Private Foundations Also Need Compliance and Ethics Programs

By David D. Dodge

According to the National Center for Charitable Statistics, there are more than 1.5 million nonprofit organizations registered in the U.S.  This number includes public charities, private foundations, and other types of nonprofit organizations.  The Foundation Center reported in its Key Facts U.S. Foundations, 2014 Edition, that the U.S. was home to 86,192 foundations with $715 billion in assets and $52 billion in annual giving.  These foundations include independent, operating, corporate, and community foundations.  Foundations are registered by the IRS and, in some states, fundraising registration may also be required.

While the running of foundations in the U.S. is big business, and involves the management and expenditure of huge sums of money, the IRS and states requiring registration provide limited resources for audits and oversight.  However, when reports are made of alleged wrongdoing within a foundation, the government is quick to act – especially when such reports of scandal make national headlines.

The below recent case is illustrative:

The Key Worldwide Foundation (“KWF”) was at the heart of the 2019 college admissions bribery scandal.  KWF was established in 2014 by Rick Singer-the mastermind of the scandal- originally to provide education to underprivileged students.  However, over the years it evolved into an illegal conduit for receiving donations from millionaire parents desiring to get a “leg up” for their children in gaining admission to elite colleges and universities, and paying bribes to coaches and others for facilitating the illegal scheme.  For some donor parents who claimed potentially illegal deductions under tax law, the donations to KWF played a central role in making the scam work.

There is no evidence that KWF had a viable compliance program or that it was relying on needed compliance services provided by a reliable third-party.  To the contrary, it was allegedly operating in blatant violation of numerous IRS rules and regulations and completely outside its own supposed missionironically, by helping the children of wealthy parents to take spaces in higher education that might well have been otherwise occupied by underprivileged students.

Obviously, the KWF did not have an effective compliance program in place.  According to Foundation Source, the nation’s largest provider of administrative and compliance support services for private foundations, “a private foundation enjoys unparalleled philanthropic flexibility and financial control.  As an independent, freestanding legal entity, the board of the foundation exercises full discretion over its grant-making activities and its investments.  And the IRS gives foundations powerful philanthropic capabilities, enabling them to grant to individuals, run their own charitable programs, award scholarships, grant to international organizations, and more.”

Jane C. Nober of the Council on Foundations (“Council”) writes that “the persistent scrutiny of nonprofit governance has prompted leaders of many types of organizations to take steps to assure that their own houses are in good legal and financial order.”  For private foundations, the Council’s compliance checklist is a good place to start.  It addresses needed organizational and operational documents, documents related to federal and state tax exemption, administrative reporting and public accountability, public disclosure requirements, grant programs and policies, and more.

To avoid the types of scandals which plagued KWF, foundations of all types would do well to either: 1) establish internal effective compliance and ethics programs; or 2) team-up with experienced organizations specializing in providing support services to foundations, including compliance management services . The continued broad failure by foundations to willingly establish and apply voluntary compliance standards is likely to result in both more scandalous activity and legislative action to require more stringent oversight by external bodies.