Meet the Massachusetts Attorney General’s Public Charities Division
Is the sum total of your relationship with the Attorney General’s office the annual filing of the Form PC? Members of the AG’s Nonprofit Organizations/ Public Charities Division came to speak about the regulation of the nonprofit sector, their priorities to support a vibrant nonprofit sector, and how they hope to work with you, as nonprofit leaders, to prevent misuse of charitable funds and protect nonprofits and their donors from fraud and loss.
Assistant Attorneys General Courtney Aladro and Emily Gabrault, members of the AG’s Nonprofit Organizations/ Public Charities Division, gave a presentation about the regulation of the nonprofit sector, their priorities to support a vibrant nonprofit sector, and how they hope to work with nonprofit leaders to prevent misuse of charitable funds and protect nonprofits and their donors from fraud and loss. They spoke candidly about their work, including some real-life examples of cases their office has seen, current office priorities, and best practices for what to do when problems arise in your organization. They discussed how to avoid common pitfalls and identify red flags to support a constructive relationship with the Division.
The AG’s Nonprofit Organizations/ Public Charities Division, which has a staff of 18 people, has as its major purpose to regulate the nonprofit sector, enforce regulations, and to provide a resource for the sector. In total, the Division oversees approximately 27,000 public charities in the Commonwealth of Massachusetts. The government regulations governing companies (nonprofit and for profits) are constantly changing: DOL regulations, the definition of exempt and nonexempt, IRS requirements, reporting requirements, etc. In addition, the political climate has changed drastically since the last election, so the AG’s office has started a hate crime hotline, which has received a lot of calls recently.
One area that the AG’s office examines is the whether the Board of Directors for a public charity performs its fiduciary duties in a responsible manner. Fiduciary duties include the following: sound fiscal policy; legal and regulatory compliance; sound policies and procedures; oversight of management; Board self-assessment; and safeguarding assets. Board members and management have a duty of loyalty including policies against conflicts of interest and personal financial gain from corporate decisions. Some of the common problems that the AG’s office has dealt with public charities are: “founders syndrome” where the charismatic, visionary, committed founders has become autocratic, distracted, weak, and too comfortable with a controllable Board; conflicts of interest in the Board and management; and a lack of structure and sound corporate processes, especially when it relates to checks and balances and separation of duties. Courtney and Emily reviewed the Fraud Triangle with the 3 points of the triangle being: motivation, rationalization, and opportunity.
How do issues involving public charities come to the attention of the AG’s office? Sometimes a Board member contacts the AG, sometimes issues are raised by other government agencies, sometimes from a consumer. The main goal of the Public Charities Division of the AG’s Office is not to penalize or punish an agency, but to assist the agency in correcting the problem and adopting preventive measures and sound policies. The AG can seek restitution and can assess penalties for various violations and can issue injunctive relief to prevent a “bad actor” from continuing in his/her nonprofit role. Courtney and Emily gave several examples of the types of issues the Division deals with. Example one involved a husband and wife team operating a nonprofit where the lines between personal and business activities became blurred. Example two involved a charity which purchased health insurance from a Board member who worked for the insurance company. Example number three involves a lack of segregation of duties, which led to fraud. A civil case is often easier to prosecute than a criminal case. Example four involved an agency who received a funding cut and as a result, cut back on its operational functions such as paying its employees and paying its debts in order to keep operating. In that case the agency has to maintain its operational functions as well as to continue to fulfill its mission. The agency should monitor its expenses and keep ahead of any potential funding issues. The AG’s office lists the best practices for a public charity as the following: have an independent Board; adopt sound documented policies and procedures; adopt good governance procedures; adopt solid disclosure, evaluation, discussion, and documentation procedures; and major decisions should be made by the independent Board.
A question was asked about changing the purpose of a restricted fund when the funder is no longer available. You can go to the AG’s office to try to get that resolved. You cannot borrow from restricted funds or an endowment fund to temporarily fund cash flow shortfalls. Courtney and Emily said that the enforcement priorities for the next year will be to curtail foundation self- dealing and to better monitor how organizations solicit donations.