990 Check Box Reveals Instances of Significant Diversion of Funds

An investigation by the Washington Post may have found the Pandora’s box  for nonprofits missing some money. In an obscure box added in 2008, quietly phased in and reportedly only asked of larger public charities, the 990 form asks nonprofits to disclose “a significant diversion of funds.” A simple YES typed in the box presents a mystery waiting to be unraveled or, as in many cases, kept under cover. Until now.

For 14 years, the American Legacy Foundation has managed hundreds of millions of dollars drawn from a government settlement with big tobacco companies, priding itself on funding vital health research and telling the unadorned truth about the deadly effects of smoking.

Yet the foundation, located just blocks from the White House, was restrained when asked on a federal disclosure form whether it had experienced an embezzlement or other “diversion” of its assets.

Legacy officials typed “yes” on Page 6 of their 2011 form and provided a six-line explanation 32 pages later, disclosing that they “became aware” of a diversion “in excess of $250,000 committed by a former employee.” They wrote that the diversion was due to fraud and now say they believe they fulfilled their disclosure requirement.

Records and interviews reveal the full story: an estimated $3.4 million loss, linked to purchases from a business described sometimes as a computer supply firm and at others as a barbershop, and to an assistant vice president who now runs a video game emporium in Ni­ger­ia.

Also not included in the disclosure report: details about how Legacy officials waited nearly three years after an initial warning before they called in investigators.

The Washington Post


In fact, the Post’s research of filings from 2008 to 2012 found more than 1,000 nonprofit organizations had checked the box indicating that they had discovered a “significant diversion” of assets, disclosing losses attributed to theft, investment fraud, embezzlement and other unauthorized uses of funds. As the Post reports:

While some of the diversions have come to public attention, many others — such as the one at the American Legacy Foundation — have not been reported in the news media. And The Post found that nonprofits routinely omitted important details from their public filings, leaving the public to guess what had happened — even though federal disclosure instructions direct nonprofit groups to explain the circumstances. About half the organizations did not disclose the total amount lost. The diversions drained hundreds of millions of dollars from institutions that are underwritten by public donations and government funds. Just 10 of the largest disclosures identified by The Post cited combined losses to nonprofit groups and their affiliates that potentially totaled more than a half-billion dollars. Based on its research, the Post has compiled a searchable database of nonprofits that have disclosed diversions.

  • Laura Kurzrok

    This article was truly eye-opening. There is a link in the article that allows you to obtain the names, by state, of the organizations reporting fraud. I recommend you review the list.

  • Jane Ward

    I think it is important to remember that this is NOT a story about fraudulent charities but one about dishonest individuals trying to defraud nonprofits. Nonprofits are not unique in their vulnerability to employee theft. Of course, our resources are valuable, hard earned, and both donated/held in the public trust–so important that our organizations take the utmost care to protect them–and clearly most of them do.

    Of the ~1,000 groups reporting diversions over a 4 yr period, 644 are public charities and the rest are various other types of tax-exempt groups. What portion of all tax-exempt groups does this represent? How many 990s were examined? It’s hard to judge the scale of such diversions without knowing how many 990s were examined.

  • Paul Davidson

    Great article. Thanks for the info, you made it easy to understand. BTW, if anyone needs to fill out a form 990, I found a blank form here http://goo.gl/ki9f1e. This site PDFfiller also has some tutorials on how to fill it out and a few related tax forms that you might find useful.