How to Spot a Nonprofit Crook with the1-7-22 Method

This week, the front page of The New York Times featured a story about criminal charges filed against a family who ran 4 cancer charities -- the biggest The Cancer Fund of America -- that bilked over $187 million (!) from donors for their personal use.  As a lawyer who advises a lot of nonprofits, I’ve witnessed and investigated several crooks.  It’s just a fact: the nonprofit sector attracts its fair share of criminals who have no problem using a fake mission -- like helping children with cancer -- to steal. 

How can you avoid being swindled?  First of all, if you receive a cold call from a charity, treat it like any other telemarketer call -- because that’s what it is.  The person on the other end is being paid a hefty commission to “sell” you on their product and wrangle your dollars from you.  They may be raising money for a charity with 501(c)(3) status, but 99.99999% of reputable charities never use telemarketers.  While not illegal, using them does not comply with accepted nonprofit best practices.  

For any tax-exempt nonprofit (other than churches and religious organizations), anyone can check out their annual required filing -- the IRS Form 990 -- online and for free at www.guidestar.org.  You have to register for a free account, but it only takes a few minutes and is well worth it.

If the nonprofit has not filed a Form 990 over the past three years, move on.  If they have, click on the most recent year’s report.  Now I know that anyone who enjoys reading an IRS form is a candidate for a good intervention, so I am going to simplify things by telling you where to look for red flags. 

First, check out page 1, lines 12 and 18, which tell you the revenue and expenses for the recent year and the prior year.  This will show how big the charity is in terms of dollars.  Also, it gives a financial health snapshot. Did expenses exceed revenues significantly for the years shown?  How do revenues and expenses compare between the two years?  

With Cancer Fund of America, expenses exceeded revenues for both years.  Most strikingly though, revenue for the current year was $8M versus $29M for the prior year.  Something seriously wrong must be happening for revenue to have dropped $21M in one year.  Red Flag #1.

Now go to page 7, which lists the officers and directors, along with the amounts paid to them.  Do you see many of the same last names listed as officers and directors?  How do the officer compensation levels compare to the total revenue reflected on page 1?  How big is the board and are many directors  compensated? 

With Cancer Fund of America, page 7 reveals that there are only three directors listed -- the statutory minimum in Tennessee.  Ordinarily a healthy $8M nonprofit will have at least seven to ten directors.  With three, if one person dies or resigns, the nonprofit is immediately our of compliance.  Only three directors is Red Flag #2.

Lastly, turn to page 22, which lists the people and entities contracted for fundraising.  If the nonprofit uses telemarketers for fundraising, they will be listed here.

Looking at Cancer Fund of America’s page 22, they contracted with six different telemarketer fundraisers who retained 85% of the money raised as commission!  One firm alone kept $2.43 million of the $2.85 million it raised!  That is a staggering Red Flag #3.

Not all nonprofits will be this easy to evaluate, but you can protect yourself from being victimized by remembering to check out pages 1, 7 and 22 of a charity’s Form 990 before giving.