Safe and Sound?

Charities that work abroad caution that antiterrorism guidelines could hinder, not help, their efforts

American charities and foundations are warning the Internal Revenue Service to tread carefully as it considers

whether to craft new rules designed to keep nonprofit groups from unwittingly helping terrorists.

In written comments submitted to the federal government, organizations such as the Council on Foundations, Independent Sector, and InterAction say the nonprofit groups they represent already take great care when they give money to groups outside the United States or work with them overseas. Requiring U.S. nonprofit groups to collect and report additional information — now suggested but not required by the Treasury Department — could discourage charitable work abroad and place overseas aid workers in life-threatening situations, the umbrella organizations contend.

“If we have to collect this information, we could be seen as U.S. government agents, and that could result in risk and danger to the humanitarian workers,” Mary McClymont, chief executive officer of InterAction, a coalition of international-aid groups, said in an interview. “They could become targets, in fact, of terrorist activities.”

Ms. McClymont also said that the Treasury Department guidelines or unhelpful new regulations could discourage charities from forming partnerships with indigenous aid groups — something the U.S. government has encouraged in the past. “They could discourage nongovernmental organizations from operating in conflict zones in dangerous places where the government really wants and needs NGOs to be working, such as Iraq or Afghanistan or Liberia,” she said.

State Presses for Change

While many nonprofit advocates are resisting certain new requirements affecting foreign charitable work, some state regulators are pushing for changes. The New York State attorney general’s office is asking the IRS to require nonprofit organizations to provide additional details on their federal Form 990 informational tax returns to help government officials identify charities and foundations that make grants outside the United States.

The comments from InterAction, Independent Sector, and other groups stem from a request by the IRS in the spring for nonprofit groups to explain how they conduct their international work and how they try to keep assets from being used for terrorism. The IRS wanted to know, in part, whether new or improved rules are needed and what nonprofit organizations thought of voluntary guidelines released last year by the Treasury Department. Those guidelines were designed to help charities, including Islamic ones, assure donors of good will that their money was used for legitimate purposes.

Charities and foundations responding to the IRS request for comment say they understand the need to do all they can to make sure terrorist organizations do not benefit from humanitarian efforts.

Still, many of their comments were critical of the voluntary procedures, called “Anti-Terrorist Financing Guidelines,” that the Treasury Department released in November.

InterAction, a coalition of 160 international relief and development organizations, and Independent Sector, a national coalition of charities and grant makers, said that some of the guidelines are consistent with what their members now do. Such steps include collecting basic information about overseas grantees — their names in various languages, the jurisdictions in which the organizations have a physical presence, their principal purposes, and public information and annual reports on the groups’ operations.

But it would be troublesome, say InterAction and Independent Sector, if some of the Treasury’s guidelines were to become hard-and-fast requirements — for example, if nonprofit groups working overseas had to obtain from their grantees the names and addresses of organizations they support, the subcontractors they use, and the recipient groups’ sources of income.

InterAction and Independent Sector also worry that if the guidelines became mandatory, humanitarian groups would have to identify the financial institutions at which foreign grantees maintain accounts. A further concern is that charities would have to determine whether the institutions were “shell banks” or in jurisdictions that lacked “adequate money-laundering controls and regulatory oversight.” The umbrella groups also fear that U.S. organizations would have to perform routine, on-site audits of foreign grantees whenever possible.

“Proposals to require charities to gather more information about local partners or grantees raise serious threats to our members’ missions and personnel,” InterAction and Independent Sector said in a joint statement to the Internal Revenue Service. “Our members are engaged in every developing country in the world and are present at every significant disaster and armed conflict requiring international assistance. NGOs are able to function in such difficult milieus because of their reputation for impartiality and operational independence from governments.”

Views of Grant Makers

The Council on Foundations, an association of private foundations, charities, and corporate grant makers, noted in its comments to the government that private foundations are already subject to “expenditure responsibility” rules, not imposed on charities, that require them to gather a great amount of information from grantees in order to provide reasonable assurances that grants sent overseas are used for charitable purposes.

