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Conflicts of Interest Are a Red Flag for Donors: Some Charity Insiders May Take Unfair Advantage of Their Position

Published 02/20/2018

 

The term “conflict of interest” has been seen and heard quite often in the political news arena over the last year or so. President Trump’s potential conflicts of interest, in particular, have been hotly debated given the substantial personal business interests of the Trump family and many of the President’s past and present White House advisers and cabinet members.

The recent media attention given to conflicts of interest may have a political lean, but managing conflicts of interest has always been a critical part of good governance for charities and other nonprofits. The existence of conflicts of interest at a charity, or even the appearance thereof, should raise a serious red flag for donors. Therefore, it is important for donors to understand the concept of conflicts of interest, and to be able to recognize when a charity may be troubled by such conflicts.

Conflicts of Interest: What Are They and How Can Donors Be Warned?

A conflict of interest arises when a board member, officer, or key employee has a personal interest that is, or appears to be, in conflict with the interests of the organization, whereby that person may be influenced by his or her personal interest when making decisions for the organization. The underlying notion is that the board members and officers serving an organization have a “duty of loyalty” that requires them to make decisions that they believe are in the best interests of the organization, not for the benefit of themselves or a third party. Conflicting interests may be either financial or nonfinancial in nature, although it is often financial interests that raise the most concern.

While it may be unrealistic for organizations to avoid every possible conflict of interest situation, nonprofit boards need to identify and follow a process for effectively handling conflicts of interest. To follow good governance principles, nonprofits “should adopt and implement policies and procedures to ensure that all conflicts of interest (real and potential), or the appearance thereof, within the organization and the governing board are appropriately managed through disclosure, recusal, or other means,” according to guidance provided by the Independent Sector, an association of nonprofits. If board members or anyone else in a position to influence the decisions of an organization find that they, or someone they are close with, might stand to gain (or lose) from the organization’s action, they should be required to disclose that situation. The more board members openly discuss potential conflict of interest issues, the better prepared the organization will be to handle any conflicts that may arise. A culture of accountability for conflicts of interest should be established, one that requires disclosure and includes consequences for non-compliance of policies.

Unfortunately, federal laws do not require nonprofits to have a conflict of interest policy although some states, such as New York, have adopted policy or procedure requirements for managing conflicts. Charities and their board members and officers are, however, subject to the federal tax law doctrines of “private inurement” and “private benefit” that prohibit nonprofits from being organized and operated for personal gain. Additionally, individuals in a position to exercise substantial influence at a charity are subject to tax penalties if they are found to be involved in a transaction that results in an excessive financial benefit for themselves or their family members. The public charity “excess benefit transaction” penalties include a 25% excise tax on the value of any excess benefits and an additional 200% tax if the excess benefits are not repaid to the charity.

To find out if a charity does maintain a conflict of interest policy, donors can reference its annual IRS Form 990 tax filing. In the Form 990, charities must report whether or not they have a written conflict of interest policy, as well as if annual disclosure of potential conflicts is required and if compliance with the policy is “regularly and consistently” monitored and enforced. The Form 990 also requires the reporting of family and business relationships among any board members, officers, or key employees, in addition to any financial transactions between the organization and interested persons. Therefore, donors can use the disclosures in a charity’s Form 990 filing to alert themselves to some of the warning signs for possible conflicts of interest, such as undue family or related party influence within the board of directors and the existence of business dealings or other financial transactions that directly benefit board members, officers, or key employees.

Although avoiding conflicts of interest is a key part of good governance, not all nonprofits manage conflicts of interest with the seriousness that they should. Even nonprofits that report having a conflict of interest policy may not actually be enforcing that policy in practice.

How outrageous can some of the conflicts of interest within a charity really be? You can judge for yourself from the three real life examples below.

(1)  The Sekulow Family: Turning “Law & Justice” Charities into Personal Millions

The American Center for Law and Justice or “ACLJ” may be a familiar name to some donors, but there are actually two different charities that use that name to raise funds – American Center for Law and Justice and Christian Advocates Serving Evangelism. The charities each file their own Form 990 with the IRS and issue separate audited financial statements, but as the name confusion suggests, the charities otherwise are interconnected in a number of ways. In particular, one family is at the heart of those connections, and in what appears to be an outrageous example of conflicts of interest, that family and its businesses have used the ACLJ charities to reap millions in personal benefits.

