Legal Framework: International Philanthropy

1
Legal Framework International Philanthropy

• Betsy Buchalter Adler
• Silk, Adler Colvin
• San Francisco, California
• Symposium March 11, 2004
• University of Southern California

2
Wheres The Map?

• Before 9/11, the law on international giving was
  familiar
• Private foundations expenditure responsibility
  or equivalency determination
• Public charities discretion and control
• Now we have multiple lists to check without
  guidance on what to do with a match, scary
  guidelines without safe harbors, and no sense of
  whether obeying existing law is enough

3
Todays Agenda

• What we know
• Laws governing charities specifically
• Laws of general application, including federal
  sentencing guidelines
• Treasurys Voluntary Guidelines
• What we dont know
• Plenty!
• What might be coming our way

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What We Know Charity Law

• US law divides charities into public charities
  and private foundations for tax purposes
• Public charities generally have more flexibility
  in their international activity
• Private foundations must exercise expenditure
  responsibility or make a public charity
  equivalence determination

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Public charities and international philanthropy

• Most recent IRS advice is 40 years old
• Guidance focuses on whether US individuals can
  take a charitable deduction for gifts to a US
  charity for use abroad
• IRS emphasizes need for US charity to have
  discretion control over assets

6
Expenditure Responsibility (PFs)

• Pre-grant inquiry, documented in writing
• Written grant agreement signed by funder and
  grantee, with specific required limits on how
  grantee may use funds
• Separate tracking of grant funds
• Written reports from grantee to funder, at least
  annually
• Funder reports ER grants on Form 990-PF

7
Public Charity Equivalence (PFs)

• If foreign entity is equivalent of US public
  charity, private foundation funder does not have
  to exercise expenditure responsibility
• 2 common paths to public charity status
• Nature of grantee - church, school, hospital
• Finances of grantee data shows grantee receives
  financial support from a sufficiently broad
  donor/consumer base, plus governing documents
  satisfy technical US standards

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What We Know General Law

• Executive Order 13224
• USA Patriot Act
• Treasury Office of Foreign Asset Control (OFAC)
• US Sentencing Commissions guidelines for
  organizations convicted of violating federal law

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Executive Order 13224

• Applies generally, not only to charities
• Prohibits transactions involving Listed Persons
  or their property
• Prohibits transactions with unnamed persons who
  assist, sponsor, or provide financial support to
  Listed Persons or are otherwise associated with
  Listed Persons
• Prohibition includes humanitarian aid

10
USA Patriot Act

• Applies generally, not only to charities
• Imposes criminal penalties for providing material
  resources or financial support for terrorism,
  foreign terrorist organizations, or Listed
  Persons
• Government must prove defendant knew or intended
  that the support would be used in terrorist acts
  or used by foreign terrorist organizations
• Civil liability those injured by a terrorist
  act may sue those who funded the group behind the
  act

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The Lists

• Theyre making the lists, were checking them
  twice the only way to be sure you are not
  dealing with listed persons
• Lists are not yet consolidated searching is
  harder than it needs to be
• Links to all lists are at www.usig.org

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Treasurys Voluntary Guidelines

• Treasury released Voluntary Best Practice
  Guidelines in November 2002
• Treasury General Counsel guidelines have no
  legal force and offer no safe harbor issued to
  reassure Muslim groups no longer promoted
• Chilling effect on charities appears not to
  trouble Treasury more focused on deterring
  financing of terror and violence

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Voluntary Guidelines Details

• Parts 1-3 governance and accountability, mostly
  ignored law already covers it
• Part 4 preventing use of charities for terrorist
  finance
• Consensus among charities unworkable, costly,
  charities arent banks or law enforcement agents
  local staff would become targets ineffective in
  any case

14
Federal Sentencing Guidelines

• Details at www.ussc.gov
• Currently being updated in response to
  Sarbanes-Oxley Act
• An organization shall (1) exercise due diligence
  to prevent and detect violations of law, and (2)
  otherwise promote an organizational culture that
  encourages a commitment to compliance with the
  law.

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Sentencing Guidelines Elements of Due Diligence

• Conduct ongoing risk assessment
• Establish compliance standards and procedures
• Governing body must exercise reasonable oversight
  of program via reports from compliance officer
• Implement training programs so staff, board, etc.
  know the rules

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Sentencing Guidelines More Due Diligence

• Monitor compliance of staff, board, etc.
  evaluate effectiveness of compliance program
  make whistle-blowing safe
• Reward compliance, punish non-compliance
• If violations occur, modify program to prevent
  recurrences

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Sentencing Guidelines Dont Tell Us

• How does an unstaffed charity (e.g. a family
  foundation) design a compliance program?
• Does violations of law refer only to US law?
  What if a charity is active overseas?
• What if a rogue employee or grantee of an
  otherwise legally-compliant charity becomes a
  listed person do the Sentencing Guidelines
  affect the charitys culpability under the strict
  liability provisions of the Patriot Act?

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What Else We Dont Know

• How much due diligence and oversight is enough to
  protect a donor from civil or criminal liability
  for a charitys acts?
• How much due diligence and oversight is enough to
  protect a grantmaker or an operating charity from
  civil or criminal liability?
• How will the government use its prosecutorial
  discretion where a charity has acted in good
  faith?

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More Unknowns

• Charities are used to answering to the IRS and
  state charity regulators what other government
  agencies will we hear from, what will they want
  to know, and what must we tell them?
• Will the governmental attention to terrorist
  financing and money laundering affect the
  traditional practice of informal cash gifts to,
  and through, religious institutions?

20
IRS Information Request

• IRS asked how charities protect their assets from
  diversion to non-charitable ends overseas
• Consensus of responders charities exercise
  great care in their international operations,
  Treasury Voluntary Guidelines should be
  withdrawn, and list-checking is severely
  burdensome
• No consensus on whether we need more guidance or
  whether IRS should just enforce current law more
  vigorously

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Enforcement Not Just IRS

• IRS Small Business/Self Employed group asked a
  charity about payments to its overseas aid
  workers, alleging the charity is a financial
  institution under the Bank Secrecy Act
• The FBI questioned various donors and funders of
  charities whose assets were frozen
• Media coverage of charities as terrorist finance
  tools may influence local government agencies

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What Should Charities Do?

1. Assess the risk how likely is it, in the
   circumstances, that your money will be diverted
   to non-charitable ends?
2. Manage/prevent the risk based on your
   assessment, do whats reasonably necessary in the
   circumstances to reduce chance of asset diversion

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Managing the Risk

• Adopt and implement a compliance program as
  described in the Sentencing Guidelines
• Know your grantees/vendors check the lists
• Have a clearly written grant agreement
• Obtain and review reports from your grantees on
  how they used the funds
• Follow up if you see potential problems

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Working with IntermediariesAnother Way to
Manage Risk

• U.S. charities and donors can work with
  charitable intermediaries that have staff or
  volunteers in the region and are better placed to
  assess and manage any risk of diversion
• Some operate programs directly in particular
  areas of interest or need
• Others have active re-granting or donor-advised
  programs based on local due diligence and
  oversight

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Dont Give Up!

• U.S. charities have an essential role in
  cross-border giving, especially in communities
  with strong ties to countries of origin and
  especially in times of international turmoil
• Governmental donor deterrence efforts were not
  meant to deter the responsible philanthropist