Nonprofits And Fundraisers Face Unflattering Light Of Consumer Media

Scrutiny by consumer media into some potential skeletons in the nonprofit sector’s closet has charity officials both capitulating and complaining. The capitulation is the handing over of potentially explosive documents. The complaining is about attorneys general and consumer media supposedly not understanding the cost to raise a dollar and the value of a donor list.

In the case of the fundraisers, much of what is alleged is via a common practice known as the no-risk contract, potentially taken to the extreme. But in the case of the Boy Scouts of America (BSA), it’s combing through and releasing embarrassing rec­ords of suspected child molesters.

The Los Angeles Times this past August reported on an investigation it conducted of the BSA during which it allegedly found patterns of sexual abuse, cover-ups and failure to properly screen volunteers.

In September, fundraising service providers InfoCision and Quadriga Art separately came under fire for the percentage of funds raised that went to paying for the appeals.

The Irving, Texas-based BSA was first under the microscope for the issue of sexual abuse this past February, when a California judge ordered the organization to turn over about 20 years’ worth of personnel documents, known as ineligible volunteer (IV) files, as part of a lawsuit brought by the family of a 2007 abuse victim.

In June, an Oregon judge declared that IV files used as evidence in a 2010 case involving the abuse of six scouts by a scout leader in Portland should be released as public records with the names of potential victims and whistleblowers redacted. Approximately 1,200 files from 1965 to 1984 were used as evidence.

The IV files, kept by the BSA since the 1920s, are intended to identify and blacklist child molesters and others whom the BSA deems a threat. But the newspaper’s investigation revealed that many molesters slipped through the system. The newspaper cited numerous examples of leaders accused of abuse being transferred to other troops only to attack children again, or quietly resigning with no mention of the alleged abuse to scouts or the community. According to The Los Angeles Times, many incidences of abuse were never reported to the police.

In late September, the BSA released a report by Janet Warren, D.S.W., in which she analyzed 930 of the IV files from the 2010 Oregon case. Warren wrote that, “while it was not perfect, and mistakes clearly occurred, BSA’s IV File system has functioned well in keeping many unfit adults out of Scouting.” She characterized the incidence of reported abuse compared to the number of scouts and adult volunteers as “very low,” with between 25 and 75 IV files being created per year. Many of the years saw more than one million adult BSA volunteers.

Deron Smith, BSA’s director of public relations, said that the BSA will be going back through that subset of files and reporting incidents to the police where it’s “unclear if the police were involved.” Approximately two-thirds of those files examined by Warren documented police involvement. Smith said the BSA would contract with Warren at a later date to examine the files from 1985 to the present and report suspected abuse in instances where there is no mention the alleged crimes were reported to police.

Roughly half of all states have no criminal statute of limitations for felony sexual offenses against a victim younger than 16, so the BSA’s efforts could lead to new criminal investigations.

“Our main concern is that good-faith suspicion is reported,” said Smith. “The protection of youth requires sustained vigilance. We’ve learned from every experience, but the important thing is to continuously enhance our policies. These measures are the right thing to do for youth safety.”

The BSA has fought the release of IV files every time the issue has come up, arguing that public access to the records could be a violation of victims’ privacy and that many of the claims in the files are unsubstantiated in courts of law. “While we respect the court, we are still concerned that the release of two decades’ worth of confidential files into public view, even with the redactions indicated, may still negatively impact victims’ privacy and have a chilling effect on the reporting of abuse,” BSA officials said via a June statement.

The BSA released a response to The Los Angeles Times articles that included a timeline of its youth protection efforts, beginning in 1911 with reference checks for scoutmasters. The mid-1920s saw the implementation of the IV files, according to the timeline. But it wasn’t until 2008 that the BSA began conducting full criminal background checks on all potential volunteers, and did not require that all suspicions of abuse be reported to police until 2011.

Fundraising practices questioned

Donors want to know their gifts are being used for an intended purpose and not for fundraising expenses, and nonprofits start to sweat when their fundraising partners make the news for all the wrong reasons.

Two professional fundraising firms — telemarketing firm InfoCision Management Corp., in Akron, Ohio, and New York City’s Quadriga Art, a direct response firm — have come under attack in the consumer media for the high percentage of funds raised kept by the firms and the tactics alleged to be used.

Bloomberg Markets magazine published a story on InfoCision regarding fees and allegedly instructing telemarketers to lie about how much money goes to the company’s clients and about working or volunteering for charities. An example given was 22 percent of funds InfoCision raised in a 2011 national campaign for the American Diabetes Association went to the nonprofit, according to a report filed by InfoCision with the State of North Carolina.

Bloomberg alleged that telemarketers sometimes identified themselves as volunteers or employees of the charity for which they are calling, instead of as paid telemarketers.

