Monday, October 25, 2010

Money Laundering in Nonprofits

My colleague from Stanford’s Center on Philanthropy and Civil Society, Professor Rob Reich, is a smart political theorist. He even makes tax incentives interesting. For a long time Rob has been asking whether the “blunt tool” of tax exemption is right for all charitable giving.

On a recent panel discussion with Rob I realized that the post Citizens United years may well give us the opportunity to revisit that structure. Rob said something akin to “After Citizens United was passed by the U.S. Supreme Court this January, we expected to see huge corporate dollars flow into politics. What we’re seeing is nonprofits playing the big funding role.”

I hadn’t seen it that way. To me, it’s corporate money that just happens to be flowing through nonprofits. The nonprofits are, in effect, laundering the corporate money. Yes, that’s strong language. Intentionally. Now that the law of the land allows corporations unlimited spending on campaigns, why else would they bother to move the money through nonprofits unless they want to mask their involvement? The lack of transparency around these organizations provides the donors with unfettered funding opportunities while letting them hide their identities (except when four intrepid reporters spend countless hours digging through document trails). When these nonprofits then spend 50% or more of their money on issue and political ads, it's hard to see them as anything but shills for that money. To me, that's money laundering.

When you think of money laundering, trust and integrity are not what comes to mind. Yet trust and integrity are the calling cards of nonprofits. This is just one reason everyone in the social sector needs to be thinking about what it means if 501c4s and 501c6s start gaining a reputation as fronts for company money. That’s not a reputation your local food bank or youth organization wants to have to live down, and talking tax code subtleties with the general public is not going to be an effective way to deal with this issue.

I'm working on a more nuanced, thoughtful, and less deliberately inflammatory sets of posts on the impact of Citizens United. There are a lot of strategies to consider - including changing the way broadcasters charge for political ads, since so much of the "money in politics" just winds up at TV and radio stations anyway. And there are other things to do as well, campaign finance reform, DISCLOSE Act, shareholder proxy voting - stay tuned, I'm going to try to get at all that.

As this is a partial thought (a Random Philanthropy Observation) I had posted it on my Tumblr blog but had some trouble with that technology so moved this post over here. Please bear with me.


Pete said...


Thanks for highlighting this important issue. “Money laundering” is indeed the right term for much of what is going on. Seven figure individual and corporate contributions to political advocacy by 501(c)(4), (c)(6) and (c)(7) organizations are being channeled through those organizations because, for now, the sources of the contributions can be kept confidential.

Your focus on trust and integrity is the heart of the matter. The harm to the charitable/public benefit sector is that every time news stories talk about “nonprofits” being used to launder corporate and foreign contributions, it will further erode public trust in charitable organizations. At its extreme, this kind of collateral damage could lead to calls to tighten restrictions on, or even prohibit, lobbying and advocacy by charitable organizations, (the “ACORNing” of charitable and community organizations?). Never mind the fact that charitable orgs already are absolutely prohibited from supporting or opposing candidates.

In addition to preserving charitable organizations’ advocacy rights, we also need to prepare for the coming battle about disclosure. Let’s assume for a moment that elected officials will actually agree to strong disclosure requirements (we can wish, but probably too much to hope for). The easiest case is to require disclosure of all contributions to 501(c)(6) organizations (chambers of commerce and business leagues). The harder case will be 501(c)(4) social welfare organizations, where some organizations might be able to make a stronger claim to a “freedom of association” interest in keeping their contributors or members private, along the lines of the NAACP case from the late 1940s.

Is there any doubt that the general rule should be that voters need to know where funding is coming from? Disclosure is important to shareholders, too. Giving by corporations to political advocacy campaigns must be disclosed, and immediately (in the age of RSS feeds and Twitter, there is no reason the broad outlines of filing statements (who gave to what campaign in what amount) shouldn’t be made available within 24 to 48 hours. Dan Schnur, Chairman of the California Fair Political Practices Commission, says regulatory agencies like his need “a microscope, a time machine and a megaphone.”

There also will be a battle over how to determine what communications efforts are “political.” As Greg Colvin, an attorney who specializes in the law of tax exempt organizations, points out, there will be a need for clear rules for deciding the tax treatment of corporate contributions to political advocacy campaigns. Colvin presents a good proposal for the guidance that Treasury and IRS should provide, calling for “bright line” rules for determining when an advocacy campaign should be judged to be political, in which case the contribution would not be deductable by the corporation as a business expense. He suggests that when a campaign (1) refers to a candidate, and (2) expresses a view on a candidate, then the speech is political and contributors cannot deduct what they gave. My only comment is that we might also expand “refers to a candidate” to be “refers to a candidate or a political party,” as ads saying “Vote Party X” are certainly just as political as ads that refer to a specific candidate, even moreso, in fact. Just as it is forbidden for charitable organizations to say anything that even indirectly endorses or intervenes in a race (they cannot run issue ads saying “Vote Green Power” for example), any corporate support for communications that even indirectly support a party or candidate should be taxable.

Please forgive the length of this comment. Looking forward to reading the post you are working on.



Lucy Bernholz said...

Want to see some of the money flow? Read @JakeBrewer's column on Huffington Post

And more discussion on this issue are in commments here

Lucy Bernholz said...

Beautiful job of laying out the cross cutting issues - advocacy by nonprofits, donor anonymity and transparency, etc. I've been drawing a little mind map (I have a little mind!) to keep all these pieces visible at once. Your post does a great job of laying out how complicated this is. Thanks for your comments and the resources - going now to find Colvin's piece.


Pete said...


Thanks! I'll also post my comment at HuffPo site, too, in case it helps push the conversation there.


@pmanzo - Twitter

Lucy Bernholz said...

Here are two more pieces, both from Rick Cohen at Nonprofit Quarterly, that may be of interest:


Mazarine said...

This is why the Urban League is a toothless organization that is NOT actually helping protect African Americans or other disadvantaged groups.

Corporations are doing their money laundering through it.

As a fundraising professional, I feel like on the one hand, nonprofits need to be finding other sources of income, but on the other, they just really need money and will take what they can get.

Sadly, this is also the principle on which our current government is operating.

Buy-outs in congress and the senate has been graphed here by Mother Jones:

Wonder if we could create a buy-out graph for the white house as well?