Draft alternative to "Voluntary Best Practice Guidelines for Domestic Charities" published by Department of Treasury Office of Foreign Assets Control. You can submit comments to Kay Guinane online at http://www.ombwatch.org/article/articleview/2431 or fax to 202/234-5150. 11/17/04 -- DRAFT: PRINCIPLES OF INTERNATIONAL CHARITY Preamble International charitable work fills critical gaps in the global socioeconomic infrastructure. Governments alone cannot solve every social problem. Businesses alone cannot meet every economic need. Without international charity, more people in the world would die of hunger and disease, fewer children would learn to read and write, and more people would live in poverty. There would be more environmental destruction and fewer scientific advances. The participation of charitable organizations based in the United States is vital to maintaining a level of international charity sufficient to address some of the world's most critical needs. Many U.S.-based charitable organizations promote international charity: private foundations, public charities, corporate foundations, corporate grantmaking programs, donor-advised funds, friends' organizations, churches and religious organizations. In general, the charitable activities of these groups can be divided into two types: the provision of resources through grants to domestic or foreign organizations for use in international work, and the provision of services through program operations abroad carried out directly or in partnership with indigenous organizations. Charitable resources provided may be monetary or in-kind contributions. The range of charitable services provided is extensive � medical care, food, agricultural training, disaster relief, shelter, education, clothing, water, professional exchanges, institutional reform, technical assistance, and support of human rights and civil liberties. The budgets of these organizations range from the thousands to the hundreds of millions of dollars each year. Many characteristics distinguish these organizations from each other. These differences, however, pale in the face of the overriding shared commitment of these organizations to do charitable work wherever it is needed in the world. For almost a century, U.S. charitable organizations have engaged in international work. The Rockefeller Foundation, for example, was established in 1913 with a mandate "to promote the well-being of mankind throughout the world," and launched programs promoting medical education and eradicating, after a 30-year fight, Yellow Fever throughout the world. The Red Cross, first chartered by Congress in 1900, staffed hospitals and ambulance companies in World War I, with more than $400 million contributed by the American public. In 1918, the National Information Bureau was created to monitor the war-related charitable fundraising. During World War II, charitable organizations helped fill the need for international war relief, and afterwards, they provided humanitarian assistance to survivors. By the 1950s, charitable organizations were engaged in fighting poverty and starvation and promoting health all over the world. When U.S. charitable organizations pursue activities outside the U.S., foreign citizens have the opportunity to have personal contact with U.S. citizens. Consequently, an important byproduct of the global reach of charitable work is the goodwill it creates towards America. Charitable organizations have vast experience in overcoming the difficulties associated with carrying out charitable work in distant lands. Some challenges are merely inconvenient: language barriers, cultural differences, technological limitations. Others - disease and hostile fire - may be deadly. Somewhere along this continuum have always been those threats posed by persons and organizations that view legitimate charitable organizations -- along with banks and businesses and virtually any other source of funds -- as the unwitting financiers of non-charitable private interests. Charitable organizations have successfully addressed these challenges through procedures designed to reduce the risk that charitable assets would be used for non-charitable purposes. Some of these procedures are mandated by the U.S. tax law, and others are determined by individual organizations' assessments of the demands of their charitable activities. In November 2002, the U.S. Treasury Department issued "Anti-Terrorist Financing Guidelines: Voluntary Best Practices For U.S.-Based Charities" (the "Guidelines"), indicating that charities could reduce the likelihood that charitable funds would be diverted to terrorist purposes by following the Guidelines. While some charitable organizations had begun reassessing the effectiveness of their due diligence and monitoring procedures after the September 11 terrorist attacks, the Guidelines provoked a sector-wide reexamination. After consideration of both the effectiveness of existing procedures and the implications of strict compliance with the Guidelines, charitable organizations concluded that the Guidelines are impractical given the realities of international charitable work, unlikely to achieve their goal of reducing the flow of funds to terrorist organizations, but very likely to discourage international charitable activities by U.S. organizations. In April 2004, the Treasury Department encouraged charitable organizations to propose alternative ways of safeguarding charitable funds from diversion to terrorist uses. This document responds to that invitation. Each of the undersigned organizations believes -- based on years or even decades of experience -- that its due diligence practices have protected its charitable assets from diversion. Because organizations rightly adopt practices suited to the demands of their charitable activities and expertise, due diligence differs somewhat from organization to organization. Since September 11, organizations have considered whether their existing practices are sufficient to protect their assets from diversion to support terrorist uses. Many have concluded that the practices that safeguarded their assets before September 11 continue to provide ample protection. Other organizations have chosen to adopt additional procedures, such as those illustrated in this document. The fundamental principles below underlie the diversity of due diligence procedures that have proven effective in minimizing the risk of diversion of charitable assets. Fundamental Principles 1. Consistent with the privilege inherent in their tax-exempt status, charitable organizations must exclusively pursue the charitable purposes for which they were organized and chartered. 