Kermit Washington investigation: Should donors have suspected fraud?
Former NBA player Kermit Washington was charged this week by a federal grand jury with evading taxes and defrauding donors to his charity. Could donors have spotted problems with his charity before making contributions?
Former NBA player Kermit Washington faces up to 40 years in prison and up to $1 million in fines if convicted of charges brought against him this week by a federal grand jury that he evaded taxes and defrauded donors to his charity, according to the US Department of Justice.
Mr. Washington allegedly promised donors to his 32-year-old charity Project Contact Africa, including other former athletes, that 100 percent of their donations would go to needy families in Africa. Instead, it has been charged, Washington spent hundreds of thousands of dollars of donations on personal gifts and jewelry and entertainment. He also used the charity's money to pay his rent and to go on vacations, says the justice deparment.
“Individuals who use charitable organizations to defraud donors and evade tax obligations inflict substantial harm on every US taxpayer and cause untold damage to well-intentioned charitable endeavors,” said Acting Assistant Attorney General Caroline D. Ciraolo in a statement. “The department is committed to identifying those engaged in such criminal conduct and holding them accountable,” she said.
Fraud happens in the nonprofit, tax-exempt world, though there is no evidence that it is widespread.
"It's a few bad apples that paint a bad picture," Rick Cohen, spokesman for the National Council of Nonprofits, an association of charities, tells the Monitor in a phone interview.
It's difficult to know how many charities commit fraud. One of the only ways, and not a very good one, to estimate the number is to look at how many nonprofits report illegal financial activity committed by their employees on their tax filings, which is required by the Internal Revenue Service (IRS): about 1,000 per year, estimates Chuck McLean, senior research fellow at GuideStar, a website of information about nonprofits.
“Out of a million charities, it’s a pretty small percentage, but it’s more than you would like to have,” Mr. McLean tells The Christian Science Monitor in an interview.
Considering that in 2013 charitable contributions reached more than $335 billion, according to a 2014 report from Giving USA, it’s important for donors to know that their contributions are spent as promised, rather than getting diverted to support the lifestyles of the Kermit Washingtons of the world.
“We recommend giving local or to a group that you have a connection to,” says Mr. Cohen. “If you’re giving to a local group, you can see the results of your donation or be engaged through volunteering,” he says.
But sometimes, a donor’s charitable aspirations are national or international. In those cases, there are myriad ways to investigate the legitimacy of a charity before handing over money. The caveat is that it takes some work.
“There is no magic bullet,” says McLean.
A good first step toward quickly evaluating a nonprofit is to peruse its website to see if it’s transparent about its work, its staff and board members, and how much money it makes and spends. Washington's charity website doesn't list this type of information.
Searching online for possible complaints about an organization is also a good idea, as is searching websites such as GuideStar, which can confirm that a nonprofit is actually registered as such with the IRS. GuideStar also offers financial and other important information.
“Come to GuideStar and search for the name of the charity,” says McLean. “If you can’t find it, there’s something wrong there.”
Other charity-rating and information sites include: GiveWell, Charity Navigator, and CharityWatch. There’s also the Better Business Bureau, which monitors charities and offers information to donors through Give.org.
Project Contact Africa barely passes the GuideStar search test. It is a government-approved nonprofit and listed as such on GuideStar, but it would have been hard for a donor to find, because it is listed only under the name “6th Man Foundation,” with Washington named as executive director. None of the other nonprofit databases list Project Contact Africa.
If a charity is listed in an IRS-approved database on one of these sites, the next best bit of research to do would be to look at the group's tax filings, known as Form 990. Most nonprofits – except for some houses of worship and other religious organizations – are required to file a Form 990 annually with the IRS. The 990s that are publicly available, however, are usually a year or more old.
But the tax filings include important financial information, details on governance and operations, and they have to be handed over to anyone who asks for them. Many nonprofits willingly post 990s every year on their websites, which is a good sign.
For signs of fraud or other financial inconsistencies, McLean advises that donors look at the 990 supplemental section, “Schedule O,” which would describe the nature of any reported fraud and how it was handled. Though as The Washington Post has reported, some nonprofits omit a lot of information here.
While Washington is accused of filing fake 990s, McLean points out that there is still some useful information in the foundation’s 2013 tax filings.
For one thing, it shows that 6th Man Foundation’s revenue – the accuracy of which is questionable – had been declining for about a decade up to 2013, from around $200,000 to $50,000.
“Generally speaking, businesses are either growing or they’re dying,” says McLean. “It’s the same thing with a charity.”
For McLean, the revenue would immediately raise a question: What is the chance that a small charity with the mission, “To support a medical clinic in Africa for needy families and children,” according to its 990, could be as effective as large organizations doing the same work in Africa? Very little, he says.
He also points out that the nonprofit’s board has three members. A donor would want to explore who the board members are and how they’re connected to the charity founder.
“Ultimately, it is the board that’s a fiduciary in this case, so it’s responsible for making sure the charity is honestly run,” says McLean.
A board comprising several family members can be a bad sign.
“When you have those intertwined familial boards, that’s almost always a red flag,” says McLean. “And not necessarily because they're doing anything illegal, but because that’s not the right way to find boards.”
Also, he warns, watch out for charities headed by celebrities such as Washington. In McLean’s experience, these groups are often more about vanity than mission.
In Washington's case, the alleged exploitation of donors led to his arrest Tuesday in Los Angeles and an initial appearance in US District Court. The ex-basketball star was ordered to surrender his passport and was released on bond with a tracking device. His next court date is tentatively scheduled for June 16.