Charities and Disaster Relief

With the attacks on the United States on 11 September 2001, followed by the December 2004 Indian Ocean tsunami, the earthquakes in Pakistan, Hurricane Katrina in the Gulf Coast of the United States, and the earthquake in China in May 2008, almost all the arguments in the debates concerning nonprofits were joined. The numbers of deaths and injured were simply staggering. How do we comprehend the number of people killed in the earthquakes and resulting tsunamis in Asia and Africa for example? In just six days after the December 2004 tsunami, for example, the reported dead exceeded 150,000 with the numbers climbing. Two weeks later, the estimated total was 280,000 dead and more than 5 million rendered homeless by the tsunami.

These events stirred the charitable impulses of millions of people all over the world. With television and other forms of public media, and with the Internet, the reports of the damage and loss of life were numbing. Almost immediately people from around the world dug deep into their pockets and seemingly spontaneously and generously began giving to the victims of the disaster and to charitable organizations carrying out rescue operations and relief efforts. Very soon thereafter, movie stars and musical celebrities rushed to hold concerts and television marathons to raise money for the rescue and relief efforts. What were the controls on transparency, tracking of funds, and accountability for the monies raised and distributed or used in the relief operations? How were the donors satisfied with the giving experience other than by feeling happy that they thought that gave something to a cause?

Within several weeks, governments from around the world began to be involved in relief efforts. But, by that time, charitable organizations from many corners of the world had already swung into action. Two former American presidents were enlisted to appear on television and to spearhead efforts urging people to open up their hearts and bank accounts to help the poor victims of this natural disaster, just as they had done in the Hurricane Katrina that hit the American Gulf Coast several months earlier. And billions of donations flowed in. Again, was there transparency and accountability of these charities and of their activities upon which thoughtful and responsible donors could rely? Or, was it just a good feeling that the donor had subjectively for doing something, anything?

One example of the extent of generosity was experienced by Medecins Sans Frontieres (Doctors without Borders) based in Geneva, Switzerland. According to press reports, and my contacts in France and Switzerland who monitor charitable operations and cooperated in an international level with similar organizations that are members of the International Committee on Fundraising Organizations (ICFO) based in Berlin, Doctors Without Borders raised approximately four times the amount needed for its relief operations. So great was the public response to the appeal of Doctors Without Borders that it closed its appeal only one week after the tsunami. It then set about tracking down thousands of people that had given to the tsunami appeal in order to get their approval to allow Doctors Without Borders to redirect or refund the monies given by these people. Less than one percent refused to let the money be directed elsewhere to other projects. Amazing!

At the time of the tsunami, Doctors Without Borders had its biggest operation in Darfur, Sudan, and needed money there for the one and a half million people that were in desperate need of aid. And this was only one project in which Doctors Without Borders was providing relief. A spokesman for one of the affiliates of Doctors Without Borders speculated that people gave so much money because of size of the disaster and the media coverage, especially with celebrities advancing the cause for giving, and because in some way people could relate to this kind of natural disaster. But how about other humanitarian disasters, such as man-made disasters relating to conflicts and civil wars?

According to published reports and testimony before a U.S. Congressional Committee, the experience of the American Red Cross in connection with the attacks on 11 September 2001 was quite different. As a result, the American Red Cross was criticized and its president was forced to resign. The American Red Cross is a financially efficient organization and is highly rated for spending 90 percent of its total expenses on program services.

However, the Red Cross got caught up in its zeal to raise funds immediately after the attacks with the result that it raised significantly more money than it needed for what it would ordinarily do in a disaster. It was reported that it behaved opportunistically by using this crisis to raise money for programs that were not identified in its fundraising appeals. These included upgrading telephones and computers, promoting humanitarian principles, and building up the strategic blood reserves, probably all legitimate needs of the Red Cross, just not part of the 9/11 crisis need and appeal. Many of its operations in connection with rescue and relief work in New York, Pennsylvania, and Washington, D.C. and Virginia, could have been better performed by many other nonprofits. The result was a tarnished reputation to the high standing of the American Red Cross and distrust and skepticism to the entire sector.

