REPORT: Conprofit: How the IRS’s Failed Oversight Allows Nonprofit Money Laundering
I. Executive Summary
“We will continue to work tirelessly with our partners from SIPC, the FBI, and the IRS, to track down any and all proceeds of Madoff’s Ponzi scheme and return them to their rightful owners. . .The investigation of prodigious fraud, like that of Madoff, remains one of the FBI’s top priorities. From robbers to fraudsters, the FBI will continue to bring to justice crooks who steal.”
-Preet Bhara, U.S. Attorney
“Nonetheless, there are some investigations underway. The California attorney general’s office has received sufficient complaints to have begun its own investigation. . . . . [C]ontacts have been made with the FBI and the Los Angeles district attorney. . . . Meanwhile, these projects will have to track down known donors, explain the details of what amounts to a fiscal sponsorship Ponzi scheme, and hope that the donors will be willing to ante up more money to make up what was lost.”
-Nonprofit Quarterly
The two above quotes may sound like depictions of the same problem, but the first statement was made by U.S. Attorney Preet Bharara concerning the money laundering, embezzlement, and fraud of white collar criminal Bernie Madoff. The second, however, came from a Nonprofit Quarterly article about the nonprofit International Humanities Center that defrauded over 200 projects it sponsored and ran off with nearly $1 million.
While the IRS’s recent attention has been focused on scrutinizing tax-exempt applications, it has approved the tax-exempt status of charities that have engaged in money laundering and fraud. This system of abuse involves CEOs and corporate fraud, but its culprit cannot be found on Wall Street or in the boardrooms of large, publicly-traded corporations. This fraud occurs in small, tax-exempt nonprofits, often run by one or two individuals who have discovered an opening in the tax code that allows them to dupe unsuspecting start-up charities and fly under the radar of an over-complicated tax code.
What follows in this report, based on Cause of Action’s fifteen-month investigation, is an account of a dangerous pattern of abuse that has destroyed jobs and ruined charities whose aim was the public good. This abuse, combined with fabricated tax documents and bank statements and the mismanagement of federal grant money, paints a picture of corruption protected under the auspices of a process called fiscal sponsorship that is unmanaged, unchecked, and undefined by the Internal Revenue Service (IRS).
Whether through Congress or IRS rulemaking, the abuse of fiscal sponsorship warrants correction to protect taxpayers and charities. By clearly defining the parameters and standards of fiscal sponsorship, the IRS can alleviate its backlog of failed oversight of tax-exempt groups and prevent future non-profit Ponzi schemes.
Fiscal sponsorship was intended for good, but is being used for harm
When individuals seek to establish a new charity, they often apply for 501(c)(3) tax-exempt status in order to receive tax-exempt donations. However, many projects only intend to exist temporarily and therefore have no incentive to seek formal tax-exempt status. Other projects may require donations while their tax-exempt applications are being processed. Fiscal sponsorship solves these problems by allowing existing tax-exempt organizations to accept grants and donations on behalf of the charity, or “project.” As reflected by the current IRS scandal, the process for attaining tax-exempt status can be lengthy and arduous. For groups that either cannot afford the time or money to attain their own status before wanting to conduct their charitable activities, or have no desire to become an independent organization, fiscal sponsorship allows them to come under the umbrella of an existing non-profit organization.
But despite the benefits of fiscal sponsorship, we see in the cases of International Humanities Center (IHC), Christian Community, Inc. (CCI), and Help Is Here, Inc. (HIH) that these organizations were able to use the practice of fiscal sponsorship to abuse their tax exempt status, and in some cases even commit fraud.
IHC served as a fiscal sponsor for over 200 projects, funneling almost $1 million in project funding toward its own mismanaged debts before closing its doors.
Though IHC’s overall structure was not necessarily illegal, the organization may not have abided by the law governing sponsored projects’ individual transactions, and while the IRS was conducting an audit at the time of its collapse in 2011, former IHC employees reported to Cause of Action that the agency had focused on smaller issues and missed the fundamental problem which plagued IHC: uncontrolled and unaccountable spending.
IHC came under federal investigation for the potential mismanagement of federal grant money.
