For most people, charities are cherished organisations. The vast majority of them are not only genuine and authentic but make an important contribution to society, in areas such as health, social assistance and education.
Such is their high standing that many governments give special recognition to the role the charity sector plays in building a stronger and fairer world. For instance, several countries provide tax relief to these organisations and their donors. But while the vast majority of charities are honest and legitimate, fake charities emerge from time to time. Even bone fide charity organisations can be targeted by criminals to launder the proceeds of tax crimes and other financial offences. Why charities? There may be a range of different reasons for this. For a start, the fact they are charities may make them a "soft touch" for criminals, who see them as being above public suspicion, and perhaps not subject to the kind of tough accounting vigilance afforded to regular businesses. Yet some charities handle vast amounts of money and, just like major corporations, often have to move those finances across borders.
As a result, the privileged status of a charitable organisation is too often wilfully abused, whether by taxpayers, by donors or by tax-return preparers.
Terrorist organisations and fraudsters not only use charities, but many pose as charitable organisations themselves. Little wonder governments now want to tackle abuse of charities, and this demands knowing more about how they function, and clearing out the blind spots. In 2008 the OECD set about addressing this problem by carrying out an in-depth survey. The results threw up some surprises.
The 19 countries surveyed show a great diversity in the way that charities are perceived in different societies-and the way in which charities and donors are treated for tax purposes. For instance, in Austria, charities are mainly subject to tax, but are exempted from paying income tax if the given purpose of the charity is related to public welfare. As for the donors, only donations for charities with charitable goals related to science and research are passed as valid for tax exemption. Transparency is also important, as shown in Chile and Denmark, where charities must declare both the amounts they receive and the donors' identification to the tax authorities.
The extent to which charities are abused also varies widely. In fact, five of the countries surveyed-Austria, Chile, Denmark, France and Germany-reported that they had not identified any cases of abuse of charities for money laundering and tax evasion. However, for the other countries, there was some evidence of abuse, including organised crime. How do they do it? The OECD identifies a range of common methods and schemes. For instance, a bogus company might pose as a registered charity that solicits contributions which end up in the pockets of its directors. There are registered charities that sell charity receipts to tax-return preparers for a commission. Taxpayers and tax-return preparers might counterfeit charity receipts of real charities. Or terrorists use charities to raise or transfer funds to their organisations.
The list of possible fraudsters is long, too, from tax-return preparers and professional fundraisers, to lawyers and doctors, and even charities themselves. Take the case of a tax-return preparer described in the OECD report. This person prepared 1,190 income tax returns claiming false charitable donations. First, she charged a small processing fee to complete her clients' income tax returns. She then asked those clients if they wished to make a "donation" to a charity. The tax return preparer falsified the charitable receipts of those "donations" by using the names of legitimate charities and then claimed the false deductions on her clients' income tax returns. She charged her clients an additional fee for processing these fraudulent receipts. The result was an astounding total in forged charitable donation receipts of some €2.4 million. The tax-return preparer collected no less than €525,884 from her clients over a three-month period for her services. The consequent loss to the tax authorities was €675,804, not to mention the cost of having to reassess 1,190 income tax returns. In this case, the tax-return preparer was caught and ended up in prison.
Though not every case ends this way, detection is improving, thanks to a combination of intelligence gathering, data matching and risk profiling and analysis to uncover charity frauds. Indepth audits of the charitable organisation's bookkeeping can also help verify the tax status of the donors. The OECD report suggests that valuable tax information could come from domestic intelligence agencies such as the Financial Intelligence Unit (FIU), customs and immigration agencies, or foreign tax authorities. Informants can also provide leads.
Tax authorities can also find out quite a lot by working with law enforcement agencies, such as the US Federal Bureau of Investigation (FBI), the Royal Canadian Mounted Police (RCMP) and, in Italy, the Finance Police.
Campaigns to raise awareness about fraudulent charities and abuse are important. But so is legislation. Many countries have passed bills to exclude ‘‘remunerated donations", where the "donors" get something of value in exchange for their "donation", while others have made it obligatory to report suspicious transactions to the FIU. Several countries have set up special task forces and audit teams to combat the abuse.
Because charities and tax both have crossborder aspects, international organisations are stepping up to the plate. The OECD is doing its part by keeping track of developments and co-operating with members to identify best practices, including, for instance, whether compliance policy needs tightening up or not. A number of international organisations, including the EU Justice Directorate and the United Nations, have also expressed an ongoing interest in the need for transparency and good governance of charities, particularly where cross-border transactions are involved. And they are working with charities on the ground to ensure that they have the good practices and legislative protection they need to combat fraudsters and their accomplices. They all agree that the role of charities is too important to allow financial abuse and fraud to continue any further.
For more on tax abuse and charities, contact Brian.McAuley@oecd.org
OECD (2009), Report on abuse of charities for money-laundering and tax evasion, Centre for Tax Policy and Administration, available online at http://oecd.org/dataoecd/30/20/42232037.pdf
©OECD Observer No 273 June 2009