InfoCision’s Chief of Staff Steve Brubaker said the allegations fly in the face of company policy. “Our scripts and training processes clearly communicate that all our employees are paid by InfoCision to do the work which our clients hire us to do for them,” he said. “If a rogue employee chooses not to abide by company policy, we take swift disciplinary action. We offer our clients complete transparency into our operations.”

Brubaker said that when a donor asks specifically about the campaign for which InfoCision is calling, “We explain that InfoCision is paid on a fixed fee basis and not on a percentage arrangement. The most conservative estimate of the client’s campaign cost ratio is then provided to the donor.” He said any percentage quoted had been provided by the nonprofit client and is “the organization’s overall percent of funds dedicated to their mission.”

Ken Berger, president and CEO of Charity Navigator in Glen Rock, N.J., said these types of acquisition programs are “found money” for the charities. “Even if it’s five or 10 percent that you get, it’s found money that you wouldn’t otherwise get.” He said that charities often rationalize these loss leader acquisition programs by looking to the future, that today’s efforts will generate revenue next year.

“The perspective of the donor is lost in all this. When donors find out this is the arrangement, they would feel deceived and would never want to give to these charities again. The whole approach is based upon deceit to one degree or another,” said Berger.

InfoCision paid a settlement of $75,000 to the Ohio Attorney General this past April. Elk and Elk, a law firm in Mayfield Heights, Ohio, filed a lawsuit against InfoCision in September on behalf of donors who allegedly had been told charities would get a greater percentage of their gifts than they did. Elk and Elk did not return calls requesting comment.

Regarding the Ohio settlement, Brubaker said, “There were a few employee mistakes in a handful of calls, and a situation involving a former employee who did not follow procedures.” He said the Elk and Elk suit is not likely to get class action status, because “the claim by necessity must make general assertions that every call was the same, and that is just not true.”

Federal inquiry

The Finance Committee of the United States Senate has requested financial documents from 2008 to 2011 from direct response firm Quadriga in relation to an investigation into one of Quad­riga’s clients, Disabled Veterans National Foundation (DVNF) in Washington, D.C. A Senate hearing for DVNF has not been scheduled.

“We are hopeful (the Senate Committee on Finance) will be satisfied with the information we have provided, that DVNF is existing properly as a tax-exempt organization in pursuit of its mission,” said DVNF Communications Manager Doug Walker.

CNN reported DVNF between 2008 and 2010 paid Quadriga more than it received in donations – on paper anyway. CNN alleged that DVNF also inflated the value of its in-kind donations to veterans’ charities and sent them unneeded goods such as hand sanitizer and candy.

“DVNF, in good faith, relies upon valuations that are provided by appropriate sources,” said Walker. “If any valuations are found to be inaccurate, then corrective action has been taken or will be taken.” When asked about valuation for donations specifically to the organizations mentioned by CNN, Walker said, “I don’t know, but I would think so.”

DVNF had a no-risk contract with Quadriga. Those are used in the nonprofit sector by organizations with no infrastructure to build a donor base. The vendor fronts the money for the fund­raising campaign and recoups fees from the money sent in. There are U.S. Postal Service regulations regarding how these programs must be operated.

Some charities are worried that they will be painted with the same brush as those fundraisers in the news. “That’s very troubling, and we worry about association,” said Richard Cervera, CFO of the Association of Marian Helpers in Stockbridge, Mass. “Our fear is that we get lumped in with all other fundraisers.” The Association of Marian Helpers previous contracted with Quadriga to provide art for mailings, but for the most part keeps its direct mail operations in-house.

Quadriga has been the subject of multiple stories by Anderson Cooper and his program AC360 on CNN. Melissa Schwartz of The Bromwich Group, a public relations firm in Washington, D.C., working with Quadriga, argued the show’s reporting was not balanced. She said the coverage “shows a misunderstanding of what the industry and Quadriga Art does.”

Schwartz also said that DVNF’s and others’ federal Form 990s upon which the coverage has been based, do not “come close to telling the true story of any charity’s operations,” adding that the value of the donor file is not reflected as an asset on a Form 990.

“Despite having responded to all requests for information from AC360, they have knowingly withheld information that would have provided a balanced view of the direct mail program that Quadriga Art has implemented,” said Schwartz.

Both the New York and California attorneys general are reportedly investigating Quadriga. The New York attorney general’s office said it would not comment on ongoing investigations, but the office has issued subpoenas looking broadly into whether some of Quadriga’s practices deceived the public, according to a spokesman for the attorney general. Nick Pacilio, press officer with the California attorney general’s office only responded, “We do not confirm or deny the existence of investigations.”

