A troubled recipe for nonprofits: equal parts Congress, Sarbanes-Oxley, U.S. Treasury Department, the IRS, and Bankruptcy

RMA Journal, The, March, 2007 by Gerald L. Blanchard

* GAAP should be followed in accounting for monies received and spent.

* Annual reports should be made available to any member of the general public who requests one.

* Disbursements should be made available by check or wire and not in cash.

Anti-Terrorism Funding Guidance

The Treasury guidelines then proceed to describe how nonprofits can minimize the risk of financing terrorist organizations.

* Get the recipient's name in English and also in the language of origin, together with any acronyms or other names used to identify the recipient.

* Ask whether the recipient has changed his or her name recently, perhaps in an effort to throw off suspicion.

* Run the names through the Terrorist Exclusion List published by the U.S. Secretary of State's office and the Office of Foreign Asset Control (OFAC) master list of Specially Designated Nationals.

* Assuming the names do not appear on the list of terrorists, the next step is to determine whether the names appear on any terrorist lists maintained by the country where the nonprofit is engaged.

* Assuming that the names or acronyms do not show up on any of these lists, the nonprofit should then require recipients to certify that they do not employ, transact with, provide services to, or otherwise deal with any individuals, entities, or groups that are sanctioned by OFAC, or with any persons known to the recipient to support terrorism.

* The nonprofit also should verify that no key employees, board members, or senior managers of the recipient are on any of these lists.

GAO and IRS Focus on Nonprofits

People are naturally suspicious when the federal government comes out with something it calls "voluntary best practices." The concern is that it is not actually voluntary--and, as it turns out, the concern is a valid one. In this case, the General Accounting Office (GAO) decided that it would be a good thing for those charities that participate in the Combined Federal Campaign (roughly the equivalent of a United Way campaign in the private sector) to certify that they are OFAC compliant and that, at a minimum, they follow the U.S. Treasury Anti-Terrorist Guidelines (which, as we noted above, don't deal solely with terrorist financing). The Combined Federal Campaign raises over $250 million for nonprofits in the U.S. and supports 22,000 charities. Congress did not have to pass any laws affecting nonprofits and their corporate governance; yet, a full set of corporate governance requirements has now been effectively pushed down onto a large portion of the U.S. nonprofit sector.

Interestingly, the GAO did not stop with the guidelines. It also conducted an investigation into the nonprofits that participated in the Combined Federal Campaign and owed taxes to the federal government. As it turned out, over 1,280 charities owed in excess of $36 million in unpaid withholding taxes, annual reporting penalties, and unrelated business income tax. The GAO investigation turned up instances of management using payroll tax withholdings to pay their own salaries.