International Grantmaking

John R. Wylie, Esq. 
This article provided by the Engstrom Institute

This resource provides an overview of U.S. laws affecting international grantmaking by U.S. tax-exempt organizations.

Background

Religious organizations throughout the U.S. participate in international grantmaking activities. These grantmaking activities vary in type and purpose. Some international grants are made to fund traditional ministry activities, such as evangelism, church planting, and religious education, while others are made as part of relief efforts in impoverished and needy communities. Regardless of the type and purpose of these international grants, they are undoubtedly motivated by the outreach purposes of the religious organizations that operate them.

From a purely religious perspective, such ministry acts should probably be unhindered by government regulation. Nevertheless, for religious organizations that enjoy tax-exempt status for federal income tax purposes and want to maintain the deductibility of contributions that they receive, there are rules and regulations by which such organizations must abide. In addition, in today's environment, following the events of September 11, 2001, the international grantmaking activities of a Christian organization are subject to a variety of laws, regulations, and recommendations meant to curb and eliminate terrorist financing by U.S. charities.

The following detailed discussion highlights those laws that any tax-exempt organization must follow when conducting international grantmaking activities.

IRS Rules Regarding International Grants

Generally speaking, a taxpayer may deduct the amount of charitable contributions made to a tax-exempt organization described in Code §501(c)(3).[1] The rules and regulations governing the charitable contributions is quite broad, and a full exposition of those rules is outside the scope of this memorandum. However, deductibility of charitable contributions is generally governed by Code §170.

While Code §170 allows a U.S. taxpayer to deduct the value of charitable contributions made to a U.S. charity, it generally does not allow a deduction for contributions made to foreign organizations (even if the foreign organization were to use such contributions for charitable purposes).[2] These rules therefore create some hurdles for taxpayers who wish to make financial contributions internationally that will further their religious faith and at the same time maximize the tax benefit provided under Code §170. Nevertheless, Treasury Regulations promulgated under Code §170 indicate that a charitable contribution by an individual to or for the use of a U.S. charity may be deductible even though the U.S. charity may use some or all of its funds in foreign countries for charitable purposes.[3]

The IRS, however, is concerned with taxpayers using a U.S. charity as a mere conduit for contributions to foreign corporations that would not otherwise be deductible. Thus, it has issued some guidance that restrict deductibility under Code §170 of contributions made to a U.S. charity that are then distributed to a foreign recipient. The thrust of those rules can be found in two 1960 revenue rulings.

First, in Revenue Ruling 63-252[4] the IRS specifically addresses the "[d]eductibility of contributions by individuals to a charity organized in the United States which thereafter transmits some or all of its funds to a foreign charitable corporation." The ruling first acknowledges that contributions directly to a foreign organization are not deductible for federal income tax purposes. Thus, Revenue Ruling 63-252 asks "whether the result should be different when funds are contributed to a domestic charity which then transmits those funds to a foreign charitable organization."

To answer this question, Revenue Ruling 63-252 poses five examples. The five examples are as follows:

1. In order to solicit funds in the U.S., a foreign organization[5] forms a U.S. charity. It was intended that the U.S. charity will conduct a fund-raising campaign, pay any administrative expenses associated with the campaign, and remit the balance to the foreign organization.
2. Certain U.S. residents wanting to provide financial assistance to a foreign organization's charitable work form a U.S. charity. The governing documents of the U.S. charity provide that it will receive contributions and send them, at convenient intervals, to the foreign organization.
3. A foreign organization enters into an agreement with a U.S. charity. Pursuant to the agreement, the U.S. charity will conduct a fund-raising campaign on behalf of the foreign organization. In conducting the campaign, the U.S. charity will represent to prospective contributors that the funds raised will go to the foreign organization.
4. A U.S. charity conducts a variety of charitable activities in a foreign country. Where its purposes can be furthered by granting funds to charitable groups organized in the foreign country, the U.S. charity makes such grants for purposes which it has reviewed and approved. The grants are paid from its general funds and although the U.S. charity solicits from the public, the U.S. charity does not solicit funds on behalf of particular foreign organizations.
5. A U.S. charity that does charitable work in a foreign country, forms a subsidiary in that country to facilitate its operations there. The foreign organization was formed for purposes of administrative convenience and the U.S. charity controls every facet of its operations. In the past the U.S. charity solicited contributions for the specific purpose of carrying out its charitable activities in the foreign country and it will continue to do so in the future. However, following the formation of the foreign subsidiary, the U.S. charity will transmit funds it receives for its foreign charitable activities directly to that organization.

