FUND RAISING
Preventing Fraud in Social-Network Fund Raising: a New Challenge
By Ben Gose
SOCIAL-NETWORKING SITES like Twit- ter and Facebook are part of a new frontier for charities looking
to use low-cost technology to appeal to
donors.
But a fraud case filed in Hawaii illustrates the unseen downside of giving
on these networks—and points to why
state regulators believe they will soon
need to step up oversight of social networks to protect donors.
Anthony Marasia, an animal-rights
activist in Hawaii, solicited donations
for a group called Love the Animals using networking sites like Facebook and
Myspace from 2007 until last December. But it turns out Love the Animals
isn’t a registered charity and does not
have tax-exempt status, according to a
complaint filed last month by Hawaii’s
attorney general.
And the contributions—some $16,000
via PayPal alone—went into Mr. Marasia’s own bank account and were used
primarily for personal expenses like
drinks at Jamba Juice, according to
Hugh R. Jones, Hawaii’s supervising
deputy attorney. (Mr. Marasia could not
be reached for comment.)
The promise and pitfalls of social networks were also highlighted in the immediate response to the tsunami that
devastated northeast Japan this month.
Within hours, a call for people to send
money to the American Red Cross via
text message became one of the most
popular topics on Twitter. But the
Federal Bureau of Investigation also
quickly warned consumers to be wary
of fraud and to verify the legitimacy of
charities before entering credit-card information over the Internet.
Bob Carlson, an assistant attorney
general in Missouri who oversees charities, is among the growing number of
state regulators closely scrutinizing
the changing fund-raising landscape to
determine whether new laws are need-
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Hugh Jones, a regulator in Hawaii, sued a man who he says
was falsely raising money for charity on Facebook and MySpace.
ed to protect donors from fraud. “The
scam artists will follow the legitimate
actors in,” Mr. Carlson says.
raising money on their sites. Network
for Good, in turn, relies on GuideStar
data, which reveal whether an organization has charity status from the Internal Revenue Service.
Karsten Robbins, chief executive of
FirstGiving, a for-profit company that
allows people to raise money online for
charities, says organizations that receive donations through the site must
be included in the lists of tax-exempt
organizations maintained by both the
Internal Revenue Service and GuideStar. Mr. Robbins also says the very
structure of social networks—people
are generally giving in response to a
pitch from someone they know—helps
to avoid fraud.
“It’s not an appeal that’s coming out
of nowhere,” Mr. Robbins says. “I call it
the network policing itself.”
Mr. Robbins says he seeks out conver-
sations with state regulators to try to
make the case that his site is more like
a “utility” than a paid solicitor.
“You’re using our tools to share your
personal passion for a particular non-profit and raise more money for it,” he
says.
Limited Awareness
State regulators are meeting in New
York this month at a conference on the
intersection of technology and charity
fund raising. At the conference, which
is closed to the public, regulators will
revisit the “Charleston Principles,” a set
of guidelines governing Internet solicitations across state lines.
The nonbinding principles (named
for Charleston, S.C., where they were
drafted in 2001 by the National Association of State Charity Officials) and
state laws that focus on Internet solicitation came into existence well before
the rise of what many describe as the
“wild west” of social networking.
Watchdogs say these networks have
the potential to become breeding
grounds for a new wave of scams, and
regulators want to step in before con
artists take advantage of unsuspecting
donors.
Consumers who have learned to avoid
“phishing” e-mail schemes and bo-
gus Web sites are not yet wary enough
about the potential for fraud on social-
networking sites, says Robert Otten-
hoff, president of GuideStar, the on-
line repository of financial information
on charities. “It’s new and exciting,” he
says. “I think the public is more vulner-
able to being taken advantage of with
social media.”
And criminals may find charitable so-
licitations especially appealing because
it is somewhat easier not to get caught,
notes Judy Chang, a senior manager
at PayPal who oversees the company’s
nonprofits division.
“Because nonprofits are soliciting
funds and there’s no exchange of goods
or services, there’s more opportunity for
fraud than if they were a merchant who
shipped out goods,” Ms. Chang says.
“When you buy something from a retail-
er you expect to receive the merchan-
dise. When you make a donation to a
nonprofit organization, you don’t receive
any goods or services in exchange.”
PayPal, which processed $1.8-billion
for nonprofit organizations in 2010, 50
percent more than in 2009, requires
charities to go through a more rigorous
sign-up process than either businesses
or consumers are required to do.
GREG GILBERT/SEAT TLE TIMES/MCT/NEWSCOM
Jim Manis of the Mobile Giving Foundation worries that the “philosophy
of enablement” guiding social networks can also invite fraud.
Vetting Charities
The social-networking sites say they
are aware of the risks of fraud and have
taken steps to mitigate those risks.
Networking sites like Jumo, Crowdrise, and Causes, a company that runs
fund-raising efforts on Facebook, all
rely on the nonprofit group Network for
Good to help vet the charities that are
Requests for ‘Tips’
State regulators say that their challenge is to avoid taking steps that would
inhibit the growth of online fund raising. The key is to make sure legitimate
organizations can make use of these
networks while weeding out those who
are using them with ill intent.
“The last thing we want to do is discourage charitable giving,” Mr. Carlson
says.
The Charleston Principles, which focus on solicitations across state lines,
suggest that a group could be required
to register as a solicitor in a state if it
does anything more than process transactions on behalf of a charity—
especially if it receives a fee for the broader services it provides to the charity.
Sites like Jumo, a nonprofit, and
Causes, a for-profit company, suggest
that donors provide “tips” worth as
much as 15 percent of a gift to help cover their expenses. FirstGiving takes 5
percent of each gift.
“There’s something in it for them,”
says Mr. Jones, in the Hawaii attorney
general’s office. “They’re not doing it out
of the goodness of their heart.”
Colorado requires paid solicitors to
register with the state and file notic-
es before embarking on specific cam-
paigns.
Chris Cash, who oversees charities
for Colorado’s secretary of state, says
he will “look closely” at networking
sites to see if they should be required
to register. “If they’re charging some
kind of fee above and beyond the processing fee, that might open up the door
to defining them as a paid solicitor,” Mr.
Cash says.
But doing so could turn into a headache for both the sites and regulators
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