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Charities Don’t Need To Break Laws To Waste Your Money

A Tennessee family is accused of using a fraudulent network of charities to take more than $187 million from donors and spend it on themselves. The Federal Trade Commission filed suit against three members of the Reynolds family but is unlikely to recover the money it says their charities scammed out of donors. The Cancer Fund of America and three additional groups made their money by hiring telemarketers to cold-call people and ask for $20 donations.

The FTC lawsuit will stop the Reynolds family from placing any more calls, but the next time you get a call from someone asking you to be generous, the odds are still better than not that you’re being taken for a sucker — even if the charity isn’t technically committing fraud.

The New York State Office of the Attorney General took a look at charity drives that were run by for-profit telemarketing companies registered in New York and found that an enormous percentage of donations wound up paying for the cost of the calls, never reaching the soliciting charity at all.

In 2013, for-profit telemarketers persuaded New Yorkers to donate $302 million to charity. More than half of that money, $156 million, went straight to the telemarketing firms, rather than the charities they were working for. So, for every dollar a New Yorker gave, only 48 cents reached the group they were trying to give to, and some of that will be spent on salaries, offices and other overhead costs, leaving less than donors might expect for the people the group ostensibly serves.

Charity Navigator, an independent and well-regarded charity evaluator for consumers, grades charities’ financial practices in several categories, including how much of the money they take in is spent on fundraising. Charities that spend 10 percent or less of their revenue on fundraising get 10 points. Those that spend more than 10 percent on fundraising receive fewer points (on a tiered scale), and those that spend more than 25 percent of their revenue on fundraising get no points at all.

If the groups that New York examined are held to Charity Navigator’s standards, only 10 of the 573 campaigns (1.7 percent) spent 10 percent or less of their revenue on fundraising and would receive the highest rating. The vast majority of the groups (543 in total, or 95 percent) would receive Charity Navigator’s worst rating.

In fact, Charity Navigator’s point system doesn’t go far enough to adequately describe how badly many of the charities using for-profit telemarketers in New York are doing. Seventy-six percent of campaigns (435 in all) spent more than half of what they took in on telemarketing, and 39 percent of charities (225) wound up keeping less than 20 percent of what donors gave.

It’s hard to say whether New York’s numbers can be generalized to the rest of the country. But the New York attorney general’s office claims in its report that practices observed in New York are likely to spread because New York is a hub for nonprofit agencies, and many people who work in this sector will spend part of their career working in New York.

Not all of these charity are scams. As Daniel Borochoff, the president and founder of CharityWatch points out, “You could have charities that are well-intentioned but being taken advantage of by vendors,” and New York’s numbers bear him out. Eighteen percent of charities in the state attorney general’s report lost money on their phone fundraising drives.

Borochoff recommends that “you shouldn’t give to a cold-call telemarketer ever.” The companies tend to use hard sell tactics, and, because the people on the phone don’t work directly for the charity they’re calling for, they can’t answer your questions if you go too far off of their script.

Groups that are simply inefficient aren’t doing anything illegal and can’t be stopped by force of law. Starving them of funds requires individuals to donate wisely. Groups such as Charity Navigator, GuideStar, and CharityWatch let people check whether the money they donate is spent on the programs they want to support. GiveWell goes further and checks up on how effective a charity’s program is at saving lives; they’d rate a charity distributing malaria nets higher than one that simply visits sick children in the hospital. Ultimately, informed donors are the most important check on charities.

Leah Libresco is a former news writer for FiveThirtyEight.