The holiday season “it's a time for giving thanks and wishing good will toward all men, but it's also a perfect time for con artists to prey on the charitable spirit of others for their own financial gain." 

Last February a federal grand jury in Nova Scotia indicted George Campbell of Halifax for running a telemarketing scam that solicited donations for numerous fake charities, including a "wish foundation" for dying war veterans. In actuality, not a penny of the proceeds was given to charitable causes. All of Campbell s ill-gotten gains either went into his own pockets or were used to further the telemarketing scam. Campbell s scam was one of literally hundreds of telemarketing frauds busted due to "Operation Double Barrel," the code name for the 2 ½-year collaborative investigation involving the FBI, 35 state attorneys general, and federal prosecutors, which largely relied on taped telephone conversations between fraudulent telemarketers and undercover agents posing as gullible victims.

In another case, Marvin Cherna of Dallas, Texas, was charged with 13 counts of mail fraud in March 1998 for embezzling nearly $10 million from donors by organizing fraudulent fund-raisers that supposedly benefited sick children and war veterans in need. Cherna claimed the proceeds bought medical equipment for hospitalized children, as well as for disabled veterans in the communities where the fund-raisers were held. According to court records, Cherna deposited the majority of these proceeds into his personal bank accounts and divided the rest among his hired fund-raising staff.

Inspector and national public information officer Robert Bethel of the Washington, D.C., office of the U.S. Postal Inspection Service said his agency investigated 11 cases of suspected fraudulent charity mailings during fiscal year 1998, which resulted in one arrest and one conviction. One of the investigations focused on an organization in Tampa, Fla., called The Police Association, which solicited money that supposedly benefited local police departments and community anti-drug programs. The association hooked most of their donors by mailing out official-looking invoices that demanded amounts due even if no prior contact had been made with the individuals. The investigation revealed that only a small amount of the donations actually went to community programs. An injunction was filed against the organization and the case is still pending.

What Can Fraud Examiners Do?

As part of the consumer community, fraud examiners can reduce the incidence of charity fraud and abuse by informing their family members, friends, and business associates of the red flags associated with fraudulent solicitations for donations. Con artists can t make any money unless they find victims. By speaking publicly about charity fraud awareness, fraud examiners can help people to avoid becoming victims of these schemes. Some consumer advisory tips include:

• Ask for identification and the full street address of the charity organization when approached by a door-to-door solicitor. Be suspicious if this information isn't readily available.
• Choose locally known charities, visit their offices, and give donations directly to them.
• Ask what percentage of the donation will go to the charitable cause. Be wary of solicitors who won t give you the facts.
• Don t give bank account or credit card information over the phone.
• Ask telephone solicitors to send you written information about the charity, and say you will make your decision to donate after reading the material.
• Ask for the charity s IRS Form 990, which outlines the charity s expenses and costs. This is a public document, and federal law states that it should be provided to anyone who requests it.
• Pay close attention to the name of the charity and make sure it s not a "copy cat" organization falsely trying to affiliate itself with a more well-known and established nonprofit entity.
• Don t give cash. Always write a check paid out to the name of the charity – never an individual. Keep a copy of the check for your records.
• Make sure the charity and the professional fund-raiser are registered with your state attorney general s office. If they aren t registered, they aren t operating legally.

These are just some of the things people should practice when deciding whether to donate to a charitable cause. Many organizations are devoted to informing the public about charity fraud and abuse, and they are excellent resources for fraud examiners who want to spread the word. Some of these groups are the Federal Trade Commission, the National Charities Information Bureau, the Better Business Bureau Philanthropic Advisory Service, state attorneys general offices, the Management Assistance Program for Nonprofits, and the Internet Nonprofit Center. (The majority of these entities can be found on the Internet. You may need to contact your state AG s office to see whether the department has a Web site.)

Pro Bono Fraud Prevention

Fraud examiners also can fight charity fraud by helping valid nonprofit organizations implement internal risk management programs. Like any for-profit venture, charity foundations and nonprofit organizations need to have controls and policies in place to reduce the incidence of internal criminal activity. Fraud examiners can evaluate an organization s fund-raising and accounting practices for efficiency and soundness, as well as ensure that the nonprofit meets all standards set forth through the federal and state governments. Following are some checklists for financial activities and fund-raising activities, authored by The United Way of Minneapolis Area, that fraud examiners can use to conduct their evaluations of nonprofits. These lists can be found on the Internet at www.mapnp.org/library/legal/rskmgmnt.htm. Each line item is rated as either "E" – essential, "R" – recommended, or "A" – additional, to strengthen organizational activities. Fraud examiners can determine whether each line item has been "met" within the organization or if it "needs work."