Through a Department of Energy program under the American Recovery and Reinvestment Act of 2009, Cause of Action found that IHC potentially improperly accepted federal grant funds intended for one of its sponsored projects, ultimately resulting in a DOE investigation. A criminal and civil case was pending against IHC as of April 2012 and DOE was considering debarring high-level IHC officials.
CCI fabricated tax documents, audits, and bank statements, costing its projects over $400,000 in lost funding.
CCI’s director, Steven Clapp, ran the fiscal sponsor organization for twenty years with little repercussion for his fraudulent activities. For instance, Clapp told projects that he withheld Social Security taxes but never actually submitted the withholdings. He also failed to file accurate 990 forms with the IRS. When a former employee of one of CCI’s projects attempted to verify forms, payments, and legal filings by CCI, she discovered “nothing but fake colored pieces of paper.” Prior to joining CCI, Clapp himself spent over four years in prison for bank fraud in Illinois for forging financial statements in order to obtain loans to support his business. Despite a history of financial fraud, the IRS was only alerted to potential problems at CCI when the organization failed to file its tax forms.
HIH preyed upon projects, improperly seizing funds, refusing to disburse funding to projects, and attempting to wrest control over projects which attempted to leave.
Under the leadership of Maggie Lane-Baker, HIH mismanaged funds intended for its projects which, without oversight by the IRS, were forced to take HIH to court. HIH not only attempted to seize donations, but also claimed control over the charitable projects themselves. When one project attempted to end its agreement with HIH, the request was denied. While Lane-Baker eventually acknowledged that she confiscated $50,000 in funding, she claimed HIH was justified in keeping the funds. This organization not only mismanaged money, but caused its sponsored projects to expend the time and resources required to initiate litigation, all of which could have been avoided with IRS oversight and a better understanding of how to properly structure a fiscal sponsorship arrangement.
Remedy
Cause of Action’s findings demonstrate a substantial lack of guidance regarding fiscal sponsorship that has subjected hundreds of charities to abuse and allowed substantial sums of donations—including federal government grants—to be mismanaged by unaccountable sponsors.
Furthermore, the IRS’s failure to properly oversee tax-exempt groups puts all projects who find themselves under a non-compliant fiscal sponsor at risk of losing funding and shutting down. Either Congress or the IRS must define fiscal sponsorship and remove ambiguities that have allowed groups such as IHC, CCI, and HIH to exploit and defraud American taxpayers through fiscal sponsorship.
REPORT: Ethical Violations and Retaliation: How to Get Promoted at the Bureau of Indian Affairs
According to a Department of the Interior, Office of the Inspector General (DOI OIG) report and numerous complaints filed by Bureau of Indian Affairs (BIA) employees, Jeanette Hanna, the former Regional Director of the Eastern Oklahoma Regional Office of the BIA, mismanaged tribal trust funds, abused her authority, retaliated against employees, steered contracts, and had an inappropriate relationship with a government contractor that created a conflict of interest. The DOI OIG report reveals that there were at least 17 formal complaints, 2 separate DOI OIG investigations, and 4 different reviews by the BIA and the DOI Office of Policy, Management and Budget (PMB) of Hanna’s behavior between 2005 and 2011. Just how badly must a federal employee behave before getting fired?
In November 2009, the BIA placed Hanna on detail in Washington, DC, while the Office of the Assistant Secretary for Indian Affairs (AS-IA) reviewed her alleged ethical violations. Hanna remained on detail for more than 500 days longer than allowed by agency rules. However, no action was ultimately taken by the AS-IA, so the DOI OIG initiated an investigation in August 2011 after receiving information that BIA officials failed to act on the complaints against Hanna.
During the AS-IA’s formal review of the complaints against Hanna, investigators interviewed BIA employees who were “physically shaking” because they were so afraid Hanna might retaliate against them. As the AS-IA discovered, Hanna had previously installed 40 “extra” security cameras with live feeds she used to monitor employees in her regional office, and the initial AS-IA report confirmed that Hanna engaged in retaliation and harassment of employees. However, this report appears to have been ignored by higher ups at the AS-IA, who dismissed the findings as “minor personnel issues” and just so happen to be friends with Hanna.