The American Center for Law and Justice (ACLJ - National) describes that it “is committed to ensuring the ongoing viability of freedom and liberty in the United States and around the world.” ACLJ - National was founded in 1990 by the televangelist Pat Robertson, who continues to serve as its board president. Christian Advocates Serving Evangelism (CASE), which was formed in 1986, uses “American Center for Law and Justice” as its “doing business as” name. The mission of CASE is to be “specifically dedicated to the ideal that religious freedom and freedom of speech are inalienable, God given rights.” CASE and ACLJ - National have a financial relationship with each other that includes a grant agreement requiring CASE to make weekly payments to ACLJ - National. The grants of approximately $18 and $20 million ACLJ - National received from CASE represented 93% and 91% of ACLJ - National’s total revenue in its 2016 and 2017 fiscal years (ending March 31st), respectively. ACLJ - National’s heavy reliance on CASE for funding puts CASE in a position to wield strong influence over ACLJ - National, and the family that runs CASE, the Sekulow family, has definitely taken advantage.

Jay Sekulow and three members of his immediate family (his wife and two sons) comprise CASE’s entire board of directors, according to CASE’s 2016 tax filing. Moreover, three out of the four CASE officers in 2016 were Sekulows, including Jay, the President, and Jay’s brother, Gary Sekulow, the Chief Financial Officer/Chief Operating Officer (CFO/COO). In addition to Pat Robertson, ACLJ - National reported only two other board members, per its fiscal 2017 tax filing, one being Jay Sekulow, who is also Chief Counsel at the behest of Robertson. Similar to his position at CASE, Gary Sekulow is reported as the COO/VP of Finance at ACLJ - National in fiscal 2017, essentially giving him control over the finances of both charities. Additionally, Gary’s son, Adam Sekulow, works at both CASE and ACLJ - National in a fundraising position, as Director of Development Services and Director of Major Donors, respectively, based on each charity’s most recent tax filing.

The Sekulow family holding major positions of influence within and between the two ACLJs puts the charities in a risky position concerning potential conflicts of interest, and unfortunately for ACLJ donors, the Sekulows appear to be leveraging their control over the charities to great personal benefit. Furthermore, with CASE and ACLJ - National each operating as separate legal entities, the conflicts of interest involving the Sekulow family and their personal business interests are more difficult for regulators and potential donors to track. Even going back to late 2005, a reporter for the Legal Times exposed how Jay Sekulow “through the ACLJ and a string of interconnected nonprofit and for-profit entities, has built a financial empire that generates millions of dollars a year and supports a lavish lifestyle…” Noting the potential confusion created by the two ACLJs, the Legal Times article reportedly states:

Certain solicitations mention CASE in fine print as an entity ‘doing business as’ the ACLJ. Sekulow confirms that checks resulting from these mailings are routed to CASE. Internal critics say that the lesser-known CASE is where Sekulow reports most family-related transactions and other financial information that would be unflattering if revealed on the IRS forms filed by the more visible ACLJ.

Over ten years later, the compensation the Sekulow family has continued to receive from the charities, as well as the on-going related party transactions with Sekulow-owned business interests that have occurred, indicate that the Sekulows have greatly profited from their “ACLJ” conflicts of interest going unchecked for an extended period of time.