Checklist for Assessing Financial Activities

(E) The organization follows accounting practices that conform to accepted standards.

(E) The organization has systems in place to provide the appropriate information needed by staff and board members to make sound financial decisions and to fulfill Internal Revenue Service requirements.

(R) The organization prepares timely financial statements, including the balance sheet and state of revenue and expenses, which are written clearly and are useful to the board and staff.

(R) The organization prepares financial statements on a budget versus actual and/or comparative basis to achieve a better understanding of their finances.

(E) The organization develops an annual comprehensive operating budget that includes costs for all programs, management and fund-raising, and all sources of funding. This budget is reviewed and approved by the board of directors.

(R) The organization monitors all costs of programs and services through the documentation of staff time and direct expenses, and uses a process for allocating management, general, and fund-raising expenses.

(E) The organization prepares cash flow projections.

(R) The organization periodically forecasts year-end revenues and expenses to assist in making sound management decisions each year.

(E) The organization reconciles all cash accounts monthly.

(E) The organization has a review process to monitor that it is receiving appropriate and accurate financial information, whether it be through a contracted service or internal processing.

(E) If the organization has billable contracts or other service income, procedures are established for the periodic billing, follow-up, and collection of all accounts, and for maintaining the documentation that substantiates all billings.

(E) Government contracts, purchase of service agreements, and grant agreements are in writing and are reviewed by a staff member of the organization to monitor compliance with all stated conditions.

(E) Payroll is prepared following appropriate state and federal regulations and organizational policy.

(E) Persons employed on a contract basis meet all federal requirements for this form of employment. Disbursement records are kept so IRS Form 1099s can be issued at year s end.

(E) If an organization purchases and sells merchandise, it takes periodic inventories to monitor against theft, to reconcile general ledger inventory information, and to maintain an adequate inventory level.

(R) The organization has a written manual on fiscal policies and procedures, and follows it.

(E) The organization has a documented set of internal controls, including the processes for handling cash and deposits, and approving spending and disbursements.

(E) The organization has a policy identifying authorized check signers and the number of signatures required on checks in excess of specified dollar amounts.

(E) All expenses of the organization are approved by a designated person before payment is made.

(R) The organization has a written policy related to investments.

(R) Capital needs are reviewed at least annually and priorities are established.

(R) The organization has established a plan identifying actions to take in the event of a reduction or loss in funding.

(R) The organization has established, or is actively trying to develop, a reserve of funds to cover at least three months of operating expenses.

(E) The organization has suitable insurance coverage that periodically is reviewed to ensure an appropriate level and type of coverage.

(E) Employees, board members, and volunteers who handle cash and investments are bonded to help assure the safeguarding of assets.

(E) The organization files IRS Form 990s within prescribed time lines.

(R) The organization reviews income annually to determine and report unrelated business income to the IRS.

(R) The organization has an annual, independent audit of its financial statements, prepared by a CPA.

(R) In addition to the audit, the CPA prepares a management letter containing recommendations for improvements in the financial operations of the organization.

(R) The board of directors, or an appropriate committee, is responsible for hiring an auditor, including the solicitation for bids and interviewing process.

(R) The board of directors, or an appropriate committee, reviews and approves the audit report and management letter, and with staff input and support, institutes any necessary changes.

(E) The audit, or an annual report prepared by the organization that includes financial statements, is made available to service recipients, volunteers, contributors, and other interested parties.

(A) Training is made available for board and appropriate staff on relevant accounting topics. All appropriate persons are encouraged to participate in various training opportunities.

Checklist for Assessing Fund-raising Activities

General Fund-raising

(E) The organization raises funds in an ethical manner for activities consistent with its mission and plan.

(E) The board of directors and organizational staff are knowledgeable about the fund-raising process and their respective roles in the organization.

(E) The board of directors has established a committee charged with developing, evaluating, and reviewing fund-raising policies, practices, and goals.

(E) The committee actively is involved in the fund-raising process and works to involve others in these activities.

(R) The board of directors, executive director, and fund-raising committee support and participate in the entire fund-raising process, including project identification, cultivation, solicitation, and recognition.

