Trust+No Controls=Fraud

By Gary Snyder

Rita Crundwell was a longtime, trusted employee. She had a virtual stranglehold over city finances. She was Dixon, Illinois’, a city of nearly 16,000, longtime treasurer and comptroller.

City officials didn't monitor the books closely enough to notice that huge amounts of tax dollars were disappearing. She allegedly pilfered an astonishing $30 million from the coffers of the small northwestern Illinois town over the last six years.

The city's auditors did not raise any red flags about the city's finances. There were virtually no questions about what could have been done to prevent the alleged thefts. The auditor might have spotted the large transactions but accepted Crundwell's explanations for them. It was from one account that the FBI alleges Crundwell spent more than $30 million in city money over the last six years on her horse business, a luxury motor home and horse trailer, jewelry, and credit card payments.

All those that knew her were even indifferent to one of the most common indicators of fraud. They shrugged off her lavish personal lifestyle despite her comparatively modest $80,000-a-year city post. (link)

Nonprofit Imperative gathers its information principally from public documents...some of which are directly quoted. Virtually all cited are in some phase of criminal proceedings; some have not been charged, however. Cites in various media: Featured in print, broadcast, and online media outlets, including: Vermont Public Radio, Miami Herald, National Public Radio, Huffington Post, The Sun News, Atlanta Journal Constitution, Wall Street Journal (Profile, News and Photos), FOX2, ABC Spotlight on the News, WWJ Radio, Ethics World, Aspen Philanthropy Newsletter, Harvard Business Review, Current Affairs, The Chronicle of Philanthropy, St. Petersburg Times, B, USA Today Topics, , Newsweek.com, Responsive Philanthropy Magazine, New York Times...and many more • Nonprofits: On the Brink (iUniverse, 2006)

IRS’ Validation of Charity Fraud

by Gary Snyder

The fascinating, but not surprising, Internal Revenue Service research report adds to the overwhelming evidence that there is 'significant diversion' of charitable assets. This study is the latest in a series of studies that highlights this abuse.

Because the report is based on self-reporting and does not include the IRS form 990s that need additional information, are incomplete and are only those that passed 'technical screening’, the IRS study results reflect a small percentage of a much larger problem. The gravity of the IRS diversion/governance study is only part of the problem.

The study’s underpinnings point to why the problem is so vast. It shows the following:

• only 29% of the perpetrators resulted in criminal or civil charges;
• just 16% ended in incarceration or probation;
• only 3% resulted in fully-paid restitution;
• just 4% ended in partial restitution

The likelihood of getting caught and suffering consequences is extremely remote.

The diversion issue is further exacerbated by no acknowledgement of the crisis by charity leaders and regulators despite academics, private consultants and public officials noting that it is a major problem.

With the spotlight once again on this abuse, let’s hope that all will coalesce and address this compounding problem.

Nonprofit Imperative gathers its information principally from public documents...some of which are directly quoted. Virtually all cited are in some phase of criminal proceedings; some have not been charged, however. Cites in various media: Featured in print, broadcast, and online media outlets, including: Vermont Public Radio, Miami Herald, National Public Radio, Huffington Post, The Sun News, Atlanta Journal Constitution, Wall Street Journal (Profile, News and Photos), FOX2, ABC Spotlight on the News, WWJ Radio, Ethics World, Aspen Philanthropy Newsletter, Harvard Business Review, Current Affairs, The Chronicle of Philanthropy, St. Petersburg Times, B, USA Today Topics, , Newsweek.com, Responsive Philanthropy Magazine, New York Times...and many more • Nonprofits: On the Brink (iUniverse, 2006)

Greg Mortenson Again Defending His Actions

By Gary Snyder

On the heels of a settlement, author Greg Mortenson is facing accusations that he fabricated parts of his best-selling books “Three Cups of Tea” and “Stones Into Schools.” A hearing is set on claims that Mortenson lied about how he came to build schools in Central Asia after losing his way in a failed mountaineering expedition and being nursed back to health in a Pakistani village.

