Maybe. But should we all become tired and bored reading and thinking about Persche in this series of Posts, I would like to put a little perspective on whether Persche stands for anything more within the charitable sector than how much the government receives in taxes, and more specifically, how much money a particular Member State can lose because it grants a tax deduction for money flowing out of the State to a public benefit body resident in another Member State.
My main concern about some of the commentary regarding the Persche decision is that much of it suggests is that this will increase the potential for cross border fundraising by efficiently allowing tax deductible gifts to be made to charities outside the donor’s State. Thus, whereas in the past, tax incentives for charitable giving have been limited within many Member States, to domestic charities, the Persche decision was an attempt to level the playing field.
While the Persche rationale is based on the Court’s interpretation of Article 56 of the EC Treaty, this, it seems to me, could also raise the issue of transnational fundraising for charity beyond the limits of the EU, a much more interesting and broader question. Some commentators have suggested that although the theory of Persche may be accepted, the practice may be quite different, a subject beyond the scope of this Post.
If we limit the implications of the European Court of Justice decision in Hein Persche v. Finanzampt Lüdenscheid to the tax consequences of cross-border giving to charity, we are only addressing one part of the trust element with respect to transparency and accountability within the public benefit sector. I would argue that tax consequences of charitable giving, including gifts-in-kind donations, are only part of the motivation for giving, and are of limited relevance to the trust and loyalty that motivates much of the public benefit sector.
For example, recent statistics for giving in the United States reflect the fact that Americans gave the staggering sum of $306 billion to charity in 2007. This figure did not include more than $100 billion given to religious organizations, such as churches, foreign mission agencies, and church operated food kitchens and homeless shelters, camps, and large religious institutions, such the Salvation Army and denominational efforts. The largest percentage of giving reflected in these statistics was from individuals, with 85 percent of all households in the United States giving to charity. Of the total number of household givers in the United States, 65 percent were families with annual incomes of less than $100,000. The average annual household donation was $1,872.00, not enough I would suggest to have serious tax impact.
In the United States, approximately 70 percent of all taxpayers file tax returns claiming the standard deduction, with only 30 percent filing tax returns itemizing deductions. Accordingly, the tax consequences to individuals or households making donations to charities would appear to be quite insignificant when such contributions are not claimed as tax deductible gifts in their tax filings because of a standard deduction.
It would be interesting to know if there are comparable statistics and tax treatment of donations among the Member States of the EU, or indeed anywhere in the world, just to get some idea of how the tax consequences of charitable giving affect the giving patterns of potential donors.
It may be true that tax benefits accorded by the State to certain institutions in society represent that State’s assessment of what is important for society and what should be encouraged for its citizens. I could accept a proposition that tax consequences of charitable giving, such as the tax status of certain institutions, may also be reflected in the pattern of giving and the timing of giving on part of particular donors. Thus, major giving to charity at the end of a tax reporting period may be motivated by the overall tax situation on the part of the donor. Yet, I would argue that this may have more to do with the giver’s motivation with respect to the timing of the donation rather than to whether there should be any donation to a particular charity at all.
My guess is that the European Court of Justice was not focusing on the motivations for giving to charity, nor was it focusing on whether transparency and accountability within the public benefit or charity sector were even important factors to be considered on the part of donors. Moreover, if I understand the procedures involved in this case, the issues before the European Court of Justice were framed by Bundesfinanzhof, the Supreme Court of Federal Taxation and Customs in Germany, when it stayed the proceedings before it and certified the questions arising out of the application of the European Treaty to national tax laws. The European Court of Justice was only answering the questions which the Bundesfinanzhof certified to it for answers.
As we see in Persche, there may be several factors at play other than a challenge to the tax laws of Germany. Hein Persche may have already determined that he had a sufficient relationship with Centro Popular de Lagoa in Portugal that transparency and accountability on the part of Centro Popular were not big deals for him. Or maybe he had satisfied himself that the Centro was a charity he could support without regard its tax exempt status in Portugal and the tax consequences in Germany of his gifts. After all, he must have known what the Centro Popular needed when he gave the gifts of bed linens and towels, zimmer-frames, and toy cars for the children. Moreover, these donations with a total value of €18,180 did not represent an insignificant commitment to charity on Persche’s part.
