Identifying and Addressing Financial Abuse By Muslim Organizations

By Danya Shakfeh, Esq.

As we open our hearts – and our wallets – to give our zakat and sadaqa this Ramadan, we should also be aware of financial abuse among Muslim organizations . Being aware not only allows us to give intelligently, but also to hold our institutions accountable. There are many tactics that our religious institutions engage in to avoid accountability, often exploiting that we, as a community, trust them without question and even feel guilty for questioning where funds go.

What is a Non-Profit?

The term “non-profit” is somewhat misleading as it implies that non-profits have little money. In reality, “non-profit” is only a legal term that signifies that the entity cannot pay dividends or be sold. Otherwise, its employees can still be paid handsome salaries or generate a large amount of revenue. For example, many large insurance companies, such as Blue Cross Blue Shield in Illinois is a “nonprofit” (a 501(c)(4)) and its CEO received a salary of $16.6 million in 2016 despite the company’s reported net revenue declining. Other nonprofits can actually be quite lucrative and can be used as part of schemes to deceive people. To be clear, this is not meant to be a criticism of the tax code or of high salaries. Rather the takeaway is that we should not make assumptions simply because the word “nonprofit” is attached to an organization.

As Muslims, we (rightfully) criticize certain Christian groups and their prosperity gospel mentality. However, there are Muslim organizations and institutions in the West that are following suit. We should not think that Muslim clergy are immune from the same abuse that we are so critical of.

Through my own experience and consulting other experts in the financial realm, I put together a basic guide that explains these tactics and ways we can hold our institutions accountable.

Common Tactics of Financial Abuse

1. Personality-centered messaging: This is becoming increasingly common, especially in the age of “celebrity shaykhs.” Instead of cause-centric charities and appeals to donations, the appeals to donate sound more like “can Shaykh so-and-so count on you?” or “have iftar with Shaykh so-and-so.” Often the actual cause being donated to is a footnote. Another version of this tactic is “endorsements” by other scholars in support of the fund. I can tell you from personal experience it is incredibly easy to get an “endorsement” from other scholars and those endorsing an organization do not vet in any detail the organization they are endorsing. It is as easy as simply as asking for the endorsement. This is known as ‘affinity fraud’ because it allows fraudsters to bypass typical vetting processes because of his or her affiliations. In a similar vein, over reliance on testimonials for soliciting funds is another tactic. Firstly, testimonials are not always verifiable and usually only take advantage of donors’ emotions by generating testimonials that prey on voids in our community such as lack of female scholarship. To be clear, merely having testimonials is not an issue; the issue is when it seems to substitute actual financial information that should also be disclosed. So what should we base our decision to donate on? The cause being donated to and fiscal responsibility of the organization. If an organization is not leading with these messages, reconsider your donation and take it elsewhere.
2. Vague references to allocations of funds: Reputable organizations issue an annual report as to their budget and allocations of donations. Unfortunately many Islamic organizations expect donors to only take their word with messages such as “we closely vet the beneficiaries” without explaining the criteria used or what the funds are specifically used for.
3. Multiple causes under the same organization: When an organization seeks donations beyond its corporate purpose under the same organization, this is a cause for concern. The better practice is to have distinct corporate entities and boards for every corporate purpose. In other words, if an Islamic organization wants to assist scholars who are in need of charity, a separate corporation should be set up in order to avoid conflicts of interest and commingling of assets. It is not enough that donors “earmark” different funds for distinct causes. Merely “earmarking” different causes of donations does not address conflicts of interest or prevent commingling of assets. The asking organization should have distinct corporate entities and boards in order to avoid these problems. For example, if an organization wants to raise funds to create Islamic classes but also raises funds and zakat to help scholars in need, these are two distinct corporate purposes that should have two different corporations and boards. Otherwise, the organization can more easily – and without accountability – use the funds designated for the scholars in need for the organization’s classes instead of the scholars, or even to pay salaries for the teachers in the organization when teachers’ salaries were not made as part of the request for the scholars in need. The conflict of interest and lack of accountability is clear here. Another example is creating an organization to solicit funds to build a mosque but also use that same nonprofit to solicit funds for the unrelated purpose of humanitarian causes. Such a scenario is ripe for commingling of assets and mismanagement of funds. In both cases, ultimately what is happening is that donors are lead to believe they are contributing to one cause when in reality the funds are going to a different cause without their knowledge. This is especially concerning when one cause is zakat-eligible and another is not hence affecting whether a donor fulfills his or her zakat obligations. (Another good piece on this issue is this discussing “kitchen sink” claims.
4. Constant budgeting issues: When an organization is constantly soliciting funds for shortages, it is a red flag to some sort of mismanagement of money. In my observation, either the organization is incapable of budgeting or is simply using it as a tactic to gain sympathy for donations. In addition to the fact that such a model is not sustainable, it is dishonest.
5. Bypassing formalities and legal requirements: It is often the case that when asking for money, many legal and conventional formalities are ignored. For example, the one seeking money may avoid a written contract (or anything in writing for that matter), will not properly balance books, request cash donations, or request that funds be deposited into different bank accounts or funneled through a particular individual. More clever organizations may adhere to common formalities as a way to shadow other breaks of legal or conventional formalities. For example, a well-known teacher asked for a large sum of money that was needed from me and immediately offered to sign a written contract. However, the reason for his request was due to the organization exceeding its “zakat budget” and he emphasized that it was “urgent.” Although a written contract was offered (apparently adherence to formality), I was troubled by the organization exceeding any budget. Further, the concept of “zakat budget” sounded completely nonsensical given that zakat is an annual payment of one’s personal wealth, not a payment to be allocated by a corporate entity. Based on my own personal expertise of corporations and consulting other financial and fiqh experts, the concept of a corporate “zakat budget,” is dubious, at best.

