Where does your money really go?

By Kevin Begos

updated 6:10 a.m. ET Dec. 12, 2007

Created to alleviate poverty, the nonprofit Miami-Dade Empowerment Trust seemed for nearly a decade to be taking aim at South Florida’s most impoverished neighborhoods by creating new business opportunities and jobs.

As it happened, the organization also had been busy creating wealth for some of its own. The taxpayer-supported agency had lavished money on insider deals, lost money on failed loans, and spent hundreds of thousands on celebrity entertainers. Just one wasteful expense involved a tab of more than $87,000 to fly hip-hop star Sean “Diddy” Combs from New Jersey to Miami on a charted Gulfstream jet. Diddy’s antipoverty mission for the nonprofit? Hosting an MTV awards ceremony.

Suddenly, in September, it all came out in the open — on the pages of The Miami Herald, which detailed questionable practices going back years. The nonprofit couldn’t account for millions in expenses. It had exaggerated the numbers of jobs it had created. Board members and advisers benefited from insider loans. Some $175,000 had been spent on trips, including for singers Shakira and Eve and actor Owen Wilson.

But perhaps even more telling than the abuses was the initial response to them: the nonprofit declined comment. And no wonder. It didn’t have to say anything. Nobody could make it say anything. Indeed, barring some allegation of outright illegality, those at the helm of a charity generally can persist in those trademarks of the nonprofit world: silence and denial.

By many measures, this is the golden age of the charitable-industrial complex: gifts are up. Growth is off the charts. These days, nearly everybody seems in on a benevolent act or the catalyst for one — movie stars, rock stars, former presidents, financiers, school teachers, and CEOs. From all appearances, the nonprofit sector has never been so positioned to make substantial headway against challenges such as disease, poverty, and environmental calamity.

How much is squandered?
Yet as Americans give away more money than ever before — the total amount of U.S. philanthropy is on track to top $300 billion this year — an unpleasant question lingers: how much of that money is well-spent, and how much of it is squandered? The uncomfortable truth: no one knows for sure, and even worse, few are checking.

Whether it’s wrongdoing, wasteful spending on administrative overhead, rent or celebrity balls, or questionable proportions of benefit to causes and corporations in symbiotic cause marketing relationships, who can tell? The Internal Revenue Service lacks enough investigators to glimpse more than a minute sample of nonprofit behavior. Publicly disclosed forms often provide only a vague and incomplete picture of what’s going on. Some states are even unable to identify legitimate charities; they lack requirements for nonprofits to register. Other states lack even a single full-time attorney to investigate complaints.

Despite some tough talk by the feds in recent years — and initiatives in which tax authorities are said to be cracking down on nonprofit executive compensation and other abuses — the chances of an IRS audit are so remote that even shaky nonprofits can go for years without much risk of being caught. Even litigation is difficult: the Supreme Court has ruled there’s nothing inherently illegal about a charity that spends just 1 percent of donations on good deeds.

The result? Just about anything goes — an unregulated, unpoliced free-for-all in which anything might be happening to donor dollars, with anything short of blatant allegations of legal wrongdoing unlikely to be exposed, except occasionally by enterprising reporters or bloggers well after the fact. “These are times that try nonprofit souls,” says New York University Professor Paul Light. “It used to be that the nonprofit sector had the benefit of the doubt from donors. But not anymore. Donor confidence is shaky. Americans have come to believe that there is some sort of leaky bucket that no matter who they give to, some of the money will be lost through waste, inefficiency, and high executive salaries.”

Consider just a few recent headlines about what’s happening in this emerging Wild West of America’s nonprofit industry: in September, the Lucile Packard Foundation for Children’s Health in Palo Alto, Calif., reported that an employee had embezzled $350,000. Then, later that month, the director of the African Community Resource Center in Los Angeles was arrested and charged with embezzling more than $1 million. Previously, she had been named “Phenomenal Woman of the Month” by Oprah Winfrey’s O Magazine. And in October, right after the president of Goodwill Industries International complained that an IRS plan to better monitor donated goods amounted to “pointless reporting requirements,” a Goodwill employee was arrested — for stealing more than $1,700 in donated goods. Finally, in late October, the Associated Press reported that the director of a Catholic charity, the North Fork Parish Outreach Center in Suffolk County, N.Y., used $700,000 in charity donations and thrift shop proceeds to finance her gambling habit, using much of that money to buy lottery tickets.

Some people tire of being so close to messy nonprofit situations. In October, Dorothy Cann Hamilton, the chairwoman of the James Beard Foundation Board, resigned five months before the end of her term, much of which was spent in damage control mode after the former president pleaded guilty to stealing from the foundation in 2005. “I have been put to my best and highest use,” Ms. Hamilton told The New York Times, referring to her reform efforts. “But it was never intended to be a lifetime appointment.”

MORE FROM GIVING

Giving Section Front

Philanthropist funds fight against autism Widow leaves millions for opera, birds ‘Slow money’ gains momentum Molly Sims joins fight against malaria Pepsi pays to 'refresh' communities ‘Sleepers’ raise money for homeless Madonna promises light for Malawian village Giving Section Front   Add Giving headlines to your news reader: