The International Journal
of Not-for-Profit Law

Volume 12, Issue 4, November 2010

By David Z. Nowell, Ph.D.*

Introduction

The story was not surprising to anyone familiar with the work of American volunteers in emerging countries. In the weeks following the devastating earthquake in Haiti last January, ten American missionaries were arrested and charged with kidnapping thirty-one Haitian children when they tried to take the children across the border into the Dominican Republic. Ostensibly, the Americans were acting in what they saw as the best interests of children who had been orphaned by the earthquake. Their actions were in clear violation of Haitian law—but the Americans claimed ignorance of the law: “‘We didn’t know what we were doing was illegal. We did not have any intention to violate the law. But now we understand it’s a crime,’ said Paul Robert Thompson, a pastor who led the group in prayer during a break in the session. Group leader Laura Silsby told the hearing: ‘We simply wanted to help the children.'”[1]

For the better part of a century, charitable organizations in the United States have been major players on the world stage. The Red Cross, so evident in relief work in the U.S., began its international involvement when it provided personnel for World War I hospitals. The Rockefeller Foundation, chartered in 1913, specifically uses the term “throughout the world,” and it was this foundation’s programs that led to the worldwide eradication of yellow fever. By 2007, U.S. foundation support for international giving reached $5.4 billion[2], climbing to 22% of all foundation grants made;[3] that figure does not include additional billions provided in direct aid by non-foundation charitable organizations. Interestingly, well over half of the dollars targeted for cross-border work by U.S.-based foundations were given to U.S.-based organizations for their international programs[4].

Charities have significant experience addressing the challenges of cross-border work. Some of these challenges are intrinsic to encounters between cultures: language differences, cultural mores and expectations, and conflicts of objectives are part of the “inconvenience” of working internationally. Even in these areas, however, charities often stumble despite the best intentions. As emerging countries have developed more and more comprehensive regulatory systems in everything from accounting standards to orphan-care normatives, and as the United States tax code and Department of the Treasury regulations (especially following September 11) continue to become more and more detailed, U.S.-based charities have found that navigating a path through often conflicting standards is increasingly difficult. When conflicting and often convoluted regulations involving two or more countries are thrown into the mixture, many charities struggle to maintain equilibrium and successfully fulfill their missions. How can charities chart a course that keeps them in legal compliance, but also enhances their ability to deliver the services that are their purpose for existing?

The answer begins with a non-paternalistic respect for the culture and the laws of the recipient country[5]

Two years ago, I was called as a consultant for a group that desired to begin a shelter for biological and social orphans in the Amazon basin of Brazil. The group had been given a sizable tract of land in Amazonas. With virtually no operational monies, they planned to have the orphans create craft pieces which would be sold in the United States. The income provided would make the shelter totally self-sufficient. Unfortunately for their plans, Brazil has very strict child-labor laws, even stricter than the United States, and selling child-created crafts is absolutely in violation of the normativos. I asked the leader of the group if he would ever consider doing the same type of operation in Appalachia. His response was an immediate dismissal of the question, not understanding its relevance; there was never a consideration that what might be inappropriate or illegal in Appalachia would also be unacceptable in Amazonas.

The common thread in this and the opening narrative is that both groups acted in a manner which they would never condone in their home country. They also acted as if Haiti and Brazil had no legal code, or, if each did, as if the laws did not apply to Americans who truly were interested only in doing good.

Far too often, NGOs prefer not to be “distracted” from their work by bothering to become acquainted with the laws of the countries where they operate. In many cases, however, the emerging country, sensitive to past colonial abuses, codifies strict protections for children or other groups who may be the recipients of international aid. For example, Brazil’s recently enacted Orientações Técnicas: Serviços de Acolhimento para Crianças e Adolescentes,[6] based on the United Nations Convention on the Rights of the Child,[7] establishes rules governing child-care that are measurably more restrictive than corresponding laws in the United States. Brazil’s long history of “warehousing” orphans, coupled with the country’s desire to be seen as a world leader, led to the development of this very comprehensive document. Many longstanding practices of international child care providers operating in Brazil (such as long-term residential shelters) are explicitly forbidden by the new standards. Organizations that desire to continue delivering services to children there not only must become well-versed in the evolving laws, but also must be diligent in adherence to the standards of care.

In some instances, technical adherence to regulations can present challenges for organizations operating in multiple countries. For example, accounting standards can vary greatly from country to country. A unified audit report can be very difficult when the host country’s standards do not distinguish between capital and operational expenditures, and the sending country requires an audit with categorical distinctions. It becomes a challenge not only for the organization to manage cash flow, but also for a governing board to understand financials when there is no apples-to-apples comparison. Hope Unlimited for Children, based in the United States but providing services in Brazil, has separate audits of its U.S.-funding organization and its Brazil-based service delivery organization, and then provides a unified financial statement for the governing board. By so doing, it meets audit standards in both countries, and provides its board with a necessary tool for effective oversight.

