Sham Charities-And How to Avoid Them

The American people are among the most generous in the world. Yet that tendency, and our relative wealth, makes us easy targets for fraud, particularly fraudulent charities.

The American people are among the most generous in the world. Yet that tendency, and our relative wealth, makes us easy targets for fraud, particularly fraudulent charities. In late May, the headlines told of 4 “sham” cancer charities that had been uncovered and were being prosecuted. It may have been a shock to some, especially those who contributed, but this revelation of wrongdoing is really just the tip of the old iceberg.

According to The Wall Street Journal, Americans gave a record $355 billion to charity last year. That money went to the roughly 1.63 million nonprofit organizations in the US and it is relatively easy to do the paperwork to become registered with the IRS. Yes, they are solely responsible for who gets to be officially called a tax-deductible “charity,” just as they are the arbiters of what constitutes a tax-exempt “religion,” as outlined here not long ago.

Aside from the ease of setting up a so-called 501(c)3, there is precious little oversight or auditing thereafter. So the primary watchdogs become after-the-fact complaints from the public. In 2014, the FBI received 343,000 complaints, of which about 5,000 resulted in prosecution.

The fraud takes several forms, all too recognizable. First is the just outright pocketing of the funds for personal use. The second type is the one-step-removed embezzlement under cover of cooking the books.

The last 2 types are more insidious and therefore harder to identify. The first would be simple poor management—waste and incompetence. This is true especially for small organizations who cannot afford top executives or the control systems to run efficiently, even if they intend well.

The next kind of “fraud” is the high overhead telemarketing that is commonly used even by otherwise worthwhile charities. A recent example of this might be last season’s NFL “Pink Campaign” to raise breast cancer awareness. It has been claimed in the press that as little as 5% of the millions raised by this program actually found its way to some useful cancer-related purpose. The NFL denies this claim.

There are many red flags to watch for, and a number of things that the altruistic doc might do to be better prepared when donating. First of all, raise an eyebrow when you see a new disaster-related charity. Earthquakes, floods, and tornados are evergreen for the con artist set. If you have never heard of some charity that comes to your attention, watch out.

Secondly, be careful of the affinity pitch if you are a member of an identifiable group. Televangelists are one notable group whose occasional misbehavior has found its way into the news; “They’re our people making the appeal, it must be OK…right?” Maybe….

Thirdly, even otherwise reliable names like The Red Cross and The Salvation Army have been misappropriated time and again. Those names lower our suspicions.

So what can we do to tread the fine line between paranoia and being careful? I am glad you asked. Number one, do your homework; do not act emotionally and impulsively. There are watchdog organizations that you can consult online. These include Charity Navigator, Charity Watch, and Give Well.

You can also Google the charities directly and see if they pass the smell test. Transparency of methods and results are desirable; be wary of those relatively opaque websites.

In the end, the desire to reach out and help is a noble one. Just be careful that your helping hand doesn’t get bitten.