The lawsuit — filed by two California residents, a Montana man and an Illinois woman who bought the books — list more than two dozen alleged fabrications and accusations of wrongdoing by Mortenson, publisher Penguin Group, co-author David Oliver Relin and the Central Asia Institute. Lawyers for Mortenson and Penguin Group are asking Haddon to dismiss the lawsuit, which seeks triple the amount of total books sales, plus punitive damages. 


The lawsuit is asking a judge to order that everybody who bought the books be refunded. Whatever money is left over would go to a humanitarian organization selected by the plaintiffs’ attorneys and approved by the court. That could add up to $7 million.

The hearing comes less than two weeks after Mortenson and the Montana attorney general announced a $1 million agreement to settle claims that Mortenson mismanaged the Central Asia Institute and misspent its funds. The agreement removes Mortenson from any financial oversight and overhauls the charity’s structure. (link)

Nonprofit Imperative gathers its information principally from public documents...some of which are directly quoted. Virtually all cited are in some phase of criminal proceedings; some have not been charged, however. Cites in various media: Featured in print, broadcast, and online media outlets, including: Vermont Public Radio, Miami Herald, National Public Radio, Huffington Post, The Sun News, Atlanta Journal Constitution, Wall Street Journal (Profile, News and Photos), FOX2, ABC Spotlight on the News, WWJ Radio, Ethics World, Aspen Philanthropy Newsletter, Harvard Business Review, Current Affairs, The Chronicle of Philanthropy, St. Petersburg Times, B, USA Today Topics, , Newsweek.com, Responsive Philanthropy Magazine, New York Times...and many more • Nonprofits: On the Brink (iUniverse, 2006)

A $12 million charity fraud

by Gary Snyder

It purports to be a charity that provides assistance to injured Texas highway patrol troopers and the families of those who have died in the line of duty. Telemarketers claimed that 100 percent of donations went to provide assistance. 

Unfortunately that is not the case for the Texas Highway Patrol Association.

In fact, less than 1 percent of donations helped troopers and their families, while the balance was spent on salaries and expenses that included cigars, liquor, meals, personal travel, luxury car leases and even a veterinarian bill for a cat. The organization had raised nearly $12 million between 2004 and 2009. It gave only $63,500 to troopers and their families.

Texas Attorney General Greg Abbott charged the nonprofit, which has no official connection to the Texas Department of Public Safety or the highway patrol, with fraud for misspending millions of dollars in donations raised from telemarketing operations.

Board members of the supposed charity, who are themselves current and former Department of Public Safety officers, claim the group's senior staff and attorney kept them in the dark about its shady operations. A new lawyer representing most of the troopers said that they didn't have backgrounds that prepared them to carry out the fiduciary responsibilities of a nonprofit organization. At a February meeting in which they fired the organization's top employees and its former legal counsel the board agreed to hand over more than $1.2 million in assets to a court-appointed receiver. (link)







Nonprofit Imperative gathers its information principally from public documents...some of which are directly quoted. Virtually all cited are in some phase of criminal proceedings; some have not been charged, however. Cites in various media: Featured in print, broadcast, and online media outlets, including: Vermont Public Radio, Miami Herald, National Public Radio, Huffington Post, The Sun News, Atlanta Journal Constitution, Wall Street Journal (Profile, News and Photos), FOX2, ABC Spotlight on the News, WWJ Radio, Ethics World, Aspen Philanthropy Newsletter, Harvard Business Review, Current Affairs, The Chronicle of Philanthropy, St. Petersburg Times, B, USA Today Topics, , Newsweek.com, Responsive Philanthropy Magazine, New York Times...and many more • Nonprofits: On the Brink (iUniverse, 2006)

A typical nonprofit fraud scenario …

by Gary Snyder

Randall Morrison earned up to $160,000 a year in legitimate income, yet he admitted to stealing $142,000 from the Seattle-based Ronald McDonald House Holiday Cruise fund. A recent study indicated that most of those that steal from charities have ample incomes but want more to splurge with. 

