Madoff Warning: Is Your Charitable Organization A Target?

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Guest Columnist Author: Bill J. Harrison, CFRE Last Updated: Mar 22, 2009 - 1:16:27 PM

Madoff Warning: Is Your Charitable Organization A Target?
By Bill J. Harrison, CFRE
Mar 22, 2009 - 1:17:27 PM

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( - Every charitable organization, no matter what the size or the mission, should know about the Bernard L. Madoff scandal. Not because Madoff is an evil genius who perpetuated the longest Ponzi scam in history and not because his impressive scam wiped-out investors and shut down numerous charitable organizations. Nonprofit organizations should know about this incredible crime because it’s a loud and clear warning: If you don’t pay close attention to your philanthropic income and how it’s managed and invested, you are a prime target for a scam.

How can you protect your organization?
By keeping informed, being proactive and avoiding complacently, a charitable organization will stand a much better chance of protecting their philanthropic assets and good name.
Chandler Cultural Foundation reacted quickly after the Madoff scandal broke. A non-profit organization in Chandler, Arizona, the Foundation manages Chandler Center for the Arts, a 1,535 seat performing arts venue. Although the Foundation wasn’t negatively impacted by the Madoff scandal, the board members felt it important to immediately revisit the investment policies and guidelines to assure proper procedures and safeguards were being followed.

“The Madoff scandal is terrible, but it didn’t cause me too much grief,” states Katrina Mueller, President of the Chandler Cultural Foundation. “I wasn’t overly concerned about our investments because of the unique nature of our organization. We function as a nonprofit support organization to the City of Chandler as it relates to the Chandler Center for the Arts. Under this unique model, the Foundation follows the city's investment policy of investing only in instruments backed by the U.S. Government. I was also confident in our investment management firm because they were selected by our board after a rigorous and in-depth screening process.”

An Investment Committee is your first line of defense. The primary purpose of an investment committee is to watch over organizational assets, establish investment objectives, polices and procedures, and spend income wisely and carefully. It’s also the function of this committee to keep a watchful eye on investment management services.

Responsibilities of this committee include, but are not limited to:
Authority to exercise its best judgment and discretion to recommend banks, trust companies, or other professional fiduciaries for investment advice, custodianship and asset management services

Recommend investment objectives, guidelines and benchmarks
Monitor the performance of investment managers and adherence to established policies and guidelines
Personally interview investment managers annually
Provide Educational Opportunities

It’s not enough to have an investment committee efficiently and ethically performing its duties if all the board members aren’t fully aware of the organization’s operational issues and management best practices. Providing educational training and workshops on governance responsibilities, ethical fundraising activities, and stewardship programs will help build a stronger, and more aware board of directors. Scheduling a brief educational program at every board meeting and setting aside several hours at annual retreats will help board members stay current on industry trends and operational challenges.

Your organization should adopt or update your Fundraising Policies and Procedures. Fundraising Policies and Procedures have many benefits:
a.They serve as a guidelines and safeguards for gifting activities
b.They provide parameters on pledges and planned gifts
c.Your fundraising policies and procedures delineate ways gifts are accepted or rejected.
d.These policies can protect your organization from scammers and crooks.

“Detrimental Reliance”
Some charitable organizations across the country are facing a serious dilemma caused by the Madoff scam – non-payment of pledges by donors who can no longer afford to honor their pledge. Detrimental reliance refers to the hardship placed on a charitable organization because they took actions in reasonable reliance that the pledge would be paid. For example, the organization may have solicited other donors based on the pledge, incurred costs, entered into contracts, or borrowed money based on the expectation that the donor’s promise would be kept. When the donor can no longer make the pledge, the charity may have to resort to legal action to enforce payment.
With a capital campaign on the horizon, Chandler Cultural Foundation added a Gift Acceptance Policy on Pledges to their Fundraising Policies and Procedures. Here is the addition.
I)Gift Acceptance Policy of Pledges

Pledges are commitments to give a specific dollar amount according to a fixed time schedule.

A. All pledges must have written documentation that contains the following:

1a.) the amount of the pledge must be clearly specified
2b.) there should be a clearly defined payment schedule
3c.) there shall be no contingencies or conditions
4d.) the donor must be considered to be financially capable of making the gift
5e.) the acknowledgement that any naming opportunity associated with the pledge shall be removed if for any reason the pledge is not completed within the agreed upon payment schedule.

B.Recognition of Pledges

a.) For gift recognition purposes, donors will not be recognized publicly until the
pledge is paid in full.
b.) If for any reason the pledge amount is altered, the donor will be recognized at
the level of final payment.
c.) In the event of death, pledge balances will be written-off when the Center
is notified, unless there are provisions in the donor’s will, or the family has
indicated their intent to complete the pledge.
d.) All requests to deactivate a pledge must be presented to, and approved by,
the Board of Directors.
e.) Any decision to recover a defaulted grant will be based on potential loss of
funding opportunities and possible negative public relations.
For a $10 donation, you can purchase a complete set of Fundraising Policies and Procedures that can be easily modified to fit your organizational needs. Visit the Chandler Center for the Arts Web site at

Bill J. Harrison, CFRE, is a nationally recognized fundraiser with more than thirty years of experience. He has published 240 articles and 13 books on fundraising and non-profit management topics and is the author of the award-winning textbook, FUNDRAISING: THE GOOD, THE BAD AND THE UGLY (and how to tell the difference). In February, Bill received a Lifetime Achievement Award from FundraisingSuccess Magazine.

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