The IRS determined that under examples 1, 2, and 3, contributions to the U.S. charity would not be deductible. In examples 1 and 2, there was a clear intention on part of the foreign organization and U.S. residents, respectively, to circumvent the rules of Code §170. Moreover, a requirement, as in example 2, to remit contributions to a foreign organization leads to non-deductibility of the contribution. The fact that the U.S. charity would represent to donors that funds raised by it in example 3 would be remitted to the foreign organization demonstrates a clear intention that donations are given for the specific purpose of funding a specific foreign organization. Thus, contributions in example 3 were nondeductible for federal income tax purposes.

In example 4, however, the IRS opined that the deductions to the U.S. charity would be deductible. The reason for this determination was that (a) the contributions were not "earmarked"[6] for use by the foreign organization and (b) use of the contributions by the foreign organization would be "subject to the control" of the U.S. charity as a result of the review and approval rights held by the U.S. charity. In example 5, the IRS determined that the foreign organization should be treated as an administrative arm of the U.S. charity, and thus the U.S. charity was treated as the real beneficiary of the of the contributions it received for transmission to the foreign organization. Accordingly, contributions to the U.S. charity in example 5 were deemed to be deductible.

To summarize, Revenue Ruling 63-252 provides that contributions to a U.S. charity that transmits the contributed funds to a foreign organization are deductible only if it can be shown that the contribution is in fact to or for the use of the U.S. charity, and that the U.S. charity is not serving as an agent for, or a mere conduit of, the foreign organization.[7]

Revenue Ruling 63-252 has been amplified by Revenue Ruling 66-79.[8] Most importantly, Revenue Ruling 66-79 expressly articulates that charitable contributions made to a U.S. charity and used to fund foreign project are deductible under Code §170 when the U.S. charity "has reviewed and approved the project [of the foreign charitable organization] as being in furtherance of its own exempt purposes and has control and discretion as to the use of the contribution."

To illustrate, Revenue Ruling 66-79 focuses on one example. In that example, a U.S. charity was organized and operated for educational, scientific, and charitable purposes. According to its governing documents, it had the power to allocate contributions it received to any organization, foreign or domestic, that operated exclusively for charitable, scientific, or educational purposes, as those terms are defined for purposes of Code §501(c)(3).

Despite the broad purposes as stated in its governing documents, the U.S. charity in Revenue Ruling 66-79 operated in a manner that suggested its purposes were to assist one named foreign organization, which was organized and operated abroad exclusively for charitable, scientific, and educational purposes. The revenue ruling indicates that the individuals who had formed the U.S. charity were not acting as agents in the U.S. on behalf of the name foreign organization, but they were interested in raising funds for specific projects to be carried out by the named foreign organization (e.g., specific scientific research projects to be carried out by the named foreign organization or by individuals connected with the named foreign organization).

The U.S. charity established procedures within its bylaws governing grants that it might make to any charitable organization, including the named foreign organization. Pursuant to those procedures, all projects that the U.S. charity might assist had to be reviewed and approved by the board of directors prior to being made. Anyone who received financial assistance from the U.S. charity had to provide a periodic report accounting for such financial assistance. The board of directors also had the right, in its absolute discretion, to refuse to make any grants to projects for which funds were requested. In addition, the board of directors was allowed to pre-approve a specific project to be conducted by another organization and then have the U.S. charity solicit contributions to fund that project. The U.S. charity could, however, withdraw approval of such project at any time and use contributions for other charitable, scientific, or educational purposes. These procedures and guidelines were communicated to the U.S. charity's donors, and the U.S. charity refused to accept donations earmarked such that they had to be used for the benefit of the named foreign organization, no matter the circumstances. Under this scenario, the IRS ruled that contributions paid to the U.S. charity in Revenue Ruling 66-79 were deductible for federal income tax purposes.

Please note that earmarked funds were an issue in each of the revenue rulings discussed above and are commonly a concern within any grantmaking program. In perhaps the most common earmarking situation, a donor desires that his or her charitable contribution be used to benefit a particular individual. The Code does not preclude a U.S. charity from making distributions of its funds to individuals, provided that such distributions are made on a true charitable basis.[9] However, charitable contributions that are specifically earmarked to assist a particular individual are generally not deductible because they are treated as being gifts to the individual and not to a charity.[10] Donors may indicate a preference (as opposed to an outright condition) that their contributions be used to assist a particular individual (e.g., a missionary) without jeopardizing the deductibility of the contribution so long as the recipient charity has "full control of the donated funds, and discretion as to their use, so as to insure that they will be used to carry out" the organization's charitable functions and purposes.[11] As indicated by the discussion above, these same principles apply in the context of international grantmaking when contributions are solicited to help fund foreign projects. The important principles, no matter the scenario, are control and discretion of such contributions by the U.S. charity.

