Was the Trump Foundation the Only Funder on Santa’s Naughty List?

As you struggled to raise more money at the close of 2018 while carving out holiday time with loved ones, you might have missed an important news story.

On Dec. 18, news reports announced that the New York Attorney General’s Office and the Trump Foundation had reached an agreement to dissolve the Foundation. Under the terms of the deal, the NY Attorney General will distribute the Foundation’s remaining assets to charities.

Donald Trump

However, the closing of the Trump Foundation does not end the matter. Barbara Underwood, the NY Attorney General, says the state still seeks $2.8 million in restitution, plus additional penalties.

Furthermore, the Attorney General is asking the court to bar Donald Trump from serving with nonprofit organizations in New York for 10 years. The state’s lawsuit also calls for a one-year ban for three of Trump’s children — Don Jr., Ivanka, and Eric — all of whom were Trump Foundation board members.

The State of New York “lawsuit says that Trump’s charitable organization, which he founded in 1987, engaged in ‘persistently illegal conduct’ and that Trump basically used the Foundation as a slush fund to promote his business and political campaign,” according to a report in Vox.

This news item is inherently important. It involves a charitable foundation with significant assets that appears to have acted far less than charitably. It also involves the President of the United States. However, the significance of this story does not end there.

If the NY Attorney General is correct about the alleged misdeeds of the Trump Foundation, dissolution of the Foundation and a temporary prohibition of Trump family members from serving with NY charities for a limited time seem like an insignificant punishment. Unless serious penalties are levied against Donald Trump and his family members who were involved, the Trumps alleged criminal behavior will go unpunished. Furthermore, they will remain free to create and/or serve with nonprofit organizations outside of the State of New York. Other than a bit of bad press, the Trumps will pay little for their behavior.

The problem does not end there. Failure to hold the Trumps personally liable not only fails to punish the Trump family, it sends a signal to anyone interested in using a charitable foundation for personal benefit. That signal is that there is little downside for misbehavior. In other words, there will be little to no deterrent effect unless severe penalties are imposed by the court, assuming the allegations are proven true.

The other thing we need to understand about the Trump Foundation story is that it is not an isolated situation. A decade into my fundraising career, the nonprofit sector was rocked by the scandal surrounding the Foundation for New Era Philanthropy. Operating from 1989 to 1995, the Foundation raised over $500 million in an elaborate Ponzi Scheme that defrauded well known charities and experienced philanthropists out of millions.

That wasn’t the first funder scandal, and it certainly wasn’t the last. Let’s face it. The Trump Foundation is not the only funder on Santa’s naughty list.

As another report in Vox observed, “There are some 86,000 foundations in the United States, with total assets of around $890 billion. And the vast majority of them never face this kind of scrutiny.”

The primary reason the Trump Foundation was thoroughly investigated was the involvement of a presidential candidate who went on to become US President. What if Trump had remained a private businessman?

Yes, regulators do occasionally catch wrongdoing. Vox points out that the NY Attorney General’s Office “did crack down on the foundation affiliate of the UK-based Pearson education company for intermingling charitable and business funds, and got Broadway producer David Richenthal to pay back the $500,000 he bilked from his family foundation. But in those two cases, the punishments were pretty mild. Note that when poor people — as opposed to Richenthal — steal lots of money, just giving the money back isn’t usually enough to avoid prison. The Attorney General got $7.7 million from Pearson, in a year when the company booked upward of $1 billion in profits (using exchange rates at the time). That’s less a punishment than it is a rounding error.”

The philanthropic sector has a problem. Funders are not required to be particularly transparent. Regulators are understaffed and, therefore, ill-equipped to provide oversight of the tens of thousands of foundations that exist. Furthermore, when bad operators are caught, the penalties are often light and, therefore, do not punish the wrong doer, and do not serve as a credible deterrent for others.

Making matters worse, when philanthropy scandals do arise, they further erode the public’s trust in the entire charitable community. This makes life even more difficult for legitimate charities dependent on philanthropic support.

There are five things tht the nonprofit sector must do immediately to address the issue revealed by the Trump Foundation scandal:

1. The nonprofit sector needs to face up to the lack of accountability for funders. The Association of Fundraising Professionals, the Council on Foundations, Independent Sector, and other leading associations should form a coalition to review the current situation and make recommendations for better ensuring the lawful activity of foundations.

2. Charities should not ignore the suspicious activities of foundations. If something doesn’t seem right, charities should report their concerns to their state’s regulators.

3. States should adopt new transparency regulations, preferably with input from the philanthropic community and nonprofit sector.

4. States should adopt harsher penalties for foundations and their board members who violate the law.

5. States should ensure their oversight departments are adequately staffed and funded.

Whenever there has been a scandal involving a funder, the tendency has been for people to think of it as a terrible but isolated situation. Clearly, it’s not. With a large number of funders and a small number of regulators, the chances of getting caught are tiny. With punishments usually nothing more than a slap on the wrist, the downside risk associated with wrongdoing is tolerable. No wonder we see these scandals periodically. They’re not isolated. They are a result of a permissive environment that we can and must fix.

In the conclusion to his Vox article, Dylan Matthews writes:

But it would be a real shame if our lesson from the Trump Foundation is just ‘Trump is bad.’ The lesson ought to be, ‘Foundations can be bad, and we don’t have a system in place to hold them accountable.’”

The vast majority of foundations are virtuous organizations providing the funding necessary for charities to do exceptional work. Unfortunately, the current permissive environment allows too many individuals to take advantage of the situation for personal benefit. This robs charities of needed resources and erodes public trust.

We must do better.

That’s what Michael Rosen says… What do you say?

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