January 18, 2008
News & Events
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Enforcement of Charitable Organizations
Ellen Ryan, Project Manager and Counsel, Consumer Protection and Telemarketing Fraud
The holiday season is often a time when people think about charitable giving. The web site, Charitynavigator.org, estimates that 50 percent of all charitable gifts for 2007 were made between the day after Thanksgiving and the end of the year. Unfortunately, fraudulent fundraisers try to use the public’s good intentions to their advantage by illegally setting up programs that solicit funds for phony causes. Over the holiday season, many Attorneys General issued consumer alerts informing the public on how to avoid charity fraud. But what gives the Attorney General and other governmental officials authority over charitable organizations? And how do state officials work together in combating charity scams?
What Determines a Charity?
Last year, Americans donated more than $295 billion to 1.4 million public charities, religious groups and other nonprofits, according to Giving USA. But what makes a nonprofit organization a charity? Under the Internal Revenue Code (IRC), there are 25 different categories of nonprofit organizations. One of these categories, 501(c)(3), is described as a charitable organization, to which donations made are tax-deductible on the donor’s income tax return. Under the federal tax law definition and to qualify for tax-exempt charitable status, the organization must be organized and operated solely for an “exempt” purpose. Exempt purposes are religious, scientific, charitable, testing for public safety, education, literacy, fostering national and international sports competition, or the prevention of cruelty to children and animals. Federal tax law also requires that there be no improper private benefit to anyone in control of the charitable organization and that the charity not engage in political lobbying activities.
While, federal tax law has a substantial effect on most charities by maintaining their exemption from taxation and the deductibility of their donors’ contributions, state law is what regulates much of charities’ internal affairs and defines the obligations of their leaders.
Attorney General’s Role in Charitable Regulations
The duty of a state Attorney General is to enforce the laws regulating charitable organizations, and to ensure the proper administration of funds dedicated to charitable purposes. An Attorney General’s supervisory authority over charities is rooted in the common law of charitable trusts and corporations, as well as the power of each state to protect the interest of the public in assets pledged to public purposes. Every state regulates charitable organizations in some fashion, which varies in scope and content. Regulation may be through registration requirements for charities, professional solicitors or professional fundraisers. It may also take the form of civil and criminal sanctions.
For instance, some states provide for exemptions from the initial and annual registration requirements for certain charitable organizations, but even these types of exemptions are not uniform among the states. As a general rule, churches are exempt from the registration requirement. Schools or hospitals may be exempt in some states, while many states require registration. Under the Maryland Solicitations Act, organizations must file a request to qualify for the exemption, while other states provide for an automatic exemption.
Generally, charities planning to solicit charitable contributions within a particular state must register with the appropriate state regulatory authority. At least 38 states have statutes that require charitable trusts, including private foundations, to register and file periodic financial reports. Some of these jurisdictions require registration and reporting with the Attorney General while the other jurisdictions require registration and reporting with another government agency.
All states have authority to investigate alleged charity violations; however, some have larger staffs and more resources to do so than others. As stated above, some states impose both civil and criminal sanctions, while others impose only one or the other. Civil remedies generally include suspension of the right to solicit in the state, injunction against specific conduct, civil penalties, and restitution. For example, Missouri Attorney General Jay Nixon charged a defendant with five counts of unlawful merchandising practices, following allegations that he defrauded several individuals through false solicitations for well-known charities that serve children. In Missouri, a charge of unlawful merchandising practices is a class D felony and punishable by up to four years in prison and a $5,000 fine.
Most state statutes require bonding, the filing of contracts between the charity and the fundraising professional, and periodic financial reporting for each campaign. Many laws also establish a list of prohibited acts and practices that include misrepresenting the purpose for which solicited money will be used, making false or misleading statements in the course of a solicitation, failing to file an annual financial report, and failing to register prior to soliciting in the state. During the 1980s, there were several legal challenges to state laws that limited the amount of money a charity could spend on fundraising and management expenses and the laws that required the remaining funds be used for the charitable programs for which the organization was established. However, in 2003, the U.S. Supreme Court confirmed that the First Amendment cannot be used as a shield against prosecution for fraud. In Madigan v. Telemarketing Associates, Inc., the Court held that “consistent with our precedent and the First Amendment, States may maintain fraud actions when fundraisers make false or misleading statements designed to deceive donors about how their donations will be used.”
