Preventing Fraud in Social-Network Fund Raising: a New Challenge

Social-networking sites like Twitter and Facebook are part of a new frontier for charities looking to use low-cost technology to appeal to donors.

But a fraud case filed in Hawaii illustrates the unseen downside of giving on these networks—and points to why state regulators believe they will soon need to step up oversight of social networks to protect donors.

Anthony Marasia, an animal-rights activist in Hawaii, solicited donations for a group called Love the Animals using networking sites like Facebook and Myspace from 2007 until last December. But it turns out Love the Animals isn’t a registered charity and does not have tax-exempt status, according to a complaint filed last month by Hawaii’s attorney general.

And the contributions—some $16,000 via PayPal alone—went into Mr. Marasia’s own bank account and were used primarily for personal expenses like drinks at Jamba Juice, according to Hugh R. Jones, Hawaii’s supervising deputy attorney. (Mr. Marasia could not be reached for comment.)

The promise and pitfalls of social networks were also highlighted in the immediate response to the tsunami that devastated northeast Japan this month. Within hours, a call for people to send money to the American Red Cross via text message became one of the most popular topics on Twitter. But the Federal Bureau of Investigation also quickly warned consumers to be wary of fraud and to verify the legitimacy of charities before entering credit-card information over the Internet.

Bob Carlson, an assistant attorney general in Missouri who oversees charities, is among the growing number of state regulators closely scrutinizing the changing fund-raising landscape to determine whether new laws are needed to protect donors from fraud. “The scam artists will follow the legitimate actors in,” Mr. Carlson says.

Limited Awareness

State regulators are meeting in New York this month at a conference on the intersection of technology and charity fund raising. At the conference, which is closed to the public, regulators will revisit the “Charleston Principles,” a set of guidelines governing Internet solicitations across state lines.

The nonbinding principles (named for Charleston, S.C., where they were drafted in 2001 by the National Association of State Charity Officials) and state laws that focus on Internet solicitation came into existence well before the rise of what many describe as the “wild west” of social networking.

Watchdogs say these networks have the potential to become breeding grounds for a new wave of scams, and regulators want to step in before con artists take advantage of unsuspecting donors.

Consumers who have learned to avoid “phishing” e-mail schemes and bogus Web sites are not yet wary enough about the potential for fraud on social-networking sites, says Robert Ottenhoff, president of GuideStar, the online repository of financial information on charities. “It’s new and exciting,” he says. “I think the public is more vulnerable to being taken advantage of with social media.”

And criminals may find charitable solicitations especially appealing because it is somewhat easier not to get caught, notes Judy Chang, a senior manager at PayPal who oversees the company’s nonprofits division.

“Because nonprofits are soliciting funds and there’s no exchange of goods or services, there’s more opportunity for fraud than if they were a merchant who shipped out goods,” Ms. Chang says. “When you buy something from a retailer you expect to receive the merchandise. When you make a donation to a nonprofit organization, you don’t receive any goods or services in exchange.”

PayPal, which processed $1.8-billion for nonprofit organizations in 2010, 50 percent more than in 2009, requires charities to go through a more rigorous sign-up process than either businesses or consumers are required to do.

Vetting Charities

The social-networking sites say they are aware of the risks of fraud and have taken steps to mitigate those risks.

Networking sites like Jumo, Crowdrise, and Causes, a company that runs fund-raising efforts on Facebook, all rely on the nonprofit group Network for Good to help vet the charities that are raising money on their sites. Network for Good, in turn, relies on GuideStar data, which reveal whether an organization has charity status from the Internal Revenue Service.

Karsten Robbins, chief executive of FirstGiving, a for-profit company that allows people to raise money online for charities, says organizations that receive donations through the site must be included in the lists of tax-exempt organizations maintained by both the Internal Revenue Service and GuideStar. Mr. Robbins also says the very structure of social networks—people are generally giving in response to a pitch from someone they know—helps to avoid fraud.

“It’s not an appeal that’s coming out of nowhere,” Mr. Robbins says. “I call it the network policing itself.”

Mr. Robbins says he seeks out conversations with state regulators to try to make the case that his site is more like a “utility” than a paid solicitor.

“You’re using our tools to share your personal passion for a particular nonprofit and raise more money for it,” he says.

Requests for ‘Tips’

State regulators say that their challenge is to avoid taking steps that would inhibit the growth of online fund raising. The key is to make sure legitimate organizations can make use of these networks while weeding out those who are using them with ill intent.

