The International Journal
of Not-for-Profit Law
Volume 10, Issue 3, June 2008
Filiz Bikmen 1
On February 20, 2008, the Turkish Assembly ratified Law #5737, a significant reform of foundation law. Many of the changes were recommendations that grew out of a “Comparative Reports on NGO Law” project launched by ICNL and TUSEV in 2004, which created an inventory of the most critical legal obstacles and challenges affecting foundations,2 assessed them vis-à-vis international standards, and recommended reforms.3 Ratification of the new law took more than four years.
It is remarkable that Turkish foundations continued to operate at all, given the rather restrictive circumstances that governed before enactment of Law #5737: a complex array of documents, including the Constitution and Civil Code, with core provisions regarding foundations; the original foundation law, drafted in 1935 and modified at least 20 times since, most thoroughly in 1970; plus circulars, court decisions, and other legal notices, many of which contradict core provisions and sometimes one another. Yet Turkish philanthropists persevered throughout decades of legal immobilization.
For centuries during the Ottoman Era, foundations provided almost all the core social services in the absence of a welfare state. Yet foundations and philanthropy in recent years have faced enormous hurdles. Why? The answer is complex, yet three points provide some insight:
1. The Republic of Turkey, the social welfare state established in 1923, did not initially conceive of foundations as “economic, social or political actors”4 or as components of “civil society” but merely as “charitable institutions”—a sentiment that continues to exist among many factions of the State.
2. While core provisions did adhere to international standards of rights and the role of the judiciary for foundations, intense social and political unrest throughout the ’60s, ’70s and ’80s, resulting in three military coups, led to a significant clamp down on all forms of civil society organizations, including foundations. In this light, it is interesting to note that Law #5737 in some ways reverses restrictions created by other legal interventions, realigning the law with its original form and purpose as reflected in the Civil Code.
3. Members of the public and especially state officials suspected that foundations were formed only to evade taxes and conduct other “adverse” activities. A few rotten apples and tales of corruption cast a shadow over the entire sector and thus were held to justified harsher laws and regulations.
A solution to the last issue would have been to increase the auditing capacity of regulators and improve public accountability and reporting standards for foundations. Instead, a complex system reigned, and was influenced greatly by previous coups and government suspicion of civil society activities. So the foundation regulation system became one that encouraged “charity” but discouraged “civic activity.” This system could be characterized as autocratic and controlling.
Autocratic reflects that the system commanded a sector based on the concept of private wealth for public good, and viewed foundations’ assets and activities as State property (e.g., requiring that a government representative participate in annual trustee meetings, and that funds be deposited in State banks).5 Controlling reflects requirements of prior permission for many facets of standard operations (e.g., buying and selling assets, and engaging in international activity).
This was the starting point for cooperation between TUSEV and ICNL, with the goals of restoring (in some cases) and advancing (in others) the rights of foundations in a democratic system. This article provides an analysis of the original problems, the proposed solutions, and the outcomes of the law reform initiative, in light of ICNL and TUSEV’s “Comparative Law Reform Reports Project,” and discusses how these changes, and those yet to be made, are likely to affect the foundation sector in the years to come.
Upon completion of a full review of the laws and regulations, ICNL and TUSEV decided the most critical issues meriting reform could be grouped under the following categories:
- Financial (Endowment and Asset Management)
- Governance (Founding Members, Board Membership Eligibility, Termination, and Government Participation in Meetings)
- Activities (International Cooperation)
The following section provides an overview of the original problems, recommendations for reform, and the outcomes (new provisions in Law #5737).
Background. As discussed in the comparative report, “the Turkish Civil Code does not state a minimum capital requirement for the endowment of a foundation: The only criteria requires that there be ‘enough’ capital/assets allocated to realize objectives as stated in the foundation by-laws (to be then determined on a case-by-case basis by the courts during the registration process). However, two communiqués of General Foundations Directorate dated 21 September 1997 and 21 January 1998 introduced additional limitations to these criteria. According to the provisions, the establishment of a foundation requires a minimum (as of 2004) of 375 to 940 Billion TL (app. USD 250,000 to 627,000) which is determined specifically (by the courts) according the purpose of the foundation.”
Recommendation. Although a minimum amount was not favored, the ICNL-TUSEV report put forth two options: 1) to determine a fixed amount, or 2) to leave it to the discretion of the registration authorities (courts).