For victims of man-made disasters, such as Iraqis, Afghans, Rwandans, Congolese, Timorese, or Haitians, there are few world-wide fundraising efforts. There are no celebrity concerts, no celebrities on television in marathon fundraising appeals, no former presidents urging people to give, and little or no media attention. Yes, there may have been protests against the war, or against some government action that either exacerbated the damage, or failed to take steps to stop the war or conflict. But, protests, even if important as voices in a democracy, are not the same as the relief efforts needed to relieve suffering. Or are they? Can political action and protest activity for a cause that may or may not turn into a humanitarian disaster be properly equated with the kind of charitable efforts providing relief in the case of earthquakes, tsunamis, hurricane and typhoon storms, massive fires, volcano eruptions, and the like, or the charitable activities dealing with the relief in the cases of killing and suffering resulting from conflict or war?

And, what about long-term calamities, like AIDS, malaria, diarrhea, trachoma, and other epidemic and infectious diseases that kill and maim more people than those that died in the 2005 tsunami? Many of these are preventable, and may be avoidable calamities if properly addressed. Are the needs represented in the situations needs that can only be addressed by governments, either in the location of the disease or world-wide? Or, is there a role for charitable organizations and operations that are specially equipped to deal with these formidable challenges?

Unanswered is the question: why should I give to a cause on the other side of the world that has nothing to do with me personally or with my immediate community? For the most part, this question is not clearly answered in all the literature regarding the nonprofit sector. As one writer put it, there is a moral confusion on the part of donors. Another writer suggested that the lack of consistency between giving for relief for victims of natural disasters, such as the tsunami, and giving for relief for the victims of man-made disasters and preventable or infectious diseases, has nothing to do with a failure on the part of the people that could give. Rather, this writer suggests that it is a result of the failure of political leaders and societal models. And my only response is “really?” That case has not been sufficiently made to be persuasive.

But, central to many of these debates are the questions concerning the roles of government. One question asked is why should non-government organizations even be involved in disaster relief at all? This question may be phrased a little differently, such as, should not governments be responsible for providing all the required assistance in the case of man-caused disasters, such as in the attacks on 9/11 as well as natural disasters, such as the tsunamis and earthquakes and hurricanes? The question seems to be a little more relevant in the case of the national government in the geographic place of the disaster but it still does not answer the fundamental questions of how government, any government could step in and do what the third sector is doing, even if hampered by obstacles that are present no matter the situation.

A second set of questions relates to the general subject of the recognition of a charitable sector, and particularly, of specific charities, the nature of fundraising and distribution of relief, and the monitoring of those activities. For, example, is the mere tax exempt status or recognition granted by the government sufficient to provide legitimacy to the fundraising and charitable activities of particular non-government organizations? With so many possible tax exempt and charitable organizations, how is the government to effectively and credibly monitor these organizations in a free and democratic society? Indeed, can a broad range of charities with a variety of public benefit purposes be monitored at all with any degree of assurance concerning their legitimacy and the legitimacy of their activities?

A third set of questions pertain the moral obligation, if any, with respect to a charity’s responsibility to the public in terms of transparency and accountability about the funding of its charitable purposes. Is there a moral obligation apart from some regulatory scheme imposed on the sector by government or by independent monitoring or some form of self-regulation?

Closely related are the questions about how the public and the potential donors and donors, are to protect themselves from fraudulent schemes and improper allocations of funds received. Perhaps, this includes the need to protect one’s self from one’s own impulses when faced with such needs. With the vast resources of public media outlets, and the vastness of the Internet, all with images of damage and destruction and loss of life and security in far-away places, one’s resistance to hasty decisions is reduced. At the same time, we may be so overwhelmed with the magnitude of it all and by our own natural tendency toward skepticism common to our post-modern culture, that we are simply immobilized from doing anything, and certainly to do the due diligence required for making sound giving decisions. Ken Berger, President of Charity Navigator, in his recent blog post in discussing the roles of the boards in insuring that the governance, transparency, and accountability of charities implied that how these roles were effective could give confidence to donors making these kinds of decisions.

