Want to help refugees, overseas missions, or international environmental efforts? As technology increasingly provides vivid windows into the lives of people around the world, donors and tax-exempt organizations are more aware than ever of foreign needs to be addressed. A key way for a U.S. based charity to serve is by partnering financially with a foreign nonprofit. In turn, that foreign nonprofit may collaborate with other foreign nonprofits, such as local churches, schools, and community organizations, which are equipped to respond well and with keen insights into local culture and needs. From a financial and legal perspective, these arrangements involve subgrantees carrying their own special considerations for legal compliance.
International Grant-Making 101
With a few exceptions, when a U.S. tax-exempt organization grants funds or services to a foreign organization not recognized by the Internal Revenue Service (“IRS”) under Internal Revenue Code Section 501(c)(3), a grant agreement should be used. Under IRS guidance, the agreement must satisfy the following conditions: (1) further the grantor organization’s exempt purpose; (2) limit the grantee’s use of the funds to specific projects that further the grantor organization’s purposes under Section 501(c)(3); (3) maintain sufficient control and discretion over grantee’s use of the funds; and (4) require periodic accounting from grantees establishing that the funds were actually utilized for Section 501(c)(3) tax-exempt purposes.
U.S. charities that are considering directly or indirectly supporting a foreign nonprofit need to make sure that, at a minimum, the plan they develop will enable the U.S. charity to continue to discharge these legal obligations. They also must fulfill requirements related to anti-terrorism and anti-money laundering law. A well-drafted plan should provide for all of these legal compliance areas, and it may address other potential topics too such as employment, indemnification, and use of intellectual property. See our post here for more detailed into these international grantmaking considerations. Working with a foreign charity through such a plan should also reduce the U.S. entity’s legal barriers to entry, such as foreign business registrations, foreign bank account reporting, and foreign employment law – all of which may be handled by foreign grantees if structured properly.
If the foreign organization or U.S. partner organization plans to re-grant the U.S. organization’s funds to other nonprofits, is the U.S. entity responsible for ensuring the arrangement continues to meet the four requirements enumerated above? Or may the U.S. entity rely on its partner organization's choice of recipients?
As one might surmise, the answer is “yes” to the former question and “no” to the latter. In the eyes of the IRS (and numerous other charities regulators), the U.S. entity remains responsible for ensuring that their charitable funds are actually used for their tax-exempt purposes. Accordingly, in this context, the agreement between the U.S. entity and the foreign grantee must extend these four requirements to the subgrantees as well.
What exactly will this required oversight of subgrantees look like, on a practical level? The answer depends on the specifics of the transaction.
Generally, the agreement with the foreign grantee should include requirements that any subgrantees who receive re-granted funds originally donated by the U.S. entity comply with the four listed requirements. Typically, the U.S. entity’s donated funds should not be comingled with other donations, in order to make oversight of the use of these funds more practical. The foreign grantee should commit to the U.S. entity that any subgrantees receiving funds from the designated U.S. entity donation account will be required to provide reports to both the foreign grantee and the U.S. donor entity. The foreign grantee should further agree that donations from the designated accounts will be offered on a project-by-project basis, not as “blank checks” to be used at the subgrantees’ discretion. Prior to the grant of funds, the foreign grantee should confirm that the subgrantee’s intended use furthers the U.S. entity’s exempt purposes. All parties should indicate in writing their understanding that noncompliance by either the foreign grantee or the subgrantee may result in terminated funding.
Tying It Together: A Tale of Three Charities
Consider a hypothetical U.S. humanitarian organization called Help Through Farming, with leaders seeking to help people in another country where farm-related economic opportunities are scarce. They want to focus on a certain area of the world, but they lack knowledge about local customs, culture, and the best ways to address needs. Despite these obstacles, Help Through Farming identifies a relatively new foreign organization there called We Need Help, whose leaders are very willing to accept funds for land, seed, and equipment. How does Help Through Farming comply with the above grant-making requirements, especially with so many miles between them and We Need Help? Enter the foreign organization Been Here Awhile Charities. This entity may well provide the bridge, or the link, between Help Through Farming and We Need Help.
Help Through Farming begins a conversation with Been Here Awhile Charities and learns that this foreign organization indeed has a good track record and is willing to develop an accountability relationship with We Need Help. Been Here Awhile Charities is registered in the foreign country as a nonprofit. In addition, it has staffing sufficient to handle finances, to exercise program oversight, and to report back to Help Through Farming. Been Here Awhile Charities is also willing to enter into written grant-making agreements with both Help Through Farming and We Need Help, sufficient to satisfy Help Through Farming’s requirements for accountability, in keeping with Help Through Farming’s Section 501(c)(3) tax-exempt responsibilities. These agreements set forth both scope of the charitable assistance and the responsibilities of all three parties, thereby reflecting prudence, diligence, and related legal compliance considerations.
In summary, it’s a win-win-win! Help Through Farming is the grantor, Been Here Awhile Charities is the grantee, and We Need Help is the subgrantee.
What if We Need Help is not a foreign organization but rather a group of individuals, who are desperately poor and seeking to improve their lives through farming? The charitable funds may still be spent, but in that case an intermediary organization like Been Here Awhile Charities may be critical. Regardless of the specific circumstances, Help Through Farming, as a U.S. charity, must at all times responsibly steward its charitable assets. Such assets thus may not be used for improper private benefit, such as to help people who are not appropriate recipients of charitable assistance, for vendors who do not deliver purchased goods, or for wages paid to those who do not actually provide services. Enlisting the assistance of an organization like Been Here Awhile Charities may be just the ticket – if that organization is sufficiently responsible too – for Help Through Farming to satisfy its own legal obligations for accountability.
U.S. charities seeking to partner with foreign organizations can carry out worthwhile and exciting endeavors. With proper diligence and legal conscientiousness, U.S. charities can build a legally compliant foundation for the future and enjoy the opportunities of serving across borders.