The two revenue rulings discussed above, in conjunction with the law on earmarked contributions, represent the focal point of federal income tax law as it applies to the deductibility of contributions to U.S. charities which are used in the international grantmaking activities of those charities. Other IRS rulings and authorities that have applied the basic rules as discussed above and some of those are discussed below.

Included in those additional rulings and authorities is Private Letter Ruling 9651031. There, the IRS ruled that contributions to a U.S. charity that were used to fund scholarships and other projects of a foreign university would be deductible because:

1. use of the charitable funds was in the sole discretion of the U.S. charity;
2. the U.S. charity required periodic accountings of funds transmitted to the foreign university;
3. the U.S. charity had discretion to refuse to make contributions for any and all purposes for which the funds were requested;
4. the U.S. charity refused to accept contributions that were earmarked for transfer to the foreign university; and
5. the U.S. charity made a determination that the foreign university was a "charity" within the meaning of federal income tax law.

Under these guidelines, the IRS ruled that the U.S. charity was not acting as a mere conduit, but was exercising discretion and control over the contributions of its donors.

In Private Letter Ruling 9129040 (April 23, 1991), a U.S. charity, which was organized and operated for the purpose of promoting amateur athletics (primarily basketball), was raising funds to help build a multi-purpose athletic facility in a foreign country that would be primarily used for amateur athletics, including amateur basketball competitions. The bylaws of the U.S. charity gave the board of directors the power to make grants to any organization organized and operated exclusively for charitable purposes as described in Code §501(c)(3), provided that (a) the board or directors reviewed and approved all requests for funds from such organizations, (b) the requests specified the use to which the funds would be put, (c) the grantees furnished a periodic accounting to show that the funds were expended for charitable purposes as indicated in the request for funds, (d) the board of directors had the absolute discretion to refuse to make any grants or contributions, and (e) the board of directors had the right to withdraw approval of any grant if the funds were ever used for purposes other than those set forth in Code §501(c)(3). The bylaws also allowed the U.S. charity to raise funds for a specific project that would be operated by a separate organization once the project had been approved by the board of directors. Under these circumstance, the IRS ruled that contributions solicited to help pay for the multi-purpose athletic facility were deductible under Code §170.

In Revenue Ruling 75-65,[12] a U.S. charity was formed to deal with environmental problems in a foreign country. The conservation efforts of the U.S. organization encompassed a variety of programs, some of which were active programs within the foreign country and others which involved providing financial support for projects operated by foreign charitable organizations.

With respect to the financial support provided to foreign charitable organizations, the U.S. charity maintained control and responsibility over the use of any distributed funds by first making a field investigation of the proposed project to which the funds would be put, by then entering into a written agreement with the recipient organization, and lastly by making continuous field investigations to see that the money was expended in accordance with the agreement. The field investigations were done by the U.S. charity's staff within the foreign country. Any foreign organization that received financial assistance from the charitable organization was organized and operated in a manner analogous to a U.S. charity and was completely independent of the foreign government.

The IRS ruled that these circumstances were similar to those in example 4 of Revenue Ruling 63-242 and the example in Revenue Ruling 66-79. Thus, contributions to the U.S. charity in Revenue Ruling 75-65 were treated as deductible under Code §170.

There have also been a few General Counsel Memorandums[13] that have addressed this issue. These General Counsel Memorandums reiterate many of the principles already articulated herein, although they emphasize some points more than others. For example, in General Counsel Memorandum 35319 (April 27, 1973) the IRS emphasized that in most cases, a U.S. charity should have precise, advance knowledge of how funds forwarded to a foreign recipient will be used. Mere promises from a possible foreign recipient that grant funds will be used for charitable purposes with subsequent reports accounting for the precise use of such funds will typically not be sufficient unless other procedures are in place, such as (a) reviewing multiple proposed projects in detail and allowing the foreign entity to choose from the proposed projects based on need or (b) conducting frequent, periodic audits to determine how a foreign recipient is using distributed funds.

In General Counsel Memorandum 31809 (Oct. 17, 1960), the IRS concluded that contributions to a U.S. charity and later distributed to a foreign organization were deductible, emphasizing that the U.S. charity exercised substantial responsibility for determining how the foreign recipient would use the distributed funds. The IRS noted that the foreign organization submitted a detailed budget to the U.S. charity which allowed the U.S. charity to select projects that it wished to support. The IRS also emphasized that the U.S. charity employed a representative in the foreign country to inspect the foreign organization's activities that it supported and it had the right to withhold future distributions for a particular project if the foreign organization did not act in accordance with the terms of any grant.

