Who Can Regulate Fraudulent Charitable Solicitation?
Authors: Fishman James J. 
Published: February 2016

The scenario is common: a charity, typically with a name including an emotional word like “cancer,” “children,” “veterans,” “police,” or “firefighters,” signs a contract with a professional fundraiser to organize and run a campaign to solicit charitable contributions. The charity may be legitimate or a sham. The directors of the charity may be allied or coconspirators with the fundraiser, or as likely, well-meaning but naïve individuals. The fundraiser raises millions of dollars through telemarketing, Internet, or direct mail solicitation. The charity receives but a small percentage of the amount. In some cases, at the close of the campaign, the organization owes the solicitor more than the amount raised for the charity.1Thereafter, the state attorney general investigates the charity and finds fraud in the solicitation or an improper use of the funds raised. As part of the settlement, the professional solicitor agrees to be barred from operating in that particular state. Thereafter, the fundraiser moves to a neighboring jurisdiction, opens business (perhaps under a different name), and commences the same cycle of fraudulent fundraising using another charity.2 Deception in solicitation and misuse of monies raised for charitable purposes is not only a fraud on the donor; it also can be a diversion of tax dollars from state or federal treasuries.This article examines several approaches for regulating unscrupulous professional fundraisers and preventing carpetbagging, moving from jurisdiction to jurisdiction, committing fraud, or willfully violating regulatory requirements. It examines limitations in the existing regulatory framework to prevent charity fraud and offers possible solutions to the problem. As a first solution, the Internal Revenue Service should revitalize and extend the “private benefit doctrine” as a tool of enforcement. Second, Congress and the Service should amend § 4958 to address excess benefit transactions to more clearly include unscrupulous solicitors.A third possible resolution to the problem outlined would be the expansion of the Federal Trade Commission’s enforcement authority to cover charitable solicitation generally. Currently, the FTC has authority over telemarketing by for-profit fundraisers.3 The legislation proposed would enable the creation of a self-regulatory organization under Federal Trade Commission aegis that fundraisers would be required to join. This new organization would enforce norms and rules for professional fundraisers, have the authority to discipline and, if necessary, to bar dishonest fundraisers from the fundraising industry.A final recommendation is the creation of an online, readily accessible database containing records of violations of professional fundraising companies and the individuals who own and work for them, the contracts between professional solicitors and the charities they work for, the results of fundraising campaigns listing the percentage of dollars raised that goes to the charity, and the texts of settlement agreements between state charity officials and fundraisers and the charities involved. An important issue not addressed in detail is the fiduciary responsibility of charity boards to carefully select the firms that manage their solicitation campaigns.