Fraud Investigations Raise New Questions for Beleaguered Red Cross

The American Red Cross faces new questions about its management and operations after it disclosed last month it is investigating 5,500 allegations of fraud and mismanagement related to Hurricane Katrina relief efforts.

The Red Cross said 50 percent of the cases could involve criminal activity. As part of the inquiry the group has fired three administrators who worked in the Gulf Coast after Katrina struck.

According to The New York Times, which first reported the dismissals, two of the fired employees oversaw the group’s emergency kitchens and shelters in Louisiana.

John F. (Jack) McGuire, the organization’s interim chief executive, said he was not sure if more Red Cross personnel would be let go. In cases when it appears the law has been broken, he said, the charity has turned the information over to the Federal Bureau of Investigation, state attorneys general, and local police departments.

“Any time there might be criminal activity, we call the authorities,” he said. “We take this really seriously. This is a matter of trust between our donors and us.”

So far, the Red Cross has recovered $2-million in Katrina funds.

But despite such efforts, the Red Cross has done little to improve its public image, said experts in public relations. By disclosing the severity of its abuse investigation only after the news media reported it, the group has gotten another black eye.

According to Frank Mankiewicz, vice chairman of Hill and Knowlton, a public-relations company, in Washington, there are rules organizations should follow in a crisis, and the “Red Cross seems to be breaking all of them.”

“The rules are: Tell the truth, tell it all — don’t dribble it out — and tell it now,” he said.

Government Scrutiny

The revelation of widespread misconduct during Katrina also has emboldened government regulators who are looking at the relief group.

“To us, it really highlights the underlying point that there are issues in terms of governance and transparency and openness and culture that really need to be looked at in a serious manner by the Red Cross,” said a senior staff member of the Senate Finance Committee, which is chaired by Sen. Charles E. Grassley, a Republican from Iowa.

Mr. Grassley started examining the Red Cross in December after its chief executive, Marsha J. Evans, resigned. He has accused the $3-billion nonprofit group’s board of doing a poor job overseeing the charity, and says the organization has overstepped its Congressional charter and created a culture that cares more about its image than fixing long-standing problems (The Chronicle, March 9).

In addition to Mr. Grassley, last month Louisiana Attorney General Charles C. Foti Jr. said he would start an inquiry into possible abuses by the Red Cross.

Mr. Foti is also investigating the Humane Society of the United States, in Washington. The state attorney general’s office said it has received numerous complaints from Louisianans that the organization rescued their pets, but then gave them to other families around the nation. In some instances, the new owners have refused to return the animals.

The Humane Society said it reunited many pets displaced by Katrina with their owners, but that its efforts were hampered by several poor decisions by the state, such as closing a large temporary animal shelter in Gonzales, La., only a few weeks after the storm hit.

“Many shelters extended their normal holding periods for Katrina animals, but animals whose owners could not be found were adopted into new homes,” the charity said in a statement.

Kris Wartelle, a spokeswoman for the attorney general, said Mr. Foti has received complaints about other nonprofit groups and may widen his investigation. “We want to make sure charities are using their donations the way they said they would,” she said.

Theft of Relief Supplies

As for the Red Cross, the Louisiana attorney general is focusing on volunteers who may have stolen relief supplies and has asked the group to provide the names and telephone numbers of all its employees and volunteers who worked in the state after the hurricane came ashore. The Red Cross said it is cooperating with the request.

According to Mr. McGuire, the Red Cross leader, the charity is working quickly to fix problems before hurricane season starts June 1. Aside from preventing further misconduct, the organization is also forming new partnerships with small churches and local charities in disaster-prone areas. Mr. McGuire said he wants to avoid the problems the Red Cross experienced after Katrina when it failed to help minorities in some parts of the Gulf Coast.

In addition, Mr. McGuire has proposed larger changes, such as asking Congress to revise the group’s charter to cover the work it does collecting and selling blood and to allow the relief group to be more “flexible” in its mission. If the charter “gives us the flexibility to keep upgrading it as the American people change and their needs change, that to me is a better world to be in,” he said.

Mr. McGuire, who is a candidate to become the group’s permanent chief executive, admits, though, that the Red Cross requires an overhaul that will take years.

“We need to look out at the people we serve and we need to design practices and programs and behaviors to best support them, not a bureaucracy that supports itself,” he said.

One of the key questions facing the Red Cross is how to fix what many say is a flawed governance structure. Last month the charity held a meeting at its headquarters in Washington of its board members, charity leaders, and experts in management practices to discuss the problem.

The Red Cross closed the meeting to the news media, saying it wanted to foster a “frank discussion” between the participants.

In an interview with The Chronicle, Jay W. Lorsch, a professor at the Harvard Business School who spoke at the event, said he encouraged the Red Cross’s Board of Governors to ask Congress to reduce the number of its members. Congress requires that the board have 50 members.

However, Mr. Lorsch said Red Cross board members were divided over what adjustments need to be made. “There were some who thought things should change and some who thought things maybe shouldn’t change,” he said. “That’s a debate they need to have.”