It is not uncommon for a United Stated-based organization to have activities in other countries. Indeed, for many organizations international activity is their primary reason for existence and the thrust of their mission. Sometimes, these international activities may take the form of grant from the U S-based organization to an organization in another country. These grants may present some issues for the U S organization if they are not handled properly.
Federal law is not clear in regard to documentation requirements for grants made by a 501(c)(3) public charity to foreign organizations. Specific laws do apply to 501(c)(3) private foundations. The IRS has taken the position, however, that public charities should follow the expenditure responsibility rules that apply to private foundations in regard to foreign grants.
The U S public charity should conduct an analysis of the foreign organization prior to committing to the grant, seeking to determine the legitimacy of the organization. This should give the U S organization reasonable assurance that the grant funds will be utilized for the intended purposes. The analysis should be somewhat comprehensive, addressing the identity, past history, and experience of the organization and its principals. Additionally, information concerning management, activities, and practices of the foreign organization should be examined. In today’s world, it almost goes without saying, but the U S organization should ascertain that neither the foreign organization nor its principals are on the U S government anti-terrorism watch list. Results of the inquiry should be documented and retained for future reference. Periodic follow-up inquiries should be part of the ongoing monitoring of the organization.
There should be a written grant agreement drafted or reviewed by legal counsel and signed by an appropriate official of the foreign organization. Included in the agreement should be the amount and purpose of the grant. In addition the agreement should specify that the funds be used only for the purposes and activities specified in the grant agreement. Lobbying and influencing an election or voter registration drive should be specifically prohibited. The organization should be required to repay any funds not used for purposes specified in the agreement. In order to assure accountability, the foreign organization should be required to submit full and complete reports on the expenditure of the funds and progress made toward accomplishing the purposes of the grant. These should be submitted at least annually, but interim reports is advisable. In submitting the reports, the foreign organization should agree that it will maintain good records of funds received and spent and allow the U S organization to examine its books and records. Deadlines should be established for the submission of these reports. An affidavit stating that no funds were diverted from their intended purpose should be included.
If the grant amount is significant and it is feasible, the U S public charity should make periodic visits to the foreign grantee’s locations to verify the progress being made toward accomplishing the goals of the grant.
The Treasury Department has issued a document designed to combat the financing of terrorist organizations by U S public charities. It covers topics beyond grant making, but is a useful source for U S charities making such grants. The title of the document is “U. S. Department of the Treasury Anti-Terrorist Financing Guidelines: Voluntary Best Practices for U. S.-based Charities.” To avoid unintentional funding of terrorist organizations and to avoid public embarrassment, this document should be a part of the grant making process for U. S. charities. It can be downloaded at the U. S. Treasury web-site and is only 15 pages long.
Organization in the United States have a long history of assisting foreign organizations. This is praiseworthy, but organizations making these grants should take special precautions to be certain that the funds are being used to accomplish goals of the U. S. organization.
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