Former Regulator Urges New Rules to Crack Down on ‘Rotten Apples’

During his five years as chief charities regulator for Attorney General Eliot Spitzer in New York, William

Josephson earned a reputation for straight talk and for taking an aggressive approach to enforcement. He helped tighten his state’s rules and regulations, cracked down on fund-raising abuses, and asked the U.S. Congress for far-reaching changes that would have included prohibiting the creation of small private foundations.

And while he stepped down from that post earlier this year, Mr. Josephson continues to play a prominent role in shaping charity regulation as he helps the U.S. Senate consider new legislation.

“Charitable organizations are doing a good job in this country,” says Mr. Josephson. “But there are some rotten apples out there.”

When he took the charity-regulator job in 1999 at the age of 65, Mr. Josephson could already look back on a full career.

As a State Department official in his 20’s, he worked with Sargent Shriver to create the Peace Corps during the Kennedy administration. Then, for 35 years, he was a corporate lawyer in Manhattan who helped City University of New York and other organizations raise billions of dollars through tax-exempt bonds.

Under his watch at the New York State Charities Bureau, Mr. Josephson helped the attorney general negotiate with Empire Blue Cross Blue Shield as the health organization took the controversial step of converting from nonprofit to for-profit status. In the chaotic aftermath of the September 11, 2001, terrorist attacks, he worked to create databases for charities and victims to coordinate relief efforts.

Starting in 1999, Mr. Josephson lobbied Congress to allow the Internal Revenue Service to share information and work much more closely with state charity regulators to identify and investigate nonprofit groups that may be breaking laws.

Since leaving the Charities Bureau, Mr. Josephson has been appointed by Independent Sector, a coalition of charities and foundations, as an adviser to a committee that will suggest legislative changes aimed at stamping out abuses at tax-exempt organizations. The Senate Finance Committee, which asked Independent Sector to form the committee, also counts on Mr. Josephson to provide advice directly to it.

In an interview, Mr. Josephson talked about his time as a charity regulator and key issues facing charities today:

What steps did you take to improve charity regulation?

We embarked on the difficult task of improving and merging databases — which were rudimentary, to put it mildly — that had in the past been separately compiled by the attorney general, which registers charities, and the secretary of state, which had registered professional fund raisers before we assumed the responsibility.

Having a good database is crucial to accountability, to journalist access, to donors who really want to find out whether charities they may support are worthy. And it’s crucial to law enforcement, because we can do studies of organizations that have strange or unusual data that should trigger inquiry on our part, which we haven’t been able to do. The accountants in the past have been able to go through about 2,000 organization files a year on a catch-as-catch-can basis. Now we can be much more systematic.

The improved database has already allowed us this year to identify 3,300 organizations that were delinquent — that had failed to file reports annually — which led to our obtaining $500,000 from them in back fees.

The better database should also help us more easily identify charities that are merely creatures of their professional fund raisers.

What else changed under your watch?

When I arrived in 1999, the offices in which the bureau existed were really reprehensible. Fifty people were crammed into old, dirty, disgusting spaces. And, in particular, the staff that processes charity registrations was crowded into an interior room surrounded by miles and miles of files. It was unconscionable.

In time, we were able to double the Charities Bureau’s space and provide a marvelous working environment, especially for the registration people, including some window space, and to create a modern file room, so they were not in danger of having everything topple over on them. This was a major challenge, and I count it as one of my major achievements.

We were also able to hire another accountant, bringing the total to five, and to increase the number of lawyers in the bureau from 19 to 21 using flexible-time arrangements — even though we can pay them a starting salary of only $40,000 and require two years of experience.

The improved space and larger staff have had a transforming effect on morale and productivity in the bureau. And that leads to better enforcement.

You asked Congress to consider banning small private foundations, citing abuses you found. Isn’t that a drastic step?

What we were saying to Congress was: Think about it.

There are more than 74,000 private foundations in the United States. The 1,000 largest private foundations by assets make more than half of all grants. At the other end of the spectrum, 56 percent of private foundations have less than $500,000 in assets.

Now it may be that some of the 56 percent were created to be repositories for eventual substantial bequests, or later gifts. But my instinct is that overwhelmingly that’s not the case.

There are so many small foundations that actually do not add that much to the good use of philanthropic funds for which they have gotten significant tax deductions and that add tremendously to the regulatory burden.

