The Charitable Deduction Games: Catching Change

• Publication year: 2015

The Charitable Deduction Games: Catching Change

Khrista Johnson

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THE CHARITABLE DEDUCTION GAMES: CATCHING CHANGE

Khrista Johnson^*

ABSTRACT

The article addresses a matter that could result in profound changes in the ability of the United States to ameliorate the most pressing humanitarian and global problems of our times. It provides the mechanics and addresses the solutions required to enable U.S. donors to do more good. In an efficient market, capital ends up in its most productive use. In charitable giving, donations are not always allocated to their most effective use due in no small part to current cross-border giving laws impeding that result. The article sets forth the concept of an "efficient charitable market," which is predicated upon unshackling the hands of the giver. The article proposes a system for implementing a new law that would allow U.S. donors to make contributions to non-U.S. charities.

INTRODUCTION.........................................................................291

A. A Short Definition of Efficient Market and an Explanation of Why the Charitable Market Falls Short...........................................................................291
B. Expectations of Philanthropists Today......................292
C. Why? . . . Because the Laws Are Currently Not in Your Favor..........................................................................293
D. Catching Change: Identifying Barriers & Bridges to an Efficient Charitable Market........................................293

I. CHARITABLE PURPOSES OF NON-U.S. CHARITIES................294

A. Defining "Good" Globally........................................295
B. Adequate Funding Resources and Inadequate Progress......................................................................296

II. AN EFFICIENT CHARITABLE FORM FOR NON-US CHARITIES.........................................................................298

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A. Using the Newly Proposed European Foundation Statute to Produce a Solution.....................................299
B. Basic Characterizations of a Standardized Charitable Form (European Foundation Statute with U.S. Modifications)............................................................300

III. KEEPING CHARITABLE FUNDS OUT OF THE HANDS OF TERRORISTS......................................................................306

A. Current IRS Monitoring of Charitable Funds...........307
B. International Supervisory Organizations..................310

1. International Landscape of Supervisory Organizations.......................................................311
2. The Most Relevant International Supervisory Organization—the FATF......................................313

a. FATF Rules to Prevent Terrorist Financing Through Charities: Recommendation 8.........315
b. FATF Requirements: FATF Best Practices Paper and the Interpretive Note to Recommendation 8.........................................316

C. Fitting It All Together for Implementation in the U.S..............................................................................317
D. Comprehensive Analysis of Rules to Prevent Terrorist Financing Through Charities: U.S. Treasury Regulations (Revised Guidelines) v. FATF Requirements..............................................................319

1. The Need for a Simple Approach.........................320
2. U.S. Treasury Guidelines: Basic Purpose and Principles..............................................................321
3. Comparison of U.S. Treasury Guidelines with FATF Requirements........................................................323

a. Financial Accountability and Transparency ..324
b. Receipt and Disbursement of Funds...............325
c. Programmatic Verification.............................326
d. Responsibilities of the Board..........................328
e. Anti-Terrorist Financing Best Practices........330

E. Current Inconsistent U.S. Stance...............................336

1. FATF Rating of Canada.......................................337
2. FATF Rating of Mexico........................................337

F. Going Forward—U.S. Approach...............................338

CONCLUSION: THE PATHWAY TO CHANGE...............................339

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INTRODUCTION

The United Nations (UN) has stated, "Millions still live in extreme poverty, yet the world has enough money, resources and technology to end poverty."¹ If cross-border charitable giving could perform with the efficiencies intrinsic to the private sector, it could have profound impacts on the betterment of humankind. Unfortunately, the charitable market is not remotely as efficient as the private sector for many reasons. However, the main reason from a historic standpoint is that U.S. laws do not favor cross-border charitable giving. This problem was evaluated in the first article of this series, The Charitable Deduction Games: Are the Laws in Your Favor?² In this article, I outline the steps needed to eventually establish what I will refer to as an "efficient charitable market" where we are better equipped to ensure our collective charitable investment ends up in the hands of charities that will put it to its most productive use.³ This end goal of achieving an efficient charitable market would allow us to address some of the most pressing problems confronting our global society today.

A. A Short Definition of Efficient Market and an Explanation of Why the Charitable Market Falls Short

In an efficient market, private sector investors rarely receive returns that exceed average market returns given the amount of information—and fluidity of funds—available at the time of the investment.⁴ In the inefficient charitable market, beating the market is easy: All the private investor (i.e., donor) must do is give to a charity that a reputable rating organization like GiveWell recommends.⁵ These charities will

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"achieve far greater returns (in social value) per marginal dollar than the average charity [will]."⁶ In other words, the private investors will receive a dramatically better return on their investment, seeing a measurable impact, from investing in one of these charities as opposed to other nonrecommended charities. This restriction of information, together with cross-border giving laws that make it difficult to give to non-U.S. charities, highlight inefficiencies of the charitable market partially because they show investments often do not end up with the charities that will put them to most productive use.⁷

B. Expectations of Philanthropists Today

At one end of the spectrum, some ponder that we should expect charitable markets to be as efficient as the private sector. Eric Thurman, Chief Executive Officer of Geneva Global, which provides research and grant management for philanthropists internationally, has succinctly underscored this point: "Approaching philanthropy as a form of investment is an important part of the solution to the problems of philanthropy."⁸ On an optimistic note, he has found that now more than ever "donors are treating their giving like their investments."⁹ Furthermore, Geneva Global has found that the "highest returns on investment" result from "local, grassroots organizations rather than big national agencies or international non-governmental organizations (NGOs)."¹⁰

At the other end of the spectrum is the status quo, where there is often little to no concern about the performance of charities.¹¹ Private investors frequently contribute to charities without expecting a return (in social value) for their investment.¹² Similarly, charities are unaccustomed to accounting for the productive use of funds invested

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in them.¹³ Even after being asked to produce reports of effectiveness, charities are unable to do so.¹⁴ The current market is pushing charities away from being the effective providers they need to be for investors and for the causes they set out to address: "[M]arket incentives of the nonprofit world push charities toward happy anecdote and inspiring narrative rather than toward careful planning, research, and evidence-based investments . . . ."¹⁵

C. Why? . . . Because the Laws Are Currently Not in Your Favor

To achieve an efficient charitable market, we must first confront the problem in our laws. In charitable giving, investment is not always allocated to its most effective use because cross-border giving laws impede that result. As explained in the first article in this series, the U.S. must change its cross-border giving law to make investing in, or giving to non-U.S. charities a sensible option.¹⁶ The European Union (EU) recently made an equivalent change in 2009 to make cross-border giving easier, which shows alternatives are available. Simply stated, our current cross-border giving laws make it too difficult, and much less effective, for a U.S. private investor to invest in non-U.S. charities.¹⁷ Now that the problem has been identified, this article turns to a viable solution with the end goal of an efficient charitable market in mind.

D. Catching Change: Identifying Barriers & Bridges to an Efficient Charitable Market

In this article, I identify attendant barriers and bridges to establishing an efficient charitable market. Each part of this article provides a solution for impediments associated with unshackling the

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hands of U.S. givers. Part I outlines how the U.S. should determine the global goals (i.e., charitable purposes) of non-U.S. charities that are allowed U.S. investment (i.e., deductible donations). Part II explains the mechanics of a standardized charitable form for non-U.S. charities eligible to receive such investment. Part III provides a path for insuring that these investments do not land in terrorist hands. Finally, this article sets forth a solution for the three main problems associated with changing U.S. cross-border giving laws to create an environment conducive to an efficient charitable market.

I. CHARITABLE PURPOSES OF NON-U.S....