Ten Tips for Avoiding Charitable Scams

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Ten Tips for Avoiding Charitable ScamsNo sooner had the rain stopped falling from Hurricane Sandy then the scammers were set up to take advantage of compassionate Americans who wanted to help. Investment scams and charity fraud crop up after every natural disaster. Nearly 1,100 Internet addresses related to Sandy had been registered within a week of the storm. State attorney generals, business and consumer groups and the Justice Department were immediately cautioning consumers to be wary of requests for donations.

The charitable community is in desperate need of our philanthropy due to the weak economy and government cutbacks. Don’t let high-profile scandals discourage you from giving to needy organizations. By following a few simple suggestions, donors can feel confident that they are giving to organizations that are effectively governed, transparent about their operations, fiscally responsible and—equally important—aligned with their core values. The following “Top Ten Due Diligence List for Donors” was borrowed from Strategic Philanthropy:

  1. Evaluate the organization’s overall mission to determine if it reflects your personal values and philanthropic goals.
  2. Check the organization’s tax exempt status and confirm that it is in good standing by using the IRS’s free exempt organizations search tool. This online database lists all of the nonprofit organizations in the U.S. eligible to receive tax-deductible contributions as well as those organizations whose federal tax exemption has been revoked.
  3. Review the organization’s financials. Online tools like the Foundation Center’s 990 Finder allow users to review copies of nonprofits’ most recently filed Form 990s. These forms contain useful information on a nonprofit’s assets, liabilities, reserves, expenses and revenue sources. Additional financial information can be found in an organizational audit as well as in copies of current and previous years’ budgets. Make sure expenses seem reasonable given projected income and the scope of the organization’s work, and pay attention to the diversity of the organization’s funding sources. If the organization receives government funding, look at how it has coped with delayed payments and social service funding cuts. Ask if they have a contingency plan in the event that government funding is cut further.
    When reviewing organizations’ expense allocations it is important not to dwell on so-called “overhead” or “expense” ratios (a measure of how much of each donation is spent on programs versus administrative and fundraising costs) to guide decisions about which organizations deserve your charitable investments. By relying on this data and awarding funds to only those organizations with lower “overhead” costs, donors inadvertently punish those organizations that invest in the infrastructures (e.g. fundraising software, adequate work space, up-to-date equipment) necessary to support successful program delivery.
  4. Review the organization’s programs and services. Are they aligned with the organization’s mission and does the organization have the capacity (i.e. staff and resources) to successfully deliver programs and services to the target population?
  5. Find out if, and how, the organization evaluates the outcomes of its programs and services. Reviewing formal evaluations that have been conducted can show whether or not an organization has had a positive impact on the population it serves or on the issue it aims to address.
  6. Ask if there is a strategic plan and a fundraising plan in place and ask how they are being implemented. This will give you a sense of where the organization is headed and whether or not they will have the resources to get there.
  7. Review the organization’s investment policy. Find out the track record of the investment manager(s). Inquire about whether or not there is a conflict of interest policy in place.
  8. Talk to Board members and other donors in order to gauge the organization’s commitment to donor stewardship.
  9. Schedule an in-person visit. Most organizations welcome the opportunity to show donors, first-hand how their organizations operate on a daily basis. Many offer formal group visits for donors to their work sites—both locally and around the world. Donors can also schedule meetings with the organization’s lay and professional leadership to talk with the key people behind the organization’s work. These meetings provide donors with deeper insight into how the organization is run and usually result in greater confidence that their gifts will be put to use in a meaningful way.
  10. Consider reaching out to professionals, firms that offer philanthropic advisory services, to learn the “language” of nonprofit management so that you can ask the right questions and be in a better position to make informed decisions.

Charity scams will always be with us because to get rid of them you would need to eliminate people’s compassion for their fellow human beings. Scammers make use of this compassionate feeling to make money out of nothing. But you can avoid the scammers and help those in need by following this top ten list.

Rick’s Insights

  • Scammers take advantage of people’s compassion for their fellow man.
  • Due diligence is the key to finding worthy organizations that are effectively governed and fiscally responsible.
  • Whenever possible, visit an organization you are interested in supporting.

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