Proper organizational structuring can safeguard an organization operating in multiple countries

Many NGOs find that careful structuring can provide an effective means of assuring compliance with varying—and sometimes conflicting—not-for-profit regulations in more than one country. One of the simplest and cleanest ways to manage non-profits that are primarily funded in one country, but largely operate in another, is to establish separate corporations in the two countries. For example, a United States organization with a primary mission in Mexico would charter as a 501(c)(3) in the United States and then establish a second, quasi-independent not-for-profit in Mexico. The U.S. organization functions as a funding parent for the grant-receiving Mexico operation. Structurally, the U.S. organization is a non-foundation, grant-making charitable organization. All services are delivered by the Mexican corporation chartered under Mexican laws. The U.S. organization owns no property in-country, signs no contracts, and, from appearances, has very limited presence.

By hiring competent Mexican staff, familiar not only with national and local laws but also with preferred paths of navigation which are often labyrinthine in their complexity, the U.S. charity can avoid running afoul of Mexican authorities. Additionally, having native in-country staff certainly engenders the good will always necessary for building an effective organization, and allows the organization to avoid the pitfalls of apparent or actual paternalism—to which the recipient country is often very sensitive.

At this juncture, many U.S. boards face the uncomfortable issue of control. As a board member once demanded of me after we had invested over $40 million in the course of two decades in international orphan care, “What do you mean we do not own any property down there?” The answer was very simple, we did not; all property was owned by our foreign counterpart. What that did not mean, however, was that we had no control. The U.S. corporation’s CEO was, by charter, also the CEO of the foreign operation, and on several other levels we were able to direct operations in-country. Managers of internationally working non-profits must make developing control mechanisms (if desired) and educating their boards about those mechanisms very high priorities. Most donors as well as board members expect the recipient organization to ensure that donated funds not only end up where intended, but also that they accomplish the purpose for which they were solicited. As long as the charitable organization can report success in the deployment of funds, very few donors will raise the issue of actual in-country ownership. In this type of relationship, the U.S.-based charity becomes a grantor organization, and the transfer of funds to the in-country organization meets the legal definition of grant-making, and can be so reflected on the organization’s Form 990.[8]

Managing a board’s expectations and levels of frustration is also a very important task. Many environments in which cross-border organizations work can seem almost hostile to an organization which, after all, only wants to improve the lives of others. One would think that any governmental agency, be it at local, regional, or national levels, would welcome such aid with open arms. However, implicit (and, unfortunately, often explicitly stated) in aid or service delivery is a critique of the government’s or society’s inability or unwillingness to care for its own. Even when such a message is never intended to be delivered, the dynamics of being a recipient of international aid may foster resentment. Truth be known, it is a very rare board that does not at least carry a bit of a “they should be grateful” attitude. When regulatory or structural challenges arise—as they inevitably do—it takes skillful management to help a board maintain its level of commitment and enthusiasm for working in a particular geographic region.

Conversely, there are times when an organization working internationally must deliver a very clear message to local authorities regarding the relationship. Lower-level administrators in aid-recipient countries may find a sense of empowerment by over-the-top enforcement of regulations, site inspections, or micromanagement of day-to-day operations. Tactful and intentional communications with supervisory staff reminding them of the organization’s investment in the community may be necessary. This can be especially important with higher-ranking elected or politically appointed officials who can see the bigger picture. Fostering positive relationships on professional, social, and personal levels is often critical for securing a positive aid-delivery environment.

Meeting domestic control standards for international grant making and support of cross-border organized entities

The Internal Revenue Service provides reasonably clear guidelines for charitable organizations making international grants. Essentially, any funding provided to non-U.S.-based organizations must meet the U.S. organization’s charitable purpose as described in the IRS-provided letter of determination. There are several tests which the IRS lists to judge whether a foreign organization is eligible to receive funding:

• 1. Organization receiving the grant has an IRS-issued U.S. determination letter;
• 2. Foreign recipient organization uses the grant for activities consistent with the grantor’s exempt purpose;
• 3. Grantor organization is a public charity or private foundation;[9] and
• 4. Grant is made in consideration of the Treasury’s updated anti-terrorist financing guidelines.[10]

Application of the standards is something of a challenge, however, because the rules may fall under the either/or distinction or the both/and distinction. For example, if the foreign organization has received an IRS-issued U.S. determination letter, it is presumed to be eligible to receive grants from U.S.-based grant-making organizations. This standard is, by and large, exclusive of the other three tests.

