ED Certificate a License to Give?
Update: The IRS has since released Rev. Proc. 2017-53 that serves as final regulations on Equivalency Determination. The final regulations require that, among many other things, the party undertaking the ED also include anti-money laundering and counter-terrorism financing checks. This is a welcome addition to the equivalency determination process. Please see the excerpt below from our companion blog “IRS Publishes New Guidelines for Equivalency Determination”.
“Section 5.09: There is a new requirement that the “preferred written advice” must also confirm that the grantee is not subject to sanctions or designated as a terrorist organization by the US government. It is now also required that private foundations confirm that controlling persons, officers, or trustees of the organization do not have sanctions or terrorist designations, although this need not be included in the written advice.”
Due to the complex nature of making charitable donations to organizations outside of the U.S., it can be challenging for people and institutions to ensure that they’re adhering to all requisite laws imposed by the United States federal government in addition to local country regulations. It has been our business for nearly 25 years to ensure that our clients, which include some of the largest and most prominent companies in America, HNW philanthropists, family foundations and other organizations, are in full compliance with these laws as well as to protect their most valuable asset, their reputation. Charities Aid Foundation of America (CAF America) believes that part of its mission is to ensure that all parties in our industry remain knowledgeable about the risks and regulations associated with international grantmaking. We have thus on occasion found it beneficial to engage with the industry “at large” when it appears that there is confusion around certain subjects.
We have recently seen a misunderstanding in certain sectors of the industry around what constitutes an eligible international organization — that is, in what instances can a grantmaking body take a charitable deduction against gifts made to organizations outside of the U.S. More specifically, it is the false assumption that since an organization is listed within another country’s (IRS-equivalent) database of charitable organizations, such as the Australian Business Register, Canada Revenue Agency or UK Charities Commission, it is therefore eligible to receive charitable gifts from U.S. grantmakers without said grantmaker having conducted the requisite vetting (i.e., Equivalency Determination or Expenditure Responsibility). Such a mistake may trigger penalty taxes on the grantmaker and further investigations by the IRS that may damage the reputation of all parties involved.
As noted above, this is an incorrect and potentially dangerous assumption to work under, and all organizations issuing grants — whether directly or through a third party, must ensure that they or their representative are in compliance with all laws, regulations and best practices — especially since reputational risk may be the most important consideration of all.
Another misconception is that by undertaking Equivalency Determination, the grantmaker is under no obligation to perform further safeguards. While the requirements of Equivalency Determination are indeed very strict, there are many additional regulations and best practices that should be followed when making grants to foreign charities, such as:
1) Mitigating the risk of criminal or terrorist activity as per the requirements of the PATRIOT Act;
2) Preventing bribery, per the requirements of the Foreign Corrupt Practices Act (FCPA);
3) Monitoring sanctions programs and licensing requirements set by the Department of Treasury’s Office of Foreign Assets Control (OFAC) and ensuring compliance;
4) Knowledge and consideration of in-country laws regarding a local grantee’s ability to accept foreign funding or other applicable local laws.
Expanding your philanthropy internationally requires compliance in all of these areas, and therefore obtaining an Equivalency Determination Certificate on a foreign charity should not be interpreted as a general license to give as it does not completely address these other regulatory and risk-based issues.
Thus while global companies spend considerable resources, both via internal and outside legal/compliance teams, to ensure that their core business operates in adherence with the myriad of U.S. and local country laws, it is imperative that other corporate undertakings, such as its charitable giving, are also beholden to the same level of review — as the result of erroneous actions, whether intentional or not, can have serious repercussions.