Federal and state officials, troubled that nonprofit organizations have quietly lost millions of dollars to financial wrongdoing, this week launched multiple investigations into whether the groups properly reported losses to authorities.
Three ranking senators and a House committee chairman said they were distressed about new revelations regarding what are known as “significant diversions” of assets. Regulators in seven states and the District also said they moved this week to scrutinize how well nonprofits are safeguarding charitable funds meant to serve their communities.
Republican Sen. Charles E. Grassley (Iowa), ranking member of the Judiciary Committee, opened an investigation into legal issues related to the diversions. He launched a second probe into an alleged $3.4 million embezzlement at the Washington-based American Legacy Foundation.
“The public should know when charitable dollars are diverted,” Grassley said in a statement. “Tax-exempt dollars are meant for tax-exempt purposes, not bankrolling someone’s personal Champagne lifestyle.”
Sen. Tom Coburn (R-Okla.), ranking member of the Homeland Security and Governmental Affairs Committee, said he will ask the Government Accountability Office to look into many of the same issues.
On the other side of the Capitol, Rep. Dave Camp (R-Mich.), chairman of the House Ways and Means Committee, issued a statement calling it “vital that nonprofits account for, and accurately report, how their funds are used, even when the worst happens and funds are misused.”
Charity regulators from Maryland to Hawaii said that a database of diversions, developed and made public this week by The Washington Post, gave them an additional weapon in their fight to identify wayward nonprofits and focus their limited investigative resources.
D.C. Attorney General Irvin B. Nathan said the database provides “a valuable tool for screening whether nonprofits are fulfilling their basic obligation to protect the charitable assets entrusted to them.”
In New York, the state attorney general’s office is “reviewing the database and will be following up with a number of the charities listed,” said David E. Nachman, the office’s chief of enforcement for charities.
In Hawaii, regulators said they had contacted one charity named in the database that appeared to have failed to disclose the amounts and circumstances of its loss.
“You’ve basically given us all homework,” said Hugh R. Jones, Hawaii’s supervising deputy attorney general for the charities division.
The officials were responding to an investigation, published Sunday, in which The Post identified more than 1,000 larger nonprofits that in recent years disclosed that they had suffered significant diversions of their assets — many acts of fraud and embezzlement.
The diversions highlighted in the article totaled hundreds of millions of dollars. But the investigation also found that in apparent violation of federal reporting rules, many of the organizations failed to include the amount they lost and other key details in their disclosures.
The largest diversion identified in the investigation was $106 million, the amount Yeshiva University and its affiliates said they lost in a Ponzi scheme linked to Bernie Madoff.
In Legacy’s case, the foundation believes that it lost $3.4 million to a former executive. The Post reported that after a whistleblower came forward, Legacy officials waited almost three years before notifying authorities. On its federal disclosure, the foundation reported that its loss had been “in excess of $250,000.”
On Friday, Grassley sent Legacy a six-page letter seeking answers to 30 detailed questions about its financial practices. A Legacy spokeswoman said the foundation would respond after reviewing it. In a statement, Grassley called it “stunning that diversion appears to be so common.”
“That should be a wake-up call to the IRS, law enforcement and every tax-exempt organization,” Grassley said. “Without this kind of disclosure, law enforcement and charitable donors might never learn of diversion. And let’s call ‘diversion’ what it is a lot of the time – old-fashioned stealing.”
Coburn said he had long been concerned about accountability at nonprofit organizations. In July, he asked the GAO to conduct a wide-ranging review of the IRS’s oversight of tax-exempt organizations.
“These cases are yet another wake-up call for Congress,” Coburn said. “It is immoral and unethical to ask taxpayers to subsidize charities that are not following the law.”
Orrin Hatch of Utah, ranking Republican on the Senate Finance Committee, said that he will be taking a “serious look” at the issue and that the IRS has an obligation to crack down on charities that game the system.
Bennett Rushkoff, chief of the D.C. attorney general’s public advocacy section, said that before The Post’s investigation, he was unaware that federal law required nonprofits to disclose diversions in their reports and added that he will start using the data.
“I would expect that a lot of the state attorneys general will want to know from these nonprofits how they would have answered the required questions, had they answered them,” Rushkoff said. “If they are tolerating embezzlement, that raises a question about whether they are fulfilling their fiduciary responsibilities.”
Rushkoff said he had not previously known of the alleged embezzlement at Legacy, adding that he could not say publicly which nonprofits would be under greater scrutiny from his office.
In Maryland and Oregon, regulators said they lacked enough staff to examine every paper disclosure. “We’ll look at all of them” in the database, said Peter Fosselman, Maryland’s deputy secretary of state.
A number of news organizations across the nation — and one in Israel — also have used the database to identify and examine nonprofits.
The Milwaukee Journal Sentinel reported that a Wisconsin charity it found, Shepherds Baptist Ministries, lost nearly $500,000, allegedly to its former financial controller. Business First of Buffalo reported that in 2008, the local Society of St. Vincent de Paul lost $360,000 to embezzlement, allegedly by a former bookkeeper.