The first question was simply whether or not gifts-in-kind, such as the consumer goods given by Hein Persche, were entitled to be treated as charitable, if so treated under the law of the Member State and as falling within the principle of free movement of capital within the scope of Article 56, EC. The Court of Justice held that gifts-in-kind came within the compass of Article 56 EC with respect to the principle of free movement of capital.
The second and third questions addressed the issue of a Member State’s interest in fiscal supervision of the charitable body receiving the benefit of the donation in question. It seems to me that a relevant question not articulated by the Court is the question of just what Germany required in its tax laws for tax exempt status of charitable bodies resident in Germany and for allowing the deductibility of gifts to those bodies, other than such charitable bodies satisfy some definition of public benefit or charity.
I recognize that this question, while posed in the context of a specific tax case arising out of German tax question, has broader application to all countries of the EU with respect to their respective tax legislation. My guess, as an American somewhat familiar with the tax laws and regulations in the United States regarding tax exempt status of charitable institutions and bodies, the requirement for achieving tax exempt status are quite minimal as long as the body seeking the exemption meets the definitional description of the allowed and recognized charitable or public benefit purposes listed in the statute.
More specifically, does German tax law recognize the role of charitable monitoring bodies in Germany, such as the Deutsches Zentralinstitut für soziale Fragen (DZI), to monitor charitable bodies entitled to, or seeking tax exempt status, and to assist the tax authorities in Germany in providing some form of fiscal supervision over the sector and bodies recognized by the State’s tax authorities as charitable institutions. I think the answer is clearly no. And I guess that no other Member State of the EU, or indeed in any country, has such a requirement. My further guess is that this subject is at the center of the debate about the role of government in regulating and monitoring charity versus the possibility of attempting to address the matter of transparency and accountability within the charitable sector. But, that is a topic I would like to address in a forum of future posts by guest contributors.
Thursday, August 27, 2009
Saturday, August 15, 2009
Some Reflections on Hein Persche
As Clive Cutbill of Withers Worldwide wrote on 27 January 2009 regarding Hein Persche v. Finanzamt Lüdenscheid, the decision of the European Court of Justice is “a very significant decision which should have ramifications for charities, donors and tax authorities across the EU.” While Mr. Cutbill identified some of the ramifications for charities, donors, and tax authorities, my purpose here and in future posts, is to reflect on the meaning of this decision in the context of charity generally, and the monitoring of charity transparency and accountability. If we are interested in the success of the charity sector, and in transparency and accountability in that sector, then we need to consider more than the tax consequences of our decisions to donate to charitable causes.
The European Court of Justice built its rationale in Hein Persche v. Finanzamt Lüdenscheid on its earlier decision in Centro Musicologia Walter Stauffer v. Munchen für Körperschaften. Together, these decisions stand for the proposition that Member States must extend non-discriminatory tax treatment of charities that are resident in other EU Member States. In Walter Stauffer, the Court held that a Member State could not tax the income of the Member States’ charities if that income would have been exempt had that nonresident charity been resident in the Member State charging the tax. As I wrote in my last post, the Court held in Persche that based on its interpretation of Article 56, EC, which dealt with the free movement of capital, a tax deduction for gifts made to charitable bodies must not be restricted to those charitable organizations established and resident in the Member State in which the taxpayer donor resides and claims the deduction for the gift made to the charity in another Member State.
What the European Court of Justice did was to simply treat the donation as a normal commercial type transaction, the movement of finances and goods across State borders, without regard to whether such transactions and tax treatment are consistent with the whole nature and purpose of charitable giving and activities. While I cannot argue with the importance of the free movement of capital in normal commercial transactions, and the rationale of the Court here in Persche, I still wonder if the Court did not overly simplify this principle to the extent that it could be applied to situations in which it clearly would not be appropriate and which would not be consistent with the intent of the framers and signatories to the EC Treaty.