2. Charitable organizations must comply with both U.S. laws applicable to charities and the relevant laws of the foreign jurisdictions in which they engage in charitable work. Charitable organizations, however, are non-governmental entities that are not agents for enforcement of U.S. or foreign laws or the policies reflected in them. 3. Charitable organizations may choose to adopt practices in addition to those required by law that, in their judgment, provide additional confidence that all assets -- whether resources or services -- are used exclusively for charitable purposes. 4. The responsibility for observance of relevant laws and adoption and implementation of practices consistent with the principles contained herein ultimately lies with the governing board of each individual charitable organization. The board of directors of each charitable organization must oversee implementation of the governance practices to be followed by the organization. 5. Fiscal responsibility is fundamental to international charitable work. Therefore, an organization's commitment to the charitable use of its assets must be reflected at every level of the organization. 6. When supplying charitable resources, fiscal responsibility on the part of the provider generally involves: a. in advance of payment, determining that the potential recipient of monetary or in-kind contributions has the ability to both accomplish the charitable purpose of the grant and protect the resources from diversion to non-charitable purposes; b. reducing the terms of the grant to a written agreement signed by both the charitable resource provider and the recipient; c. engaging in ongoing monitoring of the recipient and of activities under the grant; and d. seeking correction of any misuse of resources on the part of the recipient. 7. When supplying charitable services, fiscal responsibility on the part of a provider involves taking appropriate measures to reduce the risk that its assets would be used for non-charitable purposes. Given the range of services in which organizations engage, the specific measures necessarily vary depending on the type of services and the exigencies of the surrounding circumstances. The key to fiscal responsibility, however, is having sufficient financial controls in place to trace funds between receipt by the service provider and delivery of the service. 8. Each charitable organization must safeguard its relationship with the communities it serves in order to deliver effective programs. This relationship is founded on local understanding and acceptance of the independence of the charitable organization. If this foundation is shaken, the organization's ability to be of assistance and the safety of those delivering assistance is at serious risk. Commentary on the Principles The following commentary is intended to illustrate the range of practices consistent with the fundamental principles underlying effective and responsible international charitable activities: 1. Consistent with the privilege inherent in their tax-exempt status, charitable organizations must exclusively pursue the charitable purposes for which they were organized and chartered. Commentary Charitable organizations are mission-driven. The mission of an organization defines its purpose, its program activities, its values and operations, and the measures of its success. Commitment to mission can require an organization to engage in activities involving people and places outside the reach of United States laws and customs. Activities are no less charitable, however, just because they might occur outside the United States or benefit persons who reside outside the United States. 2. Charitable organizations must comply with both U.S. laws applicable to charities and the relevant laws of the foreign jurisdictions in which they engage in charitable work. Charitable organizations, however, are non-governmental entities that are not agents for enforcement of U.S. or foreign laws or the policies reflected in them. Commentary Generally, U.S. tax law requires that when a U.S. charitable organization supports charitable activities abroad it must satisfy certain criteria designed to reduce the risk that resources would be expended for noncharitable purposes. The primary way in which a private foundation may provide support to a foreign organization is by undertaking expenditure responsibility, which focuses specifically on why a particular grantee is well suited to carry out the terms of a particular grant, and then monitors the grantee's progress in doing so. Similarly, a public charity may provide support to a foreign organization if it retains control and discretion as to the use of the funds and maintains records establishing that the funds were used for charitable purposes. Furthermore, to permit the deductibility of individual contributions made to a U.S. charity, the U.S. public charity must conduct its own review of the projects in advance to determine that they would further its exempt purposes. While tax rules prevent U.S. charitable organizations from supporting noncharitable activities, U.S. laws also prohibit any person -- including charitable organizations -- from engaging in transactions in support of terrorism and provide for civil and criminal penalties in the event of violations. Most of the counterterrorism measures have been in place for nearly a decade, and others have been more recently enacted. Under anti-terrorism laws in place before September 11, all U.S. persons - including organizations engaged in charitable work abroad - are barred from knowingly providing material support for specific acts of terrorism. "Material support" includes money, financial services, lodging, training, expert advice or assistance, safe houses, false documentation, personnel, transportation, and any goods except food and medicine. It appears to capture grants, microfinance assistance, and many types of technical assistance provided by charitable organizations. In addition, under anti-terrorism laws in place before September 11, all U.S. persons are prohibited from providing material support to over 35 organizations listed as foreign terrorist organizations, without the limitation that the material support