Lessons Learned from NY Settlement with Fundraisers and Veterans Org

Following Accountability Standards Could Have Prevented
Disabled Veterans National Foundation Problems

Statement from Art Taylor, President & CEO, BBB Wise Giving Alliance (BBB WGA) with regard to the $25 Million settlement with the New York State Attorney General's Office and Disabled Veterans National Foundation (DVNF), and vendor firms* that ran DVNF's direct mail marketing campaigns.

The Assurance of Discontinuance announced by the New York State Office of the Attorney General specified, in part, the following monetary relief: The vendor firms hired by DVNF (Quadriga Entities*) shall pay restitution to DVNF totaling $13.8 million which consists of a forgiveness of debt. In addition, the specified vendors shall pay damages totaling $9.7 million to compensate for amounts that could have gone to help disabled veterans. One of the vendors shall pay damages of $300,000 and Quadriga Entities shall pay $800,000 to defray the expenses of the Office of the Attorney General

BBB WGA believes that Attorney General Eric T. Schneiderman's July 1, 2014 announcement helps demonstrate three things: 1) Americans give generously to those in need, 2) fundraising vendors and charities who distribute misleading appeals will not only face financial risk but also damage donor trust, and 3) following established charity accountability standards could help charities avoid such catastrophes.

We hope this settlement will be a wake-up call for charity boards, staff and fundraising firms to ensure that they are considering the impact of their fundraising activities on their most precious and generous stakeholder – the American donor.

One of the key findings of the New York Attorney General was that "None of the Founding Directors [of DVNF] had any experience with direct mail campaigns or large-scale fundraising prior to forming DVNF." New or smaller charities can be especially vulnerable when a potential fundraising vendor promises to provide a national fundraising campaign without any "up front" costs being required for the charity. Leaders of such charities could particularly benefit by following widely-accepted guidelines for good nonprofit management practices.

BBB Wise Giving Alliance Standards for Charity Accountability offer such guidelines – 20 standards to help charities manage themselves more successfully, with integrity and transparency. The standards call for accuracy and truthfulness in fundraising solicitations, provide details about how to exercise good governance, and offer specifics about how to achieve accountability in operations. In particular, four of these standards could have helped DVNF avoid the problems found by the New York Attorney General:

• Board Oversight. Standard 1 calls for charity boards to exercise adequate oversight over the charity's operations and staff. The New York Attorney General's Office found that the DVNF board was not adequately informed by the fundraising firms about the financial arrangements with the vendors and provided little oversight of accounting matters, the content of appeals, and the operation of its gifts-in-kind program.
• Material Conflicts of Interest. Standard 5 states that a charity should not conduct transaction(s) in which any board or staff member have material conflicting interests with the charity resulting from any relationship or business affiliation. The Attorney General found that DVNF hired the daughter of the fundraising firm's commissioned sales agent as DVNF's chief administrative officer. While the Attorney General also found that DVNF was unaware that the employee's father was receiving commissions, this circumstance demonstrates the importance of ensuring arm's length transactions when hiring vendor firms.
• Reasonable Fundraising Costs. Standard 9 seeks to ensure that total fund raising costs were not high (i.e., not exceeding 35%) when compared to the contributions raised in the past fiscal year. In other words, a charity should spend no more than 35 cents to raise a dollar. An overwhelming majority of charities we evaluate meet this standard. New York's Attorney General found that "over 90% of the charitable funds donated to DVNF [since its inception] were used to cover the organization's direct mail expenses..." Fundraising is a necessary activity of a charitable organization. This is why we were co-signers of a letter to donors entitled: The Overhead Myth. In that letter we advise donors to consider many factors when making a donation rather than simply relying on the percentage of money a charity spends on overhead. However, it is essential that fundraising costs be reasonable if a charity expects to maintain the trust of donors who do not expect disproportionate amounts of their contributions will be spent on fundraising.
• Truth and Accuracy in Fundraising Solicitations. Standard 15 concerns solicitations and informational materials. It states that appeals distributed by any means should be accurate, truthful and not misleading, both in whole and in part. This standard is unique to the BBB Wise Giving Alliance among other major charity evaluators. We cannot emphasize enough the importance of accuracy in fundraising appeals conducted through any channel, including direct mail, websites, telemarketing and social media. Direct mail appeals, for many donors, are the only information they consider before contributing. This is all the more reason they should include a clear, accurate explanation of the charity's programs and should not mislead in any way. Although the solicitation letters drafted and mailed by the vendors "variously contained numerous misleading statements concerning DVNF itself, the individuals helped by DVNF, and the impact of a donor's contribution in advancing DVNF's mission," the Attorney General further found that "Among other things, some or all of the [DVNF] Founding Members failed to ask for or review... each of the fundraising appeals sent out in DVNF's name...."

As part of the Assurance of Discontinuance with the State of New York, without admitting to any violation of law, the cited parties agreed to carry out certain actions. DVNF agreed to enact a number of changes, including but not limited to, appointing a new board of directors, establishing an audit committee, ceasing to make misleading statements in appeals about its activities, and replacing its fundraising vendors and henceforth will only select vendors after a competitive bidding process. Among other things, the cited marketing firms agreed to disclose more information on financial risks to "start up" charities that employ their services, confirm the accuracy of direct mail copy, and make certain appeal disclosures to potential donors. These are positive developments for the fundraising profession and it is our hope that other firms will take such measures.

DVNF noted that they had hired a new Chief Executive Officer several months prior to the settlement and said major programmatic and governance reforms were already underway at the organization.

* NOTE: There were six marketing firms named in the Assurance of Discontinuance (No. 14-145) with the State of New York: RBS International Direct Marketing, Quadriga Art, Brick Mill Studios, PEP Direct, PEP Response Systems, and Convergence Direct Marketing. The settlement collectively referred to them as "Quadriga Entities." Convergence Direct Marketing is not owned by Quadriga and is an independent company. The Quadriga Entities agreed to the Assurance of Discontinuance without admitting any violation of law. They also agreed to implement new procedures (Protocol for Implementation) when dealing with future circumstances similar to those that caused the identified concerns.

BBB Wise Giving Alliance (BBB WGA) evaluates national charitable organizations that solicit funds from the public. The BBB WGA does not rate or rank charities but provides comprehensive information on charity governance and oversight, effectiveness, finances, and fund raising appeals, to assist donors in making informed giving decisions. There is no charge to charities or donors for BBB evaluations, and the reports are regularly updated and available to the public at give.org.

Regional Better Business Bureaus prepare reports on locally soliciting charities using the same standards.