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The International Journal
of Not-for-Profit Law

Volume 7, Issue 3, June 2005

A publication of the International Center for Not-for-Profit Law

Table of Contents

Letter from the Editor

Comparative Approaches to Civil Society

The Liaison Office as a Tool for Successful NGO-Government Cooperation: An Overview of the Central and Eastern European and Baltic Countries’ Experiences
Maria Gerasimova

Public Benefit Status: A Comparative Overview
David Moore

How Freedom Is Won: From Civic Resistance to Durable Democracy
Adrian Karatnycky and Peter Ackerman

Articles

The Potential for an Independent Regulatory Authority for NGOs in South Africa
Yvonne Morgan

Restrictive Proposals in Kazakhstan
Stephen Larrabee

Women at the Forefront of the Democracy Movement in Iran
Nayereh Tohidi

Economic Constraints, Political Motives: Contemporary Russian Nonprofit Tax Law
Leslie Lutz

Failing to Govern?: The Disconnect Between Theory and Reality in Nonprofit Boards, and How to Fix It
Michael Klausner and Jonathan Small

Imagining Philanthropy
Richard Gunderman

Reviews

Conversations on Philanthropy
Edited by Lenore Ealy
Reviewed by Michael Bisesi

Europe and Civil Society: Movement Coalitions and European Governance
By Carlo Ruzza
Reviewed by Joseph Proietti

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The Potential for an Independent Regulatory Authority for NGOs in South Africa

By Yvonne Morgan*

Although we continue to hear calls for corporations and governments to increase their transparency and accountability – those two well-worn words –  nonprofits are also feeling the heat. The World Bank noted in March 2005 that “as the influence of [civil society organizations] continues to grow, they are also attracting greater public scrutiny, prompting calls for greater accountability” (World Bank, 2005). This has resulted in a closer examination of how nonprofit organizations are regulated and a revival of the old debate about why such regulation is necessary.

Formal Registration of Nonprofit Organizations in South Africa

A Johns Hopkins University study found close to 99,000 nonprofit organizations in South Africa as of 1999 (Swilling and Russell, 2002). A voluntary association in South Africa need not register formally, and therefore is not necessarily subject to any reporting requirements. Reporting to one’s stakeholders, however, can enhance public trust. Consequently, South African nonprofits have generally chosen to seek formal registration of one sort or another, with the attendant reporting requirements.

A South African nonprofit that wants to be seen as credible and accountable can do one or more of the following:

Why Nonprofits Register

Recent research has looked at why NGOs register under the NPO Act with the NPO Directorate. Most nonprofits choosing to register do so for three main reasons: registration is required in order to receive tax benefits; no unregistered nonprofit can seek government contracts or be eligible for government subsidies; and organizations hope that registration will help them get additional funding from other sources. Many funders do favor organizations with NPO status, though not all require it. Those NPOs formed as Section 21 companies tend to be the more sophisticated ones that prefer a more formal legal structure.

Compliance with Regulatory Requirements

Given all these different forms of registration, an NGO may be required to report to three separate authorities on an annual basis. A Section 21 company with tax benefits, for example, must report to the Department of Trade and Industry as a Section 21 company, the Department of Social Development as an NPO, and SARS as a PBO – in addition to reports for funders and beneficiaries. Even though the organization can generally supply the same information to each authority, the process entails considerable duplication of effort, on the part of government departments and NGOs alike.

South Africa does not have a comprehensive national database of NGOs; the database of registered NPOs, which is kept by the NPO Directorate, excludes some trusts and Section 21s. There is also no common repository of financial statements and narrative reports submitted by NGOs. The NPO Act requires the NPO Directorate to allow public access to all such information, but the result in practice is bulging filing cabinets in government offices where only the desperate or bold dare venture. South Africa does not have the equivalent of Guidestar (http://www.guidestar.org), the website that provides online access to publicly available tax forms of American NGOs. It would be difficult at present to introduce such a scheme in South Africa, given the lack of a standardized reporting format.