Schwartz has denied that the investigations indicate anything out of the ordinary. “Based on the massive amount of media coverage, it is not surprising that we have received some inquiries from regulators. This is a regulated industry,” she said.

Quadriga is a member of the Direct Marketing Association’s Nonprofit Federation. Xenia “Senny” Boone, senior vice president of corporate and social responsibility, said the organization is looking into the allegations but declined to give details. “We are reviewing the matter under the DMA member guidelines which all members must follow,” she said. “Our investigation is under way and once it is completed, I should have more information.”

In the 70 years Quadriga has been in business, “not once have we ever been fined, not once have we ever been charged,” said CEO Mark Schulhof in a video response to CNN’s investigation. He also stated: “My company has not made a profit” from the DVNF.

“This is the nature of direct mail,” said Schwartz. “Clients (Quadriga Art customers or not), do not make a net profit during their four to seven-year acquisition period.” She used the example of DVNF, which according to Quadriga has grown its mail file from 25,000 to 250,000 donors. “We see this effort as having been remarkably successful,” she said.

CNN reported that 11 charity clients of Quadriga’s allegedly owe the fund­raiser millions of dollars in total, but Quadriga has stated this is false. “Our clients are not in debt,” said Quadriga. “AC360 has incorrectly suggested that because charities still have bills to pay, their programs are not successful.”

That nonprofits might owe so much money to the company is problematic, but the issue goes beyond just dollars. It’s about control of the organization. If you control the money, you control the organization. In 1999, the Seventh Circuit Court of Appeals reversed an Internal Revenue Service (IRS) decision that had revoked the Indianapolis, Ind., charity United Cancer Council’s tax-exempt status. The UCC had paid fundraising firm Watson & Hughey, now called Direct Response Consulting Services in McLean, Va., more than $26 million of the nearly $29 million Watson & Hughey raised for the charity.

The IRS argued that because the UCC paid Watson & Hughey so much money, the company should be classified as an insider of the charity and therefore UCC violated rules against private inurement. The appellate court determined that the fundraising company was not an insider of the charity and that no one at the charity received inurement.

However, the issue of who is in control stands. The ruling protects charities from the IRS but not from fundraisers’ high fees. The court did not rule whether the fundraising company has undue influence over the charity.

“The (inurement) provision is designed to prevent the siphoning of charitable receipts to insiders of the charity, not to empower the IRS to monitor the terms of arm’s length contracts made by charitable organizations with the firms that supply them with essential inputs,” wrote judge Richard Posner in the opinion. “We can find nothing in the facts to support the IRS’s theory and the Tax Court’s finding that W & H seized control of UCC and by doing so became an insider, triggering the inurement provision and destroying the exemption.”

During the recent meeting of the National Association of State Charity Officials’ conference, Better Business Bureau Wise Giving Alliance (BBB) President H. Art Taylor announced the BBB would launch a review of fundraising appeals by both nonprofits and for-profit firms. He said the review would specifically target “charities that have been the subject of significant inquiry and complaint.” The Arlington, Va.-based BBB will review “every single direct mail and telemarketing script” used by the charities in question, he said.

“We are concerned about the extent to which charities are not providing sufficient oversight over paid fundraising firms,” said Taylor. “These firms sometimes employ more aggressive and potentially misleading tactics to increase donor response.”

When asked if media coverage of Quadriga and InfoCision affected the BBB’s decision for closer scrutiny of fundraising practices, Taylor said, “There have been several recent high-profile media stories about for-profit fundraising companies. Those certainly were a factor, but we have been considering for some time how to address aggressive fundraising tactics.”

He did not mention Quadriga or InfoCision by name. The program will launch in 2013 and the BBB has not decided upon which charities will bear the first scrutiny, he said.

Charity Navigator’s Berger does not see much recourse to validating the high cost and low returns of doing business with some for-profit fundraisers. “These are not social enterprises, but profit-making ventures,” he said. “When you have a telemarketing firm that’s all about profits, the tendency toward manipulation and outright lies and violations of the law is such that we think the best approach is for charities to go back and retool.” Fundraising is best done in-house, said Berger, to control costs and keep the integrity of a nonprofit’s message. No one is disputing that charities need acquisition programs to build donor bases, but “there’s no excuse for mis­representation,” said Bennett Weiner, chief operating officer of the BBB. Acquisition programs are expensive and generate low rates of return, but most charities have multiple methods of solicitation and stewardship.

“Running acquisition campaigns to acquire new donors can lead to results where the particular campaign was successful as far as obtaining new donors to add to the organization’s donor files, while the actual costs of a campaign might include postage, printing, telemarketing might result in a loss for that campaign,” said DMA’s Boone. “Over time, those amounts are recovered due to the lifetime value of the donor. The best practice standard for evaluating charities is to look at total program activities.” NPT