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Red Cross Uses Donations To Pay Fines

Published 08/01/2008

On April 8, the American Red Cross (Red Cross) appointed its seventh CEO in seven years, according to the Washington Post. Gail J. McGovern, formerly a Harvard Business School professor and executive of AT&T and Fidelity Investments, faces several challenges as new CEO to one of America’s largest charities as it continues to reform.

Among the challenges McGovern faces at the Red Cross are a $200 million operating deficit in part due to diminished fundraising, and the recent layoff of one-third of the 3,000 employees at the Red Cross Washington headquarters, according to the Post. In addition, the Red Cross’s continued mismanagement of the nation’s blood supply has resulted in penalties of $6.3 million by the Food and Drug Administration (FDA) thus far in 2008 alone. The Red Cross reports that it paid out over $20 million in penalties for violations of safety regulations over the past five years.

The AIP A- rated charity is working to address persistent errors in handling what amounts to half the nation’s blood supply. A note to the group’s 2007 Consolidated Financial Statements reports that in April 2003, the Red Cross signed an “amended consent decree” with the FDA, requiring “compliance with specific standards on how the Organization will manage and monitor its Biomedical Services’ operations and formalized management of compliance related issues,” and providing timelines for resolution of these issues. In laymen’s terms, this means that if the Red Cross is found to not be in compliance with FDA regulations, or if it harvests/releases unsuitable blood products, it is subject to fines. According to the terms of the decree, fines are capped at one percent of Biomedical Services’ revenue during the first year of the decree; two percent during the second year; and so on, up to a limit of four percent. The Red Cross audit reported that it maintains an accrual fund in anticipation of these fines without disclosing its amount. After being questioned by AIP the Red Cross disclosed that it was accruing for $15.6 million of fines in its year-ending June 30, 2007 audit.

While these penalties are a small percentage of the charity’s total revenue, and the Red Cross remains an AIP top-rated charity, we encourage the group to more closely monitor the compliance of its Biomedical Services operations with federal regulations in order to avoid wasteful penalties in the future. Charities have finite amounts of money at their disposal; the money paid in penalties could be better used toward services and operations vital to the organization’s mission.

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