Grassley Seeks to Protect Consumers from Misleading Charities

WASHINGTON – Sen. Chuck Grassley, ranking member of the Committee on Finance, todayasked the Department of Justice, the Internal Revenue Service and the Federal Trade Commissiona series of questions to gauge their engagement in protecting consumers from misleading charities,particularly those focused on granting wishes to sick children. Grassley’s letters to those agencies follow.

April 4, 2002

Via Regular Mail and Facsimile: DOJ 202-514-4507; IRS 202-622-5756

The Honorable John D. Ashcroft
Attorney General
United States Department of Justice
950 Pennsylvania Avenue, NW
Washington, D.C. 20530

The Honorable Charles O. Rossotti
Commissioner of Internal Revenue
Internal Revenue Service
1111 Constitution Avenue, NW
Washington, D.C. 20224
Re: Misleading Children’s Wish-Granting Charities

Gentlemen:

As Ranking Member of the Senate Committee on Finance (Committee), I am committed tohelp ensure that charitable contributions to United States-based charities are timely distributed toqualified recipients. I believe that oversight of charities and foundations should also be part andparcel of the President’s charitable initiatives to ensure that our citizens’ tax dollars are spentappropriately and to strengthen our nation’s trust in its charitable institutions.

Today I write to draw your attention to the problem of misleading charities that may bedefrauding taxpayers who donate their hard-earned money to worthwhile causes that may, in reality,receive little of those funds. Particularly after September 11, perhaps it is not surprising butnonetheless lamentable that the funds contributed to an ever-expanding number of tax-exemptorganizations are not used for the charitable purposes for which they were created. These misleadingcharities raise millions of dollars in donations through deceptive and otherwise questionablefund-raising tactics, but they spend only a small percentage of those amounts, if any, on legitimatecharitable activities. Instead, contrary to what donors are led to believe, the bulk of the donatedfunds is used to pay exorbitant fund-raising fees as well as excessive salaries, consulting fees, andother administrative expenses.

The problem appears to be particularly prevalent in the field of charitable wish-grantingorganizations. Perhaps because of the compelling nature of their mission, such organizations appearto be especially prone to exploitation. Although there are many credible and ethical wish-grantingorganizations in the United States, a number of unscrupulous individuals have apparently foundraising money to grant sick children’s wishes to be pretexts for fraudulent and deceptive fund-raisingpractices.

While I discuss these concerns about charities in the abstract, I would like to cite you areal-life example to illustrate my concerns. The Republican Finance Committee’s investigation ofmisleading charities has identified Children’s Wish Foundation International, Inc. (CWFI) as apurported wish-granting charity that may be engaging in deceptive fund-raising tactics. During thepast decade, CWFI has been the subject of investigations, administrative proceedings, and lawsuitsinitiated by charity regulators in several states based on a variety of alleged fund-raising and financialreporting improprieties. CWFI has also been the focus of a number of investigative reports in themedia over the years for these reasons as well as for the questionable manner in which it seeks tofulfill its tax-exempt purpose.

It is my understanding that according to CWFI’s submitted Internal Revenue Service (IRS)Forms 990, Return of Organization Exempt From Income Tax, CWFI has received total revenues inexcess of $131.9 million in the last 10 reported years. Of this amount, CWFI may have only spentapproximately $10.1 million – approximately 8% – on actual “wish fulfillment.” In this same timeperiod, it appears that CWFI may have paid more than $82.5 million to telemarketers, some of whomare alleged to have engaged in fraudulent, deceptive or otherwise questionable telephone solicitations.

Because of alleged misleading financial reporting and solicitation techniques utilized by CWFIand its contractors or other representatives over the years, I question whether American citizens areaware that only about eight cents of every dollar that they donate to CWFI might be used to grantsick children’s wishes. It also appears that CWFI may have misrepresented millions of dollars paidto telemarketers as so-called “production services” instead of more accurately listing such amountsas “professional fund-raising fees” on Line 30 of its Forms 990.

