How Corrupt has the Donation Business Become?

donations

It’s hard to imagine something more helpful than donations when one billion people, or 15% of the world’s population, experience some form of disability and over 100 million people have a serious disease. These numbers don’t include the poor, the homeless, orphans, veterans, migrants, and other people who need support. And that’s not only about people – it’s also about saving animals, preserving the environment, and even encouraging art. Hundreds of thousands organizations have been established to help those in need. However, despite all the good intentions, fraud and corruption started to grow within the industry, causing millions of dollars to end up in the pockets of bad actors. What is the state of corruption in the world of donations and how can we fix it?

billionaire
Source: https://dilbert.com/

Hell is often paved with good intentions  

In 2010, a 7.0 earthquake struck Haiti, killing over 100,000 people and leaving almost a million without homes. Back then, many Americans turned to the American Red Cross as one of the oldest and well-known humanitarian organizations in the world. This nonprofit managed to collect $488 million in donations – more than any other organization after the catastrophe happened. A year later, the Red Cross announced that it expected to spend about $100 million of the remaining funds on the “construction of permanent homes and community development projects.” In 2015, NPR and ProPublica accused it of building just six new homes in Haiti. The organization later explained that other issues like land-title systems and security made them change their plans – as a result, most of the funds were distributed to about 50 partner aid groups with each of them taking a cut for administrative costs.

In 2013, the Tampa Bay Times and The Center for Investigative Reporting published a list of 50 of the worst charity organizations in America, based on tax filings that spanned over 10 years. The investigation showed that these charities, that accounted for $1.35 billion in donations together, sent less than 30% to actual victims – and the rest went to those people who collected the money! Most of the organizations spent between 0.10% and 8.6% in direct cash aid, and for just 50 of them the fundraising costs didn’t exceed 35% of the total amount collected (as charity watchdogs expect).

It’s not only about charity but about politics. One of the examples is the Trump Foundation – in 2016, the Daily Beast reported, “In past years, Trump used foundation cash to settle personal legal disputes costing hundreds of thousands of dollars, bought paintings of himself and in one high-profile case gave money to a PAC supporting Florida Attorney General Pam Bondi – an illegal act for which Trump had to pay a $2,500 fine.” And he was not the only one – the Clinton Foundation was also investigated following the series of very large (in the millions of dollars) donations from foreign countries that were never disclosed to the State Department.

State of the market – a lack of trust caused by corruption and scandals

The donations market is huge. In 2017, Americans gave $410 billion to charitable organizations (and this number has been steadily increasing for the past 30 years, not taking the financial crisis into account). The absolute majority of these funds, 70%, was donated by individuals. Still, out of all these donations, “billions were lost due to inefficiencies and corruption, leading to a huge distrust of the sector,”  says Nydia Zhang, co-founder and chairman of the Social Alpha Foundation.

trends in giving
Source: http://www.grenzebachglier.com/wp-content/uploads/2018/06/Grenzebach-Glier-Webinar-Giving-USA-Report-6.12.2018.pdf

The US donations market is increasing, but this tendency is not global. The recent CAF World Giving Index 2018, that includes data from 146 countries, showed that significantly more people globally reported helping a stranger and volunteering their time in 2017, while the proportion of those who donated money has declined for the second year in a row.

The possible reason for this is trust, according to an nfpSynergy report. Trust in charities dropped from 60% last autumn to 54% in February of this year. In the UK, where the charity sector has an annual income of nearly £76 billion, the share of people donating money to global poverty charities decreased from 37% to 17% during the last five years. The authors at Decommlabs noticed that since 2013, both trust and donations significantly dropped at three distinct times, each during a period when charity scandals occurred.

donations
Source: https://devcommslab.org/blog/charitable-donations-in-crisis-is-trust-a-part-of-the-story/

Fake charities also negatively contribute to the overall trust level of the donations market – those are usually represented by scammers who pretend to be agents of legitimate well-known charities or create their own charity names. The Australian Competition and Consumer Commission allows people to report such scams on its website and they track the overall amount of money lost to fake charities. Sadly, this number has already reached $336,000 in 2018, with 769 reports sent to the watchdog.

What attracts scammers to the market?

The Washington Post explains that many scholars and practitioners consider nonprofit and civil society groups in general to be principled actors due to the fact that their organizational purpose has virtue, unlike that of for-profit firms. In addition, nonprofit firms don’t have to face the pressure of shareholders to increase profit, as they simply don’t have to distribute it. According to the article, “This presumption of virtue leads regulators and stakeholders to neglect issues of nonprofit governance and accountability. Compared to firms and governments, nonprofits face less scrutiny by outside stakeholders. This leads to poor governance, accountability shortfall and mission drift.”

Basically, it’s all about trust again – because of the historically high level of public trust, regulation oversight is much easier for nonprofit organizations. In addition, this also means that it’s quite easy to start a nonprofit group, which attracts bad actors to this kind of business.