Hanna not only fostered a hostile work environment. The DOI OIG’s report ultimately found that the failure of the BIA and AS-IA to ensure Hanna followed agency spending procedures cost the government nearly $200,000. After reviewing travel vouchers from Hanna’s detail filed by the AS-IA (to whom she had been assigned even though it was the AS-IA investigating her), investigators found an almost complete failure to comply with tax laws and agency regulations. In sum, Hanna was reimbursed over $130,000 in travel costs, as she often traveled between Oklahoma and DC, with her $117-a-night hotel room sitting empty for weeks for at a time. Perhaps even more outrageous, Hanna decided she required an agency-provided SUV for the over-two-year detail in DC “because of the snow,” as she later explained to investigators.
Following the DOI OIG’s referral, the U.S. Attorney’s Office (USAO) for the District of Columbia declined to prosecute this case. While the USAO might have determined that the evidence did not warrant a criminal prosecution (even though Hanna still owes significant back taxes on her travel reimbursements), it is disturbing that such blatant disregard for agency regulations and federal law has warranted no punishment for Hanna.
To read the full story, see our investigation analysis here.
FOIA request to the IRS regarding policies and practices concerning applications for 501(c)(4) status
CoA requests access to the following records pertaining to the Internal Revenue Service’s (IRS) Exempt Organization (EO) Division for the time period January 1, 2009 to the present:
- Copies of any criteria that the IRS Cincinnati Service Center has used to assess applicants for 501(c)( 4) status;
- Communications from the Treasury Inspector General for Tax Administration (TIGTA) to the EO Division concerning any audit or investigation conducted of the EO Division;
- Copies of any Form 990 Schedule B (Schedule of Contributors) released by the IRS to a third party in response to a Freedom of Information Act (FOIA) request, as well as copies of the IRS’s FOIA response letter to that request;
- All records, including documents and emails, relating or referring to any disclosure of an exempt organization’s Form 990 Schedule B to any employee, contractor or officer of the Executive Office of the President, excluding any such records disclosed pursuant to 26 U.S.C. § 6103(c) or 26 U.S.C. § 6103(g);
- All records, including documents and emails, referring or relating to any request from the President, Vice President, Cabinet official, employee in the Executive Office of the President, or employee in the Executive Office of the Vice President to any officer or employee of the IRS to conduct an audit or other investigation of any particular taxpayer; and a. If any requests are located in response to this item, then all communications between the IRS and TIGTA concerning those requests.
Click Here for the full request
Related work on the IRS:
FOIA Freak-Out: IRS Wrongly Denies FOIA Request, Comes Unglued Over Media Response
Cause of Action letter to the U.S. Attorney Kerry Harvey requesting an investigation of the IRS and their employees in the IRS Cincinnati Service Center in Kentucky for potential violations of the law concerning conspiracy by singling out organizations based on political views stated in their tax-exempt applications.
CoA Letter Requesting Investigation of IRS Violations
Cause of Action letter to the U.S. Attorney Kerry Harvey requesting an investigation of the IRS and their employees in the IRS Cincinnati Service Center in Kentucky for potential violations of the law concerning conspiracy by singling out organizations based on political views stated in their tax-exempt applications.
REPORT: CPPW: Putting Politics to Work
I. Executive Summary
Since 2009, Congress has appropriated $373 million to the Centers for Disease Control and Prevention (CDC) for the Communities Putting Prevention to Work (CPPW) program. The goal of CPPW is to educate the public about obesity prevention and the dangers of tobacco use. Despite this noble goal, Cause of Action’s (CoA) nineteen month-long investigation shows that at least seven communities that received CPPW funds violated federal law, as well as CDC guidelines, by using taxpayer dollars to lobby for higher taxes and new local laws.
Although Congress conducted hearings in 2011 to question the CDC’s oversight of the program and followed up with letters to Department of Health and Human Services (HHS) Secretary Kathleen Sebelius in 2012, these questions only addressed one potential violation in one community in South Carolina. CoA found seven other potential violations of the CPPW program that have not been public until now, and learned that the CDC’s one recorded violation was worse than disclosed.
The CPPW program was intended for public education and job creation as part of the American Recovery and Reinvestment Act of 2009 (ARRA). CoA’s investigation revealed that CPPW money went to support lobbyists and public relations companies who used taxpayer dollars to push laws and agendas that would lead to tax increases on tobacco and high calorie products – essentially transforming the CPPW program into a conduit for lobbying for higher taxes and bans on otherwise legal consumer products.
