Be a Smart Giver: Check Up on Charities Before Donating

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Be a Smart Giver: Check Up on Charities Before DonatingAs you open your wallet for charity this holiday season (and throughout the year), do so carefully. It's estimated that charity fraud costs us up to $20 billion or more each year.

There are a wide range of troubles that can plague a nonprofit, and a variety of ways that consumers can get bamboozled in the name of charity. For example:

  • Just like for-profit businesses, charities employ people. And occasionally some people turn out to be bad eggs -- the kind that steal from the organization's coffers. It can be a matter of a longtime employee who earns $40,000 per year stealing $20,000, or a bigwig in the organization using donations for private jets.
  • Some "charities" simply aren't charities at all. They prey on potential donors with heartstring-tugging stories of people in need, sometimes gaining donors' trust because they link themselves with groups people identify with, such as the military or a school. People give money -- in person, through the mail, or over the phone, and the "charity" runs off with it, usually without the donor ever knowing.
  • Charities vary widely in terms of how much of your money they spend on their core mission. In recent years, the American Institute of Philanthropy gave failing grades to 70% of veteran-oriented charities, for reasons such as managing their resources poorly, paying high overhead costs, and paying excessive salaries. At House Oversight Committee hearings held a few years ago, the example of the American Veterans Relief Foundation was used: It reportedly raised $3.6 million and spent only $21,000 on veterans' grants and assistance.

Big News, Big Numbers

A high-profile expose of alleged charity fraud occurred earlier this year, when 60 Minutes reported that Greg Mortenson, author of the best-seller Three Cups of Tea and founder of a charity that builds schools for girls in Pakistan and Afghanistan, had allegedly fabricated many parts of his story.

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Then there's this less-publicized but even-more-shocking report: An expose by The St. Petersburg Times last year revealed that the "U.S. Navy Veterans Association" raised roughly $100 million, only a small portion of which actually went to charity. Some of the funds were spent on contributions to Republican politicians. In addition, it was determined that the organization's leader, "Bobby Thompson," had been operating under an alias.

As the American Bar Association's ABA Journal reported, "[N]one of the organization's 80-plus board members could be found, the address for its national headquarters turned out to be a mail drop, and Thompson disappeared after the paper started asking questions."

Don't Give Up -- Just Get Smart

All this is enough to make you want to just give up on charities. But don't. Charities need us, and great numbers of them operate rather efficiently. You can reduce your chances of being hoodwinked by being smart about your giving. Here are some tips:

1. Don't fall for a sob story or an urgent plea for cash without doing some due diligence. Know that scammers are counting on your compassion and your desire to help. They may be collecting money outside a store or ringing your doorbell, perhaps with a young child in tow. They may call you up and ask for a donation by credit card, assuring you of their authenticity. Don't believe them. They might be legitimate, but they may also be out to steal your money, and perhaps your identity as well.

2. Spread the love. If you're really worried about fraud, consider not giving all your money to just one or two organizations. Spread it out a bit. That way, if one of your recipients turns out to have been inefficient or fraudulent, it won't have taken the lion's share of your money.

3. Research charities online. The Internet is a good way to find out how cost-effective, open, and accountable charities really are. Even the Better Business Bureau offers reviews of charities. Here are three other good sources for research:

Each of these sites, and others like them, offer many other useful features and content as well.

Finally, as you study the organizations that interest you, you needn't focus solely on a factor such as fundraising or the lowest percent of donations spent on overhead and administration. Know that a small or new charity will likely only employ a few people, and it may take some years for donations to grow enough to reduce the percentage spent on overhead.

Charities that spend more than you think they should on fundraising might also be OK. Remember that what matters is how effective that fundraising is. Imagine two organizations that each spend $100,000 on fundraising. If the first one collects $250,000 in donations from its efforts and the second one collects $50,000, the first one is clearly getting a better return on its efforts.

Look for good returns on your own efforts. Do some digging before you donate, so you can rest easy knowing you're donating your hard-earned dollars to the worthiest and most effective cause.

Longtime Motley Fool contributor Selena Maranjian holds no position in any company mentioned. Click here to see her holdings and a short bio.

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