From the August 2003 Watchdog Report
Rules that Fundraisers
Who Don't Lie Can Pocket 85% of Donations
By Daniel Borochoff, CharityWatch President
Learning the skills of an unethical fundraiser
can start early in life:
Little Freddie finishes a big piece of chocolate cake.
Wanting more and knowing his mom won't allow it, he shrewdly asks
her if he can bring some cake next door for his friend Donny. Mom
readily agrees and while handing Freddie the piece of cake she praises
him for his generosity. As soon as mom walks out of view, Freddie
devours most of the cake but is careful to leave a few crumbs to
bring to his friend.
Freddie, like most kids who have been taught by their
parents not to lie, may feel that he technically did not lie to
his mom because he fulfilled his agreement to give some cake, albeit
only a few crumbs, to his friend. In AIP's opinion, Freddie did
lie, a lie of omission, by failing to inform his mom that he would
eat most of the cake that she was led to believe would be for Donny.
Unfortunately, the Supreme Court may not agree.
According to a recent Supreme Court case, Madigan
v. Telemarketing Associates, it is okay if fundraisers keep nearly
all the money raised as long as they don't falsely claim that a
larger portion of contributions is going to the charity. So fundraisers
can avoid getting into trouble with the law by not stating what
portion of a donor's money goes to the charity. Just as Freddie
can avoid getting into trouble with his mom by avoiding telling
her what portion of the cake he gave to Donny.
The Court does not believe that Telemarketing Associates,
the telemarketer for Vietnow, an AIP "F" rated charity,
was deceiving donors by not mentioning in its solicitations that
it was letting the fundraiser keep 85% of the proceeds. Between
1987 and the end of 1995, the telemarketer was allowed to keep more
than $6 million of the $7.1 million raised. Please see "Should
Telemarketer Disclose it Keeps 85% of Donations?" in the March
2003 AIP Charity Rating Guide.
The Court ruled that the fundraiser must knowingly
provide false information with the intent to deceive to be convicted
for fraud. Proving intent to deceive is very difficult and expensive
and will discourage most regulators, even with good evidence, from
enforcing fraud statutes. For example, if mom finds out about little
Freddie's cake stunt, it would be difficult to prove intent to deceive.
Freddie could defend himself by saying that when he asked for the
cake for his friend he intended to give it to him but the smell
of it was so alluring he could not resist consuming most of it himself.
The Supreme Court sent the case back to a lower Illinois
court not because the telemarketer was keeping most of the donations
and not disclosing this important fact to donors but because of
alleged fraudulent statements made over the phone including "90%
or more goes to the vets" and that donations would not be used
for "labor expenses." Other alleged phone statements claimed
that contributions would be used for "food baskets given to
vets [and] their families for Thanksgiving," paying "bills
and rent to help physically and mentally disabled Vietnam vets and
their families" and "rehabilitation [and] other services
for Vietnam veterans." This was promising a lot considering
Vietnow only spent $118,000, or 4% of its $3,173,000 budget, on
program services in its 2001 financial statements.
This case serves as an important warning to
donors to be very careful when responding to telemarketing solicitations.
Since regulators may only be able to protect donors from the most
extremely dishonest telemarketing practices, donors need to make
sure that they know how much of their contribution will go to a
charity. Since telemarketers may not reveal the truth, AIP recommends
that donors ask for and review a charity's telemarketing contract
and/or consult AIP's fundraising ratios to see if the charity is
receiving a substantial amount of the contributions raised.
From the April 2003 Watchdog
Should Telemarketer Disclose
That It Keeps 85% of Donations?
Court to Decide If Charity Can Continue To Pull Wool Over Donors
U.S. Supreme Court has agreed to hear a case filed by the Illinois
Attorney General against Telemarketing Associates, a professional
phone solicitor of an AIP F rated charity, Vietnow.
The A.G.s court filing points out that donors are asked to
give money for specific purposes such as food, shelter and
financial support for hungry, homeless and injured Vietnam War Veterans,
yet 85% of the funds raised go to the telemarketer. In every contract
over the past 13-years the charity agreed to let the fundraiser
keep 85% of the proceeds. The charity also let the fundraiser maintain
control of the list of donors and did not disclose them to Vietnow.
This arrangement is not fair for a charity since over time it becomes
less expensive to resolicit an identified group of supporters. Also,
a charity should not give up control of its donor list in case it
wants to improve by switching fundraisers or soliciting in-house.
The A.G. has sworn testimony that donors would not have made
such contributions if they had known that at most only 15% of their
donations actually went to Vietnow. The A.G. believes that
its a fraudulent misrepresentation for a professional fundraiser
to say that a contribution will be used for charitable purposes
but keeps the vast majority of contributions raised.
The telemarketers court filing states that its
solicitations did not misrepresent material facts or claim that
most of the money raised would go to Vietnow and that it should
not be required to disclose the percentage spent on fundraising
because it would make it very difficult to raise money. The telemarketer
points to a trilogy of cases in the 80s that limit state regulation
of fundraising, as reasons why its practices are legal. According
to the telemarketer, these cases set precedents that disallow state
regulators from requiring solicitors to spend a minimum percentage
on charitable programs or a maximum on fundraising costs, and could
not compel fundraisers to disclose at time of solicitation what
percentage of donations raised were distributed to a charity.
Many charities are afraid that should the A.G. prevail
regulators will start to unfairly dictate unreasonable levels of
fundraising costs, particularly for new, small or unpopular groups
that have good reasons for higher fundraising expenses. It is AIPs
opinion that these fears are unfounded and that the Illinois A.G.
and the other state and federal regulators that have signed on to
this lawsuit are attempting to stop only those fundraisers that
are severely violating the public trust. In 2001 Vietnow raised
$3.5 million yet spent only $118,000 or 4% of it budget on program
services. It is a disgrace to our brave veterans that Vietnow, a
long-established charity raising money for one of Americas
most popular causes, continues year-after-year to give only a pittance
of its contributions to help veterans.