Moreover, in 1992 and 1994, respectively, the State of Connecticut (Connecticut) and theCommonwealth of Pennsylvania (Pennsylvania) filed lawsuits against CWFI essentially challengingthe inclusion of alleged “in kind” donations of damaged, outdated or obsolete merchandise to othercharities as “program-related” expenses on its 1990 and 1991 Forms 990. Both lawsuits alleged thatCWFI substantially overvalued this practically worthless merchandise in order to inflate thepercentage of income that it spent on program services (as compared to “fund-raising” or“management & general” expenses), thereby making it appear that CWFI’s operations were moreefficient than they actually were.

Among the gifts-in-kind challenged by Connecticut and Pennsylvania were 3,375 copies ofPrinciples of Accounting, a textbook written in English that CWFI reportedly sent to children’shospitals in Romania, and 3,702 cases of perishable food products that CWFI valued at $240,630despite the fact that the food had been valued by the original donor at $32,577 and was allegedlybeyond or imminently near its freshness expiration date. According to the Pennsylvania lawsuit,CWFI was able to qualify for participation in the Combined Federal Campaign (CFC) by includingsuch grossly overvalued items on a specially-prepared Form 990 submitted under the pretense thatCWFI had changed its fiscal year. As you know, CFC is a program through which federal employeesare able to donate to eligible charities. CWFI’s strategy enabled its participation in the Fall 1991 CFCcampaign, which resulted in its acquiring $420,000 in CFC contributions for which it allegedly didnot qualify and otherwise would not have received. However, as part of the settlement that CWFIreached with Pennsylvania, CWFI subsequently released its claims to these and other contributionsin the approximate amount of $470,000.

In October 2000, Pennsylvania initiated another action against CWFI on grounds that it made“material false statements” on its 1998 Form 990 by dramatically overstating – by a multiple of 10or more – the value of gifts-in-kind sent to 41 Ronald McDonald Houses across the country includingin Sioux City, Iowa. Ronald McDonald Houses provide a “home-away-from-home” for families ofseriously ill children who are receiving treatment at nearby hospitals. In Sioux City, for example,Pennsylvania alleges that CWFI reported on its Form 990 for the period of July 1, 1998, through June30, 1999, the value of gifts as over $52,000 when their fair market value was $2,000.

Also at issue in this second Pennsylvania proceeding is the use of donated funds by CWFI’sprincipals for first-class travel to Europe, Aruba, Puerto Rico, and other destinations as well as staysat four-star and five-star luxury hotels and casinos, and other deluxe resorts. Pennsylvania hasquestioned whether these and other expenditures made using the corporate charity credit card, suchas hosiery, silk slips, and kimonos purchased at Victoria’s Secret as well as Christmas and baby giftspurchased at Tiffany & Co., were consistent with CWFI’s charitable purpose.

On a related note, I have recently learned that Americans are receiving telephone solicitationsfrom fund-raisers located offshore to possibly avoid U.S. telemarketing laws. I am aware of threeinstances where U.S. citizens have received telephone solicitations from telemarketers who claim tobe located in the Philippines and who fraudulently misrepresent themselves as affiliated with theMake-A-Wish® Foundation of America (Make-A-Wish). Make-A-Wish is a well-respected charitythat grants the wishes of children with life-threatening illnesses and, unlike CWFI, does not engagein any telemarketing activities. One of the citizens who agreed during the call to make a donation to“Make-A-Wish” subsequently received written information about CWFI. This information was notmailed from the Philippines but from the Pittsburgh, Pennsylvania, address of CWFI’s primarytelemarketer, Reese Brothers, Inc. (Reese Brothers). Reese Brothers has received in excess of $49.6million since it was hired by CWFI in 1996.

