Frequently Asked Legal Questions about Global Grantmaking


What are the legal requirements for private foundations wishing to make cross-border grants?

Private foundations wishing to make a cross-border grant must ensure that:

  1. The grant is clearly for a charitable purpose, and
  2. The grant counts as a qualifying distribution for the purpose of meeting the foundation’s annual distribution requirement.

The easiest way for a private foundation to satisfy both of these requirements is to choose a grantee that is recognized by the IRS as a public charity.

If a private foundation chooses to make a grant to a non-U.S. organization that is not recognized by the IRS as a public charity the foundation must follow one of the two options provided in the tax code:

  1. Determine that the non-U.S. grantee is the “equivalent” of a U.S. public charity (“equivalency determination”), or;
  2. Exercise “expenditure responsibility.”

What is Equivalency Determination?

Equivalency determination is a process designed to assess whether a potential non-U.S. grantee organization is the equivalent of a U.S. public charity. It involves collecting certain information from the grantee about its origins, activities and finances through an affidavit (see link below for sample affidavit). On the basis of the information provided in the affidavit, the private foundation then makes a good faith determination concerning U.S. public charity equivalency and documents that decision. The determination may be made by the private foundation on its own or relying on the written opinion of counsel or the potential grantee’s counsel. The process need not be complicated; many private foundations routinely conduct equivalency reviews of prospective grantees.

The following documents, translated into English, are necessary to make an equivalency determination:

  1. Founding documents of the organization.
  2. A description of the purposes of the organization as well as its past and present activities.
  3. Dissolution provisions, either contained in the founding documents or applicable law (see link below to country notes).
  4. Restrictions on private benefit, non-charitable activities, lobbying, and participation in political campaigns, either contained in the founding documents or applicable law (see link below to country notes)
  5. Detailed financial records (excluding religious institutions or medical or educational organizations).

Advantages of Equivalency Determination

This method does not require grantee reports at the end of each accounting period, a separate account dedicated to charitable purposes, or detailed reporting on Form 990-PF.

Disadvantages Equivalency Determination

This method requires substantial documentation in English plus financial reporting from previous years.

What is Expenditure Responsibility?

Expenditure responsibility is a method of making direct cross-border grants to a non-U.S. organization whereby the private foundation assumes full responsibility for ensuring that its grant is used for a charitable purpose. The process need not be unduly burdensome for either the grantmaker or grantee. Private foundations may apply expenditure responsibility grants to their payout requirement if they take the following steps:

  1. Undertake a pre-grant inquiry with reasonable determination that the intended grantee is capable of fulfilling the charitable purposes of the grant.
  2. Conclude a grant agreement that includes spending and reporting responsibilities and commits the grantee to spend the money only for the specified charitable purposes.
  3. Require grantee to maintain grant funds in a separate account for charitable purposes.
  4. Require one or more reports from the grantee detailing how the funds have been spent.
  5. Report the grant on the foundation’s form 990-PF.

Reporting for expenditure responsibility grants:

The U.S. Department of the Treasury requires that recipients of expenditure responsibility grants provide reports on how the funds were used. Existing IRS guidance does not provide clear answers on the following aspects of the reporting requirement: grants for capital equipment, grants for endowment, and reasonable efforts to secure reports from grantees. In the absence of guidance from the IRS, the Council on Foundations has made available its recommendations to international grantmakers in a letter to the U.S. Department of the Treasury: Guidance on Expenditure Responsibility: Council on Foundations Letter to Treasury (in PDF).

Advantages of Expenditure Responsibility

Because equivalency determination can occasionally be a lengthy and ultimately unsuccessful process (i.e., the prospective grantee turns out not to be the equivalent of a U.S. public charity), grantmakers often choose to exercise expenditure responsibility instead.

Disadvantages of Expenditure Responsibility

Grant reports are required from the grantee until all funds have been expended which may require monitoring the grant over a period of several years.

How do I decide whether to use Equivalency Determination or Expenditure Responsibility?

In 2001, the IRS made clear in a letter to the Council on Foundations that a private foundation wishing to make a grant to a foreign organization could choose between expenditure responsibility and equivalency determination, and that there was no obligation to rule out equivalency before turning to expenditure responsibility.

Table 1: When There Is No Choice

Situation Required Action

Grantee is a non-charitable enterprise that will use the grant for charitable purposes

Expenditure responsibility is the only way to make this grant

Grantee cannot supply the information required for an equivalency affidavit

Grantor must use expenditure responsibility because it does not have enough information for an equivalency determination

Grantor evaluates the affidavit and concludes that despite everyone’s best efforts, the grantee is not the equivalent of a public charity

Expenditure responsibility is the only way to make the grant

Table 2: When the Grantor Can Choose

Circumstances that favor Equivalency Circumstances that favor Expenditure Responsibility

Grantor expects long-term relationship

Grantor plans a one-time grant

Grantee can supply governing documents and no financial data is needed (i.e., grantee is a school, hospital or church)

Grantee may have considerable difficulty in supplying historical financial data or obtaining a certified copy of its governing documents

Grantor wants flexible reporting procedures

Grantor wants strict reporting provisions

Grantor wants to make a general support grant

 

Grantee plans to re-grant funds received to accomplish its exempt purposes

 

What are the legal requirements for public charities wishing to make cross-border grants?

International grantmaking requirements for public charities are significantly less onerous than those for private foundations, yet public charities still have a fiduciary duty to ensure that grant funds are used exclusively for charitable purposes. Although they are not required to do so, most public charities follow the grantmaking rules for private foundations.