The former treasurer of a children's charity who raided the fund was sentenced up to 30 months in prison and was also ordered to serve three years of supervised release and pay $112,220 in restitution. The charity provided a wish list for sick kids and their siblings.

With internal safeguards in place, Morrison would not have been able to conduct his long-running theft by wiring money or cutting checks on the charity’s account. He had all the charity’s bank statements and financial statements sent directly to him. He fabricated reports to the charity’s board to hide the fact that the charity’s accounts were dwindling. The charity's apparent fraud was perpetrated on Morrison’s business credit card as well. 


To lighten the sentence, Morrison forged his wife’s signature on a medical information release. He failed to keep up the charity’s registration with the state, resulting in penalties to the charity, or file tax returns. He virtually bankrupted the organization. (link) Guess those in positions of trust were not watching. 






Nonprofit Imperative gathers its information principally from public documents...some of which are directly quoted. Virtually all cited are in some phase of criminal proceedings; some have not been charged, however. Cites in various media: Featured in print, broadcast, and online media outlets, including: Vermont Public Radio, Miami Herald, National Public Radio, Huffington Post, The Sun News, Atlanta Journal Constitution, Wall Street Journal (Profile, News and Photos), FOX2, ABC Spotlight on the News, WWJ Radio, Ethics World, Aspen Philanthropy Newsletter, Harvard Business Review, Current Affairs, The Chronicle of Philanthropy, St. Petersburg Times, B, USA Today Topics, , Newsweek.com, Responsive Philanthropy Magazine, New York Times...and many more • Nonprofits: On the Brink (iUniverse, 2006)

"Three Cups of Tea" author Greg Mortenson mismanaged Central Asia Institute

by Gary Snyder


From MT Attorney General's Report:

"Three Cups of Tea" author Greg Mortenson mismanaged the nonprofit organization he co-founded to build schools in Pakistan and Afghanistan and spent charity money on personal items, family vacations and millions on charter flights, according to an investigative report released.

Mortenson's control of the Central Asia Institute went largely unchallenged by its board of directors, which consisted of himself and two people loyal to him, the report prepared by the Montana Attorney General's office said. When an employee would question his practices, Mortenson either resisted or ignored the person, the report found.

The result was a lack of financial accountability in which large amounts of cash sent overseas were never accounted for. Itemized expenses listed as program-related were missing supporting receipts and documentation. Employees and family members charged items such as health club dues and gifts to CAI credit cards.

Mortenson himself reaped financial benefits at the expense of the Central Asia Institute, including the free promotion of "Three Cups of Tea" and his later book, "Stones Into Schools," and the royalties from thousands of copies CAI bought to donate to libraries, schools, churches and military personnel, the report said.

The books came under scrutiny last year when reports by "60 Minutes" and author Jon Krakauer alleged that Mortenson fabricated parts of both and that he benefited financially from the charity. The attorney general's probe focused only on the charity's finances and operations, and did not examine the books' contents.

The attorney general's office said Mortenson was permanently removed as CAI's executive director in November. A settlement agreement signed by Mortenson, CAI and the attorney general's office said Mortenson will be barred from being a voting member of the board and from holding any position of financial oversight as long as he is employed by the charity. The charity must expand its board from three to at least seven members, and the other two current board members must step down within a year, according to the deal.

Mortenson also must reimburse the charity more than $1 million under the settlement agreement. Nearly half has already been repaid. The agreement also calls for an overhaul of the charity's operations and board.

The investigation found that CAI spent $3.96 million buying Mortenson's books to give away, paying full price through online retailers instead of using the publisher's discount for Mortenson. A 2008 agreement between Mortenson and CAI required Mortenson to donate the equivalent of what he made in royalties from the CAI-purchased books, but he never did.

The investigation also found that CAI spent $4.93 million on advertising and promoting Mortenson's books, costs that the charity and the author had agreed to split but never did.

CAI paid $2 million in charter flights for Mortenson to keep his rigorous speaking engagement schedule before he started paying for his own travel in 2011. The investigation found that in many cases he was "double-dipping," where CAI paid for his travel to a speaking engagement and the host of the event also paid him a fee or honorarium for his travel, which Mortenson pocketed.