Confusion as to the identity of these charitable wish-granting organizations does not appearto be altogether accidental. Mark Reed, the President and CEO of the Make-A-Wish® Foundationof Iowa, has personally responded to numerous complaints from Iowans who have receivedtelemarketing calls supposedly from “Make-A-Wish” but actually from CWFI and/or Reese Brothers.I have separately expressed my concerns about Reese Brothers’ seemingly deceptive telemarketingpractices to the Honorable Timothy J. Muris, Chairman of the U.S. Federal Trade Commission(FTC), and have enclosed a copy of that letter for your consideration.

Moreover, I want to inform Mr. Rossotti of IRS Criminal Investigation’s (CI) apparentinattention to a congressional complaint about CWFI’s allegedly fraudulent operations. Last fall, Irequested that CI investigate allegations made by Pennsylvania’s Bureau of Charitable Organizationsagainst CWFI, emphasizing the importance of said investigation to this Committee’s broaderinvestigation of misleading charities. I also requested that CI keep the Committee informed of anyinvestigation relating to CWFI. To date, the Committee has not heard from CI.

Although the vast number of charitable organizations are worthy organizations that deserveto be generously supported, it is unfortunate that a few are fraudulent, employ deceptive solicitationpractices or mislead the public by submitting false or inaccurate Forms 990. Given the importanceof these issues to our society and its citizens, I appreciate that you provide your responses to thefollowing questions to the Committee:

For IRS:

1. It appears that CWFI may be engaging in fraudulent or deceptive fund-raisingpractices and utilizing questionable financial reporting tactics to conceal the fact that its primaryreason for raising money is not to grant children’s wishes but, rather, to line its own pockets. Iappreciate that there be many reasons why IRS does or does not audit or investigate a tax-exemptentity. That said, does IRS intend to investigate CWFI for their activities as described in this letteror otherwise? If your answer is in the affirmative, I request that you keep the Committee informedof the progress of your investigation including any prosecutory referrals. If the answer is in thenegative, explain why not. Further, has CI has opened an investigation concerning CWFI? If not,explain why not. If so, explain why CI has not kept the Committee informed of any suchinvestigation.

2. During the past five (5) years, state the number of state agency referrals and othercomplaints IRS has received relating to alleged tax fraud or deception by charities. For each suchreferral or complaint, please: (a) identify the organization in question as well as the person or personswho made the referral or complaint; (b) describe in detail the action IRS took regarding the matter;and (c) state the disposition of the referral or complaint.

3. At what point, and under what circumstances, does IRS consider revoking thetax-exempt status of misleading charities like CWFI? Please describe the process in detail, includingin your response all of the criteria you consider.

4. To what extent, if any, does IRS scrutinize Forms 990 filed by charities to see if theyinclude program-related expenses of overvalued in-kind donations of essentially worthlessmerchandise (like accounting textbooks supposedly intended for Romanian children, outdated orunusable food products, etc.) to other charities? Please explain your answer, and include the Form990 audit coverage rate for the past 10 years. Explain whether the rate is consistent across all exemptorganizations or whether it varies by gross receipts.

5. As stated in this letter, CWFI may have hidden its extensive telemarketing expensesunder a self-styled heading, “production services,” rather than list such amounts on its Forms 990,Line 30. Describe any IRS procedure that explains how IRS considers such novel categories usedby tax-exempt entities to report their expenses or income. Moreover, state whether IRS subjects suchcategories to additional scrutiny to determine whether such categories or the expenses or incomesthat they represent are allowable under the Internal Revenue Code (IRC). If your answer is in thenegative, explain why not.

6. I am aware that the National Association of Attorneys General and NationalAssociation of State Charity Officials (NAAG/NASCO) have urged that the provisions of IRCSection 6103 be relaxed to permit IRS to share certain examination information and records for IRCSection 501(c)(3) organizations with appropriate state agencies for limited use. Explain whether IRSshares NAAG/NASCO’s view on this subject.

