June 24, 2020

Nonprofit Enforcement in the Time of COVID

5 min

In a recent webinar, three of the nation's most active state charity regulators – including the current president of the National Association of State Charity Officials (NASCO) – discussed recent trends in enforcement activity in the nonprofit sector. The panelists addressed lessons learned from NASCO's recently issued annual report, as well as an update on enforcement against public charities, fundraisers, and foundations in the era of COVID-19.

What is NASCO and what should nonprofits understand about its mission and role?

NASCO is an association of state officials across all 50 states, Washington, DC, and U.S. territories, facilitating information exchange among charity regulators. It provides oversight of charitable solicitations, entity governance, and organizations’ use of assets.

Charities are regulated by the Internal Revenue Service (IRS) and by states (charity regulators are typically housed within the state’s attorney general’s office or the secretary of state’s office) – some states approach nonprofit regulation as a consumer protection issue, others oversee only the major life cycle events of charities (i.e., creation, changes in mission, mergers, dissolution), while other states are more interested in internal governance regulation. Many charities operate across state lines, requiring registration and reporting across borders, so NASCO assists charity regulators in coordinating nationwide enforcement efforts to allow charities to operate efficiently and effectively. Multistate actions are becoming increasingly sophisticated in both coordination and communication, and more strategic than responsive. NASCO also does legislative work on behalf of the sector.

What are the key highlights of the current NASCO annual report?

The annual report contains a compilation of major actions by states that are relevant to charities – regulation and breaches of fiduciary duties, healthcare issues, and trusts and estates, among others. It also highlights changes in legislation impacting nonprofits and updated guidance in those areas. It contains reports on state actions in various areas, including sham charities, legitimate charities that commit fraud, working with charities on dissolution, and other organizational and operational changes. By listing enforcement actions, the NASCO annual report helps charities and their vendors (such as professional fundraisers) identify potential areas of concern in their individual operations and reinforces the commitment of regulators to the pursuit of bad actors. Awareness of enforcement trends can also result in the identification of other nonprofits that may need additional training to avoid pitfalls. NASCO helps nonprofits respond to enforcement and improve compliance. Charities that self-identify areas of challenge are encouraged to notify regulators; by identifying issues and relating how the charity is responding, regulators can often work with those nonprofits proactively.

What are some regulator priorities at this time?

  • Reviewing cases/intervening in charitable cases
  • Representing state agencies as beneficiaries of charitable trusts
  • Fraudulent activity involving charities, including misappropriation or distribution of funds
  • Deceptive trade practices, which are generally handled through consumer protection divisions
  • Solicitation registration and law enforcement over telephone solicitation activity
  • Addressing donor and/or consumer complaints

Are there any new developments in state regulation?

  • An uptick in outreach and training to keep nonprofits out of investigations
  • Guiding charities through the impact of coronavirus with recommendations like the following:
    • Nonprofit board governance needs to be updated to reflect new realities
    • Operations should be adjusted (keep checking mail, for example)
    • Embrace the practice of offering and attending virtual training
    • Conduct surveys to gauge issues being faced by constituents and overall levels of concern

Have regulators seen a spike in fraudulent fundraising practices since the start of the coronavirus pandemic?

NASCO is aggregating information from states on this topic; there has not been a noticeable increase in fraud as a result of the COVID-19 outbreak. The reasons for this may include reduced giving in the sudden economic downturn or the positioning of online giving/payment-processing platforms as a first line of defense against fraud. Some complaints being raised include sound-alike charities, price gouging, and related-party transactions.

Regulation during a recession poses challenges, and nonprofits are adapting to those challenges while realizing that the collateral impact of this crisis might not hit for several months or years. As this collateral impact unfolds and charities face sustained tough times, fraud may become more noticeable. In the context of the pandemic, another priority of regulators is to support the nonprofit sector and be responsive when needed.

How are changing technologies impacting nonprofits?

Using internet-based fundraising opens nonprofits to increased scrutiny because, for example, separate registrations may be required for different states. Newer and more popular forms of fundraising, like GoFundMe, are also used for charitable fundraising and are subject to state regulation. The state of New York is looking at high-value campaigns because they’re able to raise amounts of money previously unrealized – online solicitations that go viral can raise a significant amount of money from around the world in a short time. Regulators monitor how that money is spent in addition to how it is initially raised.

In this era of COVID, are regulators treating anything differently?

States are making accommodations in different ways. Regulation in the time of a recession might include relief related to deadlines, signature requirements, notarizations, etc., but there are no signs of registration fee waivers at this time. State budgets will be very stretched and states will still need to generate revenue through fee collection. Nonprofits should continue to operate with the expectation that regulation will not change and should carefully document all activity and decisions contemporaneously for potential future audits.

Want to learn more? View the full webinar, or explore our COVID-19 resources.