Time to Rethink

Several factors make this a good time for South African nonprofit stakeholders to consider where they stand in regard to regulation of the sector. These factors include the Department of Trade and Industry's major review of the Companies Act, with particular attention to the status of Section 21 companies; an imminent report on the impact of the NPO Act and how well it has fulfilled its objectives; and the Governance Initiative project, which is provoking discussion of nonprofit governance issues.

The Governance Initiative, which is project-managed by the Charities Aid Foundation Southern Africa (CAFSA), began at a 2004 Johannesburg conference on governance and accountability for nonprofits. It was decided to draft a code of good governance for nonprofits and investigate ways of facilitating its implementation. Discussions led to the concept of an independent regulatory authority that could house the code and provide certification and advice on governance issues.

At present, SARS and the NPO Directorate receive thousands of registration applications each year, and neither one has the capacity to process them efficiently. The NPO Directorate, in addition, is too busy registering new organizations and enforcing reporting requirements to be able to offer advice, information, and support to nonprofit organizations. The NPO Act envisioned the Directorate as undertaking educational and supportive activities in addition to its role as regulator, but, as the NPO Act impact assessment will probably conclude, the Directorate has not been able to fulfill its complete mandate. It is unlikely that the Directorate will be given adequate resources, as the government faces many more urgent needs for funds.

The questions being asked include the following: How can publicly filed information on nonprofits be made more accessible? What can be done to lessen the duplication of reporting requirements? If nonprofits use public money to do their work, should registration and disclosure remain voluntary? How can nonprofits be encouraged to adopt good governance standards? Should a separate body promote and certify nonprofits for good governance?

All these lead to the overarching issue: Should nonprofits continue to rely on government, with its limited resources, to regulate the sector? If not, what are the alternatives?

Not a Job for Government?

Perhaps the NGO community would be better served if the tasks of regulating and supporting the nonprofit sector were reassigned. It might well be that all these roles cannot be optimally performed within a specific government department, or indeed within government at all. This is because government budgets are shaped by forces beyond an entity's actual need, such as political will, economic conditions, international pressure, and other, seemingly more pressing demands on limited government resources.

It can be argued that the existence of a positive and enabling regulatory environment, one that promotes good governance while at the same time respecting the independence of the nonprofit sector, should not be subject to government’s inclinations and limitations. Salomon and Flaherty, looking at issues of nonprofit law, conclude that where regulatory authorities are uncooperative, "a separate nonprofit registration authority may therefore be the most promising and easiest for nonprofits to use" (Salamon and Flaherty, 1996).

One solution under discussion is an independent regulatory authority. It would register all types of nonprofit organizations and monitor their conformance with reporting requirements. Its power would be delegated by the government authorities that now exercise it, according to legislative and statutory provisions.

What might such an independent body do?

For one, it could handle the task of ensuring compliance with the various requirements imposed by the NPO Act, the Income Tax Act, and the Companies Act, with a mandate to act on behalf of the government departments and a duty to report annually either to the Department of Trade and Industry or directly to Parliament. There is a precedent for this: the Financial Services Board has the authority to register and regulate South African financial service providers on behalf of the Department of Finance.

The body should also provide advice and guidance to NGOs on registration, tax, and other pertinent issues. Administration of the registration framework should be centralized, while educational and registration services should be available at a local, decentralized level.

Further, an independent regulatory body could collate and distribute information on the nonprofit sector, including through a common database of all registered NGOs, open to the public and available electronically. There is a dearth of current, credible information on the nonprofit sector in South Africa. The Johns Hopkins data are now over six years old, and the HIV/AIDS pandemic has led to the formation of many new NGOs.

In addition, the nonprofit sector in South Africa lacks an ombudsman. While NGOs can use the courts for any serious offenses, it may be appropriate to have some sort of procedure for the independent regulatory authority to receive and consider complaints and, where necessary, refer them to the authorities for investigation.

In the interests of accountability, an independent regulatory authority should consider implementing the sort of certification system offered by the Philippines Council for NGO Certification (PCNC), to back up a code of good governance among NGOs and to support such governance practices as board management and oversight, formal staff policies, and effective financial management. Lloyd makes the additional point that sufficient accountability will not result solely from improving reporting requirements and compliance with laws and regulations. He argues for greater emphasis on downward accountability, including the right of NGO beneficiaries to hold NGOs accountable for compliance with a code of conduct (Lloyd 2005).