7. Does IRS have any other suggestions for encouraging more effective cooperationbetween IRS and state charity regulators in identifying and prosecuting questionable charities thatraise millions of dollars though fraudulent or misleading fund-raising tactics but spend only a smallpercentage of those amounts on legitimate charitable activities? If so, please describe thosesuggestions in detail. In answering this and the questions above, please state whether there is anyimpediment under current law that prevents your agency from auditing or investigating, or taking anyremedial action against charities engaging in fraudulent or deceptive practices.For the Department of Justice (DOJ):

8. Does DOJ have jurisdiction where telephone solicitors located in a foreign countrycommit telemarketing fraud while soliciting donations from American citizens on behalf of aU.S.-based charity? Please describe how DOJ goes about enforcing the provisions of 18 U.S.C.Section 2325 (i.e., crimes relating to telemarketing fraud) under such circumstances. Also, pleaseinclude in your answer DOJ’s efforts to work with FTC given its recently-acquired jurisdictionpursuant to the USA PATRIOT Act of 2001, which includes a “Crimes Against Charitable AmericansAct.”

9. Will DOJ investigate CWFI and/or Reese Brothers regarding any of the complaintsoutlined in this letter? If your answer is in the affirmative, I request that you keep the Committeeinformed of the progress of your investigation and any actions taken as a result thereof. If youranswer is in the negative, explain why not.

Your cooperation in responding to these requests by May 2, 2002, is appreciated.

Sincerely,

Charles E. Grassley
Ranking Member

Enclosure
CC Via Hand Delivery
Senator Max Baucus, Chairman, Senate Committee on Finance
CC Via Regular Mail

Mr. Mark E. Matthews
Chief
Internal Revenue Service Criminal Investigation
1111 Constitution Avenue, NW
CI: S: LL - Room 2531
Washington, D.C. 20224
Facsimile: (202) 622-7613

April 4, 2002

Via Regular Mail and Facsimile: (202) 326-3585

The Honorable Timothy J. Muris
Chairman
U.S. Federal Trade Commission
6th & Pennsylvania Avenue, NW
Washington, D.C. 20580
Re: Offshore Telemarketing Fraud

Dear Chairman Muris:

As Ranking Member of the Senate Committee on Finance (Committee), I am committed tohelp ensure that charitable contributions to United States-based charities are timely distributed toqualified recipients. I believe that oversight of charities and foundations should also be part andparcel of the President’s charitable initiatives to ensure that our citizens’ tax dollars are spentappropriately and to strengthen our nation’s trust in its charitable institutions. Today I write to drawyour attention to a problem that has surfaced during the Republican Finance Committee staff’sinvestigation of misleading charities that may be engaging in deceptive fund-raising tactics.Recently, I have learned that Americans are receiving telephone solicitations from fund-raiserslocated offshore to possibly avoid U.S. telemarketing laws. I am aware of three instances where U.S.citizens have received telephone solicitations from telemarketers who claim to be located in thePhilippines and who fraudulently misrepresent themselves as affiliated with the Make-A-Wish®Foundation of America (Make-A-Wish). One of the citizens who agreed during the call to make adonation to “Make-A-Wish” subsequently received written information about another charity,Children’s Wish Foundation International, Inc. (CWFI). This information was not mailed from thePhilippines but, rather, from the Pittsburgh, Pennsylvania, address of Reese Brothers, Inc.

By way of background, Make-A-Wish is a well-respected charity that grants the wishes ofchildren with life-threatening illnesses and does not engage in any telemarketing activities whatsoever.CWFI is a purported wish-granting charity located in Atlanta, Georgia, that, over the past decade,has been the subject of investigations, administrative proceedings, and lawsuits initiated by charityregulators in several states for a variety of alleged fund-raising and financial reporting improprieties.Reese Brothers is CWFI’s primary telemarketer and has received in excess of $49.6 million since itwas hired by CWFI in 1996.