For example, I cannot believe that one could argue with any degree of plausibility that money laundering in support of some terrorist or criminal activity in another jurisdiction should be permitted as consistent with the free movement of capital without regard to the legal consequences of such transactions. Indeed, this was the concern of the EC Directorate-General, Justice, Freedom and Security in its initiative regarding “The Prevention of and Fight against Terrorist Financing through enhanced national level coordination and greater transparency of the non-profit sector” and its meeting of NPO umbrella organizations, representatives from Member States, and stakeholders on 12 February 2009 in Brussels. Moreover, as Clive Cutbill pointed out in his paper of 27 January 2009 concerning the Persche decision, Member States will now have to establish mechanisms to prove to fiscal authorities that the activities of charities from other Member States must satisfy the requirements for charitable tax treatment in the taxpayer’s Member State.
However, I am not prepared to agree with Clive Cutbill that for donors this Persche decision is “unmitigated good news.” While I would agree with him that donors may be able to give tax free donations efficiently to any charity in the EU, subject to the proviso that they can prove that the charity satisfies the domestic meaning of charity, I am not sure this will necessarily open up a much broader range of potential donors as he suggests.
The reason for my caution relates to the whole nature and import of donor trust, and indeed, of public trust. I will address this subject in subsequent posts, but suffice it to say at this point, the tax consequences of the gifts are not the sole motivating factor for much of the giving to charity that I believe exists today, and for the foreseeable future.
I do not have the statistical data for Europe, or indeed from other regions of the world, but if the data is anything like the data for the United States, the largest percentage of giving is from individuals, rather than from foundations and institutional philanthropy. Further, statistical data for the United States demonstrate that most charitable and not-for-profit public benefit organizations are small with annual revenues under US $2 million, rather than large, well-known, international charities.
THE CHRONICLE OF PHILANTHROPY, in a recently published series of articles, spoke of coping mechanisms for dealing with the current economic situation. Almost all of these articles spoke of the importance of developing trust between the donor and the charity, and by implication, between the public benefit sector and the larger general public. To do this, the sector must be transparent in its communications with the public and with potential donors, and be accountable to that public.
The members of ICFO are committed to promoting standards and monitoring compliance with those standards by charities. Many philanthropic institutions may have the resources to perform the required due diligence to satisfy need for transparency and accountability between the specific charity and the philanthropic institution and establish the required trust between the donor institution and the charity. However, except in the case of giving by individuals on the basis emotional motivations, many donors give on the basis of their on-going relationships, either with leadership of the charitable organization, or with the organization itself. Nevertheless, except for these exceptions, individual donors cannot be expected to perform the required due diligence to establish the level of trust between the charity and donor arising out transparency and accountability that is required for responsible stewardship and giving. This is where ICFO and its member organizations come into the equation in a way government tax authorities cannot.
Hein Persche had a home in Portugal in the area in which the charity in question was located, a retirement home and attached children’s home. There is every indication in the history of this case that Hein Persche had some kind of on-going relationship with the charity, and knew of its need for the particular gifts-in-kind he donated to this charity. However, it appears that challenging the tax laws in Germany might have been part of his motivation for giving beyond simply his desire to help this charity.
The European Court of Justice built its rationale in Hein Persche v. Finanzamt Lüdenscheid on its earlier decision in Centro Musicologia Walter Stauffer v. Munchen für Körperschaften. Together, these decisions stand for the proposition that Member States must extend non-discriminatory tax treatment of charities that are resident in other EU Member States. In Walter Stauffer, the Court held that a Member State could not tax the income of the Member States’ charities if that income would have been exempt had that nonresident charity been resident in the Member State charging the tax. As I wrote in my last post, the Court held in Persche that based on its interpretation of Article 56, EC, which dealt with the free movement of capital, a tax deduction for gifts made to charitable bodies must not be restricted to those charitable organizations established and resident in the Member State in which the taxpayer donor resides and claims the deduction for the gift made to the charity in another Member State.