The IRS did, however, express some concern in General Counsel Memorandum 31809 when a U.S. charity first agrees to support a specific project of a foreign recipient and then solicits funds for financial support. The IRS indicated that in these circumstances, in order for contributions to qualify for deduction, the U.S. charity would still have to maintain control over the manner in which the foreign organization used the distributed funds and have the ability to withhold future distributions (or perhaps recollect prior distributions) if, for example, a particular project evolves into something that does not further the U.S. charity's charitable purposes. Otherwise, under this scenario, the U.S. charity risks treatment as a mere conduit for a foreign recipient, which would result in the non-deductibility of the contributions made to the U.S. charity to support the foreign project. The position of the IRS is thus somewhat more restrictive in this General Counsel Memorandum than perhaps indicated in Revenue Ruling 75-65. This illustrates that the ability of a U.S. charity to demonstrate control and discretion of funds distributed to a foreign recipient is very fact intensive and the more that a U.S. charity can do to establish control and discretion, the better situated it will be in the event such activities are ever reviewed by the IRS.

There are other authorities that focus on this issue and apply the principles primarily outlined in Revenue Rulings 63-252 and 66-79. However, in reviewing those authorities, as well as the authorities discussed herein, we have found that the same factors are often mentioned in determining whether a U.S. charity exercises discretion and control over funds distributed to a foreign organization. In general, indicia indicating the presence of such control and discretion include the following:

1. The U.S. charity, through its board or officers, pre-approves a foreign grant after reviewing the grant request in some detail (and perhaps even after a field investigation of the activities of the requesting foreign organization);
2. Periodic accountings of grant funds are given to the U.S. charity by the foreign organization recipient, or the U.S. charity periodically reviews or audits the financial statements of the foreign organization;
3. The U.S. charity can refuse grants that are requested from foreign organizations;
4. The U.S. charity retains the right to withdraw approval of a grant and perhaps even to receive a refund of any unexpended grant funds;
5. Grant monies are used for specific projects in furtherance of the U.S. charity's exempt purposes, and are not used merely for general administrative expenses of the foreign organization recipient;
6. Funds granted are from the general fund of the U.S. charity and are not from funds that have been earmarked by donors for a particular foreign project or foreign recipient;
7. If a donor has made a request regarding the use of his or her donation, a disclaimer is given by the U.S. charity in the solicitation or receipting of that donation regarding the responsibility and authority of the U.S. charity to (i) exercise control over the funds, (ii) withdraw approval of a grant if it is in the best interests of the U.S. charity to do so, and (iii) redirect the funds in furtherance of its exempt purposes as it deems appropriate;
8. The U.S. charity has a variety of charitable or religious activities underway in the foreign country to which the grant is being directed;
9. A written agreement is in place between the U.S. charity and the foreign organization recipient as to the use of the funds;
10. Continuous field investigations occur to ensure that the grant money is used in accordance with the terms of the agreement or within the parameters of the grant request and award;
11. The U.S. charity only releases grant funds for specific projects on an "as needed" basis; and
12. If grant funds are received by a foreign organization recipient, which in turn makes disbursements to other organizations or individuals, the U.S. charity making the grant determines the eligibility of the ultimate recipients of the funds.

It may be difficult to satisfy all 12 criteria with respect to any particular grant. Common sense should inform some steps taken in this regard, as an international grantmaking program that distributes tens or hundreds of thousands of dollars a year will need to be run differently than one that only makes $1,000 in distributions a year. Nevertheless, no matter the size of the foreign grantmaking program, we encourage all of our clients to maintain procedures and guidelines in their grantmaking programs that will allow them to demonstrate as many of the foregoing factors as possible and avoid being treated as a mere conduit for a foreign recipient of U.S. grant monies.

International Grants—Rules regarding Anti-Terrorist Financing

While the IRS has historically focused on the federal income tax issues associated with international grantmaking, the events of September 11, 2001 seemed to shift some of the focus. Although the deductibility of certain contributions as discussed above continues to be an important issue, a concern from the U.S. government's perspective is preventing U.S. charities from financing terrorism, whether intentionally or unwittingly.

