U.S. private foundations are increasingly involved in international grantmaking. One way for a private foundation to give overseas is to make grants directly to foreign charities. Many U.S. private foundations, however, may want to consider giving overseas indirectly through a "Friends of" organization. In the aftermath of the terrorist attacks of September 11, 2001, and the heightened focus on the fact that overseas grantmaking, like all cross-border transactions, may potentially be diverted for terrorism and money laundering, giving through a "Friends of" organization is an increasingly attractive option.
What is a "Friends of" organization?
The term "Friends of" derives from the fact that the names of so many organizations that support foreign charities begin with these two words. They include organizations such as American Friends of the Louvre, Friends of Foundation de France, and Friends of China Heritage Fund, as well as hundreds of other organizations which do not have names beginning with these two words, such as Doctors Without Borders/Medecins Sans Frontieres. The "Friends of" organization is almost always a U.S. nonprofit corporation. It can be classified as a public charity or as a private foundation. A private foundation donor will prefer to give to a "Friends of" organization classified as a public charity in order to avoid having to perform expenditure responsibility (which is required for grants to other private foundations and for grants directly to foreign organizations).
A "Friends of" organization generally exists to provide federal tax deductibility for charitable contributions to support a foreign charity by breaking a "conduit" flow of funds to the foreign charity. While a private foundation has no need of tax deductibility pursuant to Section 170, it may wish to work with a "Friends of" organization to make international grants with greater administrative ease and efficiency. Unlike a direct grant to a foreign charity, a grant to a "Friends of" organization that is classified as a public charity will not require an equivalency determination or the exercise of expenditure responsibility. Also, as it works continuously with its foreign partner organization, the "Friends of" organization may have a greater ability than the private foundation donor to conduct due diligence on the grantee, oversee the grant, and obtain reports on fund use—and to do so at a lower cost.
Private foundations must also avoid earmarking of grants  and are thus interested in the proper governance and operations of a "Friends of" organization. The Internal Revenue Service (the "IRS") has approved two structures, which provide models for two distinct types of "Friends of" organizations. The first type of organization makes grants to a foreign charity, and the second actually controls the operations of the foreign charity. In either case, the structure will succeed or fail on the U.S. charity's exercise and documentation of "discretion and control."
Discretion and Control
Directors. The IRS has noted the importance of the "Friends of" organization having directors who are U.S. citizens and who are not acting on behalf of the supported foreign charity. Based on our experience in seeking and maintaining tax-exempt status for these groups, we believe that the IRS generally requires a majority of directors to be U.S. citizens who are not affiliated with the foreign charity. Board composition may be one of the most difficult issues in setting up a "Friends of" organization unless the foreign charity understands U.S. law. Counsel must disclose in the application for tax exemption (i) the number of directors that are U.S. citizens or residents and their percentage of the entire Board of Directors, (ii) whether the directors are subject to voting or other restrictions, and (iii) whether the directors are also directors, officers, or employees of the foreign charity. It is also important to take into account any state conflict-of-interest rules and watchdog agencies' rules about disclosure and eligibility to vote on grants to an organization of which a director is a director, officer, or employee. These rules may necessitate having a certain number of directors who are not affiliated with the foreign charity.
Grants for Specific Projects. The models approved by the IRS require the "Friends of" organization to fund specific projects of the foreign charity. In contrast, disapproved models have the organization remitting net proceeds of fundraising campaigns or "receiv[ing] contributions and send[ing] them at convenient intervals to the foreign organization," which could be interpreted to prohibit general operating support grantmaking. The IRS has held that a charity had to know, in advance of making a grant, what the foreign charity would do with the funds. The problem with general operating support grants is that the "Friends of" organization cedes expenditure control to the foreign charity. Therefore, we strongly recommend that grants be made either for the activities described in a grant application or for administrative expenses (salaries, rent, utilities, etc.) of the foreign charity.