Excuses for not adhering to these rules (which exist for good reason) are not acceptable. I witnessed a fundraising campaign in which the asker requested the money in cash because it was too tedious to account for the all the monies and that the beneficiaries of such funds request privacy. Aside from the fact that cash donations in fact make it more difficult for accounting and non-cash donations do not compromise the identity of the beneficiaries, there is simply never an excuse to avoid accounting of funds. Simply put, if one wants the privileges of donations, one must also adhere to the responsibilities. If it is too difficult or tedious of a job, then one should not ask for money.

What can you do?

1. Ask questions

This is simple. We need to get past the idea that it is disrespectful to question those seeking donations. Religious organizations asking for money have the benefit of the cloak of piety. We have to tear through that. Asking questions about the details of the organization is often seen as questioning the honesty of the one asking – particularly when the organization is sending a well-known or respected individual on behalf of the organization. We need to change our perspective and not be afraid to ask detailed questions as to how our donations are spent and accounted for. An organization should have certain information readily available regarding budgeting, revenue, and allocations. Unfortunately, many of the Islamic institutions do not have this information available (this alone is a red flag). Though it is understandable that hiring a professional to create such reports can be costly, especially for an organization that is already strained financially, it is not an excuse to not have at least a basic budgeting model. Otherwise, it is best for the institution to not solicit funds to begin with. However, there are organizations and institutions asking for literally hundreds of thousands of dollars yet have next to no financial information available. If such an organization cannot provide a detailed breakdown of its revenue, budget, short and long term financial plans, and overhead, then the organization has failed to justify receiving your money. Approaching donations in a way that tackles budgeting directly versus merely trusting the one asking on behalf of an organization is also an excellent way to address the problem of affinity fraud discussed above.

Examples of questions to ask include:

1. Do you have an annual report and budget I can see?
2. What’s your most successful program and why? Give me your best example of the way you’ve seen your organization’s work make a difference
3. Where does most of your funding come from?
4. What are your daily expenditures?
5. How do you maintain and stay within your budget?
6. If you have scholarship programs or charities to a class of people, how do you choose who and how much such classes of people receive?
7. What percentage of your budget comes from private donations, and what do private donations help you to do that your other sources of funding don’t cover?
8. What are your most urgent needs?
9. Aside from testimonials, how do you measure and report on the effectiveness of your programs?
10. What are the main obstacles that stand between you and your mission, and how do you plan to overcome them?
11. Do you regularly have the resources to cover your budget? Why or why not?
12. How is your board governed? How are major decisions made?
13. What is your staff really good at? What are the gaps?
14. What are the steps you are taking to achieve your strategic goal?
15. How do you work with peers who address similar issues?

Although self-reporting is not the most reliable method of determining the legitimacy of a charity (more on that below), the ability and level of detail that an organization can answer regarding its programs, metrics, and governance gives valuable insight into how well the organization is being run. Be careful to not accept vague or detail-lacking answers. Sometimes organizations’ representatives will even resort to cop-out answers such as “the work is self-evident” or the representative may scoff or appear baffled at a question in order to make the questioner feel belittled. Such practices are unacceptable and should give you pause about donating.

2. Ask our leaders/mosques to have a process before allowing donations

It is common for mosques and Islamic communities to host fundraisers, particularly in Ramadan. Giving a platform to ask for money implies that a community or mosque at least implicitly supports or approves the organization. Unfortunately, I have yet to see a mosque or community articulate clear guidelines as to whether an organization has been vetted as trustworthy. Accordingly, this is an excellent opportunity to create a process for our mosques and leaders to create a process for vetting organizations asking for money. This can be done through independent investigation such as asking for statements and budget reports. Which leads to the next point regarding audits.

3. Ask for independent audits

As stated above, self-reporting is not always accurate because no one would actually admit to being dishonest. This includes reports filed with the state such as Form 990s sometimes required by the Internal Revenue Service (IRS) in the United States. The same also goes for internal budgets and reports created by the organization as numbers can be fudged and misrepresented. Self-reporting is still useful, nevertheless, in order to detect inconsistencies and hold an organization accountable should these inconsistencies or more obvious fraud come to light.

However, the most powerful tool that also furthers the first two actionable items above are independent audits. Independent audits can be a powerful tool for assessing whether an organization is properly managing its money (and hence, your contribution). In the United States, many states require independent audits for nonprofits based on their revenue. Here is a state-by-state guide for such requirements. As a practical matter, the legal criterion for an “independent” auditor is low. Technically speaking, any qualified auditor who is not part of the organization can be considered “independent.” This does not prevent conflict of interest, however, because the auditor may be a friend of the members or founder of the organization. This is why it is important inquire about the identity and relationship of the auditor.

Conclusion

By having a clear understanding of the many tactics nonprofits use to solicit funds without accountability, the red flags should be now be clearer. Affinity fraud and cloaking fundraising in piety instead of focusing on the actual numbers and the cause being raised for are common – and often easy to spot tactics – of soliciting funds in an unethical manner. As a community, we need to make Islamic organizations feel as though they need to make the case to donors as to why we should give to them instead of giving the impression that the funds are guaranteed. By following the basic guide above, you can empower yourself to vet organizations before deciding whether you should donate.

 

To learn about training opportunities for your institution, you can email [email protected]. You can contact Danya directly at [email protected].