As a result, the Department of Treasury, the President, and the Congress have taken various steps to combat terrorist financing through U.S. charities. These steps include issuing voluntary guidelines and enacting mandatory laws, all of which could potentially apply to the international grantmaking activities of a U.S. charity. The voluntary guidelines and mandatory laws include the following:

1. "U.S. Department of the Treasury Anti-Terrorism Financing Guidelines: Voluntary Best Practices for U.S.-Based Charities" (referred to herein as the "Voluntary Best Practices ");
2. Executive Order 13224, which is enforced by the Office of Foreign Asset Control ("OFAC"), a division of the Department of Treasury;
3. the Patriot Act[14]; and
4. the Suppression of Financing and Terrorism Convention Act of 2002.[15]

In general, the Voluntary Best Practices provide a number of suggested steps that the Department of Treasury believes should be undertaken by U.S.-based charities involved in international grantmaking before transferring funds to a foreign recipient. The Voluntary Best Practices have met with almost universal disapproval. Nevertheless, they exist, and even though they are voluntary, they may influence decisions made by law enforcement officials investigating terrorist financing.

In some manner, Executive Order 13224, the Patriot Act, and the Suppression of Financing and Terrorism Convention Act all forbid anyone (including U.S. charities) from funding terrorist activities and impose penalties for failure to abide by those prohibitions. The key determination for each of these rules is which countries, organizations, and individuals are treated as terrorists or supporters of terrorism. Those countries, organizations, and individuals that are treated as terrorists or supporters of terrorism are generally made known to the public through a list published by OFAC. Violation of Executive Order 13224, the Patriot Act, or the Suppression of Financing and Terrorism Convention Act can lead to civil and criminal penalties, and in the most server circumstances, imprisonment. Under the Executive Order, civil penalties may be imposed even if violation thereof was not intentional. That is, even unwitting violations of the rules in Executive Order 13224 could lead to civil penalties.

Each of these enforcement steps is discussed in more detail below.

1. Voluntary Best Practices. As discussed above, one recent step taken by the Department of Treasury to combat terrorist funding through U.S. charities was the release of the Voluntary Best Practices. The Voluntary Best Practices are attached as Exhibit A. While some of the practices make good sense, others can be quite pervasive (particularly those under Section IV dealing with Anti-Terrorist Financing Procedures). Considered in the aggregate, there are enough concerns with the Voluntary Best Practices that a number of organizations have suggested that they be withdrawn completely, or withdrawn and amended.

The Voluntary Best Practices are organized into four categories:

1. 1. Section I-Governance;
2. 2. Section II-Disclosure/Transparency in Governance and Finances;
3. 3. Section III-Financial Practice/Accountability; and
4. 4. Section IV-Anti-Terrorist Financing Procedures.

The practices set forth in the first three categories generally represent good grant-making practices that many U.S. charities probably already have in place. For example, Section I-Governance provides that a U.S. charity should have governing documents that outline the charity's purposes, it should have a board of directors that meets regularly, and it should document all decisions. Section II-Disclosure/Transparency in Governance and Finances indicates that a U.S. charity making international grants should disclose the identities of its board members and key employees, along with compensation levels (the type of information already required in IRS Form 990).[16] Section II also encourages U.S. charities to take steps to make their solicitation and distribution activities transparent by identifying recipients of grants and providing donors with accurate information concerning the use of their contributions. Section III-Financial Practice/Accountability focuses on things such as adopting a budget, having the U.S. charity's financial statements audited, and using wire transfers or checks rather than cash to make grants. Again, the types of best practices outlined in the first three sections of the Voluntary Best Practices are most likely the types things that the many properly operated U.S. charities are already doing.

Section IV-Anti-Terrorist Financing Procedures suggests practices that are practical and valuable in some respects, but others that are invasive and arguably not tailored to the goal of the grant. For example, Subsection A addresses information that a U.S. charity should collect about a foreign recipient before making any grant. Some of the information is fairly routine (e.g., the name of the foreign recipient in English, a report on the foreign recipient's purposes, etc.). Other information is not (e.g., a list of any sub-contracting organization, the grantee's other sources of income, etc.). We have heard from a few grantmaking organizations that these types of requests may be made in some circumstances (such as when a sub-contractor would be integral to the project for which funds are granted), but that in other circumstances, the information may be irrelevant. Likewise, Section IV.B.3 requests information regarding the nationality, citizenship, and place and date of birth for key staff, etc., for each foreign grantee. Not only would obtaining this information be time consuming and in some cases practically impossible, many grantmaking organizations fear that requesting this information will raise suspicions that the requests are being made for intelligence gathering purposes rather than for reasons associated with the charitable mission of the organization.

Another problem with the Voluntary Best Practices is that they include suggestions that are required under federal law. For instances, failure to review the identity of foreign grantees against certain lists of terrorist organizations probably results in a violation of either Executive Order 13224 or the Patriot Act, both of which are discussed below. In this respect, the voluntary notion of the Voluntary Best Practices may suggest that certain steps enumerated therein are not required when in fact they are.