The recent financial audits and tax filings of CASE and ACLJ - National provide a glimpse into the extent to which the Sekulow family has personally benefitted from the charities on an annual basis:

  • A media production company owned by Jay Sekulow was paid about $1.2 million by CASE in 2016, and a law firm where Jay is a senior partner and 50% owner was paid about $5.3 million by ACLJ - National in its fiscal year-ended March 31, 2017.
  • Jay Sekulow was paid about $77,000 in salary and benefits by CASE in 2016, and CASE also paid his son, Logan, salary and benefits of about $151,000.
  • Gary Sekulow (Jay’s brother) and Gary’s son, Adam, are each compensated by both CASE and ACLJ - National. Gary received about $955,000 in total salary and benefits in 2016 ($651,000 from CASE & $304,000 from ACLJ - National), and Adam received about $291,000 ($216,000 from CASE & $75,000 from ACLJ - National). Adam enjoyed a 61% increase in his compensation from ACLJ - National between 2015 and 2016 (from $46,768 to $75,364).
  • A radio and television agency owned by Gary Sekulow’s wife, Kim, was paid over $916,000 and $777,000 in radio agency fees by CASE in 2016 and 2015, respectively.

Based on just the single fiscal year-end reporting period of December 31, 2016 for CASE and March 31, 2017 for ACLJ - National, the Sekulow family and their personal for-profit business interests were reportedly paid a combined total of over $8.9 million by the two charities.

Jay Sekulow’s name may be ringing a bell for another reason – he joined President Trump’s team of personal lawyers in June 2017. Following that news, The Guardian and The Washington Post ran separate reports exposing how the Sekulow family has long been personally profiting from the ACLJs. The Guardian notes: “In addition to using tens of millions of dollars in donations to pay Sekulow, his wife, his sons, his brother, his sister-in-law, his niece and nephew and their firms, Case [Christian Advocates Serving Evangelism] has also been used to provide a series of unusual loans and property deals to the Sekulow family.” Some of these “unusual loans and property deals,” according to The Guardian, include:

  • CASE paid over $700,000 to a company owned by Jay Sekulow to sublet office space from 1998-2002 while Sekulow’s company paid only $462,000 in rent for the space. (CASE attributes some of the $700,000 amount to payments made for telephone and utility bills, not just rent.)
  • In 1998, Jay Sekulow’s wife, Pam (also a CASE board member and officer), bought a “retreat property” in North Carolina from CASE with the help of a $245,000 loan from the charity. CASE ended up forgiving almost $218,000 of what Pam owed on the loan, accounting for it as her compensation. The Sekulows then remortgaged the property at market value and continue to own it.
  • In 1999, CASE loaned Jay Sekulow almost $210,000. In the following years, the CASE board of directors forgave over $211,000 of the loan plus interest (totaling more than the original loan amount), classifying it as his compensation.
  • CASE used $1.5 million of its funds to purchase a townhouse in Washington. Jay Sekulow’s son and CASE board member, Jordan, has used the townhouse as a residence. Another property owned by CASE was leased to Jay Sekulow’s parents for several years. Sekulow’s parents paid CASE $1,550 per month to rent the house, based on an estimate of “fair market rates.”

The Guardian determined that since 2000, the ACLJs have “steered more than $60m to Sekulow, his family and their businesses [emphasis added].”

Although the Sekulow family has, at least to this point, seemingly gotten away with directing tens of millions of dollars to themselves through the two ACLJ charities, their brazen flouting of accepted conflicts of interest standards could be in jeopardy. The June 2017 reporting by The Guardian and The Washington Post has caught the eye of the attorneys general in the states of New York and North Carolina, with the latter calling the reports he has read “troubling,” according to The Guardian. We will have to see if the investigations by those attorneys general will finally result in consequences for the Sekulows and the ACLJ charities over which they have reigned for so many years.

(2)  Up to No Good at Goodwill Omaha: Related Party Contract Conflicts Abound

The Omaha World-Herald investigated “the web of potential conflicts” at Goodwill Industries Omaha, which has a mission to change lives and strengthen communities through education, training and work. The “potential conflicts” involve millions in no-bid contracts being awarded to parties that have personal ties to people in leadership positions at Goodwill Omaha. (Please note that CharityWatch rates only Goodwill Industries International (the National Office), which does not include the autonomously-operated local Goodwill organizations, such as Goodwill Omaha. Each local, community-based Goodwill has its own separate board of directors and does its own separate financial reporting.)

