Potential Self-Dealing in the Conservative Partnership Institute
Last week my co-blogger posted about a recent New York Times article by David Farenthold about the Conservative Partnership Institute (“CPI”), a 501(c)(3) charity. In my view, Farenthold does a remarkable job of reporting on the nonprofit sector, but the article illustrates the limits of public knowledge on nonprofit spending. He reports on numerous insider transactions at CPI, involving millions of dollars flowing to for-profit entities formed by CPI leaders. Farenthold correctly notes that, “[w]hile hiring insiders is permitted when certain safeguards are in place, the payments moved money out of daylight and into opaque entities that the nonprofit’s leaders helped control.”
The obvious question, of course, is whether those “safeguards” were in place in CPI’s case; safeguards that would presumably be described in a robust conflict-of-interest policy. Farenthold was at the mercy of CPI, which declined to provide details about its processes. There are many legitimate charities that legitimately pay for services from companies that their founders or directors own or control. There is no law against that; nor should there be in my opinion. But, of course, such payments produce risk. Farenthold quotes non-profit law scholar Linda Sugin, who correctly notes that CPI “could have reduced its risk by soliciting bids from competing firms to gauge whether insiders were charging market rates [and it] could have asked its leaders to recuse themselves from the decision to hire their own companies[.]” But because CPI refused to comment, we just don’t know whether they did. I’m guessing that they had good enough lawyers that they probably did have those procedural safeguards in place and make use of them. That doesn’t mean that they didn’t manage to overpay the companies that are connected to insiders anyway; it also doesn’t mean that they did pay too much. That’s a question that we the public are extremely unlikely to be able to judge accurately.
So, who should police whether payments from charities to insiders are excessive? That burden falls on the IRS and state charity regulators. It’s important for two different reasons. First, donors receive a tax deduction for charitable contributions, and that tax deduction is not warranted when the money is diverted from its charitable use. But even more important is that charitable donors generally rely on the regulation of nonprofits to enable them to trust that their donations will be used for their intended purpose. The one donor who would talk to Farenthold explained that he didn’t need that legal protection because of his personal relationship with the leaders of CPI, saying, “I’ve known them a long time …. They’re good people.” But most charitable donors don’t have that luxury, and the charitable sector would be much smaller (and able to do much less good) if every donor had to personally know the directors of every charity they want to support. And, obviously, the donor who talked to Farenthold could be wrong in his trust of CPI.
–Benjamin Leff