5 Reasons to be Skeptical of Charities

The Not-For-Profit sector of our economy pulls in a lot of money. In 2006, Americans dug deep and gave a record $295 billion to charity, roughly 2.2 percent of our collective take-home income. Not one penny of that came from me. Here's why.

1. They're not as efficient as you think

As with any financial endeavor, and big charities definitely fit the bill, part of the goal is just to bring cash in. Take VietNow, for example. The charity itself is well meaning, striving to address hardships that face many of the men and women who've served in the military in the last half century. But in order to reach as wide of a base as possible, VietNow employs a telemarketing group to solicit members and benefactors. It's a strategy that has worked greatly in expanding the public's awareness of the group, and over $7 million were raised between 1987 and 1995. There's a catch, however: The telemarketing company kept eight-five cents on every dollar donated, leaving a meager 15 cents on the dollar for the charity itself. Subtract further administrative costs from that, and the money that actually made it into the hands of the people who needed it most becomes meaningless.

Often the charities that are spending to send you things in the mail or call you at home have an overhead that's so expensive that most of the money received ends up cycled back into the system, just paying for more postage and telemarketers.

And like any business, there are those who make a living out of it, like Roger Chapin, the self-dubbed "non-profit entrepreneur," who's run nearly 30 non-profits over the years with names like "Citizens for a Drug-Free America," "Americans United to Conquer Disease," Coalition to Salute America's Heros Foundation, " and "Help Hospitalizes Veterans," which preforms the daunting, yet necessary task of supplying injured soldiers with arts and crafts kits while in the hospital. "HHV," for short, was by far Chapin's most successful charity to date, bringing in over $71.3 million in donations. Unfortunately, only about nine percent of that actually went to purchasing these gifts, 85 percent went to pay for the direct mailing and television campaigns. Five percent of that 71 mill was spent on administrative fees, including a $43,000 down payment on a pair of condos, a $135,000 loan to finance a friend's divorce settlement, a $17,000 country club membership, and a combined salary of over half a million dollars for Chapin and his wife, who edits the "HHV" newsletter.

2. Giving could land you in Guantanamo

It may sound extreme, but if you give money to the wrong people, you can be arrested as a terrorist. Here's how it works: Let's say you're a socially conscious American Muslim. And let's say you read the headlines and see how bad things are for people who live in northern Mali, so you decide to donate money to a charity that funds projects there- in this case, a well for clean drinking water. The Islamic American Relief Fund does just that. You write the check, post it and then let the warmth of philanthropy wash over you. But if it happens that a few of the men paid to dig the well had been paid to dig other wells in the area, and any of those wells had been paid for by Hamas, government watchlists place those men on Hamas's payroll and identify them terrorists. When this line of thinking is carried out to its extreme, that means that the Islamic American Relief fund gave money to terrorists, which means you gave money to terrorists. And that makes you a terrorist.

Sound far fetched? Not under to the USA PATRIOT Act. If you give money to an organization that, in turn, gives it to people on the Defense Department's growing list of "terrorist" organizations, then you can be arrested and sent off to wherever they send those people off.

3. Just because it's a non-profit, doesn't mean it's a charity.

The Baptist Foundation of Arizona was never technically a charity. In fact, its investors expected to see their investments returned to them. When Richard and Susan Kimsey deposited $100,000 into the trust, they were told that they were doing the Lord's work. They were also told that the money was going into a mutual fund and that the interest would be used to fund Baptist and humanitarian causes"“providing food and shelter to Arizona's poor and spreading the gospel.

Unbeknownst to the Kimseys, as well as 13,000 other investors, not only had the foundation failed to make any charitable contributions, it had also become a money pit.

The BFA was founded in 1948, and ran fine until the eighties, when the foundation's trustees invested heavily in the booming Arizona real estate market, which tanked soon thereafter. Rather than dissolving and returning as much money as possible to investors, the foundation instead solicited new donations in order to keep up with interest payments on its failed investments. Eventually, this scheme grew out of control. The BFA created dummy subsidiaries to buy the failed investments at inflated prices with money borrowed from the foundation, and issued loans that these subsidiaries could not possibly pay back. With a little creative paperwork from auditor Arthur Anderson, the foundation looked like it was staying afloat, while good intentioned, elderly "investors" continued to throw their retirement funds into the fire.

When the BFA was finally investigated by Arizona state regulators after a decade of litigation, the foundation's losses topped $350 million. Half of that was paid by Arthur Anderson in a court settlement. Further, three BFA members, including the foundation's treasurer, plead guilty to fraud charges.

4. Wealthy People Use them as Tax Shelters

Of course, Koch's means isn't the only way to game the system. In the mid-nineties, CEO of InsMark, Robert Ritter, developed a scheme called, "charitable split-dollar insurance," which allowed very wealthy people to set-up a life insurance policy in the form of a tax-exempt charitable fund, like founding a charity to support your children after you're gone. It was an abusive tax shelter technique that played off a loophole in the tax code. In 1999, Congress passed legislation banning the practice.

5. You could be subsidizing someone's love life

United Way of America president William Aramony was sentenced to seven years in prison for "25 counts of conspiracy, mail and wire fraud, the filing of false income tax returns and transactions involving criminal property." Not only did Aramony syphon off over $1.2 million from the charity's headquarters, he also diverted these funds towards his mistress in the form of chauffeured limousines, trips across the world (to accompany him, of course), checks for "consulting" services, and the use of a New York City condo. Added to the list of unethical actions was the fact that his muse was only 17 when the 59-year old executive first met her.

Of course, Aramony didn't draw straight from the company well. Instead, he set up Partnership Umbrella, Inc. with $900,000 in United Way seed money, as well as several other spin-off entities. It was through these side organizations that he masked his massive personal spending. The scandal surrounding his trial led to a sharp drop in donations to local branches of the United Way, which was unfortunate because only one cent of every dollar received at the local level goes to the national headquarters. Oddly enough, some still praise Aramonay for the advances he made in the efficiency and efficacy of the organization.

Author's Note: But I still think you should still give

For me, the number of people who've abused the system makes me uncomfortable with the idea of giving to charities. But that doesn't mean I'm not charitable. I have my own philanthropic foundation: it's called, "Pocket Change." My mission: To keep a lot of spare change and a few dollars always handy. That way, when I'm walking to work and a homeless guy asks me for money, I can give it to him.The money stays in my own community, I know it's going directly to who needs it, and I get the instant gratification of seeing the thankful look on someone's face. There's a chance he's just going to spend it on drugs and liquor, but from what I've seen, there's no guarantee that my charitable dollars aren't going to be squandered no matter who I give them to.

Of course, my "Pocket Change" approach isn't for everyone. (There's a definite downside in that you can't write off donations on your taxes.) If you're giving to non-profits, I'd suggest, before you give your money away, do your research. Be wary of organizations that are spending on mailings and telemarketers. And be doubly wary if you're asked for donations using hard sell tactics like this.