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Public Charity Grant Making – Due Diligence and Reporting


More due diligence and reporting is required than ever before for grant making and, in particular, foreign grants and programs. To maintain its exempt status, an organization must use its assets, including all domestic and foreign grants it may make, exclusively for qualified exempt purposes. Form 990 requires disclosure of whether an organization maintains records to substantiate both the amount of assistance and if eligibility for such grants or assistance is based on the organization’s policies and procedures.

Commonly recognized best practices recommend that charities develop policies, systems, and procedures for pre-grant inquiry, grant monitoring, and post-grant reporting similar to the “expenditure responsibility” requirements for private foundations. Expenditure responsibility means that the private foundation is responsible to exert all reasonable efforts and to establish adequate procedures to see that the grant is spent solely for the purpose for which made, to obtain full and complete reports from the grantee on how the funds are spent, and to make full and detailed reports with respect to such expenditures to the IRS.

Because private foundations are restricted in providing direct aid to foreign organizations and individuals, they must do so either through another U.S. public charity, by exercising expenditure responsibility, or by determining that the foreign organization is the equivalent of a U.S. public charity. Private foundations are also restricted in providing grants to domestic organizations that are not public charities, unless they exercise expenditure responsibility oversight.

While public charities do not have IRS prescribed oversight procedures for making grants to foreign or domestic organizations, they still have an obligation to ensure that their assets are used exclusively for charitable purposes. Thus it is recommended that public charities use similar due diligence procedures as are required for private foundations.

There is one circumstance where public charities are actually subject to the private foundation rules. Grants from a donor advised fund (DAF) sponsored by a charity are subject to the same restrictions and oversight rules as grants from a private foundation. Public charities sponsoring DAFs should familiarize themselves with and follow the private foundation grant-making rules.

Both private foundations and public charities must assure that the funds are not used to support terrorism. Such support can lead to loss of exemption or even criminal prosecution. Thus, organizations should be aware of and comply with the Patriot Act, Executive Order 13224, and Treasury Anti-Terrorist Financing Guidelines, which prohibit the provision of support to terrorists.

While the Patriot Act prohibits willfully providing funds for terrorism, Executive Order 13224,"Blocking Property and Prohibiting Transactions with Persons who Commit, Threaten to Commit, or Support Terrorism,” can be violated even if the grantor is unaware that it has engaged in a prohibited transaction. Thus, an organization’s pre-grant procedures should include checking the Specially Designated Nationals and Blocked Persons (SDNs) database maintained by the Office of Foreign Assets Control (OFAC), and the Terrorist Exclusion List maintained by the Department of State. Charities also should consider all known sub-grantees.  They should not make any grants where doubt exists about the grantee’s or sub-grantee’s ability to ensure that the funds do not support terrorist organizations.

The U.S. Department of the Treasury provides helpful guidance for charities involved in foreign grant-making with the “U.S. Department of the Treasury Anti-Terrorist Financing Guidelines: Voluntary Best Practices for U.S. Based Charities,” issued in 2002 and revised in 2006, and a risk matrix designed to assess the risk of potential grants. The higher the risk, the more due diligence the grant-making organization should undertake to ensure the proper use of grant funds.

Form 990 Schedule I is used to disclose domestic grants and Schedule F is used to disclose foreign grants, direct charitable, fundraising, and investment, activities. These schedules provide an opportunity for organizations to fully describe its policies and procedures.

Since the Form 990 is open for public inspection and available on the web, this kind of transparency may help to assure government enforcement agencies, watchdog groups, and potential donors that the organization engages in due diligence to ensure that funds are devoted to legitimate charitable purposes. It is important that U.S. charities consult with tax and legal counsel when engaging in grant making, particularly international grant making.

Proper policies and procedures can ensure that the organization’s assets accomplish the desired charitable purpose without putting the organization at undue risk.