Tasks for an Independent Regulatory Authority

The independent authority’s tasks might include the following:

What Is Being Done in Other Countries?

More than one government has found it difficult to regulate large numbers of nonprofit organizations. In a paper on trends in self-regulation and transparency in nonprofit organizations, Robert Bothwell noted several incidents over the past eight years that suggested a lack of capacity to monitor and regulate nonprofits on the part of U.S. state governments and the federal Internal Revenue Service (Bothwell 2001). Lloyd makes the point that several governments have found that they cannot adequately regulate NGOs, which is fueling the worldwide rise in NGO self-regulation (Lloyd 2005).

In the United Kingdom, charity regulation is carried out by the Charity Commission, which annually reports to the Home Secretary and Parliament. The commission's job includes gathering and distributing information about charities and evaluating and investigating complaints related to charities.

The British Government is overhauling its charity regulations following extensive research. Under the new Charities Bill, each charity with an income over a million pounds will annually have to submit a standard information return, which highlights key information such as how much the charity spent on fundraising and on public benefit aspects of its work. An independent Charities Appeal Tribunal will be created to handle appeals from decisions by the Charity Commission.

In 2002, the New Zealand government approved the establishment of a New Zealand Charities Commission, assigned to approve and register charitable organizations, receive annual returns, monitor the activities of charities, and provide advice and support to the sector and to the government. The independence of the body was secured by establishing the Commission as a Crown Agency with a separate board and the power to make its own decisions about the charitable status of organizations.

In both the Philippines and Pakistan, the government has outsourced the task of certifying and monitoring nonprofit organizations' regulatory compliance to independent regulatory authorities: the Philippine Council for NGO Certification (PNPC) and the Pakistan Center for Philanthropy (PCP). There are many similarities between the two bodies. In both countries, registration is voluntary on the part of NGOs. Those choosing to register must heed rules relating to governance, vision and goals, program operations, and monitoring and evaluation. An NGO that satisfies the requirements will receive certification and can claim tax benefits –a strong incentive to register. Information on certified NGOs is published in a directory for the public.

Speaking at a conference in 2002, Karla Simon pointed out that while some 60,000 NGOs were eligible for tax benefits in the Philippines, by April 2002 only 220 had been assessed and 135 approved for certification. In her view, the PCNC’s intricate evaluation procedures were probably responsible for the long delays in certification (Simon 2002). The conference also identified the importance of having a single regulatory system for NGOs, as opposed to several different authorities that register and regulate them; and the importance of making registration a condition for receiving tax benefits.

Benefits and Challenges for a Regulatory Authority

When one considers the lack of leadership in the nonprofit sector in South Africa today, it is tempting to see this regulatory body as a sure-fire panacea. That would be a mistake. South Africa does not need an overstaffed behemoth, encumbered with too many tasks and unable to act quickly. Salamon speaks of the need to consider the "burdensomeness of the process."

What could a nonprofit regulatory body reasonably anticipate, in light of the challenges that similar bodies have faced elsewhere? For the UK Charity Commission, a problem arose over its dual roles as regulator and as "best practice" adviser. The National Council for Voluntary Organisations discerned "a very real risk that the guidance and best practice advice will become de facto regulation" (NCVO 2001). In the Philippines, as noted, the combination of hundreds of applicants and a complex registration system has led to long delays. The original New Zealand regulatory model ran out of money and time before it could be formally adopted.

Here, summarized briefly, are some of the perceived benefits and challenges for an independent regulatory authority:

Benefits

Challenges

Promotes and rewards good governance through certification

Not all NGOs will choose to register

Provides mechanism for complaints and whistle-blowing

Monitoring can be time-consuming and expensive

Circumvents multiple reporting by NGOs

Requires consensus of sector

Creates common repository of NGO information available to public

Current regulatory authorities must agree to delegate authority

Avoids duplication of resources in different government departments

Needs to be seen as independent, but also must attract sufficient funding

Provision of financial information reduces risk of money-laundering

Electronic reporting requires development of standardized reporting format

Administrative Issues

An independent regulatory authority would require excellent information technology and human resources to oversee large numbers of NGOs. It would also need a guaranteed source of funding. Within the NGO community, it would need to establish a reputation for independence from government and other bodies, and this would take time.