Now, while I have introduced these issues in the context of disaster relief, I think that they also apply to the simple daily routine work of charities, large and small, operating in an environment of need, no matter what responsibilities governments may assume to meet these needs. Over the next few months I hope to explore some of these questions in future posts.

During the weeks following the tsunami in the Indian Ocean, concerts were organized around the world to raise money for relief efforts. Presumably these concerts and similar events were supposed to be a testament to the solidarity and generosity of ordinary people toward fellow human beings struck by the disaster. But, that may not actually have been the case if we believe reports of comparative studies on donations received from private individuals in 12 countries to the victims of the Indian Ocean tsunami. For example, according to one study, Norwegians donated the most at $13.20 per person, followed by the Swedes who donated in absolute terms, $12.04 per person, with the Dutch donating $9.16 per person. The Americans donated $1.08 per person, and the French donated $.80 per person. An interesting note and aside to this listing of donations received from individuals in different countries is, that unlike the other countries mentioned, Sweden allows no tax deduction for gifts to charities.

However, ranking individuals’ generosity in this way is not very helpful, nor does it answer the basic moral questions about giving. Nor does it answer the questions about the roles of government and charity in addressing the social, welfare, and disaster victim needs of people in the affected areas. If two people donated $1,000 to charity, but one of these had an annual income of $50,000 whereas the other had an annual income of $100,000, it would appear that the former would be twice as generous as the latter in terms of percentage given out of differing annual incomes. Interestingly, the pattern that less wealthy people tend to give a larger percentage of their income to the church and charity than the rich is mirrored in the patterns of domestic giving in the United States, a well documented fact.

But, this is not simply a story about individuals giving to charity. In testimony before the U.S. Congressional Committee on Ways and Means, the American Institute of Philanthropy said that Americans have been too hazy when it comes to making charitable giving decisions and for following up on their responses to appeals.. According to this testimony, charities tend to make appeals for certain aspects of their work that produce greater results in terms of giving, failing to notify potential donors of other uses for the funds received. As a result, the advertised need may represent only a small percentage of the charities’ total spending. Moreover, missing from many, if not most disclosures after the funds have been solicited, is any report on the effectiveness of the use of those funds, or the impact that the project had on the needs that were being addressed by the charity.

As a general rule, nonprofit organizations find a need that they feel must be addressed, develop a plan for meeting that need, approve a budget to execute its plan addressing that need, and then solicit funds for accomplishing its purpose or goals. In disaster situations, such as the attacks on the United States on 9/11, the tsunami in the Indian Ocean in December 2005, or hurricanes or typhoons, the process may be reversed. The money pours in and the nonprofit organization then tries to determine how to spend or distribute it.

In the case of the attacks on the United States in September 2001, the situation was more complicated because it involved layers of the federal government, state governments, and municipal governments, insurance companies, and approximately 200 charities and church groups. Although within two months, over $1 billion was raised by charities, a significant sum. However, according to the testimony before the Congressional Committee, approximately $100 billion was to be provided by the government and insurance companies. The victims’ compensation fund had not yet been designed and established, and the rules had not been written for that fund. One role of some charities was to help victims’ families until the federal pay out was available. As a result, there was the possibility of a risk that charity-provided funds to victims would be subtracted from the Federal government pay out.

What has been missing in all of these major disasters has been sharing of data and failure of coordination between charitable organizations, and between the sector and governments. As a result, if donors are going to be making wise decisions concerning their donations, and rely less on impulse, transparency and accountability are absolutely essential. The problem here is that we really are not sure what that means and how they are to be achieved. That is part of the debate surrounding the sector.

