Collapse of Third-Party Giving Platform Leaves Charities Unpaid
Oct 16, 2019
“Leaving New York charitable donors uncertain if their donations will ever make it to their intended cause is unacceptable,” said New York’s Attorney General (OAG) in an October 4th, 2019 press release announcing a lawsuit filed against NYCharities.org (NYCharities), an online fundraising platform. The OAG’s complaint alleges that NYCharities failed to distribute more than $750,000 in contributions to over 125 charities throughout New York. Unfortunately, this case provides a real-life example of the risks associated with making donations indirectly through a third-party intermediary, rather than directly to the charity of your choice.
From Steady Growth to Cautionary Tale
NYCharities was established in the early 2000s. The complaint states that in 2005, the IRS granted NYCharities tax-exemption as a 501(c)(3) public charity, its principal program being to provide an online portal to process contributions from donors to other charitable organizations. In its 2006 financial audit, NYCharities described itself as an organization that “gives donors a centralized site to learn about New York charities, and provides an easy, safe means to give time, money and talent.” The benefit of the portal for non-profits was described as “a unique way to promote programs, to educate new donors and to extend fundraising reach in a way that supplements existing efforts.”
NYCharities “did exactly what it promised” for many years, according to the complaint, operating as an online fundraising portal through which it received donations from the public who designated specific charities as recipients. Donations were made by credit card, with NYCharities taking a processing fee (of 4%, per the complaint) before passing on the donations to the intended recipient charities on a monthly basis. NYCharities’ 2012 financial audit (the most recent available with its New York State annual filings) noted that the organization had “grown steadily, and in this audit year will have received and distributed nearly $8 million in online donations, plus an additional $4 million in ticketing proceeds [for charities’ fundraising events].”
Around 2015 or 2016, however, things at NYCharities began to unravel. At that time, based on the complaint, a number of the long-time members of NYCharities’ Board of Trustees retired and/or resigned from the Board and were not replaced. The complaint states that the only remaining member of the Board is believed to be the President of NYCharities, Cristine Cronin, who is also a named defendant in the lawsuit. As NYCharities’ Board dwindled, NYCharities started to let its annual regulatory filings lapse. NYCharities failed to comply with the OAG Charities Bureau filing requirements for the past three years and failed to file its annual Form 990 tax returns with the IRS for three consecutive years. Three consecutive years of failing to file a required Form 990 results in an automatic revocation of tax-exempt status by the IRS, and therefore, NYCharities had its 501(c)(3) status revoked, effective August 8th, 2018. Despite this, NYCharities continued to operate, according to the complaint, collecting and processing charitable donations through its website portal until it went offline around June/July 2019. What had once functioned as a dependable third-party platform for donors to give indirectly to New York-based charities would soon become the subject of a lawsuit and a cautionary tale for donors nationwide.
Allegations Include Misusing Funds for Personal Purchases
The complaint alleges that NYCharities has not passed on any contributions it collected to the intended recipient charities since the end of May 2019. NYCharities also stopped responding to inquiries from the charities it served. This spurred charities to complain to the OAG Charities Bureau “at a rapidly increasing rate” starting on July 1st, 2019, according to the complaint. It turns out that NYCharities’ sole employee, other than Cronin, left the organization in May 2019, coinciding with when NYCharities stopped distributing donations. The complaint states that without the assistance of that employee, “Cronin is incapable of running the organization and, among other things, forwarding contributions to the intended recipients.” Over 125 charities claiming missing donations of more than $750,000 due from NYCharities had contacted the Bureau as of the date of the complaint, October 4th, 2019. The individual charity claims range from $200 to more than $100,000, according to the OAG’s October and July 2019 press releases.
What it appears Cronin was allegedly capable of doing was misusing NYCharities’ charitable assets for her own benefit. In December 2018, the complaint asserts that Cronin started making “dozens of charges each month” for personal items using ATM and debit cards issued to her for bank accounts held by NYCharities. The complaint notes that some personal charges had also been made before that time. In total, Cronin’s alleged misuse of NYCharities’ funds for her personal benefit add up to “thousands of dollars,” according to the complaint. With approximately $439,000 in the account NYCharities uses to transfer funds to other charities, the complaint states that “it is not clear if this is sufficient to cover all the pass-through contributions that it must transfer to organizations to which the contributions were made.”
Donors Are Encouraged to Give Directly
In a July 31st, 2019 press release announcing the launch of its investigation into NYCharities, the OAG encouraged charities impacted by the failure of NYCharities’ fundraising platform to contact regular contributors and alert potential donors that contributions should be made directly to the charity and not via NYCharities.org. In CharityWatch’s opinion, giving directly to your charity of choice is sound advice for all donors. There are many online charitable giving platforms and mobile apps available for donors to use. Although indirect giving through such third-party platforms can be easy and convenient for donors, it is not without some risks and disadvantages.
As exemplified by what happened at NYCharities, one of the risks donors take when they give indirectly through an intermediary is that their donations may never get passed along to the intended charity. Whether through unintentional error, system or operating faults, or other unexpected events, there is always a risk that donations could get derailed before reaching the charity when a third-party is used as a go-between. Furthermore, in some cases, donors may never known for sure whether their donation actually made it to the intended charity or not. On the other hand, when donations are made directly to the charity, donors can be assured that their contributions were received. Direct giving also avoids the time delays that may be experienced when using intermediaries, which usually transfer contributions on an incremental basis, such as monthly or upon reaching certain dollar thresholds. If you want a charity to have quick access to your contributed funds, giving securely by credit card directly on the charity’s own website is usually the best way to go.
Another disadvantage of making a donation indirectly through a third-party is the added cost. As mentioned in the complaint, NYCharities charged a 4% processing fee. Many other online giving platforms charge administrative or processing fees, as well. Although donors often have the option of covering that fee, as they did on NYCharities.org, so that the charity will still receive 100% of the intended contribution, the fee is still an extra cost for the donor. And if the donor does not cover the administrative fees, then the charity ends up absorbing the cost – receiving $96 instead of $100, for example, given a 4% fee.
Be Cautious If You Do Give Through a Third-Party
Even with the associated risks and disadvantages, some donors may still prefer the convenience of using third-party online giving platforms or mobile apps. If so, CharityWatch recommends donors be cautious and diligent. Research the platform to make sure it has a reputable track record. Also do periodic checks on the governance and accountability of the organization running the platform to try to avoid a situation like what happened with NYCharities.
Some red flags popped up well before NYCharities stopped distributing contributions
to charities, such as the automatic revocation of its tax-exempt status by the
IRS and its dwindling board of trustees. It is unfortunate that the more than
125 charities that have complained of missing donations from NYCharities were
not able to heed those warning signals in time. Now it appears that they must
wait for the resolution of the OAG’s lawsuit to see if they can recover their
losses from NYCharities. Regardless of the outcome, the collapse of NYCharities
can be a lesson, for donors and charities alike, in the risks of giving
indirectly through third-party fundraising platforms.