Warning, Charities May Be Stealing Your Money. Here's What To Look For.

As some of you know, my new title, Tahoe Payback, has a backstory about scam charities.

I expected to get a lot of blow back from people protesting the very concept that not all charities are squeaky-clean good. I also expected to get trolled from people who are in the scam charity business and don't like that I'm bringing some attention to issue.

Instead, I've gotten many emails from people who have worked for and seen the inside of charities, both good and bad. Every person has supported what my book reveals. Some have been very vocal about how important it is to inform the public about scam charities. Some have seen fraud up close and are outraged.

It occurred to me that I should offer a few points about how to tell a good charity from a bad one.

First, let me explain that there are, in my mind, three major categories of charities.

1) The first category is small charities, often local to a single area, that are run by volunteers. These charities, whether they provide soup kitchens or homeless shelters or college scholarships for local high school students or literacy programs for poor kids or rescue organizations for abused animals or shelters for refugees are almost universally good. The key, to me, seems to be that they are run by volunteers. When no one is being paid by the charity, no one seems to look at the incoming revenue as a potential personal bonanza. Add to that a requirement that two people have to sign off on every expense and you end up with a clean non-profit that is run by people who only want to do good stuff. I could add that my limited research suggests that these charities nearly always have annual revenue under $1 million.

2) The second category is large charities with a nationwide or even international footprint.  These are the names we all know. Because they have a high profile, there is a fair amount of oversight from not just their board of directors but also from the press. Yes, their CEOs make very large salaries. And yes, the charities have huge revenues (often in the billions of dollars a year) that allow for an enormous range of expenses that are hard to track. And yes, when you take a close look at their 990 form filings (that by law are public) you often see uncomfortable things, like no fundraising expense listed on the "fundraising expense" line. We know they hire telemarketers to fill our mailboxes with solicitations and call us at dinnertime. But they bury those expenses in categories like "program expenses." Why? To make it look like they spend a greater proportion of their revenue on charitable activities.

When a huge charity fudges the numbers, it makes for a lot of discomfort. Why not just be honest? We are trusting them with our hard-earned donations. Why shouldn't they just tell the truth?

The bottom line is that while the huge charities do good work, they also engage in shady reporting. But in the end, they are probably worth supporting.

3) The third category of charities is the mid-sized ones, with annual revenues from $1 million to $100 million. These are the ones that seem to be fertile territory for fraud. Why? They aren't big enough to get lots of scrutiny from the general public or the press or the state attorneys general. The directors on the boards are often friends of the person running the charity. Those board members may share in the benefits that come to the management of an unscrupulous organization. The charity is small enough that there aren't a lot of employees who might get a good sense of what's going on and report it to authorities. Like any small or medium sized business, there is often just one person who is "in charge" and who really knows what's going on. And every other employee just does as they're told. If the person or people in charge manipulate the revenue and the required IRS 990 filings to produce a huge personal benefit to themselves, who's to know? A charity that takes in $1 million plus each year can send along a majority of the revenue to "business expenses" that ultimately end up in the manager's pocket.

How, you ask? While my book Tahoe Payback explains some of the ways, I'll just mention one here. A charity can hire a fundraising company to raise revenue. The fundraising company can charge a huge percentage of the incoming revenue as a fee to raise the money. The charity might end up paying 85% to the fundraising company, justifying the expense by saying that keeping only 15% of the money is better than nothing. So, even if the fundraising seems an excessive expense, is that wrong or is it just unfortunate?

Consider this: What if the fundraising company is a for-profit company owned by the manager of the charity? Or maybe it's owned by the charity manager's brother-in-law or son. However unethical that seems, it's legal. And it happens all the time.

If you have no ethics or moral code, you can set up a charity that claims to help kids with cancer, and you can send out mailers with pictures of seriously ill children. You might collect tens of millions of dollars from people who think they're improving the lives of sick kids. But most of the money those hard-working contributors send in goes directly to the fundraising company, which, in actuality, is your own bank account.

Outraged? Me too.

How to tell if a charity is like that? First, notice the solicitations they send out. If they are garish mailers with little windows showing cash or check inside, if they have lots of scary writing on the outside of the envelope, if the letter inside shows heart-stopping pictures of starving children or wounded veterans or old people with dementia, consider the charity very suspect. These are tactics you'll recognize from supermarket checkout tabloids. If the solicitation makes a bold play on your emotions and your sympathies, look out. Next, Google the charity's name accompanied by the words, 'legitimate or scam.' Spend some time reading the links that Google sends you to.

Another educational approach is to Google 'Worst charities' and see what organizations like CNN or Forbes say about them. Go to those 'worst' charity websites and notice the tactics they use to solicit money. This is your primer on what to watch out for.

One more thing: There are many agencies that rate charities. Most of them are non-profits themselves, and some if not most of the rating agencies are run by the charities they recommend! Yes, it's appalling.

So my recommendation is this. Find small, local charities that benefit your community. Charities that are 100% run by volunteers. Fund them. Don't fund any charity that comes to you with a fancy sales job. Whether you have $100 to donate or $1 million, if you send it to a company that tries to coerce you with pictures of people in great stress, your money may go to pay for the private airplane of the person running the charity. Instead, use your money to pay for, as an example, the local soup kitchen's grocery bill. Because the kitchen is run by volunteers, you can visit and actually see what you are funding. If the charities you choose to support provide services that you can personally see, and no one is getting paid with your donation, you are a thousand times less likely to waste your money.

There are thousands of good non-profit companies out there doing good work. They are mostly run by dedicated volunteers. And they almost never use slick sales brochures and over-the-top, hence revolting solicitations to hustle your emotions.

Good Luck!