The Tainted Donor Dilemma

The media recently queried us about a scandal involving renowned pedophile and convicted sex offender, Jeffrey Epstein. His contributions to New York’s Academy of Art have been called into question, along with the role of the Academy’s board of trustees’ chair, Eileen Guggenheim, in enabling his acquaintances with young female students. The unsavory story ultimately begs the question; how do organizations deal with tainted donors?

The tainted donor dilemma is nothing new; nonprofits have long wrestled with the ethical and reputational implications of receiving questionable characters’ gifts. But with the explosion of real-time mass communication and social media, stories of wrongdoing are quickly amplified and can quickly sink a person–and everything and everyone with whom they are associated.

The list of gifts called into question for the untoward actions of benefactors is long and growing. Consider the recent scrutiny of Oxycontin maker Purdue Pharma’s Sackler family, whose philanthropy touches major art institutions worldwide. Or the University of Southern California’s 2017 decision to reject a $5 million pledge from Harvey Weinstein to support female filmmakers.

So what exactly can nonprofits do to avoid the unenviable scrutiny of accepting a tainted gift?

Key Considerations for Tainted Gifts

To begin with, not all taints are equal. Some gifts are tainted because the money is illegal or derived from or gifted by illegal means. This is generally a deal-breaker for any proposed gift.

Other gifts are considered tainted due to the “sins” of the donor, which may be entirely unrelated to the gift’s manner or means. In this case, a charity must look to ethical and practical considerations in determining whether to accept the gift.

Each gift must be evaluated in the context of the particular donor’s circumstances, the donation itself, and the charitable organization’s overall mission and objectives.  Along with ethical considerations are the practical ones, such as expenses, tax consequences, and the impact on the organization’s reputation.

The wide variability of responses to this dilemma runs the spectrum. By example, Forbes posits the adoption of a “know-your-donor” obligation for nonprofits wherein gifts are accepted only from donors whose actions indicate they align with the mission and objectives of the nonprofit; because in “a time when investors are more actively working to align their investments with their values, nonprofits should strive to do the same thing by aligning their donors with their values.”

Still, others believe the end to justify the means–Mother Teresa is known to have willingly accepted donations from dictators and despots, reasoning that the money’s pedigree was irrelevant to the good accomplished by their use. At the end of the day, it’s hard to say no to major gifts, but it may be even harder to defend the decision to profit from the ill-gotten gains of a notorious serial pedophile like Epstein.

Unfortunately, there is a dearth of clear guidance available to nonprofits navigating this minefield. At the least, a board should consider key questions such as:

— What degree of diligence is required at various levels of gift?
— When, if ever, is it acceptable to accept a gift with taint?
— What happens when already accepted donations become tainted?

What is the Board’s Responsibility for Accepting (Or Declining Gifts)?

In most states, there is no specific rule about how much detail staff must share with the board aside from basic financial statements, corporate governance documents, membership rosters, and the like. Ultimately, it is implicit on the board to ask questions and implement policies and procedures to ensure they are aware of major issues that can significantly impact the organization.

The board’s active participation and engagement are a requirement of their fiduciary duties to the organization and help avoid a rubber stamp situation wherein a board unquestioningly accepts staff’s recommendations or fails to ask the tough questions.

Gift Acceptance Policies

In addition to the reputational harm that can stem from a controversial gift–or a gift from a controversial donor–, some gifts (like real estate and livestock) can impose additional legal restrictions or costs that render the overall benefit of the donation questionable.

A written gift acceptance policy can provide directors and staff guidelines in evaluating the overall risks, costs, and benefits associated with a proposed gift. A thoughtfully crafted gift acceptance policy can also serve as a useful backstop for directors placed in the awkward position of questioning or rejecting a donor’s gift. What should it include?

The following is a non-exhaustive list of matters that your nonprofit may wish to include in their own gift policy.

  • A determination of which types of gifts are subject to board or committee review.
  • Procedures for evaluating prospective gifts.
  • Guidance on when to involve legal counsel.
  • Policies on the acceptance of restricted gifts.
  • Gifts of real property–Real property presents a unique set of issues, such as costs of carrying, appraisal, and sale, outstanding restrictions or limitations on the property, and tax implications, among others. These should be analyzed thoroughly before accepting a gift of real estate.
  • Donor recognition guidelines–This can include provisions removing renaming when a recognized donor later engages in disreputable activities inconsistent with the organization’s mission and objectives.
  • Planned Giving Considerations.
  • Measures for reviewing and updating the policy, along with provisions for policy exceptions.
  • Delineating responsibility for fees and costs related to transferring certain gifts to the organization.
  • Gift return policy.
  • Whistleblower Policies

Many nonprofits have gift acceptance policies that permit them to reject gifts if they feel the source would reflect poorly on the organization or undermine its work. However, they often vest gift approval in staff whose compensation hinges on their personal or department fundraising totals. This creates a strong financial incentive to overlook red flags.

That’s why boards also need to create oversight mechanisms, such as whistleblower procedures, for concerned individuals to report suspected wrongdoing. Otherwise, a problematic situation may go unrecognized until it’s too late for damage control.

Ellis Carter is a nonprofit lawyer with Caritas Law Group, P.C. licensed to practice in Washington and Arizona. Ellis advises nonprofit and socially responsible businesses on corporate, tax, and fundraising regulations nationwide. Ellis also advises donors with regard to major gifts. To schedule a consultation with Ellis, call 602-456-0071 or email us through our contact form

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