What the European Court of Justice did was to simply treat the donation as a normal commercial type transaction, the movement of finances and goods across State borders, without regard to whether such transactions and tax treatment are consistent with the whole nature and purpose of charitable giving and activities. While I cannot argue with the importance of the free movement of capital in normal commercial transactions, and the rationale of the Court here in Persche, I still wonder if the Court did not overly simplify this principle to the extent that it could be applied to situations in which it clearly would not be appropriate and which would not be consistent with the intent of the framers and signatories to the EC Treaty.
For example, I cannot believe that one could argue with any degree of plausibility that money laundering in support of some terrorist or criminal activity in another jurisdiction should be permitted as consistent with the free movement of capital without regard to the legal consequences of such transactions. Indeed, this was the concern of the EC Directorate-General, Justice, Freedom and Security in its initiative regarding “The Prevention of and Fight against Terrorist Financing through enhanced national level coordination and greater transparency of the non-profit sector” and its meeting of NPO umbrella organizations, representatives from Member States, and stakeholders on 12 February 2009 in Brussels. Moreover, as Clive Cutbill pointed out in his paper of 27 January 2009 concerning the Persche decision, Member States will now have to establish mechanisms to prove to fiscal authorities that the activities of charities from other Member States must satisfy the requirements for charitable tax treatment in the taxpayer’s Member State.
However, I am not prepared to agree with Clive Cutbill that for donors this Persche decision is “unmitigated good news.” While I would agree with him that donors may be able to give tax free donations efficiently to any charity in the EU, subject to the proviso that they can prove that the charity satisfies the domestic meaning of charity, I am not sure this will necessarily open up a much broader range of potential donors as he suggests.
The reason for my caution relates to the whole nature and import of donor trust, and indeed, of public trust. I will address this subject in subsequent posts, but suffice it to say at this point, the tax consequences of the gifts are not the sole motivating factor for much of the giving to charity that I believe exists today, and for the foreseeable future.
I do not have the statistical data for Europe, or indeed from other regions of the world, but if the data is anything like the data for the United States, the largest percentage of giving is from individuals, rather than from foundations and institutional philanthropy. Further, statistical data for the United States demonstrate that most charitable and not-for-profit public benefit organizations are small with annual revenues under US $2 million, rather than large, well-known, international charities.
THE CHRONICLE OF PHILANTHROPY, in a recently published series of articles, spoke of coping mechanisms for dealing with the current economic situation. Almost all of these articles spoke of the importance of developing trust between the donor and the charity, and by implication, between the public benefit sector and the larger general public. To do this, the sector must be transparent in its communications with the public and with potential donors, and be accountable to that public.
The members of ICFO are committed to promoting standards and monitoring compliance with those standards by charities. Many philanthropic institutions may have the resources to perform the required due diligence to satisfy need for transparency and accountability between the specific charity and the philanthropic institution and establish the required trust between the donor institution and the charity. However, except in the case of giving by individuals on the basis emotional motivations, many donors give on the basis of their on-going relationships, either with leadership of the charitable organization, or with the organization itself. Nevertheless, except for these exceptions, individual donors cannot be expected to perform the required due diligence to establish the level of trust between the charity and donor arising out transparency and accountability that is required for responsible stewardship and giving. This is where ICFO and its member organizations come into the equation in a way government tax authorities cannot.
Hein Persche had a home in Portugal in the area in which the charity in question was located, a retirement home and attached children’s home. There is every indication in the history of this case that Hein Persche had some kind of on-going relationship with the charity, and knew of its need for the particular gifts-in-kind he donated to this charity. However, it appears that challenging the tax laws in Germany might have been part of his motivation for giving beyond simply his desire to help this charity.
Tuesday, August 11, 2009
The Hein Persche Decision
The immediate question arises as to the effect or impact of the decision in Hein Persche v. Finanzamt Lüdenscheid issued by the European Court of Justice in late January 2009. I think that we can agree that this decision is limited in its impact to the member states of the EU. But, the issue still arises as to the basic principles involved in insuring the transparency, accountability, and monitoring of charities in the context of cross-border fundraising.
