Identifying and Developing Charities Cases

Transcription

1 National State Attorneys General Program Charities Oversight and Regulation Project Seattle Regional Training September 24, 25, 2009 Identifying and Developing Charities Cases

2 Identify sources of charity cases Case Selection Criteria Anatomy of an Investigation Subpoena/Civil Investigative Demands What to Request Investigators Role What if I Have No Investigator? Using an Organizations Own Filings Registrations, Forms 990, Financial Statements, Management Letters, etc.

3 Identifying Violations of the Law Solicitation issues Governance Asset management Using the IRS Form 990 to Find Violations of State Law Multi-State Enforcement Actions

4 Charities cases can be developed from a wide variety of sources

5 Insiders often refer or report matters: Present or former board members or officers Stakeholders or consumers of the charity s programs services Employee Whistleblowers

6 anonymous complaints (These needed to be taken with a grain of salt but some are meritorious) consumer complaints about solicitation (It s a good practice to have a complaint form on your website it generates cases)

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8 Government Agency Referrals Referrals from law enforcement agencies Police Fire Consumer protection agencies Legislators making constituent referrals or inquiries

9 The organization s own documents and filings

10 Read the newspaper!

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13 Mail drops Obtain a P.O. Box and donate through the P.O. Box Old lady mail collectors Dummy phone lines, telemarketing calls received by AG's themselves Ask your colleagues to collect their direct mail

14 Local BBB Offices can make referrals Reach out and establish a relationship with your local BBB

15 1. Nature and Extent of the Harm General principle: We should select those cases involving the largest economic loss, to either charity or donors. Factors to consider: How much money is involved? If there has been diversion, what is the loss to charity? If the issue relates to statements made in the course of solicitation, how many donors are affected?

16 2. Deterrent Value General principle: We should select those cases that have the greatest deterrent value. Factors to consider: Will this case have high public visibility which will deter similar conduct? Will this case have deterrent value in this particular subsector, either because of the identity of the defendant or the nature of the practice? Does this case involve a new or emerging problem which merits aggressive enforcement in order to deter future violations?

17 3. Characteristics of the Victims General principle: We should select those cases that involve the most vulnerable victims. Factors to consider: Are the victims peculiarly vulnerable, e.g. senior citizens? Are the victims located in our state? Do the victims have private remedies available to obtain redress? Are the victims themselves partially culpable?

18 4. Nature of the Violation General principle: We should select those cases involving the most significant violations of state law. Factors to consider: Is this an isolated violation, or is there a pattern of illegal conduct? Is the violation technical, or is the conduct inherently fraudulent? Does the public care about this issue? Is this conduct common or customary in this industry? Is this a new deceptive practice that can be eliminated before it becomes widespread? Have we taken action against this kind of conduct in the past?

19 6. Defendant s Intent General principle: We should select those cases involving the most intentional violations of law or intent to defraud the public. Factors to consider: Was the defendant genuinely ignorant of the law, or confused about its application? Is there evidence the defendant violated the law willfully? Is the defendant s conduct targeted at particularly vulnerable citizens?

20 7. The Cost to the Office General principle: We should select those cases that best utilize our limited enforcement resources. Factors to consider: How great a commitment of staff time will be required? What cases will we have to forego in order to prosecute this case? What out-of-pocket expenses will be required for travel, expert witnesses, depositions, etc. Is the defendant unusually litigious and likely to drain our resources? Have we so committed ourselves to this case or issue that failure to proceed will hurt our credibility?

21 8. Likelihood of Success on the Legal Issues General principle: We should select those cases that involve the greatest likelihood of success, or present the best opportunity for establishing helpful precedent. Factors to consider: Are the legal issues well-settled, or is this a matter of first impression? Are there proof problems with our witnesses, exhibits or other evidence? If we litigate and fail, will the outcome affect our effectiveness elsewhere? If we hope to make new law, does this case present a good set of facts for doing so?

22 9. Likelihood of Effective Relief General principle: We should select those cases involving the greatest likelihood of obtaining meaningful relief. Factors to consider: Are we likely to recover funds that should have been used for a charitable purpose? Has the defendant already halted the practice? Will an injunction be effective? Is the defendant likely to flee? If the defendant is located elsewhere, can we successfully enforce an injunction or collect a judgment? Is the defendant bankrupt or judgment-proof?

23 10. Availability of Relief Through Other Means General principle: We should select those cases for which others do not have standing. Factors to consider: Can relief be obtained effectively through private litigation, either by board members or by charitable beneficiaries? Are there other charities with an incentive and standing to litigate this case? Is there a potential for action by other state or federal regulatory agencies or criminal prosecutors that may remedy the situation. Could a cease and desist letter achieve acceptable results? Could public exposure of the defendant s practices without litigation achieve comparable results? If some alternate form of relief is available, will it be available quickly enough to be meaningful?

24 11. Other Factors Are other states pursuing this action? Would a multi-state action be effective? Is there public demand or public pressure for our office to take action?

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27 Leverage technology FTC Listserve let others due the sleuthing Do it yourself take testimony and build a case. Take advantage of Internet based investigation tools and search engines Forms, CID s, Court decisions, multi-state achrives, etc.