The Voluntary Best Practices were addressed in recent IRS Announcement 2003-29. This announcement requested public comment on the IRS's existing international grant-making policies. It also requested comments on the Voluntary Best Practices. A number of organizations submitted comments, including a Task Force from the Exempt Organizations Subcommittee of the American Bar Association (the "Task Force").

The Task Force recommended that the Voluntary Best Practices be withdrawn and resubmitted in an amended format. There are numerous reasons for this recommendation. The Task Force: (1) saw inconsistencies within the Voluntary Best Practices; (2) believed that the Voluntary Best Practices were too vague and broadly worded so as to likely cause confusion; (3) perceived overlap between what was supposedly voluntary under the Voluntary Best Practices and what was required by federal tax laws and other anti-terrorism laws; (4)considered the Voluntary Best Practices to be unworkable because it was a "one size fits all" document rather than a flexible document that could be applied as necessary based on risk assessment; (5) reasoned that full compliance with the Voluntary Best Practices would prevent U.S. charities from making some much needed grants because of the compliance costs; and (6) determined that the Voluntary Best Practices would not provide any significant value in achieving the Department of Treasury's goals.

In summary, the Voluntary Best Practices includes a mix of some good and bad suggestions when considered individually. However, as a single, cohesive document, the Voluntary Best Practices probably should be withdrawn or amended for the reasons discussed above. Importantly, the Voluntary Best Practices are voluntary, and at least theoretically, failure to follow them should not in and or itself lead to liability or loss of exemption. Some commentators have nevertheless expressed concern that U.S. charities might be adversely affected by any failure to follow the Voluntary Best Practices. These commentators have referred to the Voluntary Best Practices as a vague "enforcement tool." Their opinion is that federal enforcement officials might treat U.S. charities less favorably if the Voluntary Best Practices are not followed.

Generally, we think that our clients should be aware of the Voluntary Best Practices and incorporate some of the suggestions therein as seems appropriate. However, in developing guidelines and procedures for any international grantmaking program, the focus should be on the rules discussed above with respect to the deductibility of contributions and the rules discussed immediately below, which are not voluntary but mandatory.

2. Office of Foreign Asset Control. The United States often imposes "unilateral economic sanctions" on countries and organizations that pose a threat to its national security or foreign policy. These types of sanctions, most often promulgated by presidential executive order, have become an issue of greater public recognition in the past two years as the United States has used them in response to the terrorist acts of September11, 2001.

As background, the imposition of so-called "unilateral economic sanctions" has become an increasingly popular tool for U.S. presidents to use in their efforts to coerce changes in the behavior of a broad range of foreign countries, governments, and persons/entities.[17] It is very hard to draw many general conclusions about the nature of the prohibitions and obligations imposed on U.S. persons and organizations by the various U.S. sanctions programs that are now or have been in effect, because the nature and scope of the sanctions imposed varies with each particular sanctions regime.[18] However, one concern common to all sanctions programs is that the penalties that can be imposed for failure to comply with the prohibitions and obligations under each regime can sometimes be severe and often include both civil and criminal penalties. It is therefore important for every U.S. person and entity that might be subject to prohibitions and obligations under any U.S. economic sanctions program to develop a compliance system that will permit it to identify any sanctions programs potentially applicable to its operations, assess the extent of applicability, and implement steps ensuring compliance.

Economic sanctions are imposed by the U.S. either pursuant to a particular sanctions statute, such as the statutes governing U.S. sanctions in relation to Cuba, or pursuant to one of several generic statutes authorizing the President to impose sanctions, generally by means of issuance of a presidential "Executive Order." With the respect to the latter, a presidential Executive Order can generally be issued upon occurrence of certain pre-conditions, such as a presidential declaration of the existence of a threat to U.S. national security. To understand the nature and scope of a particular sanctions program, it is therefore necessary to understand key provisions of the statute under which the sanction is authorized and, if applicable, the specific Executive Order issued to impose the sanctions in question. In addition, the department of the U.S. government responsible for implementing the particular sanctions program, often OFAC, typically issues regulations in relation to each major sanctions program, explaining how that program is to be interpreted and enforced. Among other things, those regulations usually authorize the government to issue notices or "licenses" which can confirm that specific persons or entities are permitted to carry out particular types of activities in relation to the country or persons/entities under sanction, without violating the sanctions prohibitions. For example, a licenses can sometimes be issues to allow a U.S. charity to provide charitable relief in a particular country against which the U.S. has otherwise sanctioned.