With a limited exception, ICFO has been committed to the idea of encouraging the establishment and effectiveness of national charity monitoring organizations. Indeed, one of the strengths of ICFO has been to promote transparency and accountability of charitable activity across national borders through the dialogue enjoyed by the ICFO member organizations. The thrust, therefore, is to strengthen the national monitoring organizations rather than simply strengthening the overall presence and status of ICFO.
The exception to which I just referred relates to the international assessments which ICFO performs on large, international public benefit organizations. But, this is a topic for another day.
What the European Court of Justice did in Persche was to rule that, based on its interpretation of Articles 56 to 58 of the EC Treaty which deal with free movement of capital, a tax deduction for gifts to charitable bodies must not be restricted to bodies established in the national territory.
Here, Mr. Hein Persche, a German national tax adviser, claimed a deduction on his tax return for gifts-in-kind donated to a body in Portugal recognized as being a charity. The German tax authorities denied the deduction because under German Law on Income Tax, the recipient or beneficiary of the donation must be a body established in Germany and resident in Germany. Mr. Persche appealed the adverse rulings though the various court levels in Germany, until the Budesfinanzhof, the Supreme Court of the Federal Government for taxes and duties, sitting as the Court of final appeal, stayed its proceedings and referred the issue to the European Court of Justice.
The European Court of Justice ruled that legislation of a Member State which precludes the deduction for tax purposes of gifts to bodies established and recognized as charitable in another Member State, violates Article 56 EC, because it limits the free movement of capital, which Articles 56 to 60 EC addresses. This rule applied to claimed donations without regard to whether they were financial transactions or gifts-in-kind.
While I realize that the Persche decision is limited to the facts and specific national laws at issue there, and to the provisions of the European Commission Treaty, it does raise problems from our perspective in ICFO.
My personal bias is a preference for national sovereignty rights and responsibilities as distinguished from a regional or global approach to monitoring charities. The logic of the Persche decision is clear and makes a lot of sense in the context of the EU Treaty arrangements and policy goals. The Court of Justice did observe that the inability on the part of a taxpayer to deduct gifts to bodies recognized as charitable in other Member States could affect the willingness of that taxpayer to make gifts to such bodies. Perhaps.
However, I am not persuaded. The question I think raised by the Persche decision is whether this reflects the reality of building donor and public trust in the charity sector. Motivations are difficult to determine. However, with respect to the charitable giving, I am not sure that promoting free movement of capital consistent with regional agreements plays into the charitable motivations behind much of the giving. Perhaps, there may be more of that at play in institutional philanthropic motivations, but that may also be a stretch.
The Persche case has some unique factual elements. For example, Mr. Hein Persche owned a residence in Portugal in the area of the Portuguese charity which was a retirement home to which a children's home had been added. It appears from the proceedings that he had a relationship with this charity, and moreover, that he used his gifts-in-kind to test the tax law of Germany.
The Court's decision is silent as to whether the charity in Portugal met any standards other than those required for registration by Portuguese authorities for charitable recognition, and whether it was accountable for its governance, fundraising activities, and financial affairs. This raises a question of interest to ICFO and its member monitoring organization: Does the establishment of independently formulated standards and independent monitoring or self-regulation contribute to transparency and accountability of the charity sector and of specific charities, and thereby increase donor and public trust in that sector? Well, this discussion will have to wait for another day.
With a limited exception, ICFO has been committed to the idea of encouraging the establishment and effectiveness of national charity monitoring organizations. Indeed, one of the strengths of ICFO has been to promote transparency and accountability of charitable activity across national borders through the dialogue enjoyed by the ICFO member organizations. The thrust, therefore, is to strengthen the national monitoring organizations rather than simply strengthening the overall presence and status of ICFO.
The exception to which I just referred relates to the international assessments which ICFO performs on large, international public benefit organizations. But, this is a topic for another day.
What the European Court of Justice did in Persche was to rule that, based on its interpretation of Articles 56 to 58 of the EC Treaty which deal with free movement of capital, a tax deduction for gifts to charitable bodies must not be restricted to bodies established in the national territory.
