Charities and tax abuse

© David Rooney

Charities have become the latest victims of abuse by tax fraudsters and money launderers. Can they be better protected?

For most people, charities are cherished organisations. The vast majority of them are not only genuine and authentic but make an important contribution to society, in areas such as health, social assistance and education.

Such is their high standing that many governments give special recognition to the role the charity sector plays in building a stronger and fairer world. For instance, several countries provide tax relief to these organisations and their donors. But while the vast majority of charities are honest and legitimate, fake charities emerge from time to time. Even bone fide charity organisations can be targeted by criminals to launder the proceeds of tax crimes and other financial offences. Why charities? There may be a range of different reasons for this. For a start, the fact they are charities may make them a "soft touch" for criminals, who see them as being above public suspicion, and perhaps not subject to the kind of tough accounting vigilance afforded to regular businesses. Yet some charities handle vast amounts of money and, just like major corporations, often have to move those finances across borders.

As a result, the privileged status of a charitable organisation is too often wilfully abused, whether by taxpayers, by donors or by tax-return preparers.

Terrorist organisations and fraudsters not only use charities, but many pose as charitable organisations themselves. Little wonder governments now want to tackle abuse of charities, and this demands knowing more about how they function, and clearing out the blind spots. In 2008 the OECD set about addressing this problem by carrying out an in-depth survey. The results threw up some surprises.

The 19 countries surveyed show a great diversity in the way that charities are perceived in different societies-and the way in which charities and donors are treated for tax purposes. For instance, in Austria, charities are mainly subject to tax, but are exempted from paying income tax if the given purpose of the charity is related to public welfare. As for the donors, only donations for charities with charitable goals related to science and research are passed as valid for tax exemption. Transparency is also important, as shown in Chile and Denmark, where charities must declare both the amounts they receive and the donors' identification to the tax authorities.

The extent to which charities are abused also varies widely. In fact, five of the countries surveyed-Austria, Chile, Denmark, France and Germany-reported that they had not identified any cases of abuse of charities for money laundering and tax evasion. However, for the other countries, there was some evidence of abuse, including organised crime. How do they do it? The OECD identifies a range of common methods and schemes. For instance, a bogus company might pose as a registered charity that solicits contributions which end up in the pockets of its directors. There are registered charities that sell charity receipts to tax-return preparers for a commission. Taxpayers and tax-return preparers might counterfeit charity receipts of real charities. Or terrorists use charities to raise or transfer funds to their organisations.

The list of possible fraudsters is long, too, from tax-return preparers and professional fundraisers, to lawyers and doctors, and even charities themselves. Take the case of a tax-return preparer described in the OECD report. This person prepared 1,190 income tax returns claiming false charitable donations. First, she charged a small processing fee to complete her clients' income tax returns. She then asked those clients if they wished to make a "donation" to a charity. The tax return preparer falsified the charitable receipts of those "donations" by using the names of legitimate charities and then claimed the false deductions on her clients' income tax returns. She charged her clients an additional fee for processing these fraudulent receipts. The result was an astounding total in forged charitable donation receipts of some €2.4 million. The tax-return preparer collected no less than €525,884 from her clients over a three-month period for her services. The consequent loss to the tax authorities was €675,804, not to mention the cost of having to reassess 1,190 income tax returns. In this case, the tax-return preparer was caught and ended up in prison.

Though not every case ends this way, detection is improving, thanks to a combination of intelligence gathering, data matching and risk profiling and analysis to uncover charity frauds. Indepth audits of the charitable organisation's bookkeeping can also help verify the tax status of the donors. The OECD report suggests that valuable tax information could come from domestic intelligence agencies such as the Financial Intelligence Unit (FIU), customs and immigration agencies, or foreign tax authorities. Informants can also provide leads.

Tax authorities can also find out quite a lot by working with law enforcement agencies, such as the US Federal Bureau of Investigation (FBI), the Royal Canadian Mounted Police (RCMP) and, in Italy, the Finance Police.

Campaigns to raise awareness about fraudulent charities and abuse are important. But so is legislation. Many countries have passed bills to exclude ‘‘remunerated donations", where the "donors" get something of value in exchange for their "donation", while others have made it obligatory to report suspicious transactions to the FIU. Several countries have set up special task forces and audit teams to combat the abuse.

