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Evan Steinberg
Jennifer Enoch
ENC 2135
19 July 2016
How prominent is Corruption within charities?
Charity is often considered the foundation of American Society, it fills the void
between government and the private sector; it aids, it heals, it restorations, it keeps
humanity going and is often seen as the best aspects of humanity. Yet even charities can
be plagued by some of the worst aspects of humanity such as fraud, corruption, and
greed. There are three main types of fraud that can occur in a professional atmosphere.
The first type of corruption, is the most common type of corruption, the embezzlement
of assets which occurs when an organizations assets are stolen or misused by an
internal source. The second type of corruption is simply corruption in its crude form,
this occurs when economic or political influence/coercion is used during an economic
transaction. The third type of corruption is another form of fraud, when someone most
likely an internal source deliberately falsifies an entitys financial statements (Wells).
Greed is part of the problem but opportunity makes temptation harder to resist and
then the crime is rationalized as a way to make up for low wages or other perceived
affronts (Floriteanu 1).

The United States Supreme Court decided Illinois ex rel. Madigan, Attorney
General of Illinois v. Telemarketing Associates, Inc., et al. Many reports have already
been published about this decision and the ramifications it may have for the operations
of charitable organizations and professional fundraisers. We are issuing this client alert
to provide you with our perspective on the meaning of this case and how it may or may

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not affect you in the future.
Overall, we are encouraged and pleased by the Court's decision because it has upheld
and strengthened the most important aspects of a trilogy of prior Supreme Court cases
(Schaumburg, Munson and Riley) which (i) carved out a Constitutional protection for
charitable solicitations and (ii) rejected attempts by the states to place limits on the
contractual arrangements between nonprofits and their professional fundraisers. While
it is true that the United States Supreme Court reversed the Illinois Supreme Court, it
did so only on the fraud question. The decision means that the Illinois Attorney General
is permitted to pursue its fraud action against the defendants for certain
misrepresentations they may have made to potential donors during their telephone
conversations (Pearlman).
Nonprofit entities and corruption seem like an unlikely duo, but corruption,
greed, and fraud are prevalent, even in the nonprofit sector. Not to devaluate corruption
in the private sector but corruption in the nonprofit sector is important to understand
for a variety of reasons.
First, every dollar lost to fraud represents a lost ability to provide needed public
services. Second, the [Non profit] sector is facing increased public scrutiny
primarily as a result of the widespread availability of detailed financial
information (Gordon et al 1999). Finally, Greshams Law may be at work,
[meaning] publicized fraud cases may result in an unwillingness of donors to give
to any nonprofit (Greenlee 2000). (Fischer, Gordon, Greenlee and Keating 4)
In terms of economics, Greshams law states that bad money will drive out good money.
In the case of the non profit sector, cases of corruption and fraud within charities may

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convince private donors to keep their money instead of donating it to charity.

(NEW PARAGRAPH INTRO) Although more and more instances of corruption

within charities seems to be publicized, corruption seems to be more prominent in
society.

(NEW PARAGRAPH INTRO) According to the Urban Institute public charities in

the United States bring in over $1.6 trillion in total revenue (McKeever and Pettijohn 1).

(NEW PARAGRAPH INTRO) Management seems the most to blame, more often
then not it is the executives and the upper level management that fraud is caused by.
The people that private donors trust and communicate with when making a donation
are often the reason for fraud and corruption (Cohen).

How do charities obtain government funds?

Charities obtain revenue from a variety of places such as private citizens,

foundations and the federal or state government in the form of grants.
The federal Office of Management and Budget formally recognized in new rules
called the Uniform Guidance that when governments hire nonprofits to provide
services, those nonprofits legitimately incur and need to be paid for their
"indirect costs"--government-speak for overhead and administrative expenses.
OMB, which is responsible for overseeing how federal funds are spent, is ordering
governments at all levels--local, state, and federal--to reimburse nonprofits for

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more of their direct costs, plus their indirect costs when their work is funded
wholly or in part by federal money Organizations that follow new allocation
rules in the Uniform Guidance can negotiate to receive even more than 10
percent. That approach is so radically different from past practices that a senior
federal official described them as a "historic reform [that] will transform the
landscape for generations to come (Delaney 1).

Yet government grants sometimes do more harm then good. According to Yi One
of the fundamental policy questions in public finance has been the issue of whether
government grants and subsides crowd out private funding (467). In economics the
Crowding Out Theory states that government grants and subsidies can have a negative
effect on an organization because they replace private donations. In other words
government grants often reduce an organizations incentive to work hard on
fundraising (Yi 467). More often than not government grants dont increase a
organizations revenue but maintain it due to the lack of private donors. There are a
variety of other theorys that portray the effects of government grants
This paper examines the effects of aggregate government payments to nonprofit
organizations on aggregate private philanthropy. Four behavioral models of
private philanthropic giving are proposed to formulate four hypotheses about
those effects: no net effect (null hypothesis), crowding in (positive effect),
crowding out (negative effect), and philanthropic flight or displacement
(negative effect across different subsectors)

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Intriguingly, giving as a percentage of household income is U-shaped. Households with incomes between $20,000 and 40,000 give 5 percent of their income to
charity. As incomes grow to about $75,000, gifts fall to 2 percent of income, but then
rise slightly to 3 percent. The donations of the wealthiest members of the population,
the Center on Philanthropy (2007b) has reported that among those with net worth
between $1 million to $5 million, the average donation to charity in 2005 was more than
5 percent of average income. (list)