Bad nonprofits: An unfortunate reality of charitable giving in America

I recently saw an article about “The WORST charities in America? These are the organizations giving over 90 PERCENT of donations to their fatcat executives – while ignoring their causes.” Anyone who’s worked with nonprofit organizations over time knows that, while most are reasonably honest and at least try to perform needed services, some aren’t.

Since 1993, we’re written grants for somewhere between 600 and 1,000 nonprofits across America. When a prospective nonprofit client calls for a fee quote, I can usually tell within a couple of minutes if the caller is a true believer (about 10%) or a more typical nonprofit. It’s much harder, however, to tell if the nonprofit is honorable, because nonprofit executives are skilled in the art of happy talk—a bit like Gríma Wormtongue in Lord of the Rings.

During initial calls, the prospective client is interviewing us, but to a degree we’re also interviewing them, since we try not to accept assignments from clients who are illegible applicants. Eligibility is almost always straightforward, but we also try to avoid scammers and scoundrels, which is much harder. A few times, callers have told us outright that they plan in effect to misuse the grant money.

Some of the red flags we look for:

• The caller refers to their nonprofit as a “business” or “company,” or otherwise talk about their organizations as if they’re running a business that’s going to pay money out to its owners. Real nonprofit executives rarely use this sort of terminology, since nonprofits are not supposed to generate profit and there are no “shareholders” (excess revenue over expenses is usually termed “operating reserves” or “endowment”).
• The Board of Directors has five or fewer members. While it’s possible to organize a 501(c)3 nonprofit will just a few Board members, they’re usually supposed to be “community-based,” so one expects to see a board of 7 – 11 members (odd numbers break tie votes). Tiny boards often enable the Executive Director to control the board by cherry picking compliant members. As we describe in the linked post, the Executive Director can run a nonprofit with this board structure like a small business without worrying about interference or a board coup.
• The Executive Director admits that they own the nonprofit’s facility and lease it to the nonprofit. While not always technically illegal, this obviously raises self-dealing concerns.
• The Executive Director brags about double or triple funders for the same client or service. For example, a substance abuse disorder (SUD) treatment provider might bill Medicaid and a specific grant or contract for the same service. This is a fairly common practice, but generally illegal and not discussed in polite company. Sometimes double-billing is the only way to provide effective services, but you’re not supposed to admit this to relative strangers.
• The nonprofit is just straight up charging fees to its client for services rendered. I’m not talking about a Boys and Girls Club charging a modest, but waivable, fee to join a club basketball team, but rather something like a Board & Care home in effect stealing the client’s SSI payment and putting it towards “rent,” while providing little more that “three hots and a cot.” Some years ago, we had to terminate a retainer agreement with a nonprofit that was supposedly providing adoption counseling, but in reality was selling babies.

At least six Executive Directors of former S + A clients have gone to prison, usually federal, for various frauds and scams, though we only find this out when we happen to spot a news article or someone sends us the story, so the real number is likely higher. Let’s assume that under 1% of nonprofits are bad applies, but there are over 1.5 million American nonprofits, so even a 1% estimate results in tens of thousands of questionable nonprofits. Size isn’t necessarily an indication of honor, since our nonprofit clients range from mom & pop community groups to hospital chains with billions in annual revenue. The larger the organization, the greater the number of funders and potential for corruption. Why steal a small amount when you can steal a large amount?

While we attempt to identify potential scammers, it’s much harder to decide which nonprofits to donate one’s own money to. Some of my rules of thumb for personal philanthropy:

• Don’t donate money to any organization that buys TV advertising.
• Pick a type of charity that you’re familiar with. If you’ve had a relative struggling with addiction or homelessness, you’re likely already familiar with good local nonprofit providers.
• Choose a charity with a local facility you can visit to meet the staff and possibly some of the clients. Mismatched office equipment or perfectly matched equipment doesn’t mean much, although if the equipment is super nice, ask how they got it. A scammer can fill their office with Goodwill rejects for show purposes, while a good nonprofit might have just received an in-kind donation from Steelcase of 20 new desks and chairs. If something doesn’t pass the smell test, ask.
• Be wary of any organization that can “sell stuff out the back door.” This can range from re-selling donated computer gear that was supposed to go a after school program on eBay, or an animal rescue farm selling the occasional steer to McDonald’s.
• If the donation is relatively large or your antenna has gone up, ask to see the nonprofit’s 990 Federal Tax Returns for the last few years, which among other things, should list salaries.
• Consult Givewell.org