Even so, the council pointed out that it is impossible for foundations to guarantee that their grants are always used properly.

“We seriously doubt that compliance with many provisions listed in [the voluntary Treasury guidelines] would be of significant value in achieving the Treasury Department’s goal of preventing the diversion of funds to terrorists,” said the Council on Foundations.

“For example, even if the grant maker obtains all the information set forth in the guidelines, it is unlikely to be able to make the necessary connection between that information and a link to terrorism,” the council said.

What’s more, the Council on Foundations said, requiring an overseas organization that gets U.S. grants to certify, for example, that it does not employ or deal with entities or individuals identified by the federal government as terrorist is unlikely to deter a grant recipient that is “intent on facilitating a diversion” for terrorist purposes. “A grant maker could comply fully with the [Treasury] guidelines but unwittingly fund terrorist activities anyway,” the council said.

The Council on Foundations also urged the Treasury Department to help nonprofit organizations comply with what it called a “vaguely worded” provision in the presidential executive order on terrorism that requires charities and foundations to check lists compiled by federal agencies and others of suspected terrorist organizations or individuals.

“In order to enable grant makers to identify the appropriate lists that should be checked,” the council said, “we strongly recommend that the Treasury Department either compile all the names on a single list that could be searched, or at a minimum identify and provide links to all relevant lists from one Web site.”

The Council on Foundations suggested revising the Treasury guidelines to adopt a simplified “risk-based approach” that would help “a grant maker identify those grants that may present a greater risk for diversion” and describe “additional steps that the grant maker may take to minimize the possibility of diversion for grants that are so identified.”

Avoiding ‘One Size Fits All’

In another set of comments, lawyers who represent nonprofit organizations — several members of the Exempt Organizations Committee of the Section of Taxation of the American Bar Association — suggested that the federal government write entirely new guidelines that nonprofit groups could voluntarily follow when providing funds to groups abroad.

The steps outlined by the lawyers, described as a flexible, four-step “risk-based procedural approach,” would allow organizations to avoid what the lawyers call the “one-size-fits-all” approach of the current Treasury guidelines by allowing organizations to evaluate on a case-by-case basis how risky a particular grant might be and how much information or investigation was required. For example, a charity abroad with longstanding ties to a U.S. charity would be seen as less risky; an overseas charity that had no prior relationship to a U.S. charity would need closer scrutiny.

“The presence of several risk factors, or an accumulation of risk factors, should alert the organization reviewing the payment to a greater or lesser potential for fund diversion and thereby identify those grants needing more detailed attention and oversight,” the lawyers said.

The federal government should give nonprofit organizations that followed the steps a “safe harbor” that would protect them from liability, Betsy Buchalter Adler, chair of the ABA committee, said in an interview. “Charities are used to operating in a regulated environment,” she said, “but the legal framework for charity contains many safe harbors: If you follow this particular path, then even if it turns out that your money was diverted by others, you are not liable, because you did what you needed to be doing. You took proper care.”

Added Ms. Adler: “There are two kinds of rules that the IRS can make in this whole area: stumbling-block rules to limit international philanthropy or safety nets to support international philanthropy. What we have recommended we believe could serve as a safety net.”

Tax Forms

Officials of the New York State attorney general’s office pressed the Internal Revenue Service to make major changes in the informational tax returns and applications for tax-exempt status filed by charities and foundations.

For example, New York regulators asked that separate lines be placed on the Form 990 to break out grants made to “domestic individuals, domestic exempt organizations, nonexempt domestic organizations, and foreign individuals and organizations,” and require that groups attach separate schedules offering details of each category.

“Since September 11,” said the attorney general’s office, “states have been even more concerned about transfer of funds to organizations, exempt or nonexempt, foreign or domestic, that may support terrorism.”

Copies of the IRS request for comments, Announcement 2003-29, are available online at http://www.irs.gov/charities/article/0,,id=101826,00.html.