In recent years, there has been a growing importance to establish and conduct regular due diligence practices within the non-profit sector. Just as donors often vet the organizations to which they are giving, non-profits use due diligence services to vet potential major donors to protect their organizations from risk and negative exposure. These risks include donations from financially illegitimate sources that lead to a clawback of funds as well as donations from, and association with, sources with poor reputations that damage an organization’s brand and reputation.
Given this risk environment, due diligence services are more relevant for non-profits today than ever before. Knowing your donor is as important as knowing your client or customer. The kind of enhanced due diligence that was once associated primarily with the financial services sector has expanded to many other areas – it is both relevant and important for any relationship that involves a significant transfer of funds, or public association between two parties.
For non-profit organizations to get the most from their fundraising efforts, they should adhere to the following best practices.
BEGIN BY SCOPING DILIGENCE EFFORTS PROPERLY.
There are several levels of diligence that can be run on a prospective donor and it’s important to know what each involves and understand the difference. A typical ‘enhanced’ due diligence process would include a search for adverse news, litigation history, and political exposure. In addition to performing this standard set of background checks, verification of source of wealth can be an important part of the process for most organizations. It is also wise to uncover whether the individual has a history of philanthropic donations. If they have, consider questioning the types of causes they are interested in, on what scale they have donated and how frequently. This will help to inform whether their history of philanthropic activity aligns with his or her source of wealth and net worth.
Tracking reputational and character background of donors should also be considered in cases where alignment between donor and recipient values is likely to be a matter of public attention. Has the potential donor been involved in any causes or organizations that might create problems for your organization? Is the donor associated with other wealthy individuals who raise concerns?
For instance, the American Museum of Natural History was recently forced to withdraw as the host site of an event honoring the president of Brazil, whose Amazon development policies had drawn objections. The Museum also faced the potential loss of additional donors.
UNDERSTAND YOUR ACCEPTABLE RISK.
Risk means different things to different people, and it’s important to accurately gauge what is acceptable for your organization. There are certain obvious red flags, such as illegal activity, but some kinds of political exposure may be more acceptable than others. Consider an individual that has amassed legitimate wealth from the tobacco industry or single use plastics. How does that impact your relationship with the individual?
It is also important to calibrate the level of diligence required. Screening services run the gamut from large scale bulk screenings to individual investigative services, which would typically only be used in case of very high-risk individuals, about whom an organization has no prior familiarity.
Wealth-X screenings fall in between these two extremes, with several unique strengths such as net worth and prior philanthropic activity reporting. Philanthropic history can provide important perspective on scale and frequency of giving, and net worth and source of wealth are an important framework for understanding philanthropic engagement.
POSITION YOUR ORGANIZATION FOR DOWNSIDE SCENARIOS.
Understand that no amount of research will uncover everything. Diligence efforts, no matter how thorough, will not always be sufficient. Nevertheless, due diligence services are becoming more important for both regulated and non-regulated environments. A clear and transparent process that can be easily communicated to regulators and the public is needed in case a concerning data point is uncovered that could be damaging to your organization. Regulators are concerned about proof of effort and process, and organizations need to be able to show that they’ve taken the proper measures even when a donor turns out to have broken a rule.
In a changing risk landscape, it has become more difficult to navigate the requirements of donor due diligence. Following a set of best practices will help your non-profit avoid potential pitfalls and maintain better relationships with both donors and the public.