 percent return for non- Group (CDG), with CFA pocketing only profits, but multi-state campaigns show only a $28,671 of $262,642 that CDG raised. 9.5 percent return to the charities.8 Furthermore, only $4.5 million of CFA’s $19 Colorado’s 2004 report fared better than oth- million in expenses were spent on actual pro- ers, showing that of the $96 million Colorado gram services. New York’s 2000 report shows charitable fundraising yielded, $53 million or 55 CFA hired three different telemarketers that percent was returned to the charities. Their 2003 raised a total of $3,806,761, of which the tele- report had yielded an even better return, at 41 marketers received $3,339,889 (88 percent) percent. and CFA received just $466,872 (the remain- ing 12 percent). The CFA shows up again in Noteworthy Telemarketer Miscreants Connecticut’s 2003 report—this time using a Low returns are particularly common among group called Barry E. Schmoyer and veterans, police, and emergency personnel Associates. Their return rate with that particu- groups’ fundraising. For example, two firefight- lar fundraiser was 15 percent. ers’ organizations in Connecticut’s 2003 report, The Civic Development Group is even more the Association for Disabled Firefighters (ADF) suspect. A consumer-run Web site (www.ripof- and the Association for Firefighters and freport.com) blasts CDG for unethical telemar- Paramedics, had 9.55 and 10 percent return keting practices, such as impersonating fire- rates, respectively. ADF, based in Santa Ana, CA, fighters and police officers. CDG will soon also has been sued by three states so far, North be fundraising for the New York State Fraternal Dakota in 2002, Oregon in 2003, and Ohio in Order of Police, opening up a 200-person call 2004, for deliberately misleading donors as to center in New Jersey in April. According to the use of their donations. Spitzer’s 2004 report, CDG raised $3.7 million 14 Spring 2005 Responsive Philanthropy
  • 4. for the Order but gave only $464,000 to the which will need more funding and staffing if charity (12.5 percent). An article in the Albany states are expected to continue uncovering Times Union further states that the highest per- fraudulent schemes. centage of funds that charities gained from seven CDG campaigns in 2002 was 17.9. Disclosure and Fraud Prevention: Whose CDG has been in hot water with the Federal Responsibility? Trade Commission for misrepresentation in The potential for fundraising fraud means more 1998, and with the state of Vermont in 2001 for instability for an already shaky public trust of the raising money purportedly for medical equip- charitable sector, and a significant loss in tax ment for disabled children. Not surprisingly, no revenue for the government. It is obvious that money went to any Vermont children. CDG attorneys general, even with their limited will be opening call centers in states such as resources, are continuing to find cases of Kentucky, Illinois, and Virginia. Strangely, fundraising fraud. Government enforcement and Charles Caputo, executive vice president of the education certainly does not exempt the non- Order says, “In New York, we had no problems profit sector from doing its part to curb mislead- with them.” ing, fraudulent, or inefficient charitable Situations like these have provided the fodder fundraising practices. For the nonprofit sector for attorneys general in their capacity as regula- and the people it represents and serves, the tors of charitable organizations. For example, mentality of fundraising at any cost with hardly the same month that the Madigan case was a concern concern for basic ethical behavior decided, Oregon Attorney General Hardy Myers will do more harm than good if this type of filed a complaint against the Association of behavior dissuades increasingly large numbers Disabled Firefighters as part of “Phoney of donors from giving money to nonprofit organ- Philanthropy.” The basis of his complaint was izations. If sector leaders are truly concerned that ADF deliberately concealed the fact that out about fraud, they need to step up and advocate of the $4.4 million they had raised nationwide, for further regulation at the state and federal lev- less than 1 percent of funds was used to actual- els of charitable fundraising practices, including ly provide assistance to firefighters. mandatory disclosure of the return rates to actu- In January of this year, Massachusetts Attorney al charities. They need to hold charities account- General Tom Reilly won $75,000 from the able for inefficient fundraising and high over- Cancer Society of America,9 which violated the head costs. Perhaps then, charities and telemar- state’s charitable solicitation laws by misrepre- keters to think twice when planning their senting their charitable activities.10 The settle- fundraising-- or for charities specifically, when ment requires the society to pay $75,000 to the choosing a fundraising company. Cancer Center at the University of Massachusetts Memorial Center and Why Me Inc., nonprofits Notes that provide cancer patients with financial assis- 1. “Telemarketers can be liable for fraud, high court tance. Of the case, AG Reilly said, “Charities and rules,” CNN, May 5, 2003. their fundraisers have an obligation to be forth- 2. Chicago Tribune, November 5, 2002. 3. Rick Cohen, “Fundraising or Fraud?,” Responsive right to prospective donors about the mission of Philanthropy (Spring 2003). their organization.” 4. http://www.independentsector.org/programs/gr/ryan- In March of this year, New York Attorney faq.html General Eliot Spitzer went after the Saratoga 5. http://www.ftc.gov/opa/2002/12/donotcall.htm County Deputy Sheriffs’ Benevolent Association 6. www.nasconet.org/ for misrepresentation.11 The association purports 7. http://www.doj.state.or.us/ChariGroup/CAS06158.pdf to represent deputy sheriffs and solicits accord- 8. http://www.ct.gov/dcp/cwp/view.asp?a=1629&Q=285442&PM=1 ingly, when in fact it represents only support staff 9. Despite the striking similarity in names, this organi- zation is not the same as the Cancer Fund of America of sheriffs’ offices. On top of that, the Attorney discussed earlier in the article. There was no website General’s office has determined that only 10 per- on this organization, and there have been accusa- cent of its revenues go to charitable purposes. tions that this organization used to its advantage the Not all states have been as active in pursuing fact that its name is similar to the American Cancer charitable fraud as New York, Massachusetts, or Society (www.cancer.org). Oregon has. It may be a question of funding, 10. http://www.ago.state.ma.us/sp.cfm?pageid=986&id=1365 staffing, or legal priorities. Nonetheless, state 11. http://www.oag.state.ny.us/press/2005/mar/mar22a_05.html attorneys general like Spitzer and Myers are developing a standard for effective, ethical, and Naomi Tacuyan is Communications Associate at legal state-level charitable fraud regulation, NCRP. Responsive Philanthropy Spring 2005 15