Even in those jurisdictions that do not have a comprehensive registration and reporting statutory system, other laws may permit the Attorney General to obtain information and enforce the proper use of charitable assets. For example, nonprofit corporation acts and trust law will at times grant broad authority to the Attorney General to enforce charitable trusts. Some states require trustees to file periodic accountings with a court to which the Attorney General, may object. Finally, statutory reference to the Attorney General’s authority may, if interpreted liberally, enable the Attorney General to exercise some control over the management and disposition of charitable funds. For instance, in New Hampshire, the Attorney General, through the Director of Charitable Trusts, exercises all the common law and statutory rights, duties and powers of the Attorney General in connection with the supervision, administration and enforcement of charitable trusts, charitable solicitations and charitable sales promotions. The New Hampshire Attorney General also oversees the administration of charitable trusts held in the custody of the state treasurer, county governments, towns, and cities, all of which file annual reports with the Division of Charitable Trusts.
Many states’ charitable solicitations laws do not specifically address Internet solicitations; however, a number of states’ laws may access Internet solicitations because of how the charitable solicitations are broadly defined and the use of phrases such as “through any medium.” Furthermore, most states recognize the growing preference by citizens to use Internet solicitations and concluding that states have a legal obligation to enforce the charitable solicitations laws with respect to Internet solicitations.
Despite different charitable solicitation laws, states also work collectively against charity fraud, as exemplified through a multistate case in 2006. Nineteen states settled with Newport Creative Communications, a fundraising consultant for charities, resolving allegations Newport engaged in misleading and deceptive advertising and solicitation practices. Under the terms of the agreement, Newport’s direct-mail solicitations will no longer make false claims of prizes and guaranteed winnings, and Newport will cease creating mailings unless there is a prize ultimately awarded by the charity.
Other State Enforcement of Charities
State Attorneys General are not the only state official authorized to oversee the administration of charitable organizations. Secretaries of state, state tax authorities, boards of education, insurance commissioners and other similar state officials have power to enforce certain rules that may apply to nonprofits engaged in certain activities. For example, Florida law requires charities to register with the Department of Agriculture and Consumer Services and provide financial information about income and expenditures, according to the Solicitations of Contributions Act under Chapter 496, Florida Statutes.
Both the Attorney General’s Office and other state regulators have pursued litigation in the past against unregistered charities and individuals who were improperly soliciting donations in the name of philanthropy. In dealing with charity regulation, most Attorneys General and other state regulators spend their time addressing fraudulent and deceptive charitable solicitations and making sure that funds are used according to a donor’s intent. For instance, the fraudulent fundraising scams that develop after large scale disasters usually receive a heavy amount of enforcement actions by all state regulators. After the September 11, 2001 terrorist attacks, Hurricane Katrina, and most recently, the Southern California wildfires, hundreds of dishonest people and groups set up online schemes to scam millions of dollars from hardworking citizens. In response to Katrina, Louisiana state officials opened several investigations into charitable organizations alleging possible fraud in the collection and distribution of their funds.
The National Association of State Charity Officials (NASCO) unites all state officials who regulate charities. Founded in 1978, NASCO is a professional organization, which consists of representatives from most of the states that have statutes regulating charitable entities and/or the solicitation of contributions. NASCO members include representatives of the Attorneys General, secretaries of state, and other state officials charged with the oversight of charities and those who raise funds on their behalf. NASCO facilitates administration of state laws regarding charitable solicitations and develops recommended uniform formats for reporting charitable solicitations. Although NASCO does not represent any particular state, it represents the collective interests of state charity regulators.
NASCO partners with NAAG in its effort to provide support to state offices charged with oversight of charitable organizations. NAAG works together with NASCO by providing an annual continuing education seminar, which features a public session and provides regulators the opportunity to discuss issues of mutual interest with nonprofit leaders, their attorneys and fundraisers. NASCO also facilitates discussion and networking among charity regulators throughout the year. The NASCO web site, www.nasco.net maintains an index of state offices regulating charitable organizations and links to information on obtaining and maintaining federal tax-exempt status.
While state Attorneys General and other charity regulators vary in the level and scope of oversight for charitable organizations, all states can benefit from an ongoing and productive relationship with each other. It is clear that state cooperation can improve the effectiveness of government oversight and enhance the accountability of charities.
538 U.S. 600 (2003).
 538 U.S. at 624.
 Arkansas, California, Kentucky, Massachusetts, Michigan, Minnesota, Montana, Nevada, New Jersey, North Carolina, Ohio, Oregon, Pennsylvania, South Carolina, Tennessee, Texas, Virginia, Washington and Wisconsin.
SAVE THE DATE
Contact: Hedda Litwin
Washington, DC and New York City, NY
Contact: Bill Malloy
Contact: Jeffrey Hunter
NYU School of Law, New York City, NY
Contact: Bill Malloy
Contact: Bill Malloy
Contact: Bill Malloy