be intended to promote terrorist acts. Days after the terrorist attacks of September 11, 2001, President Bush signed Executive Order 13224 prohibiting transactions by U.S. persons with individuals and organizations deemed by the Executive Branch to be associated with terrorism and blocking any assets controlled by or in the possession of such entities and those who support them. The effect of the Executive Order is that U.S. charitable organizations may not engage in "prohibited transactions" with persons designated under the Executive Order or placed on the list of Specially Designated Nationals. In addition, transactions are prohibited with persons "otherwise associated with" listed persons. Prohibited transactions include financial support, in-kind support, material assistance, and technical assistance. While generally permitted under the International Emergency Economic Powers Act, humanitarian assistance, including food, clothing and medicine, to listed persons and those associated with listed persons is also prohibited under the Executive Order. 3. Charitable organizations may choose to adopt practices in addition to those required by law that, in their judgment, provide additional confidence that all assets, whether resources or services -- are used exclusively for charitable purposes. Commentary Many organizations adopt practices that provide an additional level of confidence that they have complied with legal requirements because they have determined -- based on their experience and commitment to the charitable use of assets -- that certain procedures are helpful in achieving that goal. Organizations may identify appropriate practices based on their own experiences and those of other organizations. Organizations may, for example, undertake additional monitoring efforts. A private foundation may send staff to observe the performance of a foreign organization's charitable activities to monitor compliance with expenditure responsibility rules under the tax law, even though site visits are not legally required. Similarly, a U.S. charitable organization may require narrative and financial reports from foreign organizations that have been recognized as charitable organizations by the Internal Revenue Service, even though such reports are not required under the tax law. Organizations may, for example, establish ongoing or one-on-one relationships. An organization may rely on its long-standing relationship with the prospective recipient, the recipient's history of legitimate charitable achievements, the high quality of the recipient's internal financial controls, and other factors related to the prospective recipient's legitimate use of the resources to be provided. An organization might make a similar judgment when working in a small-group environment. For example, the close scrutiny of individual borrowers by program managers and knowledgeable community members may provide sufficient confidence that a microcredit loan presents no risk of diversion. Similarly, the almost immediate consumption of charitable resources makes diversion a practical impossibility in disaster relief situations. Organizations may, for example, adopt specific anti-terrorist financing practices tailored to support compliance with the anti-terrorism laws and IEEPA, even though these procedures are not legally required. For example, some organizations may adopt procedures such as checking government lists of persons suspected of supporting terrorism or requiring recipients to certify that they do not and will not knowingly provide material support or resources to any individual or entity, knowing or intending that they be used for the furtherance of terrorist activities as defined in 18 U.S.C. Section 2339A. The practice of list checking raises fairness, legal, and practical concerns. Information about why a name is placed on a terrorist list is usually kept secret for reasons of national security. If this information is flawed, a name may be wrongly listed, thus hindering charitable work without any corresponding benefit in terrorism prevention. Removal of wrongly listed names is, at best, difficult and may be impossible to achieve. An organization may be denied a grant based on the similarity between the name of a person with whom it is associated and a name on a terrorist list. Resolution of these "false positives" -- if even possible -- imposes additional burdens on the funder and grantee. Moreover, the fact that there is no single authoritative list issued by the U.S. Government presents practical difficulties for charitable organizations. In addition to the list provided under the Executive Order and the list of Specially Designated Nationals, lists have been issued by various U.S. Government departments and also by the United Nations and even other governments. The decision to implement any procedure to provide an additional level of confidence that an organization has complied with applicable laws must be based on each individual organization's experience and circumstances. Certain procedures that will prove effective in one situation will not in another. No single approach will be appropriate in every case. 4. The responsibility for observance of relevant laws and adoption and implementation of practices consistent with the principles contained herein ultimately lies with the governing board of each individual charitable organization. The board of directors of each charitable organization must oversee implementation of the governance practices to be followed by the organization. Commentary Good governance, disclosure, transparency, and financial accountability are hallmarks of responsible charity. There is, however, no single set of "best practices" by which to govern all charitable organizations. The board of directors of each individual charitable organization is responsible for establishing a culture of compliance with laws and regulations and with empowering the organization to adopt suitable governance practices. Some membership groups and coalitions of charities have specific standards with which members are expected to comply. Responsible charitable organizations engaged in international charitable work should follow principles of governance and accountability such as the following:

• Governance by a board of directors that oversees the management of the organization in furtherance of its charitable mission and maintains minutes or other records of its decisions.