Outcome. Law #5737 states that the amount will be determined each year by the General Directorate of Foundations High Council (GDF).6
b. Asset Management
Background. The report states, “The Communiqué of the General Directorate of Foundations dated 1999 gives this department (GDF) the privilege to intervene, to permit and to authorize issues related to the foundations’ asset management.” As such, there are two main concerns. One concerns altering or selling immovable foundation property. The Civil Code requires GDF to initiate procedures for the court application, and court approval is necessary; a subsequent Statute of 1970 requires GDF High Council permission before a court motion is initiated. With regard to cash and other movable assets, the Statute of 1970 requires foundations to use State banks for all deposits and transactions.
Recommendation. The report prepared by ICNL and TUSEV deems the process of prior approval both time-consuming and unsuitable, noting that foundations themselves are best positioned to manage their assets, whether immovable or movable. As a best practice, the report declares that the responsibility and accountability should rest with the board members of the foundation, to ensure effective financial management of foundation assets.
Outcome. With regard to a foundation’s original endowment (that is, the endowment when the foundation legally registers), Law #5737 requires that the foundation apply to GDF with an “independent expert valuation report.” Upon a favorable opinion of the GDF, a court motion is initiated and approval is required. For property and assets acquired after the legal registration, the foundation board’s decision together with an expert report are sufficient; no opinion from the GDF or court approval is required. For foreign foundations, laws regarding titles and deeds apply.
As for cash and movable assets, an official notice issued in 2005, before Law #5737, nullified the requirement that foundations deposit their funds in State banks. Foundations are free to choose the banks that will let them use their funds in the best possible way.7
a. Founding Members
Background. The ICNL-TUSEV report states that “according to the Turkish Constitution Article 33, all real and legal persons have the right to establish a foundation. This right can only be restricted in the interest of national security and public order, preventing crime, protection of public health or good morals, and protecting the rights of others only with the law. In addition to these provisions, the Civil Code also requires founders to have ‘the capacity to act’ (which is described in detail in the Code). However, two communiqués issued by the General Directorate of Foundations in 1997 and 1998 created limitations on the original provision as stated in the Civil Code. According to these regulations, real persons convicted of a crime (including political and ideological convictions) and/or sentenced to imprisonment for over six months indefinitely revokes their eligibility to be a founder.”
Recommendation. ICNL and TUSEV suggest that such restrictions on founders who are convicted criminals violate Articles 10 (freedom of assembly) and 11 (freedom of expression) of the European Convention of Human Rights and Fundamental Freedoms (ECHR).
Outcome. Law #5727 removed the indefinite eligibility for convicted criminals to be founders.8 However, convicted criminals are not permitted to be board members, as will be discussed in the next section.
b. Board Membership Eligibility
Background. As stated in the ICNL-TUSEV report regarding Board Membership Eligibility, “the Turkish Constitution Article 33 [allows] all real and legal persons the right to establish a foundation. This implies no discrimination between Turkish citizens and non-Turkish citizens (foreigners)—both of which would have to abide by the same laws and regulations regarding foundations. However, according to the Statute of the Foundations dated 1970, a foreigner can be founder, appoint board members, but is not eligible to be a board member themselves.9 According to Turkish Corporate Law, there are no limitations for foreigners as board members (but they may not constitute the majority on the supervisory board).”
Recommendation. ICNL and TUSEV cite the situation as a potential violation Article 11 of the ECHR, and noted cases in European counties where similar provisions were found to violate freedom of expression to everyone irrespective of nationality.
Outcome. Law #5737 states that foreigners can be board members. Yet the majority of the board, whatever their nationality, must have residence permits in Turkey.10
c. Termination of Board Members
Background. Regarding termination of Board Members, the comparative report states, “According to the Statute of the Foundations Article 23, board members should administer foundations according to their by-laws and should be responsible and prudent managers. If a board member does not comply with the laws and regulations, their board membership may be terminated by a court decision with the application of GDF. Terminated board members are no longer eligible (for an indefinite period of time) to be board members in other foundations. According to Turkish Corporate Law, board members can only be terminated with a general assembly decision.”
Recommendation. According to ICNL and TUSEV, “It is imperative to emphasize that: (1) the removal is ordered by the court, rather than by a government agency, and (2) the disqualification is limited by a fixed term, rather than permanent. Moreover, this sort of remedy is generally imposed only for serious breaches of law.”