In an online electronic version of an American Bar Association publication, the author addressed problems that charities experience in disaster relief cases, and hence, problems donors have. This discussion related more specifically to the efforts following the 11 September 2001 attacks, although it could apply to any disaster situation. Further, the discussion in the publication related specifically to the regimes under the tax laws and regulations in the United States, and therefore, might not be applicable in other countries.

Nevertheless, “every lawyer who has worked with a charity proposing to provide disaster relief knows the difficult questions that can arise in advising a client on what can and cannot be done within the bounds of the Internal Revenue Code.” There are numerous restrictions on charities that mark “the outer boundaries of what can and cannot be done.”

"These restrictions vary depending upon on the context. There is one set of rules applicable to all charities providing disaster relief. There a second, new set of rules applicable only to charities providing relief in connection with September 11 and certain anthrax attacks. And there is a third set of rules governing the special case of a charity controlled by a company and providing relief to the company’s employees."

Well, these are just a few thoughts to prompt some discussion and reflection on the important roles of government and the third sector in addressing the needs arising out of disasters.

Remembering 9/11 and the Importance of Charity

Just eight years ago I was standing at the window in my office watching airliners flying down the Potomac River toward Washington Ronald Reagan National Airport as I listened to the radio and the reporting of the attack on the Twin Towers of the World Trade Center in New York City. At this point, my initial reaction was that a small private pilot had lost his way and had flown into one of the World Trade Center Towers. In the Washington, D.C. area, traffic on the main arteries from Virginia into Washington slowed to a crawl as an American Airlines airplane appearing to be headed to National Airport, suddenly appeared to veer off course and crashed into the Pentagon. Clearly visible from the road was the ball of fire of the explosion as the plane crashed into the Pentagon, and the smoke started to billow above the building.

Now eight years later, memorial ceremonies and events in New York City at Ground Zero, in Virginia at the Pentagon, and in Shanksville, Pennsylvania, with all the video showings of the events of the horrible day, remind us of the horror of it all, of the lives lost, of families grieving the loss of family members, and of a country changed by the attack.

Today has also brought reminders of the brave and generous work of charities, donors, volunteers, and governments from around the world that rushed to provide needed emergency services. This is not the place to address some of the criticisms and shortcomings alleged to have occurred in the raising of funds, the distribution of funds, and the accountability for the funds received. There are lessons we have learned from this tragedy, and I will identify some of them in my next post since these lessons apply across the board to charitable fundraising and activities in the case of many disaster situations, and, indeed, apply to much of the work of the third sector generally.

But, we also need a little perspective to better understand the amazing role that charity played in bringing some sense of unity to our country. The response of the American people was immediate and overwhelming. Police officers, firemen, and rescue workers from around the country took leaves of absences to travel to New York City to assist in the rescue of people and the recovery of bodies from the ruins of the World Trade Center. There was a surge in blood donations from people around the country during the weeks immediately following the attacks. For example, there were 36,000 units of blood donated to the New York City Blood Center alone.

It is difficult to determine the precise amount of charitable aid funds raised by charities for the relief efforts and immediate assistance to the victims’ families and survivors in the immediate aftermath of the attacks. This was due to the lack of clarity with respect to the purposes for which the funds were collected and distributed, and the difficulty in tracking information across multiple independent charitable organizations. However, the U.S. General Accounting Office reported to the U.S. Senate Finance Committee in September 2002 that over 300 charities were involved in collecting and distributing funds for September 11 relief efforts, families, and survivors.

An estimated $2.4 billion was raised by the 34 larger charities. Some examples of funds raised by a number of these charitable organizations include, $988 million by the American Red Cross, $55 million by Catholic Charities, $156 million by the International Association of Fire Fighters, $18 million by the NYC Police Foundation and New York State Fraternal Order of Police Foundation, $87.7 million by the Salvation Army, $180 million by the Twin Towers Fund, $12.5 million by World Vision.

