When Giving Goes Wrong: Should Nonprofits Return Money to Dubious Donors?
This topic is not as clear-cut as it may sound, and here is why: nonprofits are rarely in a position to return funds.
Because nonprofits rely on donations to keep their doors open and their programs running, they must constantly raise funds for their mission. However, when nonprofits accept funds from questionable donors, they risk the integrity of the mission to which they are beholden.?
The idea of returning money to donors also becomes a bit complicated in cases where the money received cannot always be traced directly to the donor. In 2020, Darkside, a cybercrime group, donated $10,000 in Bitcoin to Children International and The Water Project. Children International issued a statement saying it would not keep the funds, while The Water Project did not respond to requests for comment.?
Legally, while no federal law requires nonprofits to return donations, states, on the other hand, have regulations governing the conditions under which an organization must return gifts to donors.?In order to give you an example of this, here is a link to an article describing New Jersey's 2013 ruling that outlines when nonprofits must return donated funds.
This issue raises two important questions:
While this article focuses on the latter question, in 2019, "Forbes" wrote an article on the former question titled, "Should Nonprofits Accept Money from Demon Donors ?". The Forbes article defines "demon donors" as donors whose money comes from morally dubious activities that conflict with the mission of nonprofit organizations. I will not use that term here, but I will acknowledge that there are donors who knowingly choose to give away money obtained through illegal means and funnel it to nonprofit organizations. We will talk about possible reasons why later.
Some notorious examples
In 2001 , the University of Oregon returned a donation of more than $800,000 from financier Jeff Grayson and removed his name from a building after a court ruled that the donated money did not, in fact, belong to him.?
Jeffrey Epstein repeatedly donated to MIT and Harvard University before he was indicted on sex trafficking charges in 2006. That same year, the Harvard Crimson reported that the school had received $6.5 million from Epstein and would not return the gift. An independent review of Epstein's donations to MIT concluded that the university's decision to accept the gifts post-Epstein's conviction did not violate its policies because MIT had no such policy or procedures for dealing with controversial donors at the time.?
There are other instances where organizations have learned about the sullied reputation of a donor and decided to stop accepting donations. The Solomon R. Guggenheim Museum in New York, the National Portrait Gallery in London, and the Tate Museums, also in London, announced that they would no longer accept donations from the Sackler family after the Sacklers were accused of facilitating the national opioid epidemic through their ties with OxyContin.
Why do shady donors give to nonprofits?
Typically, a donor with unethical intentions will pursue multiple strategies to achieve tax benefits, and charitable giving is one of them. Charitable donations offer a tax advantage by allowing donors to write off a certain percentage of contributions. According to the IRS, you may deduct charitable contributions of money or property made to qualified organizations if you itemize your deductions. Generally, you may deduct up to 50 percent of your adjusted gross income, but 20 percent and 30 percent limitations apply in some cases (IRS Website, 2021).?
Another reason why donors may want to make charitable contributions is to improve their social standing and appear charitable. There are instances where donors who are well aware of their misdeeds will give money to causes in order to have their name emblazoned on a building or associated with another public-facing project.
Three ways nonprofits can respond to "tainted" donations
In the event that a nonprofit organization discovers that one of its major donors is involved in a serious scandal, some nonprofits can adopt a policy to reject or return donations. However, most small to mid-size nonprofits are very rarely in a position to return donations. Unless the organization has a vast reserve from which to pull funds to return donations, there are three things nonprofits can do in this scenario.
Anonymously accept the donation
Lawrence Lessig, professor of law and leadership at Harvard Law School, argues that it is fine to accept money from criminals and people who've accrued wealth in corrupt ways , as long as this is done anonymously and in a way that does not bolster the donor’s reputation. Lessing states, "No one who knows little about Rockefeller or Carnegie thinks anything negative about those criminals. That's because whitewashing works." This decision to anonymously accept a donation under these circumstances makes sense if your organizational philosophy does not ascribe value to how you received the money but prioritizes what you intend to do with it.?
Revisit your gift policy
Your organization may already have clear written guidelines to follow based on input from your organization’s board members and legal counsel. If your organization does not have clear guidelines, I recommend following the suggestion outlined below.??
Consult with your organization’s lawyer and board members
This can help you establish a gift policy and lay the groundwork for creating a transparent organizational culture. In addition to having a gift policy, a clear communication strategy that clearly articulates how your organization will communicate its decision to stakeholders will hold your nonprofit accountable to its mission.??
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How can nonprofits avoid accepting tainted donations?
This is difficult to avoid entirely because even with a thorough due diligence process, donors may engage in actions that compromise their reputation well after donating funds. Should you find yourself in this situation, as an organization, it might be helpful to have precautionary measures in place and a clear set of actions to take.
First, create a list of red flags or a list of non-negotiables?
It is important to reach a consensus on the types of donors your organization will not accept funds from to ensure alignment between your gift policy and your organization's values. For example, if an organization provides financial support to people experiencing lung cancer, it may not be in the organization's best interest to accept gifts from a tobacco company. Creating a list of non-negotiables is an exercise that will usually incorporate an organization’s values.?
In terms of red flags, here are several to look out for related to the due diligence process:
Second, establish a clear due diligence process for donations that exceed a certain financial amount?
I don't recommend doing this process for every single donor because it may not be efficient, but applying this process to donors who are providing donations over a certain financial threshold might make more sense for your organization. Below, I've outlined a three-step system for carrying out due diligence:?
1. Do a Google search and use the News and Images tab to determine whether the potential donor has been included in any negative press coverage.
2. Use websites like charity navigator to research your funder and learn about their past grants and financial habits. This step applies to foundations and other public charities that want to donate to your cause.
3. Use the OFAC sanctions list search tool to look up your individual donor to ensure they are not subject to any economic or trade sanctions.
Third, talk to your staff and board members about what to do next
The problems that nonprofits set out to address rarely happen in silos and decisions made in the sector should be grounded in this reality. When faced with the decision about what to do after receiving tainted donations, nonprofit leaders should convene with their board members and other stakeholders to discuss the next steps. While having an upfront due diligence process for accepting funds can ensure alignment between a nonprofit’s mission and values and that of a donor, having a conversation about what to do next creates a precedent or formal protocol that an organization can follow should this happen in the future.?
Final thoughts
The circumstances under which a nonprofit should return money from a dubious donor will vary, but consulting with your organization’s legal counsel will help your organization determine a legally permissible course of action. Having a policy before facing this challenge can also help an organization feel more confident about navigating this dilemma.
Preparedness starts before a disaster strikes and as a nonprofit, being in a position of readiness means giving yourself more time to focus on your mission rather than devoting all of your resources towards putting out the fire.
Sources:
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1 年This is such an interesting conversation and I have very mixed feelings on it. Thank you for writing about it.