In November 2016, the World-Herald reported that Goodwill Omaha “has awarded over the past decade more than $5 million in no-bid contracts to two major Omaha companies whose executives sit on the nonprofit’s board…” Those two companies also have a connection to the ex-CEO of Goodwill Omaha, Frank McGree. McGree’s “close friend,” Joe Lempka, is an executive at Peter Kiewit Sons’ Inc., which has been awarded $4.1 million in no-bid contracts to build the new Goodwill Omaha headquarters and several Goodwill retail stores. Even more outrageous, McGree’s own daughter is an employee at RDG Planning & Design, which has received over $900,000 from Goodwill Omaha for design work related to the new headquarters and several retail stores. (Frank McGree resigned from his CEO position in late October 2016, just days after the World-Herald exposed the relatively high levels of “corporate-style” executive pay at Goodwill Omaha.)

Goodwill Omaha ex-employees also told the World-Herald about “at least four other cases” of no-bid contracts being awarded to family members and friends of Goodwill Omaha’s leadership team. Two of the ex-employees said “they were specifically instructed by their bosses not to bid out contracts.” Overall, the World-Herald reportedly found that Goodwill Omaha has done business with the companies of eight of its recent board members.

Goodwill Omaha defended itself to the World-Herald, stating that its policy does not call for projects to be bid out if they are “ongoing services,” such as the construction and design services provided under the Kiewit and RDG contracts connected with the board and ex-CEO. With respect to the “at least four other cases” of no-bid contracts cited above, Goodwill Omaha provided a statement to the World-Herald explaining that those “decisions were made by people who are no longer employed by Goodwill,” and that it would address its contract bidding guidelines as “part of our evaluation of how to move forward.” The board members of Goodwill Omaha also told the World-Herald that they have followed applicable laws and Goodwill Omaha’s conflict of interest policy, including recusal from voting on contract decisions involving their company. If that is the case, Goodwill Omaha and all of its related party contracts exemplify the limitations of a conflict of interest policy, even when board members claim the policy is being followed.

(3)  “Naughty or Nice?”: Wreaths Across America Funds Its Related Wreath Company

Each holiday season the charity Wreaths Across America (WAA) coordinates the placement of wreaths on the cemetery headstones of veterans. The annual wreath-laying tradition started in 1992, long before WAA was founded, when Morrill Worcester, owner of Worcester Wreath Company of Harrington, Maine, arranged for his company’s 5,000 wreath-surplus at season’s end to be placed in one of the older, less visited sections of Arlington National Cemetery. About 15 years later, the Worcesters, along with veterans and others who had helped with their annual wreath-laying tradition at Arlington, formed WAA in 2007 “to continue and expand this effort, and support other groups around the country who wanted to do the same.”

Karen Worcester, the wife of Worcester Wreath’s Morrill Worcester, has been the executive director of WAA since the start. One of Morrill and Karen’s daughters, two of their daughters-in-law, as well as a former senior Worcester Wreath employee and his then-wife, also joined the initial WAA board of directors, according to a December 2015 article in The Wall Street Journal (WSJ). The year after WAA was formed, tens of thousands of volunteers helped place over 100,000 wreaths on the graves of veterans at over 300 locations, and the number of wreath placements has been growing ever since. In 2017, more than 1,565,000 wreaths were placed at 1,422 locations, including Arlington National Cemetery where all 244,700 markers received a wreath.

To fund the millions of cemetery wreaths that have been placed by WAA over the years, the charity reports receiving “wreath sponsorships.” Each sponsored wreath costs $15, with $10 going to WAA for its operations, including the procurement and delivery of wreaths, and $5 getting “paid back” to partners in WAA’s “fundraising program,” such as American Legions, local VFWs, Civil Air Patrol Squadrons, and Scouts, according to WAA’s website (as of January 2018). Wreath sponsorship revenue totaled approximately $10.5 and $7.7 million for WAA’s fiscal years-ended June 30, 2016 and 2015, respectively, according to its most recently available tax filings. It turns out, however, that the generosity of the wreath sponsors has also financially benefitted the Worcester family – the same family who founded, and continues to run, WAA.

