A new season of scandal has afflicted the nonprofit sector. In this case, it’s not bad acts by charities, but gifts tainted by bad donors. Examples abound: Jeffrey Epstein’s gifts to the MIT Media Lab and Harvard University; Bill Cosby’s gifts to Spelman College; the Sackler family’s gifts to many different charities; and the Key Worldwide Foundation’s gifts to Stanford and other universities implicated in the Varsity Blues college-admissions bribery scandal. These tainted gifts have left universities and other charities scrambling to return funds, cancel honorary degrees, and strip buildings of donors’ names, in order to protect their own reputations and perhaps even to avoid liability.

What can leaders of universities, museums, and other charities do to plan for and otherwise manage the risks presented by bad donors? In this article, I identify five planning options that will increase a charity’s ability to react and to decrease its risk.

MORALS CLAUSE

First, some have called for more widespread use of morals (or “bad boy”) clauses in donation and gift agreements. A morals clause provides for a specific remedy if certain objectionable conduct occurs. While morals clauses are quite common and commonly upheld in the employment-law context—particularly among highly compensated executives, athletes, and performers—they are still uncommon in institutional philanthropy. Morals clauses have traditionally been unacceptable to many donors and so anathema to institutions. A further difficulty with morals clauses is crafting the precise definition of what constitutes a violation permitting a donee to void a donor’s rights. The range of possibilities runs from very restrictive (e.g., only for a conviction for a felony involving moral turpitude), to the most expansive (e.g., failure to meet standards of decency or any action that has an impact on the donee’s reputation). Donors reluctant to accept a morals clause are unlikely to be persuaded by overly broad provisions.

If a charity and a donor agree to a morals clause, their agreement must also spell out potential remedies. Remedies can range from removal of signage and discontinuation of public recognition to returning the gift—a last-ditch option that is nevertheless becoming increasingly common.

If a morals clause, while theoretically desirable but impractical, is not an acceptable option, what other alternatives are available?

DUE DILIGENCE

One alternative is to perform significant due diligence. Due diligence on donors has been relatively uncommon until recently. Not for nothing the old saw: Don’t look a gift horse in the mouth.

But some organizations, particularly those involved in journalism, have long been of a more investigative bent, and others are beginning to follow that example. And, of course, self-help due diligence is easier than ever before. Today’s resources dwarf what was available 20 or 30 years ago. With widely available online databases, one can check criminal records, credit reports, professional licenses, political contributions, and the filings of publicly traded companies. And some types of due diligence may be legally advised or even required. For example, Title IV-eligible universities and colleges must report large donations from foreign sources, including agents and subsidiaries controlled by foreign sources. Foreign status thus defined might not be apparent without inquiry or investigation.

DISQUALIFIED-DONORS LIST

An alternative to conducting ad hoc due diligence before accepting a gift, or an additional protection method, is for charities to compile and maintain a disqualified-donors list (also sometimes called a “black list” or, for less offensive donors, a “gray list”), flagging persons from whom the organization will not accept gifts. Governance authorities recommend the adoption of gift-acceptance policies, and a disqualified-donors list can be viewed simply as a variation on the standard gift-acceptance policy, i.e., setting out from whom (in addition to what kinds of) gifts are accepted.

The disqualified-donors list is already a practice of many large nonprofit institutions, including universities, hospitals, and environmental organizations. One problem with a disqualified-donors list is the same issue that arises with every institutional policy: not formulating or adopting the list, but rather adhering to it. A whistleblower revealed that MIT maintains a disqualified-donors list and that Jeffrey Epstein was on the list, but his donations were accepted nevertheless. Moreover, there is no centralized disqualified-donors list, nor any precedent to communicate the contents of one institutions’ list to another institution.

VARIANCE POWER

This places in the donation agreement the charity’s right to deal with a bad donor after the fact by varying one or more terms. This could include the right to remove signage and otherwise discontinue public recognition of the donor, among other options. This “variance power” is common in some situations, e.g., a common trust instrument must grant variance power to the governing body of a community foundation or trust comprising many trusts or funds but seeking to be treated as a single entity. A variance power’s common triggers include renovation, restoration, or rebuilding of a sponsored facility or the simple lapse of time. These more neutral triggers avoid the stigma of the morals clause. A donor who balked at a morals clause may be more likely to consent to the more innocuous variance powers. Variance powers also have the effect of banning perpetual rights of public recognition, for good or for ill.

BLINDING

Finally, some charities may find useful the practice of accepting gifts only on a required anonymous basis, also known as blinding. Blinding ensures that no bad actor can burnish its reputation with public recognition, while still permitting funds to flow to charity. There is some indication that the practice is widely used on an informal basis, but institutions could establish a policy that they will accept gifts from questionable sources—perhaps from a gray list of questionable donors—only on condition of anonymity.

In the wake of the MIT Media Lab case, Harvard Law professor Larry Lessig has proposed a schema for requiring anonymity for gifts from controversial figures, arguing that good money from bad sources could still be received as charitable contributions, based on the principle that transparency, while often useful, is not a universal good. That idea comports with the IRS’s requirements that, though the names of significant donors to public charities must be reported to the IRS, they are not otherwise required to be made public. Likewise, good governance authorities like Independent Sector’s Principles of Good Governance and Ethical Practice strongly urge that charities maintain the privacy of their donors.

Charities have many planning tools, both new and old, at their disposal to deal with the real problem of bad people seeking to do good—or at least willing to give significant funds to charity.

The post Tainted gifts: five techniques for handling contributions from bad donors appeared first on Philanthropy Daily.

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