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June 13, 2016

The Panama Papers raise questions about charitable organizations

June 13, 2016

Recent headlines tying private foundations to the shady offshoring of money may mean intense public scrutiny of the charitable sector is on the horizon.

The Panama Papers, 11.5 million files recently published in an unprecedented leak, reveal the murky financial transactions used to insulate the money of the wealthy and well connected in the United States and abroad. The documents reveal that the Panama-based law firm Mossack Fonseca set up sham charitable foundations when financial institutions pressed for greater details about transactions. Through these dummy foundations, Mossack Fonseca fabricated donations to nonprofits, including the World Wildlife Fund and the Red Cross, to hide their true beneficiaries.

Recent reporting on the Panama Papers has implicated some Americans in schemes to use private foundations to evade taxes, though such abuse of private foundations is not novel or new domestically. The 1965 Treasury Department Report on Private Foundations detailed multiple schemes involving donors evading taxes by abusing the tax status granted to private foundations. More recently, federal investigators found that Quest Financial Services in Turlock, California, helped create illegitimate charitable foundations and trusts for clients to evade taxes. In 2011, an Ohio man was indicted for allegedly using a foundation in a tax evasion scheme for years.

Despite the small footprint of those incidents, the US charitable sector may face much greater public scrutiny because of the Panama Papers. The high-profile leak may deepen public doubts about the integrity of the sector.

But on the heels of national reporting on unscrupulous nonprofits that fleeced the public of millions of dollars, public suspicion of massive charitable giving as tax dodge, and various stories questioning the role of charitable organizations in the lives of political elites, the Panama Papers reinforce fundamental questions about how charitable the charitable sector actually is.

But transparency is not a high priority for most private foundations. There is an asymmetry between what is happening in the world to undermine public trust in the sector and what information the field offers about itself to support it. Strictly speaking, private foundations in Panama are unusual; annual financial reports and public or official declarations of donations are not required. Still, that makes little difference in people’s perceptions when there is little public disclosure about many private foundations domestically. Outside of voluntary self-disclosure, the public really only has the Form 990-PF, the regulatory document private foundations submit to the IRS. While the Form 990-PF is made available for public inspection, it is not always easy to access, sometimes requiring submission of another document to the IRS, the Form 4506-A. Beyond that, the form doesn’t always answer important questions about how funds are being used, as it often contains only generic responses about the purpose of the grants awarded.

While the sector has made strides toward greater transparency with private foundations through efforts like Glasspockets and having several large foundations post who they fund and for what work, these still cover only a slice of private foundations. Other great resources like Charity Navigator, GiveWell, and the Wise Giving Alliance cover 501(c)(3) charitable organizations, which include only some charitable foundations and not private ones.

That limited transparency from many foundations is not without significant risk. Public confidence in the charitable sector is essential, and charities can face intense public pressure when the public does not trust that their mission is being carried out. While private foundations may lack public pressure from outside donors, they can attract congressional scrutiny even when suspected abuse is confined to only a small number of cases.

The Panama Papers should inspire foundations to focus renewed attention on increasing public transparency. Without greater transparency to bring greater clarity, the leak’s account of private foundations as a go-to option for questionable wealth management may be the image that lasts in the public consciousness and shapes policy priorities. Greater transparency can educate the public and reassure them that US charitable foundations are working toward the public good and not private benefit.

An activist displays a newspaper headlining on f the 'Panama Papers' revelations during a banking managers meeting, in Paris, France, Thursday, April 14, 2016. The Panama disclosures have shaken the rich and powerful by exposing how they use networks of shell companies to dodge financial obligations, taking tax evasion to the top of international agenda. Photo by Francois Mori/AP

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