$187-Million Fraud Case Should Send a Message About Charity Integrity

Last week's government action charging four cancer charities with $187-million in fraud was unprecedented: The Federal Trade Commission, 50 states, and the District of Columbia for the first time ever made a concerted push to prosecute a web of groups.

While the cancer organizations' stunning array of alleged abuses drew the attention of regulators and the news media, it is hardly the only group of players undermining the integrity of the nonprofit world. Yet amid a steady parade of misbehavior, fraud, and mismanagement, little ever changes to hold scoundrels in the nonprofit world accountable. That is in large part because of the failure of regulators to take action but also the direct result of the insouciance of both charity leaders and the public. All parties need to change quickly to restore confidence in nonprofits.

State attorneys general, who have responsibility for overseeing nonprofit activities in their states, lack sufficient money or employees to police charities or foundations with any rigor. In most attorney-general offices, only a handful of workers are dedicated to monitoring nonprofits. Moreover, because most attorneys general are elected officials, politics often play a key role in stifling any serious investigations of potentially fraudulent behavior.

A handful of states do a better job than the rest monitoring charities, but even the best regulators do not have the resources they need to provide adequate oversight. New York seems to be the exception. There, a strong attorney general with substantial resources has managed to root out numerous nonprofits that have flouted the law. For instance, it is now waging a major investigation against Cooper Union's board, asking tough questions about its financial decision-making process.

While the state regulatory situation is patchy, it is even worse at the federal level, where the IRS has been hamstrung in fulfilling its responsibilities to police the charity world. It has had neither the resources and staff nor the political will to do even a mediocre job.

Primary responsibility for this sad state of affairs must be attributed to Congress. Its latest investigation of the IRS -- led by Rep. Darrell Issa of California over allegations that the tax agency was singling out tea party nonprofits seeking tax-exempt status for extra scrutiny -- turned into a witch hunt against Lois Lerner, former director of IRS's tax-exempt division. The investigation did nothing to restore the capabilities and integrity of the agency and instead has paralyzed its ability to monitor nonprofits. The Obama administration did little to intervene, letting the tax-exempt vision become even more toothless. Absent public pressure, why should politicians start putting any more resources into toughening nonprofit regulation and beefing up enforcement?

If we have any hope of curbing nonprofit wrongdoing, the Internal Revenue Service must either take an entirely new approach or it should be replaced. Many proposals have been made over time, including creating a special division within the Treasury Department that could be insulated from political pressure or by a fully independent unit like Britain's charity commission. Action on this matter must be taken without delay.

That alone won't be enough though. Nonprofit leaders themselves are guilty of ignoring the extent to which charities cheat the public. As Ken Berger, who served for nearly seven years as head of Charity Navigator, and Jeremy Kohomban, CEO of Children's Village, wrote a year ago in a Chronicle of Philanthropy opinion piece, "Cases of mismanagement abound. Some researchers have estimated that tens of billions a year are lost as a result of unethical behavior, typically by leaders of nonprofits."

Mr. Berger and Mr. Kohomban go on to worry that "a culture of constructive self-criticism has yet to embed itself in the ethos of most nonprofits. ... The result is a sense of denial and defensiveness throughout the nonprofit world that is damaging our credibility with the public".

Not only are nonprofits cocooned within their own sense of " all is well," refusing to speak out when their colleagues are out of line, but a growing number have mobilized to fend off attacks. Witness, for example, the growth of the Charity Defense Council, a nonprofit started by the activist Dan Pallotta to push the idea that nonprofits are justified in paying high salaries and spending a lot on overhead if they are getting strong results.

Behind the reluctance of nonprofits to speak out about wrongdoing is a growing concern that governments will impose new regulations that will impede the ability of charities to do their work.

Major nonprofit coalitions like Independent Sector and the National Council of Nonprofits, along with many others, have done the public a disservice by constantly pushing the idea that the best way to clean up charities is to encourage them to self regulate.

Only a tougher government regulatory and enforcement system can clean up the mess that nonprofit crooks have left behind. That and some courage by nonprofit leaders, who must start speaking out about people who aren't interested in doing good -- but simply in lining their own pockets.

Pablo Eisenberg, a regular Chronicle of Philanthropy contributor, is a senior fellow at the Center for Public and Nonprofit Leadership at the McCourt School of Public Policy at Georgetown University. His email address is pseisenberg@verizon.net.

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