Mortenson and his family also charged personal items to CAI in 2009-2010 amounting to $75,276 that included "LL Bean clothing, iTunes, luggage, luxurious accommodations and even vacations," according to the report.

Mortenson has repaid more than $495,000 of the $1.05 million that the attorney general's office says he owes CAI. He has $560,000 left to repay and will have three years to do so — with interest — because he has "insufficient financial resources" to pay it all at once, the report said.

The investigation found serious holes in CAI's operations and governance with Mortenson at the helm. The other board members weren't able to rein in Mortenson or persuade him to document his expenses, despite "requests, cajoling, demands and admonitions," the report said.

"There was a deliberate effort to put people who are loyal to Mortenson on the board," the report said. As a result, "the board did not exercise sufficient control and direction over Mortenson."

Nonprofit Imperative gathers its information principally from public documents...some of which are directly quoted. Virtually all cited are in some phase of criminal proceedings; some have not been charged, however. Cites in various media: Featured in print, broadcast, and online media outlets, including: Vermont Public Radio, Miami Herald, National Public Radio, Huffington Post, The Sun News, Atlanta Journal Constitution, Wall Street Journal (Profile, News and Photos), FOX2, ABC Spotlight on the News, WWJ Radio, Ethics World, Aspen Philanthropy Newsletter, Harvard Business Review, Current Affairs, The Chronicle of Philanthropy, St. Petersburg Times, B, USA Today Topics, , Newsweek.com, Responsive Philanthropy Magazine, New York Times...and many more • Nonprofits: On the Brink (iUniverse, 2006)

Update: Audit Catches World’s Largest Workplace Charity Fundraiser

By Gary Snyder

UPDATE: An audit that uncovered nearly $1.1 million in questionable expenses by the Washington-area Combined Federal Campaign has shaken federal employees' faith in the government's charity drive and prompted a crackdown on spending. The National Capital Area CFC is the largest in the nation, and last year it collected more than $64 million in pledges from federal employees and military service members. 

Another Office of Personnel Management inspector general (IG) report, dated Feb. 14, criticized the United Way of Ventura County's management of the California Gold Coast CFC, the fourth-largest campaign in California. That report questioned $114,161, including $92,940 that was not distributed because United Way of Ventura County did not properly allocate or account for those funds during the 2009 campaign.

The report said a full month of CFC deposits was inadvertently left off the United Way of Ventura County's spreadsheet and was not disbursed, which contributed to the $92,940. The IG said it never received any response to the audit from the United Way of Ventura County.

The IG recommended sanctioning the United Way of Ventura County and banning it from participating in the CFC in the future. On March 12, Office of Personnel Management Director John Berry sent the United Way of Ventura County President David Smith a letter banning his organization from participating in the next CFC. Berry said the United Way of Ventura County's lack of cooperation with the OIG was a major reason it was debarred. The United Way of Ventura County responded to Berry's letter March 27, outlining steps it has taken to address the problems identified in the audit. But Smith said his organization will not appeal Berry's decision to bar the United Way of Ventura County from participating in the CFC.

The largest single expense questioned by the OPM IG in the case of the Washington-area campaign was an $11,315 night out at a Washington Nationals baseball game in 2007. As a kickoff for the 2007 CFC campaign, Global Impact, the non-profit that manages the charity,  brought more than 600 campaign managers, agency executives on loan to CFC, charity workers and their friends to the game, at which retired Adm. Thad Allen, former Coast Guard commandant and CFC's honorary chairman, threw out the first pitch. Other expenses included $680 spent on chair massages in 2007 and 2008. (link)

Nonprofit Imperative gathers its information principally from public documents...some of which are directly quoted. Virtually all cited are in some phase of criminal proceedings; some have not been charged, however. Cites in various media: Featured in print, broadcast, and online media outlets, including: Vermont Public Radio, Miami Herald, National Public Radio, Huffington Post, The Sun News, Atlanta Journal Constitution, Wall Street Journal (Profile, News and Photos), FOX2, ABC Spotlight on the News, WWJ Radio, Ethics World, Aspen Philanthropy Newsletter, Harvard Business Review, Current Affairs, The Chronicle of Philanthropy, St. Petersburg Times, B, USA Today Topics, , Newsweek.com, Responsive Philanthropy Magazine, New York Times...and many more • Nonprofits: On the Brink (iUniverse, 2006)

Who Is Paying Attention?

by Gary Snyder

As they sit in silence and denial, I sit alone in my office and watch the charity leadership on the wrong side of a serious bet.