Here, Mr. Hein Persche, a German national tax adviser, claimed a deduction on his tax return for gifts-in-kind donated to a body in Portugal recognized as being a charity. The German tax authorities denied the deduction because under German Law on Income Tax, the recipient or beneficiary of the donation must be a body established in Germany and resident in Germany. Mr. Persche appealed the adverse rulings though the various court levels in Germany, until the Budesfinanzhof, the Supreme Court of the Federal Government for taxes and duties, sitting as the Court of final appeal, stayed its proceedings and referred the issue to the European Court of Justice.
The European Court of Justice ruled that legislation of a Member State which precludes the deduction for tax purposes of gifts to bodies established and recognized as charitable in another Member State, violates Article 56 EC, because it limits the free movement of capital, which Articles 56 to 60 EC addresses. This rule applied to claimed donations without regard to whether they were financial transactions or gifts-in-kind.
While I realize that the Persche decision is limited to the facts and specific national laws at issue there, and to the provisions of the European Commission Treaty, it does raise problems from our perspective in ICFO.
My personal bias is a preference for national sovereignty rights and responsibilities as distinguished from a regional or global approach to monitoring charities. The logic of the Persche decision is clear and makes a lot of sense in the context of the EU Treaty arrangements and policy goals. The Court of Justice did observe that the inability on the part of a taxpayer to deduct gifts to bodies recognized as charitable in other Member States could affect the willingness of that taxpayer to make gifts to such bodies. Perhaps.
However, I am not persuaded. The question I think raised by the Persche decision is whether this reflects the reality of building donor and public trust in the charity sector. Motivations are difficult to determine. However, with respect to the charitable giving, I am not sure that promoting free movement of capital consistent with regional agreements plays into the charitable motivations behind much of the giving. Perhaps, there may be more of that at play in institutional philanthropic motivations, but that may also be a stretch.
The Persche case has some unique factual elements. For example, Mr. Hein Persche owned a residence in Portugal in the area of the Portuguese charity which was a retirement home to which a children's home had been added. It appears from the proceedings that he had a relationship with this charity, and moreover, that he used his gifts-in-kind to test the tax law of Germany.
The Court's decision is silent as to whether the charity in Portugal met any standards other than those required for registration by Portuguese authorities for charitable recognition, and whether it was accountable for its governance, fundraising activities, and financial affairs. This raises a question of interest to ICFO and its member monitoring organization: Does the establishment of independently formulated standards and independent monitoring or self-regulation contribute to transparency and accountability of the charity sector and of specific charities, and thereby increase donor and public trust in that sector? Well, this discussion will have to wait for another day.
Thursday, August 6, 2009
Transparency and Accountability in the Age of Terrorism, Part 2, Illustrated
The September 2002 issue of the International Journal of Not-For-Profit Law, in an article titled "Charities and Terrorism: The Charity Commission Response," began: "It is difficult to imagine an issue that could undermine public faith in charity more than the suspicion of terrorist links."
The issue was brought to our attention when in December 2001, the Bush administration, as part of its war on terrorism, declared legal and financial war on groups that it believed aided and supported sponsors of terrorism. These initially included Islamic charities that reportedly raised funds that helped Islamic militants in the Palestinian territories, Iraq, Afghanistan, and other conflicts areas in the Middle East.
During the European Commission conference in mid-February 2009, addressing the ECNL study, Recent Public and Self-Regulatory Initiatives Improving Transparency and Accountability of Non-Profit Organisations in the European Union, one of the EC leaders illustrated the point of the importance of monitoring transparency and accountability in the charity sector.
Here is the situation: There is a relief and development charity based in the United States or in one of the European countries. The charity is recognized as a tax exempt charity under the laws of the relevant country, and may or may not be monitored by a monitoring or accrediting body such as those which are members of ICFO. Through its child sponsorship funding and other normal fundraising efforts, it supports a group of orphanage homes in the Gaza Strip. These homes may be owned and operated by that charity or a consortium of similar cooperating charities licensed in Palestine.
