March 2007

Note: The following discussion is provided for informational purposes only and is not intended to serve as legal advice. For specific information about international giving, consult your attorney.

This article is a guide for public charities that want to engage in activities outside the United States. It addresses the federal tax laws governing the use of funds by public charities as well as anti-terrorist financing laws. This article does not cover the additional restrictions placed on private foundations. (For more information about public charities and private foundations, click here.)

In general, a public charity may conduct part or all of its activities in a foreign country as long as the activities are consistent with the charity's exempt purposes. A charity's exempt purposes are generally found in its organizing document, for example, the articles of incorporation. A charity may operate abroad through a foreign branch office or subsidiary. It may also make grants to foreign organizations and individuals.

Grants to Foreign Organizations and Individuals

A public charity may make grants to any organization (foreign or domestic) or individual that uses the grant for activities consistent with the charity's exempt purposes.

Organizations

A public charity will not jeopardize its tax exemption by distributing funds to organizations that are not charities. The charity must, however, ensure the use of the funds for permitted purposes by limiting distributions to specific projects that further the charity's own purposes. The charity must retain discretion and control as to the use of the funds and maintain records showing that the funds were used for its exempt purposes. This is the case regardless of where the funds are spent.

The IRS has provided additional guidance on discretion and control in the circumstance where a U.S. public charity is specifically formed to support a foreign charity or charities. This type of organization is commonly referred to as a "friends of" organization. A "friends of" organization is established because contributions to foreign charities are generally not tax deductible. A donor to such a U.S. charity may be denied a charitable income tax deduction if the IRS determines that the charity is the agent of the foreign beneficiary or a conduit organization. A charity will not be considered a conduit organization if it exercises discretion and control over the funds solicited.

The IRS has held that including certain language in a charity's bylaws is evidence of sufficient discretion and control. An example of this language is:

1. the making of grants and contributions and otherwise rendering financial assistance for the purposes expressed in the corporation's articles of incorporation are within the exclusive power of the board of directors;
   
   
2. the board of directors shall review all requests for funds from other organizations, shall require that such requests specify the use to which the funds will be put, and, if the board approves the request, shall authorize payments of the funds to the approved grantee;
   
   
3. the board shall require that the grantees furnish a periodic accounting to show that the funds were expended for the purposes approved by the board;
   
   
4. the board may, in its absolute discretion, refuse to make any grants or contributions or otherwise render financial assistance for any or all purposes for which funds were requested; and
   
   
5. after the board of directors has approved a grant to an organization for a specific project or purpose, the corporation may solicit funds for the grant to the specifically approved project or purpose of the other organization; at all times, however, the board has the right to withdraw approval of the grant and to use the funds for other charitable, scientific, or educational purposes.

A charity planning to make grants to foreign organizations should include similar language in its bylaws and follow these procedures.

Individuals

In order to substantiate that distributions to individuals are appropriate, a charity should maintain adequate records and case histories including:

1. the name and address of each recipient;
2. the amount distributed to each recipient;
3. the purpose for which the aid was given;
4. the manner in which the recipient was selected; and
5. any relationship between a recipient and the members, officers, trustees, directors, and substantial contributors of the charity.

A charity that is distributing short-term emergency assistance would only be expected to maintain records such as: (1) date, place, and estimated number of victims assisted (individual name and address are not required); (2) cost of the aid; (3) type of assistance provided; (4) charitable purpose of the aid; and (5) criteria for disbursing assistance.

In light of the above, the best practices for public charities making foreign grants include:

• requiring review and approval of all grants by the board,
• including provisions in the bylaws that state that the board retains discretion and control over funds contributed to the charity,
• entering into a grant agreement with the recipient committing the recipient to use the funds for charitable purposes,
• requiring recipients to furnish periodic accountings to show that the funds were expended for the purposes approved by the board, and
• maintaining proper records regarding recipients.

Anti-Terrorist Financing Laws

In addition to tax laws specifically governing public charities, charities must also comply with anti-terrorist financing laws applicable to U.S. individuals and entities, including Executive Order 13224 and the USA PATRIOT Act.

Executive Order 13224

On September 23, 2001, President Bush issued Executive Order 13224. The order:

• blocks the property of foreign persons listed in the Executive Order, i.e., Specially Designated Global Terrorists ("SDGTs");
  
  
• blocks the property of individuals and organizations that assist, sponsor, or provide financial, material, or technological support for terrorism, SDGTs, or unnamed persons determined to be subject to the order;
  
  
• blocks the property of those who are otherwise associated with SDGTs or unnamed persons determined to be subject to the order; and
  
  
• prohibits U.S. individuals and organizations from engaging in transactions in blocked property, including making or receiving any contribution of funds, goods, or services for the benefit of SDGTs or unnamed persons determined to be subject to the order. This prohibition includes humanitarian aid.

