1. © European Center for Not-for-Profit Law 2005. All rights reserved. International Practices Relating to State Supervision of Donor Activities David Moore European Center for Not-for-Profit Law

2. © European Center for Not-for-Profit Law 2005. All rights reserved. Can We Speak of Best International Practices? There is NO consensus within the grant-making or donor community as to what constitutes “best practices”. There is NO consensus within the grant-making or donor community as to what constitutes “best practices”. But there are efforts to define best practices But there are efforts to define best practices Different jurisdictions approach the regulation of grant makers and donors from different constitutional, legal, regulatory frameworks. Different jurisdictions approach the regulation of grant makers and donors from different constitutional, legal, regulatory frameworks.

3. © European Center for Not-for-Profit Law 2005. All rights reserved. Overview of Presentation Principles Guiding Establishment of Best Practices Principles Guiding Establishment of Best Practices Why?: Purposes of Supervision Why?: Purposes of Supervision Who?: Supervisory Bodies Who?: Supervisory Bodies What?: Potential Areas of Regulatory Control What?: Potential Areas of Regulatory Control Registration / Certification threshold Registration / Certification threshold Tax treatment of grants/donations, donors Tax treatment of grants/donations, donors Accountability and transparency of donor organizations Accountability and transparency of donor organizations Special Statements on Regulation Special Statements on Regulation

4. © European Center for Not-for-Profit Law 2005. All rights reserved. Guiding Principles Charitable sector as vital to social and economic development Charitable sector as vital to social and economic development Oversight of donors/NGOs is cooperative undertaking Oversight of donors/NGOs is cooperative undertaking Government oversight should be flexible, effective and proportional to risk of abuse Government oversight should be flexible, effective and proportional to risk of abuse Non-profit sector often has representational, self-regulatory, watchdog, and accreditation organizations Non-profit sector often has representational, self-regulatory, watchdog, and accreditation organizations

5. © European Center for Not-for-Profit Law 2005. All rights reserved. Why? Purposes of Supervision To encourage charitable activity (donations/grants for public benefit purposes) To encourage charitable activity (donations/grants for public benefit purposes) To ensure government tax relief and benefits go to appropriate organizations To ensure government tax relief and benefits go to appropriate organizations To maintain public confidence through combating waste and fraud To maintain public confidence through combating waste and fraud To ensure compliance with the law To ensure compliance with the law

6. © European Center for Not-for-Profit Law 2005. All rights reserved. Purposes of Supervision “I’m not looking for the big, bad monster of a government bureaucrat coming down on a sector … but we need to make sure that money taken in for charitable purposes is used for charitable purposes.” Senator Grassley Chair of US Senate Finance Committee

7. © European Center for Not-for-Profit Law 2005. All rights reserved. Who? Supervisory Bodies Public administration (ministries, local govt) Public administration (ministries, local govt) Law enforcement and security officials Law enforcement and security officials Courts Courts Government bank, tax, financial regulatory authorities Government bank, tax, financial regulatory authorities Specialized government regulatory bodies Specialized government regulatory bodies Internal self-regulation Internal self-regulation Third parties (watchdogs, the public) Third parties (watchdogs, the public)

8. © European Center for Not-for-Profit Law 2005. All rights reserved. What? Subject of Supervision Areas of Regulatory Control Where state supervision impacts on donor activity Where state supervision impacts on donor activity Certification threshold / prohibition Certification threshold / prohibition Tax treatment of grants/donations, donors Tax treatment of grants/donations, donors Accountability and transparency of donor organizations Accountability and transparency of donor organizations

9. © European Center for Not-for-Profit Law 2005. All rights reserved. Certification Threshold International Good Practice: In order for a registered legal entity to act as a donor, there should be NO additional registration / certification / accreditation procedure at all. International Good Practice: In order for a registered legal entity to act as a donor, there should be NO additional registration / certification / accreditation procedure at all. Donors should be free to provide support to beneficiaries without threshold requirement specific to donors Donors should be free to provide support to beneficiaries without threshold requirement specific to donors To prove the good regulatory practice, we will examine examples of bad regulatory practice – where the state seeks to burden donors /grant-making process To prove the good regulatory practice, we will examine examples of bad regulatory practice – where the state seeks to burden donors /grant-making process

10. © European Center for Not-for-Profit Law 2005. All rights reserved. Prior Government Approval Belarus: Decree #8 (2001) Belarus: Decree #8 (2001) State permission required for use of funds received from international organizations State permission required for use of funds received from international organizations Turkey: Laws regulating foundations Turkey: Laws regulating foundations Foundations seeking to “cooperate” with foreign organizations must receive prior government approval. Foundations seeking to “cooperate” with foreign organizations must receive prior government approval.

11. © European Center for Not-for-Profit Law 2005. All rights reserved. Government Lists Lists of Foreign Grant Makers Lists of Foreign Grant Makers Kazakhstan Kazakhstan Russia Russia List of Domestic Grant Makers List of Domestic Grant Makers Russia: tax code amendments proposed in July 2004, later rejected in April 2005 Russia: tax code amendments proposed in July 2004, later rejected in April 2005

12. © European Center for Not-for-Profit Law 2005. All rights reserved. Serbian Draft Law on Donations Limited purposes donations can support Limited purposes donations can support Limited potential recipients of donations Limited potential recipients of donations Mandatory donation agreements Mandatory donation agreements Submission of all donation agreements to Ministry of Foreign Economic Affairs Submission of all donation agreements to Ministry of Foreign Economic Affairs

13. © European Center for Not-for-Profit Law 2005. All rights reserved. Tax Treatment of Grants/Donations Income from grants/donations is typically exempt from tax in European countries. Income from grants/donations is typically exempt from tax in European countries. In some countries (Bulgaria, Latvia, Lithuania, Poland), a full tax exemption is prescribed only for public benefit organizations. In some countries (Bulgaria, Latvia, Lithuania, Poland), a full tax exemption is prescribed only for public benefit organizations. Core issue affecting donor activity = classification of “public benefit” activities. Core issue affecting donor activity = classification of “public benefit” activities.