• Adoption of procedures for accounting for all funds which adequately document the uses of such funds in furtherance of the organization's charitable purposes.
• Fully informed directors, officers and staff members with respect to understanding of and compliance with the legal requirements affecting international charity.
• Consideration of the particular risks of diversion of charitable assets to terrorist purposes associated with the activities of each individual organization and, if deemed appropriate, adoption of anti-terrorist financing measures beyond those required by law.
• Disbursements by check or wire transfer rather than in cash, unless such financial arrangements are not reasonably available, in which case funds should be disbursed in smaller increments sufficient to meet immediate and short-term needs. Disbursements require oversight, including keeping detailed internal records of cash disbursements.

5. Fiscal responsibility is fundamental to international charitable work. Therefore, an organization's commitment to the charitable use of its assets must be reflected at every level of the organization. Commentary While the board of directors is charged with establishing a culture committed to the charitable use of assets, each individual associated with an organization is obligated to act accordingly. Thus, a board should require that staff, contractors and volunteers all understand the organization's mission, what it means, how that mission should be implemented, what constitutes success, and how to protect the organization's good reputation. Some organizations should conduct orientations and periodic training for directors, staff, and volunteers on the relationship between the organization's mission and relevant laws, regulations and best practices in international charity. Directors and staff at all levels should be encouraged to identify risks involved in various charitable activities. Fiscal responsibility may differ for organizations that provide resources alone -- that is monetary grants and grants of in-kind assistance of a type readily converted to cash -- and for providers of services. Services include in-kind assistance not readily reduced to cash, microcredit and other financial services for poor people, and technical and educational assistance. Services are inherently more variable in the risk of diversion they present and more variable also in the types of due diligence that may be both practicable and likely to reduce risk of diversion. While service providers may also provide resources, the nature of the relationship between the service provider and the recipient of those services demands a different sort of accountability for use of charitable assets. For example, a U.S. private foundation that provides resources in the form of funding for medical supplies to a foreign healthcare organization may engage in formal, arms-length due diligence. Such procedures may be impractical and ineffective for a service provider. For example, a charitable relief organization based in the U.S. that engages in front-line medical assistance abroad must adapt its due diligence procedures to the immediacy of the charitable needs presented. A service provider's procedures -- although they may be less formalistic -- may be just as rigorous as those of a resource provider. 6. When supplying charitable resources, fiscal responsibility on the part of the provider generally involves: a. in advance of payment, determining that the potential recipient of monetary or in-kind contributions has the ability to both accomplish the charitable purpose of the grant and protect the resources from diversion to non-charitable purposes; b. reducing the terms of the grant to a written agreement signed by both the charitable resource provider and the recipient; c. engaging in ongoing monitoring of the recipient and of activities under the grant; d. seeking correction of any misuse of resources on the part of the recipient. Commentary The procedures listed above are generally included in the exercise of fiscal responsibility on the part of a provider of charitable resources. A provider also may take additional measures that will vary depending upon the organization and the challenges inherent in its charitable activities. The examples below are intended to illustrate -- but not limit -- the range of supplementary practices engaged in by charitable resource providers. For instance:

• A U.S. grantmaking organization funding charitable activities in multiple countries might supplement its pre-grant investigation by checking its grantees and their board members against the terrorist lists and/or requiring grantees to certify that they have not and will not knowingly provide material support or resources for acts of violence or terrorism as defined in 18 U.S.C. Section 2339A.
• A U.S. national religious organization that supports the charitable work of affiliated foreign places of worship might, in addition to its formal letter of agreement with a responsible local religious authority, disburse large grants in semi-annual installments, with successive payments contingent upon receipt and satisfactory review of six-month interim reports.
• A small U.S. grantmaking organization with no overseas staff that has funded a few organizations abroad for many years and has developed close working relationships with them over time may continue its current practice based on formal grant agreements specifying the charitable purposes for which each new grant may be used, regular monitoring reports from the grantee, and periodic site visits and project assessments by the grantmaker, a consultant or other reputable organization on the grantmaker's behalf .
• A U.S.-based relief and development organization with overseas staff may rely upon its knowledge of the community and its continuing presence to have confidence that its pre-grant investigation and subsequent oversight are sufficient to reduce the risk of diversion of charitable funds. If such an organization is establishing a relationship with a new or untested grantee, the organization may decide that additional inquiry with respect to the bona fides of the board members or the key employees of the grantee, or requiring a statement with respect to the appropriate nature of the grantee's activities, may be appropriate.
