Explore Harvard's Nieman network Nieman Fellowships Nieman Lab Nieman Reports Nieman Storyboard

Time to regulate online philanthropic proxies?

ASK THIS | May 21, 2012

These days, Web-based charities may serve as pass-throughs for donations to nonprofit groups, sometimes without the knowledge of the nonprofits themselves. There are mountains of money involved, occasional confusion and added expense and an obvious potential for abuse as well. Expert William Bagley raises serious questions about key aspects of this system.

By William Bagley

Even in a weak economy, American philanthropy continues to grow.  In 2010 it rose to a level exceeding $290 billion (2011 figures will be reported on June 19, 2012 by www.GivingUSA.org ).  This level of charitable donation represented an increase of 3.8% over 2009 and constituted fully 2.0% of the Nation’s GDP.  It is a powerful, impactful sector of the economy and one gaining not only in its substance but in its sophistication. 

Philanthropy remains mostly the province of individual donors (73% of all donations made in 2010) and contributions are mostly to religious organizations, schools and healthcare. As philanthropy entered the 21st Century, it would find expression through especially sophisticated charitable giving techniques that run the gamut from complex trusts to IRA donations. 

At the same time, the level of need experienced by non-profits has increased as well.  One might argue that the expansive increase in the number of non-profits, alone, reflects that growing need. In 2010 there were 1,280,739 organizations certified by the IRS as eligible to receive charitable donations (so-called 501(c)(3) organizations) – compared with 865,096 in 2001. And, while certain philanthropies call for the consolidation of non-profit organizations (community foundations – notably including the Boston and RI Foundations – were early leaders in this regard), this expansion continues. 

Higher education and finance have responded to growth in philanthropy. In the case of higher education, new degree and certificate programs in philanthropy would appear – with  NYU and Indiana as two now familiar examples – preparing students to assume careers either asking for or donating funds. 

Large financial houses have seen opportunity in philanthropy too. By way of example, Fidelity and Vanguard allow individuals to channel charitable giving through non-profit subsidiaries called donor advised funds.   Other non-profits help to form families’ approaches to philanthropy – see Rockefeller Philanthropy Advisors. In other words, not only has the level of giving risen, but an entire credentialed professional class of advisors, investors and financial institutions have evolved around it. 

Some argue that the decidedly laissez-faire regulatory environment that governs philanthropy has led to elements of ambiguity in charitable giving and possibly to abuses.

A clear example of this lies in circumstances where web-based charities serve as proxies for non-profits by receiving charitable donations on their behalf – and doing this unbeknownst to many (perhaps nearly all?) non-profits ostensibly served by them. Here’s how it works:

An organization is created with an online presence to offer advice to donors interested in supporting charities. Among the many constructive things such sites may offer is access to financial records (notably to 990 forms submitted annually by the NPOs to the IRS). Access to such records, and other related background information, allows prospective donors to review information on the organization, how it is organized and how financially stable it might be. These sites may also offer advice on fundraising. So far so good.

But, at the same time, these sites allow prospective donors to make online gifts through them to non-profits of their choosing – drawn from an offered list of charities designated as 501 (c)(3) tax exempt organizations by the Internal Revenue Service. Here, things can get murky and fair questions are raised as to whether the public interest in philanthropy is well supported by such sevices.

Specifically, though enabling donors to make online gifts may benefit non-profits otherwise unable to receive gifts online, many and perhaps most charities are unaware that another non-profit is actively encouraging and receiving gifts on their behalf (when they may, in fact, neither need nor want such assistance).

What is more, these online sites often channel such donations through a donor-advised fund and the donation, for purposes of tax deduction, is technically made not to the intended charity, but to the donor-advised fund that will later (sometimes much later) pass on the funding to the intended non-profit.

Normally, when a donor makes a credit card gift directly to the charity – either online or in writing – the service fees and other costs of processing are not deducted from the gift.  In the case of donations channeled through many of these websites, such gifts are assessed a substantial enough fee for the processing.

And finally, the non-profit intended to benefit from the gift will not likely be aware of it until the site passes the check along. As noted above, this may be well after the gift is actually made, and, when it does receive the gift, the intended charity receives the donation less processing fees – possibly surprising donor and organization alike. 

Questions abound, among them:

Q. Does this system really promote charitable giving? 
Q. Do such sites operate with sufficient transparency so that donors know when, by whom and under what circumstances their gift is presented to the intended charity? 
Q. Do such sites effectively communicate any restrictions on use intended by the donor?
Q. Do such sites process gifts in a timely manner and ensure that they are quickly received by the intended charity?
Q. Are such sites (and their processing units) ready to maintain records sufficient to support donors’ interests over time?  (As when they might need to substantiate a gift.)
Q. Should such sites, acting effectively as un-appointed agents of non-profits, be required by state attorneys general to notify non-profits of their activity?
Q. Should all sites, purporting to represent other non-profits, be required to register with attorneys general?
Q. Is there a need for federal legislation to regulate the activity of one non-profit acting as proxy for a second non-profit without its knowledge or approval? 

Two prominent examples of online entities include Charity Navigator and GuideStar, both of which were created with support from respected funders explicitly to encourage greater and better informed philanthropy and both of which have done honorable work in educating donors.  Still, even they process such donations out of the direct view of charities that would benefit from them.  And, no one really knows how many other web-based entities exist.  Worse yet, such other websites may operate with even less transparency than Charity Navigator and Guidestar – or may simply be scams. 

In at least one instance, non-profits, once they become aware of such proxies, have protested to an attorney general.  California-based Charity Blossom which, in 2011, became the subject of coverage by the Boston Globe when two Massachusetts non-profits complained to the Massachusetts Attorney General that the site had encouraged gifts to be made on their behalf, but without their knowledge or approval.

All of this is not to say that online websites that offer information and proxy services might not offer some benefit to the charitable world, or, that they operate outside of the law (though, depending upon circumstances, some may).  Indeed, the role they play in disclosing information about non-profits has proven worthy. But to the extent to which they encourage and receive donations on behalf of charities usually unaware of their actions, and to the extent to which the processing of gifts is out of sight and lacking clarity, questions remain.




The NiemanWatchdog.org website is no longer being updated. Watchdog stories have a new home in Nieman Reports.