14. © European Center for Not-for-Profit Law 2005. All rights reserved. Tax Treatment of Grants/Donations Income from grants/donations is typically exempt from tax in NIS countries. Income from grants/donations is typically exempt from tax in NIS countries. Some countries distinguish between treatment of local and foreign donors, providing greater scrutiny to foreign donations. Some countries distinguish between treatment of local and foreign donors, providing greater scrutiny to foreign donations. Tax-exempt contributions may be available only for narrow purposes. Tax-exempt contributions may be available only for narrow purposes.

15. © European Center for Not-for-Profit Law 2005. All rights reserved. Incentives for Corporate Donors All CEE Countries permit legal entities (including businesses) to claim benefits for certain donations to NGOs (except Macedonia) All CEE Countries permit legal entities (including businesses) to claim benefits for certain donations to NGOs (except Macedonia) Most NIS Countries offer some tax advantages for corporate giving (except Azerbaijan, Belarus, Russia) Most NIS Countries offer some tax advantages for corporate giving (except Azerbaijan, Belarus, Russia)

16. © European Center for Not-for-Profit Law 2005. All rights reserved. Incentives for Individual Donors About ½ of all CEE countries provide incentives for individual donors. About ½ of all CEE countries provide incentives for individual donors. About ½ of all NIS countries provide incentives for individual donors. About ½ of all NIS countries provide incentives for individual donors.

17. © European Center for Not-for-Profit Law 2005. All rights reserved. Eligible Recipients General rule: To be able to claim deduction, donor must give donation to organizations pursuing some enumerated “public benefit” purpose. General rule: To be able to claim deduction, donor must give donation to organizations pursuing some enumerated “public benefit” purpose. Typical “PB” purposes: health, humanitarian, cultural, educational, scientific or amateur sports purpose Typical “PB” purposes: health, humanitarian, cultural, educational, scientific or amateur sports purpose Eligible recipients may include municipalities (Bulgaria), individuals and businesses (Kosovo), but nearly always include NGOs. Eligible recipients may include municipalities (Bulgaria), individuals and businesses (Kosovo), but nearly always include NGOs.

18. © European Center for Not-for-Profit Law 2005. All rights reserved. Accountability and Transparency of Donor Organizations Law sets minimum legal standards Law sets minimum legal standards Self-regulation should be encouraged Self-regulation should be encouraged Legal supervision should be proportionate to risk of abuse Legal supervision should be proportionate to risk of abuse Risk of excessive government interference Risk of excessive government interference Subsequent monitoring regulation is more effective in ensuring transparency than preliminary threshold restrictions Subsequent monitoring regulation is more effective in ensuring transparency than preliminary threshold restrictions

19. © European Center for Not-for-Profit Law 2005. All rights reserved. Internal Governance Governing instruments / Governing bodies Governing instruments / Governing bodies Prohibition on direct/indirect private benefit Prohibition on direct/indirect private benefit Prohibition against conflicts of interest Prohibition against conflicts of interest Duties of directors Duties of directors Internal reporting Internal reporting

20. © European Center for Not-for-Profit Law 2005. All rights reserved. Financial/Program Transparency Accounting / Record-keeping Accounting / Record-keeping Reporting Reporting To supervisory body and tax authorities To supervisory body and tax authorities Graduated reporting framework Graduated reporting framework Special reporting requirements for donors Special reporting requirements for donors Disclosure to Public Disclosure to Public Allows public to exercise oversight Allows public to exercise oversight

21. © European Center for Not-for-Profit Law 2005. All rights reserved. Financial/Program Transparency Audits and Inspections Audits and Inspections By supervisory or tax authorities By supervisory or tax authorities Procedural Safeguards? Procedural Safeguards? Special Sanctions Special Sanctions Fines Fines Loss of status, loss of tax benefits Loss of status, loss of tax benefits Termination Termination

22. © European Center for Not-for-Profit Law 2005. All rights reserved. Special Principles or Guidelines US Treasury Department Anti-Terrorist Financing Guidelines: Voluntary Best Practices for US-based charities US Treasury Department Anti-Terrorist Financing Guidelines: Voluntary Best Practices for US-based charities Financial Action Task Force on Money Laundering: Combating the Abuse of Non- profit Organizations: International Best Practices Financial Action Task Force on Money Laundering: Combating the Abuse of Non- profit Organizations: International Best Practices

23. © European Center for Not-for-Profit Law 2005. All rights reserved. Conclusion How to find the correct balance between donor transparency and freedom in grant making and philanthropy? How to find the correct balance between donor transparency and freedom in grant making and philanthropy? Ongoing struggle Ongoing struggle Legal framework Legal framework Implementation of laws Implementation of laws Self-regulation Self-regulation

24. © European Center for Not-for-Profit Law 2005. All rights reserved. Thank you David Moore ECNL