Because charities and tax both have crossborder aspects, international organisations are stepping up to the plate. The OECD is doing its part by keeping track of developments and co-operating with members to identify best practices, including, for instance, whether compliance policy needs tightening up or not. A number of international organisations, including the EU Justice Directorate and the United Nations, have also expressed an ongoing interest in the need for transparency and good governance of charities, particularly where cross-border transactions are involved. And they are working with charities on the ground to ensure that they have the good practices and legislative protection they need to combat fraudsters and their accomplices. They all agree that the role of charities is too important to allow financial abuse and fraud to continue any further.

 

For more on tax abuse and charities, contact Brian.McAuley@oecd.org

www.oecd.org/ctp/taxcrimes

Visit www.oecd.org/tax

Visit www.oecd.org/finance

Reference

OECD (2009), Report on abuse of charities for money-laundering and tax evasion, Centre for Tax Policy and Administration, available online at http://oecd.org/dataoecd/30/20/42232037.pdf

©OECD Observer No 273 June 2009

 




Economic data

GDP growth: +0.6% Q3 2017 year-on-year
Consumer price inflation: 2.3% Sept 2017 annual
Trade: +1.4% exp, +1.7% imp, Q2 2017
Unemployment: 5.7% Sept 2017
Last update: 14 Nov 2017

E-Newsletter

Stay up-to-date with the latest news from the OECD by signing up for our e-newsletter :

Twitter feed

Suscribe now

<b>Subscribe now!</b>

To receive your exclusive paper editions delivered to you directly


Online edition
Previous editions

Don't miss

  • Papers show “past coming back to haunt us”: OECD Secretary-General Angel Gurria tells Sky News that the so-called "Paradise Papers" show a past coming back to haunt us, but one which is now being dismantled. Please watch the video.
  • The annual OECD Eurasia Week takes place in Almaty, Kazakhstan 23-25 October. Writing in The Astana Times, OECD Secretary-General Angel Gurría urges Eurasia countries to stay the course on openness and international integration, which has brought prosperity but also disillusionment, notably regarding inequality. The OECD is working with this key region, and Mr Gurría urges Eurasia to focus on human capital and innovation to enhance productivity and people’s well-being. Read more.
  • When someone asks me to describe an ideal girl, in my head, she is a person who is physically and mentally independent, brave to speak her mind, treated with respect just like she treats others, and inspiring to herself and others. But I know that the reality is still so much different. By Alda, 18, on International Day of the Girl. Read more.
  • Globalisation’s many benefits have been unequally shared, and public policy has struggled to keep up with a rapidly-shifting world. The OECD is working alongside governments and international organisations to help improve and harness the gains while tackling the root causes of inequality, and ensuring a level playing field globally. Please watch.
  • Read some of the insightful remarks made at OECD Forum 2017, held on 6-7 June. OECD Forum kick-started events with a focus on inclusive growth, digitalisation, and trust, under the overall theme of Bridging Divides.
  • Checking out the job situation with the OECD scoreboard of labour market performances: do you want to know how your country compares with neighbours and competitors on income levels or employment?
  • Trade is an important point of focus in today’s international economy. This video presents facts and statistics from OECD’s most recent publications on this topic.
  • How do the largest community of British expats living in Spain feel about Brexit? Britons living in Orihuela Costa, Alicante give their views.
  • Brexit is taking up Europe's energy and focus, according to OECD Secretary-General Angel Gurría. Watch video.
  • OECD Chief Economist Catherine Mann and former Bank of England Governor Mervyn King discuss the economic merits of a US border adjustment tax and the outlook for US economic growth.
  • The OECD Gender Initiative examines existing barriers to gender equality in education, employment, and entrepreneurship. The gender portal monitors the progress made by governments to promote gender equality in both OECD and non-OECD countries and provides good practices based on analytical tools and reliable data.
  • Interested in a career in Paris at the OECD? The OECD is a major international organisation, with a mission to build better policies for better lives. With our hub based in one of the world's global cities and offices across continents, find out more at www.oecd.org/careers .

Most Popular Articles

OECD Insights Blog

NOTE: All signed articles in the OECD Observer express the opinions of the authors
and do not necessarily represent the official views of OECD member countries.

All rights reserved. OECD 2017