Charity Fraud: Is That Celeb Legit?

How to protect yourself from charity fraud.

June 1, 2012, 9:10 AM

June 1, 2012 — -- It's one thing to think twice before sending cash to a Nigerian ex-ambassador who perished in a plane crash and named you as the beneficiary of his $25 million inheritance.

It's quite another to donate money to Mary J. Blige, whose Foundation for Advancement of Women Now (FFAWN) is being sued by TD Bank for a $250,000 loan that was taken out in June 2011 --and only $368.33 has been repaid. Or to "Three Cups of Tea" author Greg Mortenson, who was recently ordered to repay $1 million in donations to his various charities. Or to phony Hurricane Katrina, Japan earthquake or tornado relief organizations.

"We see a lot of phony charities that pop up after storms or disasters," said Katherine Hutt, a spokesperson for the Council of Better Business Bureaus in Arlington, Va. Indeed, the National Center for Disaster Fraud, which the Department of Justice established in 2005 to investigate, prosecute and deter fraud associated with federal disaster relief programs following Hurricanes Katrina, Rita and Wilma.

The most recent data shows that in 2010, individual Americans donated $211.77 billion to charity, reports the Giving USA Foundation, a research and education group, and its research partner, the Center on Philanthropy at Indiana University. But while giving has increased, so has the number of fraudulent charities, reports the U.S. Department of Justice.

The tactics range from the high-tech to low-tech. Phishing, for example, is a real hazard: Users simply click on email links that lead to bogus web sites that appear legit but aren't. Instead, the users' credit card information and passwords are stolen.

"Legitimacy is a big issue today, particularly in time of crises," said Bob Ottenhoff, president and CEO of GuideStar, which collects information-- including nonprofits' official Web addresses, tax forms and financial data--on the 1.9 million non-profit organizations in the U.S. "Fake web sites pop up. It's good to be a little skeptical, and if you don't know the charity or haven't heard about it before or are not quite sure, that's a reason to say, 'I'll think about it'. I often say, 'send me some information." Ninety percent of the time you never hear from them."

The best way to protect yourself is to be proactive. Consumer and charity watchdog sites like the Better Business Bureau, Charity Navigator and GuideStar also list nonprofits' official web addresses, as well as tax forms and financial data. The BBB also rates them based on 20 standards of accountability, including the structure of the board of directors and the transparency of financial data.

"We recommend that donors check out three things before they give," said Sandra Miniutti, Charity Navigator's vice president.

First is the charity's financial health. Either go onto a charity watchdog site like Charity Navigator, which also rates nonprofits, or ask the organization for a copy of their Form 990, an informational tax return that charities must file annually with the IRS. By law, they are required to provide it to anyone requesting a copy.

You should also check on issues around accountability and transparency.

Last year, Charity Navigator began tracking whether the charity uses an objective process to determine their CEO's salary, whether it has an effective governance structure, and whether it has a whistleblower policy.

"Do they make their 990 readily available when requested? Do they have a conflict of interest policy? Do they have at least five independent board members? A lot of that are details on the 990," she said.

Lastly, check on their results. "Give them a call, find out what challenges they face, what their goals are, and what their accomplishments are," she said.

But what if it's a celebrity who, by all accounts, is legit? Should consumers assume that his or her charitable organization is on the up and up, too?

Ottenhoff advises caution. "Sometimes celebrities connect with charities and the link hasn't been defined," he said. "This happens a lot with the charities of big-name athletes. Often they start a charity not for charitable purposes, but for ways to avoid taxes or to employ friends and family. The whole Greg Mortensen thing. You had a guy who became a celebrity and he didn't have a governance structure."

Other times, a celebrity might be able to "sell the vision" but doesn't know how to process the money, or deliver on the programs, he said. "Having a good idea only goes so far—then you have to implement it. Celebs get too busy. Somebody could be using their name—the celeb may not know the details of what's really happening."

Mary J. Blige, who is the CEO and founder of FFAWN, took full responsibility for its troubles. She told TMZ that the main problem was that she "didn't have the right people in the right places doing the right things."

The DOJ has issued a list of guidelines to consider before making a donation. These include: Be skeptical of individuals representing themselves as surviving victims or officials asking for donations via email or social networking sites. Be cautious of emails that claim to show pictures of the disaster areas in attached files, because the files may contain viruses. Only open attachments from known senders. And don't feel obligated to say yes.

"We're all flooded with requests-email, phone calls, tweets, texts," said Ottenhoff. "There's no reason why you have to say yes. Don't feel like you're personally obligated. Think of the stock market—if you spent your money based on tips people give you you're probably do a lot worse than if you spend your time thinking about what is best in terms of investing."