Shortly after WAA started in 2007, Worcester Wreath Company officials proposed during a board meeting to supply WAA with “balsam fir wreaths with red American-made bows for $9 each,” per the WSJ. The WAA board, without discussion with or voting by Worcester family board members, then agreed that Worcester Wreath “would continue indefinitely as sole supplier unless outside board members determined it didn’t offer a ‘reasonable and fair price,’ according to the records [provided to the WSJ by WAA] and Karen Worcester,” the WSJ reported. Ever since, WAA has bought the wreaths it places on the gravesites of veterans exclusively from Worcester Wreath, which continues to be owned by the Worcester family.

According to the WSJ, prior to 2009, Worcester Wreath generated almost all of its annual revenue from sales to L.L. Bean. The retailer had been ordering $6.7 million a year in wreaths, but that came to a stop after the companies had a dispute over unsold inventory in 2008. (A judge would eventually award Worcester Wreath more than $650,000, per the WSJ.) Since losing L.L. Bean’s business, WAA has become Worcester Wreath’s most important customer, with sales to the charity making up 75% to 80% of its revenue, Rob Worcester told the WSJ for its December 2015 story. WAA’s tax filings report that the charity’s wreath purchases from Worcester Wreath have grown from about $1 to $2 million a year in 2009 and 2010, to more than $6 million a year in 2015 and 2016, almost reaching the reported level of L.L. Bean’s annual orders before the 2008 dispute.

Wreaths Across America does report having a conflict of interest policy and an independent board of directors that makes the charity’s purchasing decisions, including wreath procurement, without the input of Worcester family members and ex-company employees, who recuse themselves from those discussions. It also appears that Karen Worcester, WAA’s executive director, does not vote on any matters concerning the charity as she is described on WAA’s website as a “non-voting” board member. Regardless, it is hard to imagine that the Worcester family’s integral role in WAA’s founding and operations does not have some influence on the decision-making of the independent board members.

The chairman of the WAA board defended the “close relationship” between WAA and Worcester Wreath to the WSJ, citing Worcester Wreath’s “below-market prices” and “supply-chain flexibility.” Another board member is quoted in the WSJ story as saying: “We’ve looked at it and said on the surface it doesn’t look like there’s anybody who can compete with Morrill Worcester.” Until 2017, however, it was impossible for others to even try to compete with Worcester Wreath since WAA did not accept competing bids, Karen Worcester told the WSJ. And that was despite the charity having been contacted by interested wreath suppliers. As one Worcester Wreath competitor described to the WSJ: “There are plenty of wreath producers here in Downeast Maine who would love to participate in [the charity’s] growth.” The former owner of another competing company also commented to the WSJ that WAA’s exclusive relationship with Worcester Wreath “has been a thorn in my side for a long time.”

Wreaths Across America contends on its website that its business relationships with Worcester Wreath were disclosed to the IRS prior to WAA receiving its public charity tax-exempt status in 2007, and that the charity “has since been audited and its 501(c)3 [public charity] status was approved.” WAA also describes on its website that in 2016, Morrill Worcester and Worcester Wreath provided the charity’s board of directors with a “certified letter from his financial audit, explaining that since 2007, Worcester Wreath Company has grown to meet the demands of Wreaths Across America but has operated at an overall loss.” It is further noted, though, that “as the result of a growing retail customer base” in 2013 and 2014, Worcester Wreath “did produce a small profit…of which 50%...was donated back to the Wreaths Across America [to] support sponsored wreaths.” This reference to Worcester Wreath’s “overall loss,” however, is not very meaningful without being able to see its actual financial statements and accounting for expense items such as salaries paid to the Worcester family members that work at the company.

In the December 2015 Wall Street Journal article, Karen Worcester said that in 2016 the WAA board would “consider a proposal to seek bids from other suppliers for the 2017 Christmas season, a move…the charity has been mulling since last year.” WAA did go through with implementing a Request for Proposal (RFP) process for vendors to have the opportunity to bid on being the charity’s wreath supplier for a three-year contract period from 2017-2019, based on WAA’s website and confirmed to CharityWatch by WAA. It seems the RFP process implementation ultimately resulted from a “legal audit of WAA’s practices and policies,” according to WAA’s website. WAA describes that the “high profile legal firm” it engaged in early 2016 “found no improprieties in WAA’s operations, [but] it did recommend several items to comply with best practices in nonprofit operations.” As a result, WAA “made improvements” to its “control policies,” including the addition of a whistle-blower policy; updated its website to provide “even more transparency” and “to directly address concerns about the connection between WAA and Worcester Wreath Company;” and “formed an RFP Committee and began the [RFP] process for the 2017-2019 contract.”