Promises that Kill Discretion and Control. A private foundation has no affirmative obligation to investigate a "Friends of" organization's anti-conduit procedures. Nonetheless, a donor private foundation should not request, and the "Friends of" organization must not make, promises that the contribution will absolutely, positively be used overseas as the donor requires. The "Friends of" Board must have the option to say "No" if, for example, the "Friends of" organization becomes aware that the foreign charity is diverting funds or failing to account for funds. An alternative is that a donor could pledge a contribution to the "Friends of" organization contingent upon that organization's preapproval of a specific project. In this way, the contingency would not be satisfied and the funds not due unless the desired project is approved. While the pledge model comes in several varieties and may not be fail-safe, it can be a useful alternative for a donor who wants some level of assurance that a project will be selected for funding but wants to avoid earmarking.
Preapprove Projects Before Soliciting Funds. In the model approved by the IRS, the "Friends of" organization solicited funds "pursuant to grants previously reviewed and approved by the Board of Directors." This fact pattern has generally been read to create a preapproval requirement before solicitation begins in the United States . This requirement can be met by using the pledge option described above. An alternative is to ask the foreign charity to submit annually its "wish list" of projects for the following fiscal year. The board of directors of the "Friends of" organization can then review and "pre-approve" those projects that they believe will be of greatest interest to U.S. donors. The board can also authorize and conduct fundraising for these projects in cooperation with the foreign charity. Note that the "Friends of" organization should be the solicitor as it, and not the foreign charity, is likely registered to solicit in the 39 states that require registration before charitable solicitation occurs.
Recordkeeping. The "Friends of" organization should prepare form proposals, form resolutions, form grant contracts, and form reports if necessary to create the required records that discretion and control have been exercised by the U.S. board of directors in proper sequence. Creating a package of form documents also helps the foreign charity to understand better what is expected of it and to avoid misunderstandings or resentment about paperwork. The "Friends of" organization should also create a file for each grant that includes a copy of the board resolution authorizing solicitation, a copy of the resolution authorizing payment of the grant, the grant application and budget from the foreign charity, the grant-award contract, and the annual and/or wrap-up reports.
Anti-Terrorist Financing Measures
Executive, legislative and regulatory actions taken after September 11, 2001 have increased the need for U.S. private foundations to focus on appropriate due diligence procedures when making grants for use overseas. These actions include Executive Order 13224, which precludes all U.S. persons (including U.S. charities) from dealing with persons designated as associated with terrorism and freezes the property of designated persons within the possession or control of a U.S. person, and the USA PATRIOT Act, which, among other things, authorizes the President to identify, investigate, disrupt and dismantle "nontraditional" structures, such as U.S. charities, used by terrorists and their supporters to raise, collect and distribute funds.
In addition, in November 2002, the U.S. Treasury Department issued its "Anti-Terrorist Financing Guidelines: Voluntary Best Practices for U.S.-Based Charities" (the "Initial Guidelines") addressing how charities could reduce the likelihood that charitable funds would be diverted to terrorist purposes. In response to the Initial Guidelines, representatives of more than 25 organizations, including umbrella groups such as the Council on Foundations, drafted the Principles of International Charity as an alternative. The "Principles" document lists eight fundamental principles of accountability that guide international work. A revised version of the Guidelines (the "Revised Guidelines") was issued on December 2, 2005. The Revised Guidelines incorporate some of the concepts enunciated in the Principles. The last section of the Revised Guidelines, entitled "Anti-Terrorist Financing Best Practices," contains recommended steps for charities to take when making grants. When taking these steps, the Revised Guidelines state that "charities should apply a risk-based approach, particularly with respect to foreign recipients due to the increased risks associated with overseas charitable activity." The recommended steps include specific instructions for (1) gathering information about and vetting the foreign organization and the individuals and entities it serves, (2) gathering information about the organization's key employees, (3) reviewing the organization's operating activities, and (4) performing on-site audits.