28 Monitoring of the FTC s charity2 listserve for State charity regulators can alert you to problems with charities or solicitors in other states. Those charities or solicitors are likely active in your state too. The listserve also generates multistate enforcement activity

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37 Paul Luehr presented Beyond Google: Internet Investigative Techniques and Tips at the 2006 NASCO Conference Copies of his Powerpoint and Favorite Bookmarks are available

38 The charity s own documents can often be used against them. Examples include: Registration statements IRS Form 990 Websites Recorded Calls ouncil%202_2_09%20(edit).mp3 Telemarketing Scripts

39 The charity s own documents can often be used against them. Examples include: Direct Mail Financial Statements CPA s Management Letter CPA Communications under SAS 112 and 115

40 Using an Organization s Documents: CPA s Management Letter Auditors have traditionally provided their clients with a management letter at the end of the audit which points out internal control problems, issues, and weaknesses that the auditor has detected during the course of an audit This letter is written to management and the board and is not considered a public document

41 Using an Organization s Documents: CPA s Management Letter In the past, the letter was largely voluntarily and could be communicated orally or in writing Beginning with 2006 (applicable to years on or after December 15, 2006), the letter was formalized and is now part of the audit process. Certain aspects of it are no longer voluntary

42 SAS 112 and 115: Three Aspects Mandatory SAS Nos. 112 and 115 deal with communicating internal control related matters identified in an audit SAS N issued in Turned out to be overly complex in its definitions. SAS No. 115 issued in 2008 (applicable to years ending on or after December 15, 2009). It keeps much of SAS No. 112, but simplifies the definitions Must be provided within 60 days after issuance of the auditor s opinion Mandatory SAS No. 114 deals with the auditors communications with those charged with governance Voluntary SAS Nos 112 and 115 permit the auditor to discuss Voluntary Nos. other issues in the letter, but do not require further discussion Charity regulators and investigators should be interested in these two required communications (which are often combined as one letter)

43 SAS 112 and 115: Three Aspects Auditors must disclose deficiencies in internal controls that they encounter during the audit which are either Material weaknesses Significant deficiencies Critical point: In the NPO world, the auditing standards do not require the auditor to look for or find control deficiencies as an end in and of itself But in the course of performing the audit, the auditor is required to examine, test, and document internal controls as necessary in the auditor s professional judgment to permit the auditor to identify and address audit risk and satisfy the auditing standards. So the auditor inevitably will find internal control issues; perhaps minor, or conceivably major

44 The Management Letter The auditor must provide a letter identifying significant weaknesses and material deficiencies detected during the audit process The auditor: Can provide a letter indicating that no material weaknesses came to the auditor s attention if there were no material weaknesses identified Cannot provide a letter indicating that no significant deficiencies were uncovered even if none were uncovered. As the audit process is not designed to look for this, it is possible that significant deficiencies do exist

45 Internal Document: Board Minutes Minutes should: List who attended, the date and time of the meeting Describe the actions taken at each meeting and votes for and against them and major thread of discussion Describe committee reports to the board. Describe other business List all conficts discussed.

46 Internal Document: Board Minutes Minutes As a Tool: Prepare: A table of the attendance record of each director A table of employees who attended each meeting A List who attended, the date and time of the meeting A chronological list of financial decisions considered A list of new programs and services Describe the actions taken at each meeting and votes for and against them and major thread of discussion Describe committee reports to the board. Describe other business List all conflicts discussed.

47 Internal Document: Board Minutes No or poorly maintained minutes have informational value: Assess whether the Board is dysfunctional and if so, how Make inquiries of employees about their perception of the board and management Look for overrides of controls Look for violations of conflicts of interest policy

48 There are a number of documents prepared by or filed by an organization that can be very useful in build a case

49 No body is related.

50 Not married but same names??

51 Registration Data Can Develop Cases 1 DEPARTMENT OF THE ATTORNEY GENERAL 2 STATE OF HAWAII 3 IN RE INVESTIGATION OF: ) AG Subpoena No. ) Animal CARE Foundation ) ) 5 ) ) 6 ) EXAMINATION UNDER OATH OF SABINA DE GIACOMO 13 Taken on behalf of the Attorney General's Office at 14 the offices of Department of the Attorney General, Queen Street, Honolulu, Hawaii, commencing at 9:57 16 a.m. on May 29, 2009, pursuant to Notice

52 19 Q. Do you reside with Frank De Giacomo? 20 A. He lives in the house. 21 Q. Are you married to him? 22 A. It's somebody's definition. Legally the 23 paperwork has not been changed to a divorce. 24 Q. So you obtained a wedding license? 25 A. Yes.

53 13 Q. Did either of you petition the court for a 14 legal separation? 15 A. Not on paper. 16 Q. Okay. So then you're not legally separated. 17 A. Okay. 18 Q. You are currently married. If neither of you 19 has petitioned or received a separation from the 20 court, you remain legally married. 21 A. Okay.

54 No Management expenses?

55 It turns out that the Animal Care Foundation did not properly allocate its expenses among programs services, management and fundraising The Foundation failed to list its officers and directors on its Form 990 The Foundation failed to report the sale of inventory (pet food, medicine, supplies)

56 Private Foundation returns are filed with the Attorney General of Each State in which the Private Foundation is domiciled, registered or created. Treasury Reg. Sec (c)

57 Note the zeros and the handwriting. Suspicious? Nothing entered on most lines Red Flag

58 Note that the president took a whopping tax deduction and then lived tax free on the Foundation dime

59 Did the Foundation Managers Take Compensation? But so underpaid.

60 I m Sure the Supporting Schedules Explain Everything! In this case, Who lived the $35,000 here in occupancy expenses were for a luxury and condominium traveled? in the Ilikai Hotel for the President of the organization. Note the travel expenses too.

61 Pick a good poster child case. Badge Fraud Veterans Groups Disabled and Terminally ill Children, etc. Good publicity generates new referrals and complaints when the public at large becomes educated about the AG s role