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House Panel Probes Fundraising by Veteran’s Charities

(Dec. 17, 2007) Allegations of ineffective and inefficient fundraising, as well as misuse of funds raised, have been directed at charities that serve military veterans in the wake of a Dec. 13 hearing held by the House of Representatives’ Committee on Oversight and Government Reform.

The hearing was held in response to a report issued by the American Institute for Philanthropy, a “charity watchdog” organization that issues grades for charities based on fundraising performance and other factors (similar to the Better Business Bureau). The report gave many veterans’ groups a failing grade and prompted the congressional committee to examine the fundraising practices of several specific organizations, including the American Veterans Coalition, the Blinded Veterans Association and Disabled American Veterans.

During the hearing, representatives expressed great concern about organizations spending up to 87 percent of funds raised on fundraising expenses, typically to third-party soliciting firms that were paid through percentage-based compensation. Other organizations highlighted during the hearing showed a pattern of financial abuse.

Rep. Dan Burton (R-Ind.) indicated he was considering legislation to improve the accountability of the nonprofit sector, according to an article in The Washington Post (“Study Faults Charities for Veterans,” Dec. 13, 2007).

Percentage-Based Fundraising the Key

In response to the hearing, AFP distributed a press release calling on Congress to ban the practice of percentage-based compensation.

“If you examine the charities that have extremely high fundraising costs, including several of the groups highlighted during the hearing, you’ll almost always find that these organizations pay their fundraisers on a percentage basis,” says Paulette V. Maehara, CFRE, CAE, president and CEO, in the press release. “The one single reform proposal that would make the most difference in stopping fraud and strengthening public trust in the charitable sector would be for Congress to ban percentage-based fundraising.”

Maehara noted that AFP’s Code of Ethical Principles and Standards of Professional Practice expressly prohibit the use of percentage-based compensation, and the association has developed a position paper outlining its opposition. Some of the key reasons for the prohibition on percentage-based compensation include:

  • charitable mission becoming secondary to personal gain
  • donor trust being unalterably damaged
  • incentive for self-dealing prevailing over donors’ best interests
  • the very philanthropic values on which the voluntary sector is based being undermined

Other Options for Fundraising Contracts

During the hearing, some organizations noted that using third-party, for-profit fundraising firms that charge percentage-based compensation is the only way they have to raise money, and that they are receiving funds they otherwise never would receive.

In the press release, Maehara refuted this notion. “There are many ways you can structure a contract with a fundraising firm using a set fee or salary without percentage-based fundraising. I’m happy to talk with any charity that wishes to do so.”

AFP has never published specific limits for fundraising costs, owing to a wide variety of factors that can affect costs dramatically. However, according to Maehara, exceedingly high fundraising costs should at least wave red flags for donors, and percentage-based compensation is almost always the culprit.

“These are causes that are near and dear to the hearts of all Americans, but the public’s generosity is being abused,” she added. “Congress needs to act to ban percentage-based fundraising so that the public can rest assured that charities and their fundraisers are putting the needs of donors first.”

A second hearing by the committee on the same issue is scheduled for Jan. 17, 2008. AFP will continue to monitor the situation and educate members of the committee about ethical and effective fundraising.

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