One of the key sanctions programs following September 11 was established by Executive Order 13224. President Bush signed Executive Order 13224 on September 23, 2001 in response to the terrorist acts on September 11. Executive Order 13224 was issued under the authority of the International Emergency Economic Powers Act ("IEEPA").[19] Generally, the IEEPA grants the President with authority to deal with any unusual and extraordinary foreign threat to the national security, foreign policy, or economy of the United States.[20]

Most simply, Executive Order 13224 blocks property and prohibits transactions with persons who commit, threaten to commit, or support terrorism. These persons are organizations and entities as identified in a list, which is periodically updated. The list naming terrorists and terrorist supporters for purposes of Executive Order 13224 can be found on the Internet at OFAC's SEQ CHAPTER \h \r 1web site.[21]

Penalties for failure to comply with Executive Order 13224 are imposed under the IEEPA and regulations issued by OFAC implementing the Executive Order.[22] According to the IEEPA, a civil penalty may be imposed on any person who "violates, or attempts to violate" Executive Order 13224.[23] There is no requirement that a person willfully violate the Executive Order before civil penalties are imposed. By contrast, a criminal penalty may be imposed only when a person "willfully violates, or willfully attempts to violate" Executive Order 13224.[24]

For a civil violation of Executive Order 13224, the penalty will not exceed $11,000 per violation.[25] For any person who willfully violates the Executive Order, the criminal penalty will not exceed $50,000 per violation of more than 10 years imprisonment.[26]

It is also important to note that the regulations implementing Executive Order 13224 make it clear that the prohibitions therein apply to the types of transactions typical of charitable organizations.[27] Specifically, "no charitable contribution or donation of funds, goods, services, or technology, including those to relieve human suffering, such as food, clothing, or medicine, may be made to of for the benefit of" any person blacklisted under Executive Order 13224.[28] There is no specific provision in the regulations to suggest that a license could be obtained to provide such charitable relief.

With respect to the sanctions currently imposed under Executive Order 13224, U.S. charities distributing funds overseas should undertake procedures to verify that foreign recipients are not listed as terrorist organizations and persons who support terrorism. In addition to checking the name of the actual recipient against the list, in some cases a U.S. charity may need to check the names of directors, officers, and other key employees against the list because Executive Order 13224 prohibits any contribution made for the benefit of a terrorist or terrorist supporter, which might include an organization's director, officer, or other key employee. While such extensive steps would be difficult in some situations, and not justified in others, a U.S. charity should use good judgment and take this extra step if the circumstances of any particular grant so warrants.

3. The Patriot Act. In October 2001, Congress enacted the Patriot Act. The purposes of the Patriot Act are rather broad and its provisions address a variety of issues. As a brief (and incomplete) outline, the Patriot Act:

1. gives government officials greater authority to track and intercept communications, both for law enforcement and foreign intelligence gathering purposes;
2. vests the Secretary of Treasury with regulatory powers to combat corruption of U.S. financial institutions for foreign money laundering purposes;
3. seeks to further close U.S. borders to foreign terrorists and to detain and remove those within our borders; and
4. creates new crimes, new penalties, and new procedural efficiencies for use against domestic and international terrorists.

The provisions having the most impact on U.S. charities are those regarding new crimes and new penalties. In many respects, these are not really new crimes, but amendments to previously enacted laws addressing terrorism to close perceived loopholes.

In particular, the Patriot Act amends Sections 2339A and 2339B of Title 18 of the United States Code. Together, Sections 2339A and 2339B impose both criminal and civil penalties on anyone who either knowingly or intentionally provides "material support" to terrorists or foreign terrorists organizations.[29] The Patriot Act increased the potential length of imprisonment for violation of either Sections 2339A and 2339B.[30] In addition, the Patriot Act expanded the definition of "material support" to include "expert advice or assistance."[31]

4. The Suppression of Financing and Terrorism Convention Act of 2002. The Suppression of Financing and Terrorism Convention Act added Section 2339C to Title 18 of the United States Code to specifically address the financing of terrorism and consequent penalties.[32] Section 2339C prohibits, among other things, fundraising and providing funds with the intention or knowledge that funds will be used to commit a terrorist act.[33] A violation of Section 2339C could result in imprisonment and/or fines.[34] A "legal entity" will be liable for at least $10,000 in civil penalties if a person responsible for the management or control of the legal entity raises or contributes funds in such capacity, intending or knowing that they will be used to carry out a terrorist act.[35]

Importantly, the provisions under Sections 2339A, 2339B, and 2339C, as amended by the Patriot Act and enacted by the Suppression of Financing and Terrorism Convention Act, all have an intent requirement. Thus, to be guilty under one of those sections, the agents or representatives of a U.S. charity would need to have knowledge and intent to support or fund terrorist activities before civil or criminal penalties could be imposed. Given our clientele, we do not find this to be a concern. Nevertheless, the provisions of Sections 2339A, 2339B, and 2339C do provide an illustrative contrast to Executive Order 13224, because while Sections 2339A, 2339B, and 2339C require knowledge and intent, Executive Order 13224 does not.