However, Hamas is responsible for operating these orphanages and may even take over the ownership of the properties. While much of this funding went to the humanitarian causes for which it was raised, some of it ended in the hands of Hamas and was used for purchase and movement of weapons and munitions. Some of it ended in the hands of Hamas for communications equipments, medicine, visas, etc., used in fighting UN police forces, Israeli forces, and other allied groups. So, there is a problem with tracking the charity funds and determining to what extent they may be used to fund terrorist activities and what extent they are used for legitimate humanitarian causes. For the purpose of this discussion, does it really make any difference if the funds are used for legitimate humanitarian causes if some of the funds are used in terrorist activities?
Or, as it was reported in a Times of London article, the Pakistani charity, Jamaat-ud-Dawa [JuD] was accused of its involvement in the attacks in Mumbai, India. Jamaat-ud-Dawa, was a front for the terrorist organization, Lashkar-e-Taiba, which was the parent organization of JuD, and which was established in Afghanistan. Notwithstanding the charges asserted by the U.S., India, and other Western countries against JuD, Pakistan has been dismissive of these claims. Indeed, thanks to the high-profile relief work, and especially in the aftermath of the 2005 earthquake in Kashmir, Pakistan was unwilling to shut down JuD offices and hundreds of "relief camps," despite growing evidence of its involvement in terrorism.
There are a number of issues in these examples with respect to transparency and accountability in the charity sector in connection with war on terrorism. One is simply the question of whether the charities in question are in compliance with law. As noted by John Pellowe in his response to an earlier post, many countries require that domestic charities legally control and operate the foreign entity to which it channels funds. In the United States, the tax authorities will disallow a tax deduction for contributions to domestic charities if the domestic charities are mere conduits for funds to foreign organizations. Of course, this is probably different from the rule in the countries in European Union as a result of the decision of the European Court of Justice in the Hein Persche v. Finanzampt Lüdenscheid case.
Secondly, there is simply the question of standards and monitoring to be performed on charities, and whether such monitoring is to be done by government agencies or by some form of independent or self-regulation monitoring. An issue arises with respect to government monitoring of charities to determine whether funds are being channeled to organizations that support terrorist activities. Are the sanctions to be applied criminal, civil, or some other form of sanction.
Prosecution is difficult in these cases because even if intelligence shows signs of terrorism support, it is difficult, if not impossible in many cases, to obtain the kind of unambiguous evidence that is admissible in court proceedings to prove that the money ended up in the hands of terrorists overseas. As a result, critics contend that the government keeps much of the relevent evidence of possible terrorist connections secret and resorts to prosecutions for tax and money-laundering violations.
When the focus of government sanctions is against Islamic charities, it depresses or can depress giving on the part of the donor public.
The U.S. Treasury Department has issued guidelines directed to charities under which charities could take measures to ensure proper board governance, accounting practices, and transparency to donors. What has troubled many charitable organizations that make foreign grants, provide disaster relief, and provide aid to third world nations has been the unclear, ambiguous, and opaque rules that came out of the Department of Treasury's Office of Foreign Asset Control (OFAC). It is a strict liability regime without a safe harbor for legitimate charities that inadvertently finance charity activity, notwithstanding undertaking the recommended due diligence. Thus, the example used above respect to a charity providing relief in Gaza to orphanages, presents exposure to the sanctions available under the OFAC regime.
The EC Directorate-General, Justice, Freedom and Security has not yet posted the Final version of the ECNL study, Recent Public and Self-Regulatory Initiatives Improving Transparency and Accountability of Non-Profit Organisations in the European Union.
The issue was brought to our attention when in December 2001, the Bush administration, as part of its war on terrorism, declared legal and financial war on groups that it believed aided and supported sponsors of terrorism. These initially included Islamic charities that reportedly raised funds that helped Islamic militants in the Palestinian territories, Iraq, Afghanistan, and other conflicts areas in the Middle East.
During the European Commission conference in mid-February 2009, addressing the ECNL study, Recent Public and Self-Regulatory Initiatives Improving Transparency and Accountability of Non-Profit Organisations in the European Union, one of the EC leaders illustrated the point of the importance of monitoring transparency and accountability in the charity sector.