Outcomes. In this case, the proposal was accepted; however, the proposal regarding criminals and the temporary removal was not fully incorporated. Law #5737 states that board members cannot under any circumstances be removed from their positions without a court order. If existing board members have violated foundation regulations and have been penalized (fined) twice, the GDF High Council may recommend their removal to the GDF. The GDF then applies to court, which makes the final decision. If the crime or wrongdoing is irreversible, the GDF High Council can recommend that the court make an injunction for temporary removal until the court case is completed. Individuals found guilty of wrongdoing are also banned from existing Board positions in other foundations, and not eligible to be GDF High Council members or board members of any foundations for five years.
d. Board Meetings
Background. As the ICNL-TUSEV report notes, “The Communiqué of GDF dated 1998 requires an official representative to attend foundation’s general assembly meetings. This regulation also requires foundations to send invitations to the general assembly participants by registered mail or to publish the date and the location of the assembly in a nation-wide newspaper.”
Recommendation. The ICNL-TUSEV report states, “To allow government representatives to attend board meetings of private, voluntary organizations runs counter to European standards. Furthermore, such a rule is almost certainly a violation of the European Convention of Human Rights (namely the right to privacy as protected under Article 8).”
Outcome. This requirement was overturned in a regulation published in November 2004. As such, foundations are no longer required to provide notices and invite government officials to their meetings.
3. International Cooperation
Background. According to the ICNL-TUSEV report, “The Decree Law of GDF (1984) describes under which conditions foundations can engage in international relations. This decree ‘allows’ Turkish foundations to engage in international cooperation, open branches or representative offices and become members of foreign foundations only upon obtaining prior authorization from the Ministry of Interior and Ministry of Foreign Affairs. These regulations also apply to foreign foundations operating in Turkey. The Ministry of Interior issued a circular in 9 January 2004 regarding the international relations of foundations, which requires these requests to be processed through the Department of Associations (a new unit formed to regulate associations in mid 2003, within the Ministry of Interior).”
Recommendation. ICNL and TUSEV note that prior approval is not a common practice in European countries and others, and often is used as a way to discourage activity. In Turkey, it is also a costly and burdensome process, with “vague descriptions …and confusion for the ‘applicant’ foundation.”
Outcome. Law #5737 states that foundations, without any prior approval from or notification to the government, can engage in international cooperation, open branches abroad, create umbrella organizations, become members of such organizations internationally, and give and receive grants. Foundations must have such purposes clearly stated in their by-laws.
Should foundations give financial donations to organizations abroad, or receive financial donations from them, the transaction must be completed through the bank, and foundations must inform the GDF.
If the ICNL-TUSEV comparative report was used as a scorecard, it would yield quite good results: many of the recommendations put forth were incorporated into the new law, which will ease the government’s grip on foundations.
However, Law #5737 retains a trace of the past—perhaps even more than that—suggesting that this new bill is not entirely an example of “out with the old, in with the new.” Some provisions still do not adhere to good practice, and in some cases, even international standards. And the regulation for the law has yet to be published (it is expected in fall 2008), and as they say, the devil is in the details.
Yet it is important to see the big picture: this is only the beginning of the journey, one that, to be fair, has not by any means been smooth. While Law #5737 may not signify a radical departure from the past, it does signify an important shift from autocratic to democratic, and from controlling to enabling.
Advocates of better laws for civil society know better than to throw in the towel. There is always more to be done, more to be gained. As a colleague in the sector says, “Civil society always wants more; that’s its raison d’être.”
1 Filiz Bikmen is an Advisory Board Member of the International Center for Not-for-Profit Law and Adviser to the Chairman and Board of TUSEV, the Third Sector Foundation of Turkey, Istanbul, https://tusev.org.tr/.
2 The ICNL and TUSEV analysis addresses only “new” foundations, which are otherwise known as “Civil Code” foundations. Law 5737 also addresses “old” foundations, which were established during the Ottoman Era.
4 In justifying his rejection of the initial foundation law draft in 2006, Former President Ahmet Necdet Sezer claimed that the role of foundations should be strictly charitable and not be considered “economic, social or political” actors.
5 In Turkey, unlike some other countries in Europe, foundations are by default public benefit, as per their areas of operations. The challenges in public benefit law and tax exemptions raise different issues.
6 The General Directorate of Foundations (GDF) is the official regulatory body for foundations; the courts are the official registration authorities. The GDF established a “High Council,” with members from the GDF staff as well as from private foundations.
7 Official Gazette 12.11.2005
8 Law #5737 no longer makes any distinction regarding “founders” since this is addressed in the Civil Code.
9 There is one exception: if the foundation has an operating institution affiliated with it (e.g., a hospital, school , or museum), non-Turkish citizens are eligible to be board members. They cannot, however, constitute the majority, and their appointment requires the permission of Council of Ministers.
10 Note: a new provision in Law #5737 states that foreigners may only establish foundations on the basis of reciprocity—that is, if their country of origin allows for Turkish citizens to establish foundations.