Is this worth it? Especially when there are good alternatives like donor-advised funds in community foundations with professional investment management and checks and balances. So foundations won’t be using charitable money for someone’s daughter’s wedding, as The Boston Globe reported in stories last year.

The difficulty that too many family private foundations have, in distinguishing between their own money and the money they give to charity, disappears when you have a professional community foundation to administer them.

Key Senate aides have proposed that charities give the IRS updated information every five years to keep their tax exemptions. Does that make sense?

Yes. The IRS has no idea how many of the million exempt organizations on its books are really active, are still carrying out their original charitable purposes, have changed their charitable purposes significantly without advising the service as they are supposed to do, or are in fact defunct. New York cannot locate nearly 9,000 of its 48,000 registrants. Shouldn’t the government be finding that out?

Senate aides also proposed requiring large groups to give the IRS a detailed description of their annual performance goals.

Is it a bad thing for charities periodically to go through a self-evaluation that they then have to submit to the service and thus also to the state charity regulators? My answer is no. It’s a healthy thing to do.

How have limits on what information federal officials can share with states affected charity oversight?

There have been serious effects.

In July of 1999, we in New York started the first investigation of the Holy Land Foundation, a Muslim charity that was indicted last summer in federal court on charges that it supported Palestinian terrorists. [The group has denied the accusations.]

At that time, I asked the head of the IRS’s exempt-organizations operations for help and never got a response.

Obviously, an international investigation was beyond the ability of a state charities office to do effectively, although we did finally get from Holy Land, after a subpoena process, all of the documents we needed. We were preparing an enforcement action against Holy Land at the time 9/11 occurred.

What do you think of the federal government’s efforts to work with charities during the war on terror?

In 2002, Treasury issued voluntary guidelines for charities and foundations to follow to prevent them from unwittingly providing money or services to terrorists. Since then, both Treasury and the IRS asked for comments about the government’s approach from the philanthropic world, which responded by raising serious concerns.

But the federal government has not taken any formal actions with respect to these concerns. And Treasury has not provided any kind of legal or regulatory backing to the institutional foundations — the Ford and Rockefeller Foundations — that have tried to deal with these issues by putting antiterrorism clauses in their grant agreements. Treasury has simply let the institutional foundations fend for themselves.

Mr. Spitzer has sought requirements for nonprofit groups that mirror parts of the federal Sarbanes-Oxley law for companies. Are these kinds of requirements the wave of the future?

I know from my extensive speaking engagements around New York State that more charities are voluntarily moving in that direction.

Many are establishing independent audit committees, rethinking their relationship with their public-accountant auditors, and creating executive committees that will help them focus on decision making, particularly in the boards that are very large.

They are doing this voluntarily because they understand that the ideas — and the results — are good.

What do you say to small organizations that feel such steps are too expensive?

Many nonprofit groups, particularly social-service and arts organizations that are suffering from a downturn in donations, need to think about ways to enhance their credibility with donors.

It may well be that spending that extra little bit of money to follow these Sarbanes-Oxley-type requirements will prove to be worth it in the long run by showing donors that they are doing the right thing.

ABOUT WILLIAM JOSEPHSON, FORMER HEAD OF THE NEW YORK STATE CHARITIES BUREAU

Education: Earned his bachelor’s degree from the University of Chicago and a law degree from Columbia University.

Previous employment: Before joining the New York attorney general’s office, in 1999, Mr. Josephson was a corporate lawyer in the New York office of Fried, Frank, Harris, Shriver & Jacobson for 33 years. During the Kennedy administration, Mr. Josephson helped create the Peace Corps and served as its general counsel and as special assistant to its director, Sargent Shriver. Previously, Mr. Josephson was Far East regional counsel to the International Cooperation Administration (subsequently the Agency for International Development) in the U.S. State Department.

Charitable interests: Serves as president of the Peace Corps Institute. Has served on the boards of the New York State Historical Records Advisory Board; the New York State Archives Partnership Trust; Mexican American Legal Defense and Educational Fund; and others.

Books he’s read recently: The Recurrent Crisis in Corporate Governance, by Paul W. MacAvoy and Ira M. Millstein, and Governing Nonprofit Organizations: Federal and State Law and Regulation, by Marion R. Fremont-Smith.

Interests: Classical music, particularly modern; plays the baritone horn.