Identity Laundering

Some charitable gifts are made with open hearts and great altruism. Other charitable gifts are made largely to curry favor or gain attention. And then there are gifts that use charity purely to further the donors’ political and financial interests. Here’s a story about how a pair of famous billionaire brothers have manipulated charitable giving laws for personal and political ends – all while taking advantage of technicalities to cover their tracks and protect their pet charities.

First, some background.

As I have written before, paradoxically enough nearly everything that goes on at a private foundation is open to the public, while much of what goes on at a public charity can be kept private. You see, a single family can control everything that goes on in a private foundation: investments, grants, the works. Because of the family’s absolute control, federal law requires equally absolute transparency. Each grant, each board member’s name and address, and every dollar in honoraria paid to board members are part of the public record. The notion is: the family may have complete control, but in return they have to show us every little detail of their activities.

Meanwhile, activities of public charities are subject to less careful examination. The notion is that the board of directors serves as the public’s eye to ensure proper conduct, and consequently there doesn’t need to be as much scrutiny. And, as you may know, organizations that sponsor donor-advised funds – historically, community foundations, but more recently “charitable gift funds” at commercial entities like Fidelity and Schwab – are considered public charities. Consequently, not only can organizations that sponsor donor-advised funds keep their donor lists anonymous, but they do not have to disclose the identity of which donors have recommended particular grants.

Another bit of background: In order to be considered a public charity, a nonprofit needs to demonstrate that it gets broad support from many donors. If all the money comes from only one or two families, then the I.R.S. will declare that the organization has failed the “public support test” and is, in actuality, a private foundation. One reason that matters is that the rules governing charitable deductions for contributions to private foundations are less generous in several ways than gifts to public charities. Also, as we have seen, private foundations are subject to greater scrutiny.

Enter, stage right, the Koch brothers. To those with progressive political views, and to those who are concerned about the power of money to influence politics, David and Charles Koch are ranking villains in America today. Industrialist owners of the second-largest privately held company in the U.S., with annual revenues of $100 billion, the Kochs are both other-worldly rich (they are considered the wealthiest siblings in the world) and seemingly unconcerned about how their political opponents view them. They have spent tens of millions of dollars for ads that attack Democrats, moderate Republicans, and public policy positions with which they disagree.

The Koch brothers are not shy about their political machinations, but occasionally even they can use a little bit of cover. And, according to some good journalistic work by Paul Abowd, they are getting that cover thanks to a donor-advised fund sponsor called Donors Trust.

Donors Trust takes in money from wealthy donors and distributes the funds out to politically conservative causes, such as the controversial American Legislative Exchange Council or, as recently described in The Philadelphia Inquirer, “research institutions” like the Heartland Institute that work to debunk climate change theories. The Koch brothers, whose industrial fortune includes extensive holdings in the petroleum industry, find all this talk about climate change to be bad for business, but they are savvy enough to know that they don’t want to be tied in an obvious way to organizations that publish reports arguing against the widely accepted scientific truths on global warming. So the Kochs make contributions to Donors Trust, something we can track because their private foundations list Donors Trust as a grantee, and then Donors Trust makes the distributions to the controversial organizations without revealing which donors are authorizing the grants. The Kochs are not listed as donors, though their money – filtered through Donors Trust – is almost surely going to these causes.

Meanwhile the Heartland Institute, the outfit that works to disprove climate change, benefits by getting their funding from a donor-advised fund. If they were explicitly to get most of their funds from one or both of the Messrs. Koch, then they could lose their public charity status. But no – they are getting their funding from Donors Trust, a public charity that itself has some 200 donors, and so that grant is considered as coming from the public at large and not from one or two billionaires in particular. As U.S. Senator Sheldon Whitehouse (R.I.) describes it, this is an “identity-laundering scheme.”

I have written time and time again about why the rise of donor-advised funds is a challenge to the charitable world. My critique has focused on how there needs to be a requirement that the funds be distributed to actual charities over a period of time. I have also noted the distorting effect that Wall Street commissions and fees are creating: there is big money to be made in donor-advised funds, and financial incentives in the form of fees and commissions are driving the huge growth in donor-advised funds and diverting money from real nonprofits.

So now let me add to my list of what’s wrong with donor-advised funds: the lack of transparency. The Koch brothers and their ilk are making tax-deductible gifts to “charitable” organizations making dubious and clearly politically-motivated claims, and these transactions are aided and abetted by the virtually unregulated nature of donor-advised funds. Can a fair-minded person honestly say that this scheming is furthering the public interests of the people of the United States? And could someone explain why you and I are subsidizing these activities through charitable tax deductions?

Copyright Alan Cantor 2014. All rights reserved.

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2 Comments. Leave new

  • Excellent analysis, Al. Here in North Carolina we can see in ways large and small the influence of big $$ in politics and civic life – one wonders what we can’t see. Keep up the great work!

  • Are there so many more pressing issues in local, state and national politics that this issue receives little attention from elected officials???? Oh, sorry…..elected officials want to be re-elected….. I apologize for the unprofessional cynicisms.


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