To avoid huge backlogs of registration applications, the independent regulatory body should aim to be "lean and mean." It should adopt a sophisticated, computerized registration framework, and make the data publicly available through an efficient information system. At the same time, it must bear in mind that most NGOs likely to seek registration work in peri-urban and rural communities without easy access to computers. Accordingly, it must develop ways to decentralize and simplify the registration process.

Difficulty in attracting funding could prove a serious handicap. However, the formation of one body to register and monitor regulatory requirements can achieve economies over the status quo, in which these duties are handled by three different government departments. In addition, SARS would benefit by freeing up resources for its other tasks, if it authorized the body to register and monitor PBOs and to award tax benefits under Section 18A.

It might be that government would provide a portion of the funding required, with additional contributions coming from other agencies with a natural interest in promoting a well-regulated and well-supported civil society, such as the National Lotteries Development Trust and the National Development Agency. This issue needs further discussion, as it may in the end prove to be a major sticking point.

Gaining the trust and support of the nonprofit sector would be an important task for the regulatory body. Therefore, the governing committee appointed must be as representative as possible of the various stakeholders in the sector, as well as of government, funders, and beneficiaries.

Conclusion

South African nonprofits would benefit from having a single authority responsible for registration and regulation of the sector. A single, comprehensive database of NGO information, available to the public, would also be useful. An independent authority could also promote good governance by disseminating a code of good governance and accrediting NGOs that voluntary adopt its principles.

The authority would face several challenges: developing procedures for smoothly registering and regulating large numbers of nonprofit organizations, persuading the current regulatory authorities in government to delegate these tasks, and attracting sufficient funding for its operations. To ensure adequate support, it would be essential for this body to prove its independence from both government and the nonprofit sector.

Establishing such a body outside of government could do much more than merely improve registration processes. It could promote transparency and accountability – those two well-worn words again – and, as a result, foster public trust. But before the concept can become a reality, there needs to be a lot more discussion of the potential advantages and the challenges. 

References

Bothwell, R. "Trends in Self-Regulation and Transparency of Nonprofit Organizations in the US". Paper presented at The European Institute of Advanced Studies in Management Workshop:  The Challenges of Managing the Third Sector in Brussels, May 2001.  Reprinted in the International Journal of Not-for-Profit Law, Vol 4 Issue 1 (2001).  http://www.icnl.org/journal/vol4iss1/bothwell1.htm.

Lloyd, R. ‘The Role of NGO Self-Regulation in Increasing Stakeholder Accountability”. (Paper submitted to the journal Accounting, Auditing and Accountability, One World Trust, London, April 2005.

National Council of Voluntary Organisations. “For the Public Benefit?” (2001).

Salamon, L., & Flaherty, S. "Nonprofit Law: Ten Issues In Search of Resolution." Working Papers of the Johns Hopkins Comparative Nonprofit Sector Project, No. 20, edited by L. Salamon and H. Anheier. Johns Hopkins Institute for Policy Studies, Baltimore (1996).  http://www.jhu.edu/~ccss/pubs/pdf/tenissue.pdf

Simon, K. Remarks at Conference on Legal Enabling Environment for NPOs in East and Southeast Asia, Catholic University of America. (2001).

Swilling, M & Russell, B. "The Size and Scope of the Non-profit Sector in South Africa." Graduate School of Public and Development Management, University of the Witwatersrand, Centre for Civil Society Studies; Johns Hopkins University Institute for Policy Studies (2002).

World Bank. "Issues and Options for Improving Engagement Between the World Bank and Civil Society Organizations." External Affairs, Communications and United Nations Affairs, World Bank (2005).

Notes

* Yvonne Morgan, ymorgan@cafsouthernafrica.org, is a Researcher at Charities Aid Foundation Southern Africa, http://www.cafsouthernafrica.org, which is a registered South African nonprofit organization dedicated to increasing the flow of funds to the non-profit sector in Southern Africa. 

 

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