If, however, the foreign organization does not possess the IRS exemption letter, the both/and standard comes into play. That is, the grantor must be exempt, the recipient organization must utilize the grant in accordance with the grantor’s exempt purpose, and the grant must be made in accordance with the anti-terrorist guidelines. This three-part test should be applied to every international transaction made by a U.S.-based charity. If all three standards are met, then the charity has achieved the threshold to qualify its exempt status.

Satisfying boards and donors on issues of control:

Many organizations find that they can employ the same mechanisms to both assure compliance with IRS regulations and their own need to direct programs in-country. They accomplish this by closely intertwining the U.S. organization with its international counterpart. In the example cited earlier, the U.S. charity founded the in-country organization and placed in its charter the requirement that its CEO would be appointed by the U.S. board. A second mechanism that may be employed is for the U.S. board to approve the operational budget of its international partner. Such steps as these two require a very close relationship between the two legally separate organizations. Indeed, the organizations must essentially function as one; the distinct identities are legal matters rather than perceived realities. So doing, however, allows the organization(s) to satisfy not only audit and regulatory requirements, but also their boards’ and donors’ expectations.

Our organization was approached earlier this year by another charity doing relief work in Haiti that desired to use us as a pass-through for their funding. The organization was having difficulty securing their letter of determination and wanted their donors to receive the benefit of the charitable deduction. Ultimately, our board turned down their request for a long-term relationship because of issues of oversight. I said in my letter explaining our decision:

With our work in Brazil, for example, our CEO is also CEO of the Brazilian operation, and chair of their board, as well as a voting member of our Board. I view the work in Brazil several times a year. Our Board approves the Brazilian budget, and reviews the Brazilian audit. The Board itself travels to Brazil every other year. At least once a year, our Board makes a formal note for its minutes that it is satisfied that all funds sent to Brazil are expended in accordance with our exempt purpose. The Board feels very comfortable making this certification.

With the Haitian operation, although it was consistent with our organizational charter, we could not affirm the basic requirements of oversight that the close relationship with our Brazilian organization provides. I completely supported the good work the Haitian organization was doing. Could I, however, sign and attest to our board that I knew all funds were expended in keeping with our exempt purpose? No, I could not.

A secondary benefit of such structures is that they move the American organization beyond just being a grant-maker to being personally and relationally involved in the actual aid delivery. So doing secures a much deeper level of buy-in for the organization, its board, and its donors. Much greater levels of trust are engendered between U.S. and international counterparts. Such interaction does a great deal to insure that values and objectives are shared between the grant-making organization and the grant recipient. “Mission creep” is always a hazard for charitable organizations. The danger becomes especially pronounced when the on-the-ground component sees what they may deem to be a more tractable problem than that which the grant is intended to address. A well-conceived and defined working relationship which brings the U.S. organizational leadership and the cross-border organization into constant contact builds the relationships that provide mission security.

Conclusion

Without question, there are always significant challenges to any organization that wishes to engage responsibly in working or providing grants in cross-border environments. Indeed, it is often the very challenges—government bureaucracies that seem designed more to hinder aid to the needy than to facilitate it—that make such work necessary. However, such challenges should by no means discourage or deter non-profits from working in cross-border situations. Instead, organizations should enter such work fully aware of regulatory and work environments. Intentionality in structuring both the organization and its aid-delivery system will allow non-profits to successfully navigate the braided currents of such environments and genuinely impact the lives of those the organization has set out to help.

Notes

*David Z. Nowell, Ph.D., is President, Hope Unlimited for Children.

[1]“Haiti Charges U.S. Church Members with Kidnapping,” MSNBC.Com, 2010, https://www.msnbc.msn.com/id/35235514/ns/world_news-haiti_earthquake (2 February 2010).

[2]International Grantmaking IV: An Update on U.S. Foundation Trends, www.usig.org/updates.asp, The Foundation Center in cooperation with the Council on Foundations (2008), p.2.

[3]Ibid, p. 3.

[4]Ibid, p. 5.

[5]The website of the U.S. International Grantmaking Project (www.usig.org) offers perspective on the legal environment for charitable work in a number of countries.

[6]Orientações Técnicas: Serviços de Acolhimento para Crianças e Adolescentes, Conselho Nacional de Assintencia Social, October 19, 2010, 1.

[7]“United Nations Convention on the Rights of the Child,” UNICEF, 2010, (21 October 2010).

[8]An added benefit of such a structure is that all extra-country grants fall under the category of program funds in Form 990, providing a positive impact on program, G & A, and fundraising ratios.

[9]See Rev. Rul. 68-489, and Rev. Ruls. 56-304 (grants to individuals) and 68-489 (grants to nonexempt organizations).

[10]“Anti-Terrorist Financing Guidelines: Voluntary Best Practices for U.S.-Based Charities,” U.S. Department of the Treasury (8 December 2005), p. 2.