Weak enforcement of rules on U.S. charities: experts

NEW YORK Wed Apr 20, 2011 6:07pm EDT

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NEW YORK (Reuters) - Authorities in the United States, particularly in cash-strapped states, have not devoted enough resources to policing nonprofit groups like those involved in recent philanthropy controversies, experts say.

U.S. tax authorities grant groups charitable status, which exempts them from taxes, and require most to file annual informational tax returns, but experts say the main source of regulation faced by nonprofit groups is at state level from the attorney-general.

"The problem is that very few states have put the resources they should into this part of the attorney general's activities and the quality of regulation ... varies," said Leslie Lenkowsky, a professor of public affairs and philanthropic studies at Indiana University.

Best-selling author Greg Mortenson was accused by television program "60 Minutes" this week of misusing money given by donors, who include President Barack Obama, to his charitable organization Central Asia Institute. The New York Times reported last month that singer Madonna had ousted the board of her Raising Malawi charity due to mismanagement.

Many U.S. states are facing financial hardships stemming from the U.S. recession of 2007-2009, which has limited their budgets for law enforcement and other services.

There are about 2 million nonprofits in the United States. Of that number, just 20,000 receive about 85 percent of the $300 billion in U.S. donations made annually, experts said.

Mortenson, whose charity received $100,000 of Obama's $1.4 million Nobel Peace Prize award, has denied any wrongdoing and Madonna has said that her group was not under investigation.

Montana Attorney General Steve Bullock, who is responsible for overseeing the Central Asia Institute, said he will investigate concerns raised that the charity spends more promoting the importance of constructing schools in Afghanistan and Pakistan that is spends to build them.

"We've kept our rules relatively loose for charities in the United States," Lenkowsky said. "The reason being that our philosophy is that we would like to see lots of private initiatives that aim to serve a public interest."

HIGHER FRAUD RATE

Tax authorities reject very few applications by groups wanting to become charities, but making it more difficult would raise concerns about what criteria would be used to determine a nonprofit and could hinder efforts by groups to do good.

There are several independent charity watchdogs such as Charity Navigator and the American Institute for Philanthropy, where donors can get advice about larger nonprofit groups.

But their views can differ. The institute wrote a critical report about Mortenson's Central Asia Institute, while the Navigator gave it a top four star rating and then added a donor advisory warning when concerns about the group were raised.

"The vast majority of donors are looking for information that is readily available; they don't have a lot of time to do research for their charitable giving," said Ken Berger, chief executive of Charity Navigator.

"We're trying to oversee what is basically a $2 trillion part of the American economy -- one out of every 10 jobs -- 10 percent of GDP, and we are a very small operation," he said. "Creating further regulation would not be viable unless we get serious about enforcing existing law more rigorously."

Research shows that theft in the nonprofit sector accounts for 13 percent of annual donations, or about twice the rate of fraud in the for-profit sector, said Mark Kramer, co-founder of nonprofit consulting firm FSG and author of "Do More Than Give: The 6 Practices of Donors Who Change the World."

"In the for-profit sector, the line between what is illegal and what is merely bad judgment is clearly defined: Madoff committed fraud and is in jail," Kramer said.

"When one takes on the moral weight of running a charity, however, the rules are less clear," he said. "Unlike the for-profit sector, the scandal doesn't depend on whether something is illegal -- merely whether it sounds bad."

Kramer said donors tend to focus on funding good causes rather than judging charities by their results -- an approach which creates greater opportunities for mismanagement.

(Editing by Mark Egan and Cynthia Osterman)

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