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Millions lost from nonprofits with little explanation despite disclosure laws

Despite disclosure laws, little explanation given

– For 14 years, the American Legacy Foundation has managed hundreds of millions of dollars drawn from a government settlement with big tobacco companies, priding itself on funding vital health research and telling the unadorned truth about the deadly effects of smoking.

Yet the Washington foundation, located just blocks from the White House, was restrained when asked on a federal disclosure form whether it had experienced an embezzlement or other “diversion” of its assets.

Legacy officials typed “yes” on Page 6 of their 2011 form and provided a six-line explanation 32 pages later, disclosing that they “became aware” of a diversion “in excess of $250,000 committed by a former employee.” They wrote that the diversion was from fraud and now say they believe they fulfilled their disclosure requirement.

Records and interviews reveal the full story: an estimated $3.4 million loss, linked to purchases from a business described sometimes as a computer supply firm and at others as a barbershop, and to an assistant vice president who now runs a video-game emporium in Nigeria.

Also not included in the disclosure report: details about how Legacy officials waited nearly three years after an initial warning before they called in investigators.

“We’re not innocent in this,” said Legacy chief executive Cheryl Healton. “We are horrified it happened on our watch. … The truth hurts – we screwed up.”

A Washington Post analysis of filings from 2008 to 2012 found that Legacy is one of more than 1,000 nonprofit organizations that checked the box indicating that they had discovered a “significant diversion” of assets, disclosing losses attributed to theft, investment fraud, embezzlement and other unauthorized uses of funds.

The diversions drained hundreds of millions of dollars from institutions that are underwritten by public donations and government funds. Just 10 of the largest disclosures identified by the Washington Post cited combined losses to nonprofit groups and their affiliates that potentially totaled more than a half-billion dollars.

While some of the diversions have come to public attention, many others – such as the one at the American Legacy Foundation – have not been reported in the news media. And the Washington Post found that nonprofits routinely omitted important details from their public filings, leaving the public to guess what had happened – even though federal disclosure instructions direct nonprofit groups to explain the circumstances. About half the organizations did not disclose the total amount lost.

The findings are striking because organizations are required to report only diversions of more than $250,000 or those identified as having exceeded 5 percent of an organization’s annual gross receipts or total assets. Of those, filing instructions direct nonprofits to disclose “any unauthorized conversion or use of the organization’s assets other than for the organization’s authorized purposes, including but not limited to embezzlement or theft.”

From coast to coast

As part of its analysis, the Washington Post assembled the first public, searchable database of nonprofits that have disclosed diversions, available at wapo.st/diversionsdatabase. Groups on the list were identified with the assistance of GuideStar, an organization that gathers and disseminates federal filings by nonprofits.

Examples of financial skullduggery abound in the District of Columbia, throughout the Washington metropolitan region and across the United States.

A few blocks from Legacy’s offices on Massachusetts Avenue, the nonprofit Youth Service America reported two years ago that it discovered a diversion in 2009 of about $2 million that had been “misappropriated” by a former employee. After the Washington Post asked about the incident, he was charged in federal court and in June was sentenced to four years in prison for theft.

A few blocks in the other direction is the Alliance for Excellent Education, which disclosed four years ago that investment manager Bernard Madoff’s Ponzi scheme had wiped nearly $7 million from its balance sheets. In a statement to the Post, officials there called the figure a “paper” loss.

A few blocks farther is AARP, the national charity that advocates for older Americans. In 2011, it disclosed two incidents with losses totaling more than $230,000, attributed to embezzlement and billing irregularities. An organization spokesman said no one has been charged in those incidents.

Investment fraud was blamed for some of the largest losses identified. Funds linked to Madoff’s scheme, which bilked investors across the country for decades, reportedly drained $106 million from Yeshiva University and its affiliates, $38.8 million from the Upstate New York Engineers Health Fund and $26 million from New York University, according to the disclosures they filed.

But hefty sums disappeared in many other ways, too:

•The Global Fund to Fight AIDS, Tuberculosis and Malaria, based in Geneva but registered and largely financed in the United States, reported in 2012 that it had found evidence of misuse or unsubstantiated spending of $43 million in grant funds.

•The Conference on Jewish Material Claims Against Germany, a New York-based charity for Holocaust survivors, reported in 2010 that it had been bilked out of $42 million in an elaborate, decade-long conspiracy by swindlers who created thousands of fake identities. A spokesman said the estimate has since been raised to $60 million.

•The Vassar Brothers Medical Center in Poughkeepsie, N.Y., in 2011 reported a loss of $8.6 million through the “theft of certain medical devices.” A medical center spokeswoman said a confidentiality agreement prohibited her from explaining further.

•The Miami Beach Community Health Center in 2012 reported losing $7 million to alleged embezzlement by its former chief executive, later convicted of theft.

•Columbia University disclosed in 2011 that it had been defrauded of $5.2 million in “electronic payments.” A university spokesman confirmed that the disclosure referred to an incident involving a former university accounting clerk and three associates, later convicted of redirecting $5.7 million meant for a New York hospital.

•And the 140-year-old Woodcock Foundation of Kentucky, which awards scholarships to students in need, disclosed that alleged fraud by a former chairman drained more than $1 million from its accounts, leaving the charity with assets totaling just $8.

Lack of oversight

Each year, larger registered nonprofits file a form with the federal government that lays out their mission, leadership, revenue and expenses. The question about diversions was added to the forms with little fanfare in 2008, one of several changes meant to make it easier for the public to gauge how well nonprofit organizations manage money.

While the losses identified in the Washington Post’s study total hundreds of millions of dollars, they represent only a fraction of the total. The new question was phased in over three years and appears only on forms submitted by larger nonprofit groups. Private foundations and many smaller groups fill out alternative forms or no forms at all.

The Internal Revenue Service has said little about what information it has gathered from the responses, beyond reporting last year that 285 diversions totaling $170 million had been disclosed in one year alone, 2009.

Chicago lawyer and governance consultant Jack Siegel, an early proponent of adding the diversions question to the disclosure forms, said he had hoped it would allow the public to discover for the first time just how much theft was taking place and would discourage organizations from covering up problems.

“People should follow up and ask, ‘Are you properly monitoring the money I’ve given you?’ ” Siegel said. “If I’m giving you my money and you’re wasting it by allowing people to steal it, why should you be allowed to hush that up? Why shouldn’t I know that?”

More than 1.6 million nonprofit groups are registered with the federal government, and they control more than $4.5 trillion in assets. An additional 700,000 organizations, such as churches, need not register.

From 2000 to 2010, the number of registered nonprofits increased by 24 percent, according to an Urban Institute study. Annual revenue from such organizations, adjusted for inflation, grew by 41 percent.

Little comparative data are available about the prevalence of fraud across business sectors. But a 2012 study by Marquet International, a security firm in Boston that conducts an annual study of white-collar fraud, concluded that nonprofits and religious organizations accounted for one-sixth of major embezzlements, placing second only to the financial services industry.

“I come across these cases all the time,” said Christopher Marquet, who heads the firm.

He said oversight at nonprofits is often thinner and supervisors more trusting.

“The control structures in these organizations are much weaker,” he said.

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