While the Revised Guidelines are voluntary and advocate a risk-based approach, indicating that not all steps are appropriate for every grant or every grantor, they illustrate the type of due diligence the government expects when a U.S. private foundation makes a grant for use overseas. In many cases, a U.S. private foundation may not have the ability or the resources to conduct this due diligence directly. In such a case, making the grant to a well-run "Friends of" organization may be an attractive alternative. The "Friends of" organization, which presumably has close ties to the foreign charity (both operationally and due to a reliance for funding), may be in a better position to conduct ongoing due diligence of the grantee and its use of granted funds. As stated in comments by the ABA Tax Section to the IRS regarding international grantmaking, "[a]lmost all American "Friends of" grantmakers would consider their grants and recipients easier to monitor because of their close ongoing relationships with their grantees and the grantees' reliance on the U.S. funder for critical support."
A grant to a well-run "Friends of" organization can be an efficient means by which a private foundation can fund an overseas project without having to conduct expenditure responsibility and without directly undertaking an extensive and expensive due diligence investigation of the foreign recipient.
 Copyright © 2005 Victoria B. Bjorklund and Jennifer I. Reynoso. This article updates our earlier article on the same topic published in the Fall of 1998.
 A corporation seeking a corporate income tax deduction for a charitable contribution is also subject to a requirement that the contribution be used exclusively within the United States or its possessions. Section 170(c). (All section references are to the Internal Revenue Code of 1986, as amended). However, a corporate contribution to a charity organized as a corporation avoids this requirement. Rev. Rul. 69-80, 1969-1 C.B. 65. Thus, a "Friends of" organization must be organized as a corporation if it plans to solicit deductible contributions from corporate donors.
 Section 4945(d)(4).
 An individual or a corporation will not be eligible to claim a U.S. tax deduction for a direct charitable contribution to a charity organized under foreign law. Section 170(c)(2). Moreover, if a donor makes a gift to a U.S. charity and unconditionally earmarks the gift for a foreign charity, then the gift may be characterized by the IRS as being made to the foreign charity through the U.S. charity acting as a conduit, and no deduction will be allowed. A properly organized and operated "Friends of" organization avoids the conduit problem by having the U.S. board of directors exercise discretion and control over contributions made by U.S. taxpayers.
 Section 4945(h); Treas. Reg. §53.4945-5(a)(5). For a helpful guide, see John A. Edie and Jane C. Nober, Beyond Our Borders: Making Grants Overseas , 3rd Ed. ( Washington , DC : Council on Foundations, 2003).
 Treas. Reg. § 53.4945-5(a)(6). As is the case with an individual or a corporation, if a private foundation earmarks a grant, the IRS is free to disregard the intermediary organization and to treat the grant as made directly to the designated group.
 Rev. Rul. 63-252, 1963-2 C.B. 101.
 See Rev. Rul. 66-79, 1966-1 C.B. 48.
 An interesting exception is found in Priv. Ltr. Rul. 9129040 (April 23, 1991), where the IRS granted approval to an organization with seven directors, three of whom had to be approved by the foreign charity, where two of the three had to approve all major decisions. We recommend against relying on this model, especially given the increased scrutiny on grants to foreign organizations since September 11, 2001.
 GCM 35319 ( April 27, 1973 ). See also Victoria B. Bjorklund and Joanna Pressman, Chapter 10: Cross-Border Philanthropy in Complete Guide to Nonprofit Organizations ( Kingston NJ : Civic Research Institute, 2005) ("existing authority justifies support only for expenditures that have been previously identified and approved by the "American Friends of" organization. However, an "American Friends of" charity may indeed pay for general support in the form of qualifying administrative costs (such as salaries and rent) so long as the expenditures are charitable within the meaning of U.S. federal tax law.")
 Model forms may be found in Appendix 10.4 to Chapter 10 of Complete Guide to Nonprofit Organizations.
 In the past, orders similar to EO 13224 exempted donations of food, clothing and medicine intended to be used to relieve human suffering. However, EO 13224 prohibits even these donations.
Comments In Response To Internal Revenue Service Announcement 2003-29, 2003-20 I.R.B. 928 Regarding International Grant-Making and International Activities by Domestic 501(c)(3) Organizations, 41 Exempt Org. Tax Rev. 278 (2003).