If You Have an American Friends Organization, Do It Right

We think

The role of “American Friends of …” organizations in overseeing their grants to the Israeli affiliate

By David Roth and Ardie Gelman

You may have noticed that American donors and foundations that fund programs and projects in Israel outside of the Federation/UJC framework usually make the actual contribution to an “American Friends of” organization rather than directly to the Israeli amuta (nonprofit organization). The term “American Friends of” is not statutory in nature, but rather is the common term that refers to any U.S. nonprofit tax-exempt 501(c) (3) public charity whose primary purpose is to raise funds in the United States to either carry out activities overseas or to make grants to an organization located in a foreign country.  Interestingly, the overwhelming majority of “American Friends of” organizations are associated with Israeli nonprofit organizations.

Why is this so? Why not directly contribute to the Israeli amuta?American individual donors that wish to support Israelis causes can only receive a charitable income tax deduction if they donate to a U.S. public charity. American foundations, on the other hand, while allowed to make direct grants to Israeli (and other foreign) organizations provided the funds are used exclusively for charitable purposes and so long as the foundation exercises expenditure responsibility on the funds (to be explained below), generally shy away from this practice because they often lack the means to carry this out, and instead rely on the much easier route of making grants to the “American Friends of” organization instead.

The donated funds are then remitted by the “American Friends of” organization to the Israeli amuta and everyone is happy. Donors receive their tax deduction and the Israeli organization receives its money. Sounds simple, right? Wrong.

This is because U.S. public charities that make grants to foreign entities are prohibited from serving as a “conduit” to enable the free flow of funds from American donors to foreign causes. The IRS has strict regulations that relate to both the letter and the spirit of the law as to how American organizations may provide funding for foreign entities. Essentially, this entails the American organization maintaining absolute discretion and control over the granted funds.

Discretion means that the organization’s governing board may decide to provide funding for another organization – domestic or foreign, or it may decide to run its own programs in the U.S. in addition to funding the foreign entity. In other words, it is not obligated to exclusively fund the affiliated Israeli organization.

The second requirement of control means that the organization must receive pre-grant proposals outlining the purpose of the grant, as well as submit post-grant progress reports demonstrating that the funds were used in accordance with the terms of the grant. It must maintain detailed records and report on the expenditures to the IRS. In other words, it may not automatically fund the affiliated Israeli organization.

Further controls often employed include: (1) restricting the funds it grants to the foreign entity, and releasing them only after invoices and other evidence has been produced to justify the expenditure of the funds; (2) holding the funds in a separate bank account so that they do not become fungible and co-mingled with the organizations other funds; (3) reviewing and auditing the Israeli organization’s financial and other documents (not just those pertaining to the grant), and (4) maintaining staff in the foreign country to provide on-the-ground oversight of the funded project or program.

Moving beyond theory, many of the “American Friends of” organizations do not meet these standards. Israeli organizations are often the ones to initiate the establishment of the “American Friends of” organization, and rely on a friend to “do them a favor.” In such instances the organization’s role is to provide a U.S. address to allow U.S. donors to receive a tax deduction. Such organizations may be unaware of the regulations and/or unable to properly comply due to a lack paid professional staff.

In our opinion, there is a more complex issue at stake. Since most “American Friends of” organizations are established to raise funds for a single organization rather than a variety of organizations related to a single cause (hence the name American Friends of …), it is expected to play an active part in working with the Israeli organization to raise funds on the latter’s behalf. Such a relationship must naturally be based on mutual trust and respect, open communication, joint planning, and more.

On the other hand, the “American Friends of” organization has legal and financial obligations vis-a-vis the government and must be accountable to donors, the general public, and other stakeholders that its financial resources are used exclusively for charitable purposes in accordance with its mission.

This conundrum mirrors the dual roles expected of any nonprofit board of directors, namely promoting and fund-raising for the organization, and bearing responsibility for the organization’s legal and financial activities. “American Friends of” organizations must therefore assume responsibility for two roles – raising funds and oversight.

What can an “American Friends of” organization do if funds are misappropriated or if the Israeli organization fails to comply with its reporting requirements?  Ideally, the “American Friends of” organization will have established its guidelines prior to funding the Israeli entity. Failure to comply could lead to a suspension of future funding and maybe even to litigation to recoup the funds. The “American Friends of” organization could go so far as to sever its ties with the Israeli counterpart and fund other organizations, projects and programs in Israel. Indeed, there have been several such cases that have received wide publicity over the past few years, particularly regarding the Jewish National Fund and ORT.

If such guidelines do not yet exist with an “American Friends of” organization, it behooves them to educate themselves and their Israeli affiliate about their legal obligations and to establish a series of procedures and policies to rectify the matter. Most of the time noncompliance is due to ignorance. Only rarely is it a case of purposeful wrongdoing. Having an open discussion with the Israeli affiliate about how things have to be done will lead to a stronger “American Friends of” organization that can better fulfill its oversight responsibilities while continuing to promote the Israeli organization’s cause among donors.

For specific information as it may relate to your organization always consult with an American-licensed attorney versed in nonprofit tax law.

logoDavid Roth and Ardie Geldman are philanthropic consultants with Donor Associates in Israel, Ltd. and regular contributors to eJewish Philanthropy.