(R) The fund-raising program is staffed and funded at a level consistent with fund-raising expectations.

(A) There is direct communication and relationships among the information services/marketing, accounting, and other administration support functions to assist in the fund-raising needs and efforts.

(E) The organization is accountable to donors and other key constituencies and demonstrates its stewardship through annual reports.

Using an Outside Fund-raiser

(A) The organization meets the nonprofit standards of the state charities review council (if one exists in the state).

(R) If the organization chooses to use outside professional fund-raisers, it solicits several competitive bids and checks each prospective outside fund-raiser s background and references.

(E) The organization makes legal, mutually agreed upon, signed statements with outside professional fund-raisers, which outline each party s responsibilities and duties and specifies how the contributions will be handled physically, to guarantee that the fees paid are reasonable and fair.

(E) The organization verifies that the contracted fund-raiser is registered as a professional fund-raiser with the state attorney general and all necessary filings have been made before any work commences.

(E) The fund-raising committee or an appropriate representative from the board of directors reviews all proposals from the prospective outside professional fund-raiser before signing any contracts.

(R) If the outside professional fund-raiser plans to contact potential donors directly, the organization must review the fund-raising materials (e.g., public service announcements, print or broadcast advertisements, telemarketing scripts, pledge statements, brochures, letters, etc.) to verify their accuracy and to ensure that the public disclosure requirements have been met.

(E) The organization properly reports all required information regarding use of outside professional fund-raisers, amount of funds raised, and the related fund-raising expenses as required by state and federal governments. The gross amount of funds raised by the contracted fund-raiser is reported on the organization s financial statement. The fees and costs of the campaign must be reported on the statement of functional expenses.

What to Do if Fraud is Suspected

The state attorney general s office oversees the regulation of nonprofit corporations, so reports of suspected fraud ultimately should be submitted there. However, before reporting fraudulent conduct, fraud examiners need to make sure all pertinent facts and evidence of the charity s offense(s) are documented clearly for review. Include the full names and addresses of the suspected parties involved, as well as any internal financial statements that do not concur with the charity s Form 990. Again, Form 990 reports the group s expenses and income and is accessible to the public as cited by IRS Notice 88-120. By law, it must be given to anyone who visits an organization s office and requests it. The law also specifies that requests for 990s via mail and e-mail must be answered within a certain time period, ranging from seven to 30 days depending on whether there are administrative fees involved.

Nonprofits also are required to file through their states, and limited information on campaign reports can be found there. A list of these state charity officials can be accessed on the Internet at http://www.sos.state.md.us/sos/charity/html/otstates.html (Maryland s Secretary of State Web site). Remember, if you cannot directly prove the fraud, any evidence of missing or easily misleading financial information can instigate an AG investigation.

Unfortunately, fraudsters aren t the discriminating type. If they can make an easy buck under the guise of a charity, you can bet they ll do it. And the holiday season is a prime time for con artists to put their devious schemes into play. By using your fraud examination skills to raise consumer awareness and help nonprofits implement controls, you can reduce the amount of donations squandered by pseudo charities, and ensure that monies go to valid nonprofit entities that make a difference to those in need. After all, there s a reason for every season. Over the holidays, help your fellow man and make fraud awareness your reason.

Katie Garza is a former assistant editor of The White Paper. 

References

1. "Dallas Man Indicted on Fraud Counts in Alleged Charity Scams," Associated Press, Abilene Reporter-News Web site, www.reporternews.com, March 17, 1998.
2. "Federal and State Law Enforcement Snare Hundreds of Dishonest Telemarketers in Nationwide Undercover Operation," U.S. Department of Justice Web site, HTTP://usdoj.gov/opa/pr/1998/December/596cr.htm
3. Internet Nonprofit Center Web site, www.nonprofits.org
4. The Management Assistance Program for Nonprofits Web site,www.mapnp.org 
5. National Fraud Information Center Web site, www.fraud.org.
6. State of Louisiana Web site, www.laag.com/charity.htmwww.laag.com/charity.htm
7. State of Iowa Attorney General Web site, www.state.ia.us/government/ag/charity
8. "Telemarketers Charged in Charity Scam," Philanthropy News Network Online, www.pj.org/law, Feb. 4, 1999.
9. United States Postal Inspection Service Web site, www.usps.gov.