This confusion as to the identity of the charitable wish-granting organization does not appearto be accidental. Although there are many credible and ethical wish-granting organizations in theUnited States, a number of unscrupulous individuals have apparently found raising money to grantsick children’s wishes to be pretexts for fraudulent and deceptive fund-raising practices. Mark Reed,the President and CEO of the Make-A-Wish® Foundation of Iowa, has personally responded tonumerous complaints from Iowans who have received telemarketing calls supposedly from“Make-A-Wish” but actually from CWFI and/or Reese Brothers.

I question whether this apparently recent decision on the part of CWFI and/or Reese Brothersto telemarket American citizens from the Philippines has anything to do with the fact that on October25, 2001, President Bush signed into law the USA PATRIOT Act of 2001. This law includes a“Crimes Against Charitable Americans Act” that imposes disclosure requirements upon persons“engaged in telemarketing for the solicitation of charitable contributions,” empowers your agency toexpand its Telemarketing Sales Rules to include additional disclosure requirements for charitablesolicitation calls, and amends the federal criminal statute proscribing telemarketing fraud to bringcharitable telephone solicitations within its reach.

Even if the timing of CWFI’s and/or Reese Brothers’ decision to commence offshoretelemarketing were merely coincidental, I am concerned about your agency’s ability to enforce itsTelemarketing Sales Rules when offending telemarketers are located more than 8,000 miles awayfrom U.S. soil. To help safeguard American donors from telemarketers who engage in fraudulent ordeceptive “charitable” solicitations, and particularly those soliciting offshore, I appreciate yourresponses to the following questions:

1. Will the Federal Trade Commission (FTC) investigate CWFI or Reese Brothers forthe activities described in this letter? If your answer is in the affirmative, I request that you keep theCommittee informed of the progress of your investigation including any referral to a law enforcementagency for prosecution. If your answer is in the negative, explain why not.

2. I am aware that FTC has previously expressed its view that there is “no doubt thatsellers or telemarketers located outside the U.S. are subject to the [Telemarketing Sales Rules] if theytelemarket their goods or services to U.S. consumers.” Will your agency’s opinion remain the samewith respect to charitable telemarketing, especially in view of the provisions of the USA PATRIOTAct of 2001? Also, describe how FTC’s view on this subject has been adequately communicated tothe public and, particularly, to those involved in the telemarketing industry.

3. Explain how FTC identifies and stops fraudulent or deceptive fund-raising activitycommitted by U.S.-based entities through their agents located offshore. Please include in youranswer whether FTC works with federal, state or local charity regulators or other law enforcementagencies to identify illegal fund-raisers. If your answer is in the negative, explain why not.

4. For the past five years, state: (a) the number of U.S.-based telemarketing entitiessoliciting from offshore that FTC has investigated; (b) the number of such entities FTC has penalizedor referred for prosecution as well as the reason for the penalty or referral; and (c) the nature andamount of the penalty imposed. Moreover, identify any such entities that currently engage intelemarketing or other fund-raising despite a prior penalty from FTC or other law enforcementagency, and explain why each such entity was allowed to resume its activities despite such penalty.Finally, explain what FTC is doing, if anything, to ensure that any such entity’s current telemarketingor general fund-raising practices comply with U.S. law.

Please note that I have separately expressed my concerns about CWFI’s alleged fund-raisingand financial reporting improprieties to the Honorable John D. Ashcroft, Attorney General, UnitedStates Department of Justice, and to the Honorable Charles O. Rossotti, Commissioner, InternalRevenue Service. I enclose a copy of that letter for your consideration.

Your cooperation in responding to these requests by May 2, 2002, is appreciated.

Sincerely,

Charles E. Grassley
Ranking Member
Enclosure

CC Via Hand Delivery
Senator Max Baucus, Chairman, Senate Committee on Finance

CC Via Regular Mail
Mr. John Bridgeland
Assistant to the President, Director of USA Freedom Corps
White House
1600 Pennsylvania Ave NW
Washington, D.C. 20500

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