Most countries do not make nonprofit groups file annual reports. The US is an exception – there, nonprofits are required to annually file the Form 990, disclosing the details of their financial operations and other activities (though they don’t pay federal taxes). The problem is, very few citizens are informed enough to use this law. In addition, the Federal Trade Commission and attorney generals rarely investigate such fraud, although they have the right to do so.

How can we fight donation corruption and fraud?

There are several ways to ensure that public donations are safe. First, regulation of organizations which accept donations could be reconsidered. But how can this be done without doing harm to a sector that is already struggling? In 2015, Michael Peregrine, a partner at McDermott Will & Emery, wrote an open letter explaining how such actions could affect the whole industry in a negative way. Among other arguments, Michael mentioned that new laws would make it harder for nonprofits to hire competent leadership while operating in a competitive environment.

The Charity Commission of the UK published a set of tips for organizations to avoid insider fraud. The authority says that “no single measure can guarantee good governance in charities, including fraud prevention, but by adopting good practice charities can publicly demonstrate their commitment to good governance and reduce the likelihood of becoming a victim of fraud.” Recommendations include carrying out appropriate employment checks, adopting suitable controls, and segregating duties. However, recommendations don’t usually solve the problem.

fraud
Source: https://www.gov.uk/government/publications/focus-on-insider-fraud-in-charities/focus-on-insider-fraud-research-report

There is also a numerous number of tips for donators – doing your own research, checking the organization’s reputation and social media presence, as well as paying with credit cards rather than cash. Still, the responsibility for donations lie on the shoulders of donators. Adrienne Gonzalez runs a site called GoFraudMe that tracks scams on the popular fundraising site GoFundMe. She has uncovered more than 220 scams in just over three years – “GoFundMe has been better at taking down fraudulent campaigns, but the site still relies on users to report suspected fraud.”

The blockchain versus corruption – which one wins?

The blockchain could be the answer to the currently corrupt donations market. “[The blockchain] can provide radical transparency in donation tracking by providing assurance to individual donors who can track their donations and understand where and how their money is being spent by the intended beneficiaries. It will also bring about accountability from those at all levels in charitable organizations,” says Nydia Zhang, co-founder and chairman of the Social Alpha Foundation. By using the blockchain, donators can ensure that funds are released to organizations once they prove the impact of their work.

One of the solutions dedicated to solving the problem by implementing blockchain is The International Disability Assistance Chain (IDAC), co-founded by the World Help Disability Welfare Foundation. This platform plans to store the information within the charity process on the blockchain in order to improve the public welfare ecosystem for disability assistance through decentralization. The data collected is synchronized with that of the global disability assistance and poverty relief system in real time to reflect the truthful usage of funds.

Digital asset holders can use IDAC tokens to carry out donation activities peer-to-peer without any third-party organizations or handling fees, which solves the corruption problem that afflicts many charities. The disabled groups can exchange the digital asset rewards obtained for medical services, life insurance, and new smart devices, which will reduce their medical costs and serve people in need all over the world.

There are also other projects solving the same problem by incentivizing social organisations to run projects transparently and making sure that they get paid more when they achieve their goals. This will make it easier for the funders to identify and help scale social projects. There are systems  that cut out bureaucracy and enables a high level of transparency and accountability towards donators. For example, at any point until the moment the funds are locked, a giver can decide to withdraw them. Such projects are Alice and Giventh.io.

Conclusion

The donations market, despite all the good intentions of the majority of its participants, is corrupt – billions of dollars are lost because of a few bad actors who keep the money instead of helping those who need it most. Huge scandals happen regularly – such as the surpluses and dubious investments of Comic Relief in December 2013, the dramatic closure of the Kids Company in Summer 2015, and the Oxfam crisis in February 2018. Corruption and fraud damage the credibility of organizations and undermine people’s confidence. The proportion of people who donated money globally has declined for the second year in a row, but you can hardly blame them.

Nowadays, the responsibility for the safety of donations lies on the shoulders of the givers. The blockchain can serve as a trust-building technology, which will bring openness, publicity, and transparency to the public wealthfare field. The solution will allow people to track the donated funds and ensure that only reputable organizations and individuals get the money.

donations
Source: http://researchly.leobosankic.com/2018/07/16/the-importance-and-impact-or-crypto-donations/

Crypto donations is already a reality – the charitable giving arm of Fidelity has been accepting Bitcoin on its platform since 2015, and just in the year 2017 they received $69 million in cryptocurrency donations. The obstacle here may be the complexity of blockchain technology; however, in case donation platforms are easy to use and understand, attracting the public to them would be possible and so would pushing trust in nonprofits to higher levels.

Thanks to the Howtotoken Agency experts for the information and comments provided for this topic.

All materials on this site are for informational purposes only. None of the material should be interpreted as investment advice.

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