The Pension Protection Act of 2006, signed into law by President Bush on August 17, 2006, introduced new rules for international grants made from donor-advised funds. International grantmaking from donor-advised assets now requires equivalency determination or expenditure responsibility. While the Council is seeking guidance as to what expenditure responsibility means for public charities, the regulations for private foundations provide some guidance. Visit the Council website for detailed background information and updates on this topic

The suggested approach by the Council on Foundations for public charities that do not use donor-advised funds for their international grantmaking is as follows:

  • Obtain English copies of organizational documents and a description of the activities and programs of the grantee.
  • Enter into a specific written agreement, documenting the grantee’s commitments and the use of funds for charitable purposes.
  • Obtain a yearly accounting of the funds for each year until the funds are expended.

What anti-terrorism actions and policies of the U.S. Government relate to international grantmaking?

The U.S. government took a number of steps to ensure that charitable funds were not diverted to terrorists and their organizations in the United States and around the world following the terrorist attacks of September 11, 2001. These included Executive Order 13224 and the USA Patriot Act, both issued shortly after 9/11, as well as the Treasury Department’s “Anti-Terrorist Financing Guidelines: Voluntary Best Practices for U.S.-Based Charities,” originally issued in November 2002 and most recently re-issued on September 29, 2006. This section provides a brief description of U.S. government anti-terrorism initiatives:

  • Executive Order 13224
  • U.S.A. Patriot Act
  • U.S. Department of the Treasury Anti-Terrorist Financing Guidelines: Voluntary Best Practices for U.S.-Based Charities

What does Executive Order 13224 do?

Executive Order 13224 was signed by President George W. Bush on September 24, 2001, to cut off resources to terrorists and terrorist organizations through asset blocking. The Executive Order prohibits transactions with those entities deemed by the Executive Branch to be associated with terrorism and freezes all assets controlled by or in the possession of these entities and those who support them. The EO prohibits the provision of any financial or material support to any entity specifically listed in an Annex or determined by the Secretaries of State or Treasury as well as any associated entities. Several U.S. government agencies have created lists of known or suspected terrorists, as has the United Nations and the European Union. The most comprehensive of the U.S. lists is the Treasury Department's Specially Designated Nationals (SDN) list. Both the Treasury Department and Executive Order lists are physically included in the Executive Order. The open-endedness of the prohibitions contained in the EO is worrisome for grantmakers. No distinction is made in the EO between domestic and international terrorism.

How does the U.S.A. Patriot Act relate to grantmaking?

The U.S.A. Patriot Act was enacted in October 2001 and reauthorized in 2005. Among its many provisions, the Act increased existing criminal penalties for knowingly or intentionally providing material support or resources for terrorism. For grantmakers, these criminal statutes open the possibility that they could be found -- despite their best intentions -- to have knowingly or intentionally provided material support or resources for terrorism. Another concern for grantmakers is potential civil liability should their grants end up in the wrong hands. Nonprofit grantmaking organizations are not immune to potential legal liability because of the inherent charitable or humanitarian nature of their missions.[1]

What are the Treasury Department’s Voluntary Anti-Terrorist Financing Guidelines?

On September 29, 2006, the U.S. Department of the Treasury issued an updated version of the “Anti-terrorist Financing Guidelines: Voluntary Best Practices for U.S.-Based Charities.” The “Guidelines” were originally issued in November 2002 and revised in December 2005 to assist charitable organizations in complying with Executive Order 13224 and the USA Patriot Act following 9/11. The new Guidelines may be accessed here: Revised Anti-Terrorist Financing Guidelines: Voluntary Best Practices for U.S.-based Charities

On the same day, the Treasury Department also released a document responding to public comments it received during the comment period following the release of the second version of the Guidelines in December 2005. This document may be accessed here: Response to Comments Submitted on the U.S. Department of the Treasury Anti-Terrorist Financing Guidelines: Voluntary Best Practices for U.S.-Based Charities (PDF).

These comments include a submission by the Treasury Guidelines Working Group, a broadly representative group of more than 40 U.S. charities, foundations, religious organizations, corporations, umbrella associations, watchdog groups and advisors, created in the spring of 2004 and coordinated by the Council on Foundations. In February 2006, the Treasury Guidelines Working Group submitted comments in response to the invitation for public comments on the revised “Anti-Terrorist Financing Guidelines: Voluntary Best Practices for U.S.-based Charities” issued on December 5, 2005. Download the comments (PDF).

The working group developed the Principles of International Charity (PDF) that identifies eight principles to guide the anti-terrorism efforts of charities. The Principles of International Charity were submitted to the Treasury Department, as an alternative to the Guidelines in March 2005.

How should grantmakers respond to these various anti-terrorism measures?

Despite the attention paid in the media to a handful of charities alleged to have helped finance and aid terrorist activities, the Executive Order and the U.S.A. Patriot Act are not targeted directly at grantmaking organizations. As a result, they do not spell out specific procedures that grantmakers should undertake in order to comply with the law.

In the absence of such guidance, grantmakers will have to rely a good deal on common sense. Some useful ideas to consider include:

  • Know as much as you can about your grantees and their associates.
  • Know what you can about donors who play a role in identifying grantees.
  • Involve your donors and grantees in the compliance process.
  • Educate board and staff about internal anti-terrorism measures.
  • Consider developing an anti-terrorism policy statement.
  • Discuss concerns with legal counsel.
  • Document steps taken to comply with the Executive Order and the Patriot Act.
  • Keep informed about anti-terrorism developments.
  • Consult the Principles of International Charity .
International grantmakers are responding to the federal anti-terrorism policies in many ways. The Council’s Global Philanthropy staff conducted an informal survey of a representative sample of approximately thirty-five of the Council’s international grantmaking members to determine what, if any, changes they had made or were planning to make in their procedures because of the government’s anti-terrorism actions. Read the results of this survey in: "Federal Anti–Terrorism Measures: How Foundations and Corporate Grantmakers are Responding."