Laurel to The Arizona Republic for “Perfectly Legal,” a series of six articles, published in May, that exposed a network of charities that were inflating their balance sheets—and their image as efficient do-gooders—by claiming tax breaks on donated goods that they never actually handled.

The yearlong investigation analyzed the tax returns of this network, including the paper trail for a crate containing 8,884 pounds of medicine and medical supplies from a charity in Canada to the balance sheets of charities in St. Louis and Glendale, California—even as the crate remained in a warehouse operated by yet another charity outside this network. At each “stop” along the crate’s virtual journey, a charity in the network claimed the full value of the supplies on its tax return. (Eventually, the medicine ended up at missions in Guatemala and the Philippines, but what isn’t clear is whether any of the charities in the network ultimately paid the shipping costs to get it there.)

According to experts quoted by the Republic, small-scale “daisy chains” like this are common and legal. For example, one charity may receive a large donation, but without a warehouse to store it or sufficient funds to cover shipping costs, it passes on the donated goods to another charity with the necessary resources. Both charities are allowed to write off the full value of the donated goods. But it should raise flags with auditors when “daisy-chain” strategies move beyond a simple matter of one charity helping another out, and become effectively the business model, as was the case of the network of charities the Republic wrote about.

Lead reporter Robert Anglen began looking into bookkeeping practices at The Don Stewart Association, a Phoenix charity founded by a televangelism star, after receiving a number of tips. The association, which works on poverty and hunger campaigns, turned out to be the hub of a network that includes twenty-two charities that are connected by shared board members and family ties.

Over the three-year period analyzed by the Republic, the charities in the network repeatedly moved the same donated goods from one balance sheet to another, with each charity writing off the full amount. In most cases, it appears that none of the charities ever handled these donations and paid only a small percentage of the shipping costs.

Beyond the unearned tax write-offs, this bookkeeping sleight of hand helps burnish the image of the charities as efficient aid organizations—they appear to be moving a lot of goods without incurring much overhead—which in turn brings in more money both from individual donors and the federal government. The network of charities is partially funded by the Combined Federal Campaign (CFC), an annual workplace charity drive, through which federal employees contributed $273 million in 2007. This money is distributed among 2,300 charities that are vetted by the IRS and the CFC. Federal workers browse a CFC-approved list of charities, and choose where to donate based on an organization’s mission and a snapshot of its finances.

These cash donations from individuals and federal employees can then be used to pay the salaries of charity employees, rather than to fund the handling and processing of aid. For example, the Republic found that of the almost $30 million in cash the network received between 2003 and 2005, $16.7 million of it went for “salaries and expenses.”

As a result of the investigation, one of the charities in the network lost its nonprofit status in Canada. The Arizona attorney general is investigating The Don Stewart Association to ascertain what, if any, laws were broken and to determine if there is enough evidence to support a fraud case against the charity operators.

Dart to Griffin Communications for broadcasting paid advertisements disguised as news segments without adequate disclosure. And a Laurel to the Tulsa World for exposing the ethical breakdown. In April, World reporter Kim Archer wrote that Griffin Communications, which owns KOTV in Tulsa and KWTV in Oklahoma City, signed a $3 million deal with Insure Oklahoma, a state-run insurance program, under which Griffin agreed to air promotional segments for Insure during its newscasts.

The segments are designed to look and sound like news reports, and lack clear and prominent disclosure that they are in fact paid advertisements. The anchors introduce them as traditional news pieces, closing with: “Spokesperson Angela Buckelew has more.” At the end, the anchors say the segments were “sponsored by News 9’s parent company, Griffin Communications LLC, and The Oklahoma Health Care Authority,” which oversees Insure.

It would take a very attentive and savvy viewer to catch those vague bits of disclosure. And if such sins of omission weren’t enough, Buckelew is a former reporter at KWTV, and is thus familiar to viewers in Oklahoma City as a credible source of news.
Despite Archer’s story, Griffin hasn’t changed the way it handles the promotions. What’s at stake here isn’t Insure Oklahoma’s bona fides, and the segments do draw attention to the need for health insurance for employees of small businesses. But news outlets owe it to their audiences to clearly distinguish between news and paid promotion.

 

More in Darts and Laurels

Darts & Laurels 

Read More »

Katia Bachko is on staff at The New Yorker.