Charities distributed these funds for a broad range of assistance. Funds were distributed in cash grants and services to families of those killed or injured, for those directly affected by the loss of their jobs or homes, and for disaster relief workers. In order to do this, charities had to make extensive efforts to identify and verify victims, and address privacy issues affecting the sharing of information among charitable organizations involved in these relief efforts. Charities also faced challenges in providing aid to non-English speaking individuals and families needing assistance.

Charities, government agencies, and charity monitoring organizations took steps to prevent fraud. Considering the amount of funds raised and distributed, it is amazing that relatively few cases of fraud were uncovered or identified.

As reported by the General Accounting Office, “overall, charitable aid made a major contribution in the nation’s response to the September 11 attacks despite very difficult circumstances.” As a result millions of people were able to contribute to the recovery efforts and meet the needs of thousands of people directly and indirectly affected by these attacks on September 11, 2001.

Preliminary Musings About Monitoring in the Third Sector

The ICFO Constitution provides, in part, that “in order to give confidence to donors that donations are used for the purposes for which they are given,” ICFO is committed to “promoting transparency and integrity related to the activities of donor supported non-government charitable organizations” within Europe and other parts of the world. In order to accomplish this objective, ICFO shall formulate standards for non-government charitable organizations working internationally, and shall promote charity monitoring organizations throughout the world.

Burkhard Wilke, the Secretary General of ICFO stated in a conference in Paris, France in March 2003 that non-government organizations (NGOs) have become an important social counterpart to the economic and political forces in society (see www.icfo.de, ICFO Publications, “Monitoring Charitable Organizations: Criteria and Assessment Methods). As he noted in this presentation, most NGOs have been granted tax exemption and donors to many, if not most, charitable organizations receive tax deductions for their gifts made that their chosen charitable organization.

Moreover, there is an assumption that NGOs should be accountable to the public. What this means seems a little unclear. We might be able to agree that transparency and integrity and good governance of the NGO are important, and perhaps should be monitored against certain clearly stated standards.

It seems to me that there are two basic questions, and maybe several sub-questions that this blog, and indeed, the entire third sector must address. Part of the dilemma in addressing the issue of transparency and accountability in the sector, and how that is to be monitored, if at all, is definitional.

Perhaps the first and the foundational question is a question of the roles of government and non-government voluntary organizations and institutions in society. At one level, this is a mixed issue of political science and the social sciences. What, for example, is the role and reason for the existence of what may be broadly described as the civil society sector? In what respect should the welfare and cultural needs of a society be addressed by the government and by non-government or volunteer associations and organizations. To a certain extent, different histories and traditions, political philosophies, different legal regimes, and different needs and opportunities, will determine how the welfare and cultural needs of a society, for example, will be met.

However, the question goes beyond simply the provision of welfare and cultural goods and services. It encompasses the role of insuring the transparency, accountability, and trustworthiness of non-government or volunteer associations and organizations. Specifically, at what level should the existence and activities of these non-government and volunteer associations and organizations be regulated and monitored by the government. Or, are there other means of addressing the issue of public and donor trust, and the integrity, transparency, and accountability of the non-government organization or institutions? This latter subject will be addressed in a series of posts representing something of a forum in which guest contributors will express different views on the role of government in regulating and monitoring charitable activity.

It becomes apparent immediately to those of us involved in monitoring the sector that there are different concepts and roles in society for defining the third sector. To a certain extent these may be regional, or based on cultural or historical traditions for identifying the nature of the roles played by various non-government and volunteer associations and organizations. In some cases, the differences in defining the sector simply arise out of the functions performed by various segments within the sector, so that charity, for example, may be thought of as a subset of public benefit organizations which may be a subset of non-government organizations, which may then be a subset of the civil society or third sector.

I hope to explore some of these definitional and functional issues in future blogs. The questions of how the transparency and accountability are to be monitored against certain established standards, and specifically, the roles of governments in regulating matters of transparency and accountability and of independent, nongovernmental monitoring or self-regulation, will be explored by guest contributors to this blog in future posts.

Is the Persche Decision Such a Big Deal?

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.

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 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.

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.