Here is the situation: There is a relief and development charity based in the United States or in one of the European countries. The charity is recognized as a tax exempt charity under the laws of the relevant country, and may or may not be monitored by a monitoring or accrediting body such as those which are members of ICFO. Through its child sponsorship funding and other normal fundraising efforts, it supports a group of orphanage homes in the Gaza Strip. These homes may be owned and operated by that charity or a consortium of similar cooperating charities licensed in Palestine.
However, Hamas is responsible for operating these orphanages and may even take over the ownership of the properties. While much of this funding went to the humanitarian causes for which it was raised, some of it ended in the hands of Hamas and was used for purchase and movement of weapons and munitions. Some of it ended in the hands of Hamas for communications equipments, medicine, visas, etc., used in fighting UN police forces, Israeli forces, and other allied groups. So, there is a problem with tracking the charity funds and determining to what extent they may be used to fund terrorist activities and what extent they are used for legitimate humanitarian causes. For the purpose of this discussion, does it really make any difference if the funds are used for legitimate humanitarian causes if some of the funds are used in terrorist activities?
Or, as it was reported in a Times of London article, the Pakistani charity, Jamaat-ud-Dawa [JuD] was accused of its involvement in the attacks in Mumbai, India. Jamaat-ud-Dawa, was a front for the terrorist organization, Lashkar-e-Taiba, which was the parent organization of JuD, and which was established in Afghanistan. Notwithstanding the charges asserted by the U.S., India, and other Western countries against JuD, Pakistan has been dismissive of these claims. Indeed, thanks to the high-profile relief work, and especially in the aftermath of the 2005 earthquake in Kashmir, Pakistan was unwilling to shut down JuD offices and hundreds of "relief camps," despite growing evidence of its involvement in terrorism.
There are a number of issues in these examples with respect to transparency and accountability in the charity sector in connection with war on terrorism. One is simply the question of whether the charities in question are in compliance with law. As noted by John Pellowe in his response to an earlier post, many countries require that domestic charities legally control and operate the foreign entity to which it channels funds. In the United States, the tax authorities will disallow a tax deduction for contributions to domestic charities if the domestic charities are mere conduits for funds to foreign organizations. Of course, this is probably different from the rule in the countries in European Union as a result of the decision of the European Court of Justice in the Hein Persche v. Finanzampt Lüdenscheid case.
Secondly, there is simply the question of standards and monitoring to be performed on charities, and whether such monitoring is to be done by government agencies or by some form of independent or self-regulation monitoring. An issue arises with respect to government monitoring of charities to determine whether funds are being channeled to organizations that support terrorist activities. Are the sanctions to be applied criminal, civil, or some other form of sanction.
Prosecution is difficult in these cases because even if intelligence shows signs of terrorism support, it is difficult, if not impossible in many cases, to obtain the kind of unambiguous evidence that is admissible in court proceedings to prove that the money ended up in the hands of terrorists overseas. As a result, critics contend that the government keeps much of the relevent evidence of possible terrorist connections secret and resorts to prosecutions for tax and money-laundering violations.
When the focus of government sanctions is against Islamic charities, it depresses or can depress giving on the part of the donor public.
The U.S. Treasury Department has issued guidelines directed to charities under which charities could take measures to ensure proper board governance, accounting practices, and transparency to donors. What has troubled many charitable organizations that make foreign grants, provide disaster relief, and provide aid to third world nations has been the unclear, ambiguous, and opaque rules that came out of the Department of Treasury's Office of Foreign Asset Control (OFAC). It is a strict liability regime without a safe harbor for legitimate charities that inadvertently finance charity activity, notwithstanding undertaking the recommended due diligence. Thus, the example used above respect to a charity providing relief in Gaza to orphanages, presents exposure to the sanctions available under the OFAC regime.
The EC Directorate-General, Justice, Freedom and Security has not yet posted the Final version of the ECNL study, Recent Public and Self-Regulatory Initiatives Improving Transparency and Accountability of Non-Profit Organisations in the European Union.
Subscribe to:
Posts (Atom)