CoA uncovered evidence of seven different communities around the country using CPPW money to lobby in violation of federal law and CDC policy. These warrant investigation, review, and accountability, especially in light of the $2 billion in annual funding scheduled for disbursement in 2015 under the 2010 Patient Protection and Affordable Care Act’s Community Transformation Grants program to fight obesity and tobacco use at the local, state, and federal level. The HHS, the federal agency that oversees the CDC, is also the largest grant-issuing agency in the federal government.
The following report reveals how the CDC permitted and even encouraged CPPW grantees in Arizona, Alabama, Florida, Georgia, and California to violate federal law and use CPPW funds to lobby state and local governments. Internal emails, applications to the CDC outlining plans for the funds, and meeting notes blatantly show systemic corruption and use of taxpayer dollars for lobbying.
CoA found that lobbying by CPPW grant recipients violates the following four laws and guidelines:
- The Anti-Lobbying Act prohibits the use of money appropriated by Congress to influence, “an official of any government, to favor, adopt, or oppose, by vote or otherwise, any legislation, law, ratification, policy, or appropriation.”
- The CDC issued additional guidance prohibiting CPPW funds from lobbying use. Known as Additional Requirement 12 (AR-12) in the CDC’s guidelines, this rule “specifically [applies] to lobbying related to any proposed, pending, or future Federal, state, or local tax increase, or any proposed, pending, or future requirement or restriction on any legal consumer product.”
- In 2012, Congress included language in an appropriations bill to clarify that CPPW funds were prohibited from “any activity to advocate or promote any proposed, pending, or future Federal, State, or local tax increase, or any proposed, pending, or future requirement or restriction on any legal consumer product.”
- Office of Management and Budget Circular A-122 prohibits the use of federal funds to attempt to influence federal or state legislation through “communication with any member or employee of the Congress or State legislature” or “by preparing, distributing, or using publicity or propaganda, or by urging members of the general public or any segment thereof to contribute to or participate in any mass demonstration, march, rally, fundraising drive, lobbying campaign, or letter writing or telephone campaign.”
South Carolina: A Case Study in Corruption
In addition to the previously mentioned five states, the CPPW pattern of corruption can most easily be traced through the example of South Carolina.
Direct use of federal funds to lobby
As revealed by communications between local officials and the CDC, funds from a CPPW grant to the South Carolina Department of Health and Environmental Control (DHEC) were used to illegally lobby city council members in support of a pending local smoke-free ordinance, proof of direct illegal lobbying with CPPW funds.
Stealth lobbying by coalitions to avoid legal oversight
The Smoke Free Florence (SFF) coalition is a group of like-minded organizations that formed to lobby for the causes outlined in DHEC’s CPPW grant application, and yet, by design, the SFF evades regulations that apply to lobbyists. Known as stealth lobbying, this approach is one way to avoid lobbying rules but still, in effect, conduct lobbying while receiving federal dollars.
CDC failure to properly oversee the use of grant funds
In its review of South Carolina’s grant application from Florence County, which includes a proposal to hire a coordinator “to promote comprehensive smoke-free policies/ordinances throughout the county,” the CDC failed to prohibit lobbying activity, and in fact sent a CDC grants officer to local community meetings where this officer announced that securing a comprehensive smoke-free ordinance was “the number one priority with the [SFF] initiative and 100% adoption will be the determining factor” of success. While the CDC later reprimanded the South Carolina recipients for their misuse of funds, they largely ignored that meeting minutes were scrubbed to change the appearance of impropriety, raising other potential legal issues outside of improper lobbying.
This report evidences a complete failure of an HHS grant program to adhere to the law, use taxpayer dollars responsibly, or secure jobs it was intended to create. What follows are numerous examples of counties and states across the country advocating, planning, and supporting legislation in direct violation of federal law and CDC guidelines. The clock is ticking toward 2015, when $2 billion more will be allocated to similar programs. This report only begins to document the extent of waste, fraud, and abuse within CPPW, as CoA is still awaiting copious amounts of documents from both the CDC and HHS Office of Inspector General. The systemic pattern of misfeasance among grantees will end only when the CDC acts responsibly on behalf of the American taxpayers who have become the biggest losers in the government’s campaign to end obesity.