“The last thing we want to do is discourage charitable giving,” Mr. Carlson says.

The Charleston Principles, which focus on solicitations across state lines, suggest that a group could be required to register as a solicitor in a state if it does anything more than process transactions on behalf of a charity—especially if it receives a fee for the broader services it provides to the charity.

Sites like Jumo, a nonprofit, and Causes, a for-profit company, suggest that donors provide “tips” worth as much as 15 percent of a gift to help cover their expenses. FirstGiving takes 5 percent of each gift.

“There’s something in it for them,” says Mr. Jones, in the Hawaii attorney general’s office. “They’re not doing it out of the goodness of their heart.”

Colorado requires paid solicitors to register with the state and file notices before embarking on specific campaigns.

Chris Cash, who oversees charities for Colorado’s secretary of state, says he will “look closely” at networking sites to see if they should be required to register. “If they’re charging some kind of fee above and beyond the processing fee, that might open up the door to defining them as a paid solicitor,” Mr. Cash says.

But doing so could turn into a headache for both the sites and regulators without yielding much useful information about fraud.

Jeffrey Even, deputy solicitor general in Washington State, says it might make more sense to require those doing the actual solicitations to register. “The charity or commercial fund raisers who are using Facebook to raise money could very well be subject to registration requirements,” he says.

A Matter of Trust

The increasing interest of regulators is not a topic that some social-networking sites are eager to discuss.

Officials at Jumo, which was started in November by Chris Hughes, a co-founder of Facebook, and bills itself as a “social network connecting individuals and organizations who want to change the world,” did not return numerous calls or e-mail messages. Officials at Causes and Crowdrise declined phone interviews but did answer some questions by e-mail.

Officials at Network for Good also declined an interview, saying they could not get clearance from their lawyers to speak.

Ken Berger, president of Charity Navigator, a watchdog group, says the networking sites put too much emphasis on celebrating nonprofits and don’t do enough to arm consumers with information.

“Trying to engage donors is great, but it better not be all that you’re doing,” Mr. Berger says. “The public is getting a disservice if you’re not telling them the difference between the good, the bad, and the ugly. The potential for fraud and abuse is just ignored.”

Text-Message Concerns

A leader in a similarly new type of fund raising—text messaging—says thorough vetting of charities is crucial.

Jim Manis, founder of the Mobile Giving Foundation, which helps charities establish text-message donation campaigns, says his organization requires charities to go through a 32-step application process before they are approved to seek donations through a wireless carrier. The process requires some control, he says, because most people respond to text messages within 15 minutes and so might give to a charity without inspecting the group’s financials or effectiveness. “It’s viral, it’s powerful, it’s an impulse mechanism,” Mr. Manis says.

He worries that the “philosophy of enablement” that predominates among social-networking sites will carry over to text messaging as the new ways of giving converge.

“If carriers say anybody can come play, then you’re going to end up in trouble,” Mr. Manis says.

In addition to making sure consumers have adequate information about charities raising money on networking sites, regulators also want to make sure that charities retain control over their own fund-raising strategies.

In Colorado, one charity that had pledged that it would not solicit gifts was surprised to find a “charity mall” doing exactly that on its behalf. The state’s attorney general intervened and asked the intermediary organization to remove the charity from its portfolio.

“A charity has a right to understand who is raising funds on its behalf and to have an understanding of the terms,” Mr. Cash says. “Of all the money being raised, how much is the charity getting, and are they okay with it?”

Online Sleuthing Skills

These and other issues are likely to come up at the meeting of regulators in New York this month. Missouri’s Mr. Carlson argues that investments in new technology and employees with online sleuthing skills might have a bigger impact than new laws or regulations.

But Hawaii’s Mr. Jones points out that a law requiring social-networking site operators and payment processors to report any irregular activity involving charities might have aided him in the Love the Animals case.

PayPal froze the account used by Mr. Marasia for Love the Animals after noticing suspicious activity, says Mr. Jones. PayPal declined to comment on the case, citing privacy concerns.

Hawaii’s charitable regulators didn’t receive complaints about Love the Animals until three to four months later, Mr. Jones says—which he says may have allowed Mr. Marasia to swindle more unsuspecting donors.

“In terms of additional regulatory requirement, it would have been helpful if PayPal had been required to notify us,” Mr. Jones says.