However, even with WAA’s newly implemented RFP process, Worcester Wreath “won” the 2017-2019 contract with the only bid submitted. According to WAA, Worcester Wreath was the lone company to submit a response to the initial stage of the RFP process, a “Sources Sought” Request. The request, which was advertised in the Bangor Daily News and open for submission for 15 business days in September 2016, required interested vendors to provide WAA with specific information from their business in order to be considered, WAA informed CharityWatch. Some of the “key factors” that were assessed as part of the RFP process, based on WAA’s website, included: the ability to supply wreaths to meet demand, without being given a total quantity commitment (i.e., “the lack of a purchase order”); quantities being “unknown until after Thanksgiving weekend;” and the ability to “manage and operate multiple production facilities and draw raw materials from multiple controlled harvest areas.” After satisfying the pre-solicitation request and later being sent the RFP on February 3rd, 2017, Worcester Wreath submitted its proposal, and was notified on February 15th that it was awarded the contract to be WAA’s wreath vendor for 2017-2019, according to WAA’s responses to CharityWatch’s inquiry. Although we asked, WAA would not provide CharityWatch with the approximate dollar amount WAA paid Worcester Wreath to purchase the over 1.5 million wreaths that were laid at the gravesites of veterans in 2017, citing that the information “is not for public consumption” and that “it would provide an undue advantage for potential futurebidders [sic] to know the pricing of an incumbent.”

Although CharityWatch commends WAA for the steps it has taken to address some of the rather obvious conflicts of interest concerns related to its close relationship with Worcester Wreath, we noted a few questionable aspects of WAA’s newly implemented RFP process. To start, WAA informed CharityWatch that the “RFP Committee” that was in charge of the process consisted of only three people, with one being the long-time president (2010-2014) / chairman (2015-present) of the WAA board of directors. (The other two on the RFP Committee included a member of the WAA “advisory board” and a relatively new WAA board member who was not on the board as of WAA’s fiscal year-ended June 30, 2016.) Further, other than being posted on the WAA website, the “Sources Sought” Request for potential bidders in the initial stage of the RFP process was only publicly advertised “over two consecutive weekends” in a print ad in the Bangor Daily News, according to WAA’s responses to CharityWatch’s inquiry. In CharityWatch’s opinion, if WAA was truly interested in seeking additional competitive bids, the RFP Committee could have directly contacted wreath vendors throughout the country to inform them of the request. It also could have expanded, in geography and frequency, the reach of its advertising of the sources sought notice beyond the limited ad it ran in the Bangor newspaper. (WAA’s wreaths are placed at veteran gravesites nationwide, making it practical to broaden the search for vendors to other states besides Maine.) These options would seem especially reasonable to consider, even if it meant extending the response period, once the initial 15 business days expired with only Worcester Wreath submitting a response. The three-year contract period also suggests to CharityWatch that WAA may have been looking for ways to limit the extent to which it allowed for open competition against Worcester Wreath in its newly implemented RFP process.

CharityWatch’s questions concerning WAA’s RFP process, along with the comments from some of Worcester Wreath’s competitors that were included in the December 2015 Wall Street Journal article, make us somewhat skeptical of WAA’s genuine interest in trying to solicit outside bids for its wreath business. The fact that not a single wreath company other than Worcester Wreath responded to even the initial stage of WAA’s RFP process seems to support our suspicions. Perhaps in 2019, when WAA’s next RFP should be open for bidding, WAA will put forth more of an effort to encourage competition for a share of its growing multimillion dollar wreath business. Until then, Worcester Wreath will continue to enjoy its exclusive relationship as the wreath supplier for the charity that was founded, and is still run, by its namesake family – and the questions concerning potential conflicts of interest for WAA will likely persist.