The sector is in turmoil as few want to acknowledge. More than half of the charities that responded to a survey.¹ rely on local or state government contracts. And 45 percent receive federal contracts or grants. This means charities are eating up their treasuries. Some 57 percent of the charities said their reserves would only cover three months of operations or less. Thirty-one percent, mostly small organizations, said contributions dropped in 2011, and 41% said they did not meet their funding goals.²

More than half of the nonprofits in the survey are human or social service agencies, which have been hit harder than some other organizations as a result of their reliance on state and federal contracts.

As charitable dollars diminish, we see a familiar albeit depressing story: an increasing demand for services; delays in payments, especially of government grants; waning cash reserves; and a bleak outlook for 2012. Eighty-five percent of charities said demand for help grew in 2011 and 88 percent expect even more clients in 2012.

We also see thousands of insiders lining their pockets. One estimate suggests that charity fraud has increased over 20% to $51 billion in just a few years.

There is no agency that vets nonprofits or provides oversight. In spite of these challenges the sector has not exhibited any interest in improving risk management.  Furthermore, those in positions of leadership have steadfastly held to the opinion that there should be no regulation. They believe there should only be self-regulation because a one-size-fits-all solution is a straightjacket to the sector’s failings.

There is little interest by the IRS. Based on it’s own 2011 IRS Data Book, the audit rate by the IRS is .0037%. Some say that may be overstated.

Any variance at all to that of the sector’s leaders position is smothered. I watch my colleagues, almost giddily ensconced in rhetoric about any other subject but the soft spots in the nonprofit sector, financial management, sustainability and risk management.

Almost 40 percent said their boards do not understand the basics of their charities’ expenses and cannot even discuss the organization’s financial situation knowledgeably with outsiders. In addition, 36% of the boards do not provide sufficient expertise to help a charity’s bottom line.

The era based on the government’s commitment is over. We have never seen this kind of backtrack in assistance in this nation’s history. Without that assistance, the charitable sector will be in crisis with no way to be bailed out.

The numbers add up to astonishing totals. In 2011, the IRS said that almost 400,000 agencies were lost. Our larger stalwart agencies have been more insulated from the vagaries of the sector as a whole, but the other 77% of the organizations are frightened. They are fraught with internal and external challenges. Denial and lack of leadership have given rise to a catatonic sector.

We have seen in the last 5 years that a loss in confidence is very hard to get back, if at all. Without hard choices by the sector, the trust in philanthropy will continue to fade away. 

¹ Nonprofit Finance Fund

² Nonprofit Research Collaborative

³ The Chronicle of Philanthropy, April 2, 2012

Gary Snyder is the author of Silence: The Impending Threat to the Charitable Sector.

Nonprofit Imperative gathers its information principally from public documents...some of which are directly quoted. Virtually all cited are in some phase of criminal proceedings; some have not been charged, however. Cites in various media: Featured in print, broadcast, and online media outlets, including: Vermont Public Radio, Miami Herald, National Public Radio, Huffington Post, The Sun News, Atlanta Journal Constitution, Wall Street Journal (Profile, News and Photos), FOX2, ABC Spotlight on the News, WWJ Radio, Ethics World, Aspen Philanthropy Newsletter, Harvard Business Review, Current Affairs, The Chronicle of Philanthropy, St. Petersburg Times, B, USA Today Topics, , Newsweek.com, Responsive Philanthropy Magazine, New York Times...and many more • Nonprofits: On the Brink (iUniverse, 2006)