• A U.S. corporation having an employee matching gift program may not be able to individually evaluate the many organizations that benefit from the matching of thousands of small employee charitable gifts. Such a corporation might delegate the due diligence required to appropriately exercise its fiscal responsibility to a vendor and require that the vendor supplement its usual practices to verify that the grantee organizations do not appear on any list of terrorists or terrorist organizations identified by a private list-checking service provider. The corporation or the vendor may even require that both the recipient organization and the individual employee donor sign a certification that they will not knowingly provide support for terrorist activities as defined in 18 U.S.C. Section 2339A.

7. When supplying charitable services, fiscal responsibility on the part of a provider involves taking appropriate measures to reduce the risk that its assets would be used for noncharitable purposes. Given the range of services in which organizations engage, the specific measures necessarily vary depending on the type of services and the exigencies of the surrounding circumstances. The key to fiscal responsibility, however, is having sufficient financial controls in place to trace services and commodities between delivery by the provider and use by the recipient. Commentary The practical requirements of exercising fiscal responsibility with respect to the provision of services will not be the same if an organization is distributing food or building shelter after a natural disaster as when it is building and staffing a hospice for victims of HIV/AIDS. The Internal Revenue Service has recognized that flexibility is essential for charitable organizations assisting individuals in crisis situations, stating, for example, that those organizations distributing short-term emergency assistance are not expected to maintain the more detailed records usually associated with delivery of longer-term assistance. The examples below are intended to illustrate -- but not limit -- the range of appropriate practices engaged in by charitable service providers.

• A U.S. humanitarian relief organization distributing food and other relief supplies following a natural disaster could put into place an auditing system for reducing the risk of diversion as supplies are transported from port of entry to warehouse to village storeroom, as well as a ration card system for individuals or households, so that the aid reaches its intended recipients, and often security guards to protect the warehouses.
• A charitable organization involved in establishing sustainable early childhood development centers or village primary schools in rural areas of developing countries might provide the funds or the materials to construct the facility and implement a procurement and receipting system for the acquisition and distribution of the materials. If the organization finances operating expenses, the charitable organization would require that an account of receipts and expenditures be maintained and would periodically audit that account.
• A charitable organization that is working with the Ministry of Health in a developing country to provide staff and supplies to rural health clinics would have in place an effective reporting system to account for the time of the staff, would establish and require the maintenance of inventory systems for the materials supplied and would conduct periodic on-site inspections of the clinics. If it seems appropriate, the organization may perform additional due diligence beyond that generally involved in hiring to staff the clinics.
• A U.S. organization that raises funds to support microlending programs carried out by an independent legal entity it has helped to set up in a post-conflict country requires in its funding agreements with that entity that individual loan officers be background-checked and be trained to spot possible opportunities for diversion among the borrowers for whom the loan officer is responsible. Where programmatically appropriate, the organization requires its local affiliate to use a "group guarantee" lending methodology, to assure that each borrower is well known by his or her co-borrowers. Where individual lending is carried out, the local affiliate must require a loan officer to visit each borrower at his or her home or place of business before the first loan, to see how loan proceeds will be used.

8. Each charitable organization must safeguard its relationship with the communities it serves in order to deliver effective programs. This relationship is founded on local understanding and acceptance of the independence of the charitable organization. If this foundation is shaken, the organization's ability to be of assistance and the safety of those delivering assistance is at serious risk. Commentary An organization's mission can require humanitarian workers to provide services in highly dangerous areas of the world. More than ever before, service providers must pay attention to the safety of their staff. This includes investigating the risks, providing training to mitigate those risks, and -- most importantly -- developing understanding and acceptance by the community. An organization's ability to effectively deliver charitable programs will be compromised if its relationship to the community is not part of the security approach. The gravest risk to this relationship is association with a political position, a partisan entity or a particular U.S. or foreign government action. While an organization may itself give the community no reason to perceive its workers as anything but independent, governments may engage in practices that have the unintended effect of increasing the risk to these workers. For example, the use of armed forces out of uniform to deliver humanitarian assistance or the inaccurate characterization of humanitarian workers as partners or agents of the government allows the misidentification of humanitarian workers -- either purposefully or out of confusion -- as extensions of government action. The foundation of the relationship between a service provider and the community can also be shaken if inquiries by the organization are perceived as undertaken on behalf of a government or as intelligence gathering. The consequences to humanitarian workers when charitable assistance is confused with military or intelligence operations may be deadly to staff and may undermine the effectiveness of the programs they deliver. While maintaining a reputation in the community for independence is essential, humanitarian organizations may decide that additional security measures are required. The threat may be too great, either because of confusion or misidentification or because of the grave danger posed by extremist organizations unwilling to recognize the impartiality of these workers.