If a charity violates the order, its assets can be blocked and its tax-exempt status revoked. The charity may also be subject to criminal and civil penalties. Unlike the USA PATRIOT Act, the executive order does not have a knowledge or an intent requirement. In other words, a charity can violate the order even if it does not know it is providing support to an SDGT.

See a current list, updated regularly, of individuals and organizations identified under Executive Order 13224 or subject to the Office of Foreign Assets Control ("OFAC") sanctions under other list-based programs.

USA PATRIOT Act

In October 2001, Congress enacted the USA PATRIOT Act, which enhanced existing criminal penalties for knowingly or intentionally providing material support or resources for terrorism or to foreign terrorist organizations. On March 9, 2006, the president signed the USA PATRIOT Improvement and Reauthorization Act of 2005, which makes permanent many of the temporary provisions of the original Patriot Act, enhances certain criminal penalties, and expands the reach of search and seizure.

The Patriot Act imposes fines and terms of imprisonment of up to 15 years for providing material support or resources with the knowledge or intention that they are to be used in terrorist acts or by foreign terrorist organizations. If the terrorism results in the death of any person, the maximum penalty is life in prison. The act also creates civil liability, enabling those injured by a terrorist act to sue those who funded the group for treble damages, costs, and attorneys' fees.

Material support or resources includes any property, tangible or intangible, except medicine or religious materials, or any service, including financial services, lodging, training, expert advice or assistance, safehouses, personnel, and transportation. Terrorism is defined as a violation of a long list of offenses.

In addition, Congress enacted Internal Revenue Code Section 501(p), which provides a number of consequences for a charity that is identified as a terrorist organization or a supporter of terrorism. Pursuant to Section 501(p), the tax-exempt status of the charity is suspended and no deduction is allowed under any provision of the Internal Revenue Code for any contribution to the charity during any period in which the charity's tax exemption is suspended. The IRS Web site currently lists the following charities as suspended under Section 501(p):

• Al Haramain Islamic Foundation, Inc.
• Benevolence International Foundation, Inc.
• Global Relief Foundation, Inc.
• Holy Land Foundation for Relief and Development
• Islamic African Relief Agency—USA a.k.a Islamic American Relief Agency—USA
• Rabbi Meir Kahana Memorial Fund

To assist charities in complying with these laws, the Treasury issued the guidelines discussed below.

Treasury Guidelines

On September 29, 2006, the U.S. Department of the Treasury issued the third version of Anti-Terrorist Financing Guidelines: Voluntary Best Practices for U.S. Based Charities. The  Guidelines were originally issued in November 2002 and revised in December 2005. The purpose of the  Guidelines is to assist charities that attempt in good faith to protect themselves from terrorist abuse. Adherence to the Guidelines does not preclude any criminal charge, civil fine, or other action by the Treasury or the Department of Justice against charities or persons who engage in prohibited transactions. As noted in the title, the Guidelines are voluntary, and the Treasury acknowledges that certain aspects will not be applicable to every charity.

The Guidelines' anti-terrorist financing best practices state that charities should apply a risk-based approach and acknowledge that not all of the steps may be applicable or appropriate. These steps include:

• gathering detailed information about the grantee,
• conducting a reasonable search of public records to ensure that the grantee is not suspected of activity related to terrorism,
• checking OFAC's master list, noted above, to make sure that the grantee does not appear as well as grantee's key employees, directors, and other senior management,
• conducting a reasonable search of publicly available records to ensure that the charity's own key employees are not reasonably suspected of activity related to terrorism, and
• requiring grantees to certify that they do not deal with anyone subject to OFAC sanctions, known to support terrorism, or to have violated OFAC sanctions.

At a minimum, a charity should check the OFAC list (a link is provided above) as part of its normal prefunding due diligence. The charity should check the names of the direct recipients of the funds and the names of the recipients' key staff and board members. The charity should also keep records of its grant procedures and risk assessments.

Related Articles

• "Anti-Terrorist Financing: Lower Court Finds Executive Order Provisions Unconstitutional"
• "Nonprofits and Antiterrorism: An Interview with Amit Sharma of the U.S. Treasury"
• "Nonprofits Ask Treasury to Withdraw Anti-Terrorist Financing Guidelines"
• "The Patriot Act and the Nonprofit Sector: Charitable Organizations after 9/11"

Cherie Evans, Esq., Evans & Rosen LLP
© 2007, Evans & Rosen LLP

Cherie Evans is a partner in the law firm of Evans & Rosen LLP, which primarily represents nonprofit organizations. She is based in San Francisco and can be reached at
(415) 264-1800 or cherie@evansrosen.com.