Summary

In summary, the rules regarding international grantmaking today focus on federal income tax issues and anti-terrorist financing issues. The rules regarding the former have remained relatively unchanged for the past 40 years and focus on the control and discretion exerted by U.S. charities over distributions made to foreign recipients. Each U.S. charity with international grantmaking activities should implement guidelines and procedures to establish such control and discretion as is required by the IRS. The focus on anti-terrorist financing issues is a more current concern. In that regard, we believe that the rules of Executive Order 13224 are most important for our clients because there is a liability risk even if the rules are violated unintentionally. We encourage all of clients to put into place procedures to verify that their international grantmaking activities do no violate Executive Order 13224. We are happy to work with any client in establishing guidelines and procedures to help comply with the rules and regulations discussed herein.

John R. Wylie is an attorney in Colorado Springs, CO with Holme, Roberts and Owen, LLP.

[1] See Code § 170. Unless otherwise indicated, all references to the "Code" herein are to the Internal Revenue Code of 1986, as amended. In addition, organizations exempt from tax under Code §501(a) because they are described in Code §501(c)(3) are sometimes referred to herein as a "U.S. charity."
[2] Id. §170(c)(2)(A) (providing that a deductible charitable contribution is one that, among other things, is made to a corporation, trust, or community chest, trust, or fund created or organized in the United States). Prior to the Internal Revenue Act of 1938, there were no restrictions on deducting charitable contributions made to foreign recipients. See Internal Revenue Act §102(c) (1935).
[3] Treas. Reg. §1.170A-8(a)(1).
[4] 1963-2 C.B. 1.
[5] According to the revenue ruling, each of the foreign corporations in these five examples would satisfy the requirements of Code §170, such that deductions to them would be deductible if they had been formed in the U.S. instead of a foreign country.
[6] When referred to in Revenue Ruling 63-252, as well as throughout this memorandum, the term "earmarking" refers to a charitable contribution that the donor requires to be used for a specific purpose or a specific individual. If the contribution cannot be used in the manner requested by the donor, then the donor requires that the contribution be returned (or the donor simply will not make the contribution). This is a step further than indicating a preference that a charitable contribution be used in a particular manner, but leaving the ultimate use of the contribution within the discretion of the recipient charitable organization.
[7] See Priv. Ltr. Rul. 9651031 (Sept. 20, 1996).
[8] 1966-1 C.B. 48.
[9] Rev. Rul. 56-304, 1956-2 C.B. 306.
[10] Rev. Rul. 62-113, 1962-2 C.B. 10.
[11] Id.
[12] 1975-1 C.B. 79.
[13] General Counsel Memorandums are internal position papers drafted by the Office of General Counsel for the IRS. They are not binding. However, the IRS publishes some of them and most practitioners consider them to be persuasive.
[14] Pub. L. No. 107-56, 115 Stat. 272 (2001). Public Law Number 107-56 is often referred to as the Patriot Act, which is abbreviated term that we use herein.. The term "PATRIOT" is actually an acronym. The official name of the Patriot Act is "Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism" (i.e., the USA Patriot Act).
[15] Pub. L. No. 107-197, 116 Stat. 721, title II (2002).
[16] In Section II, the Voluntary Best Practices also encourage that a board member's or key employee's home address and social security number be made public. For obvious privacy reasons, these disclosures (particularly disclosure of a board member's social security number) are the type that seem too far-reaching.
[17] The sanctions are, however, sometimes imposed domestically, as was the case with a few U.S.-based organizations that the U.S. has black-listed as supporting terrorist activities (e.g., Afghan Support Committee, the Revival of Islamic Heritage Society, and the Holy Land Foundation).
[18] Economic sanctions are somewhat broad, and the U.S. has targeted foreign drug cartels, global terrorists, foreign governments (e.g., Cuba), and pseudo-governments (e.g., the Taliban). There are a number of statutes that authorize the imposition of sanctions, such as the International Emergency Economic Powers Act (discussed below), the Foreign Narcotics Kingpin Designation Act, and the Trading with the Enemy Act. Most of the sanctions programs can be reviewed on OFAC's website. For purposes of this memorandum, we have focused on sanctions imposed under Executive Order 13224, which is the sanctions program that we believe most relevant to our clients at this time.
[19] 50 U.S.C. § 1701, et seq.
[20] Id. §1701.
[21] OFAC's web site can be found at <www.ustreas.gov/offices/enforcement/ofac/index.html>. In addition to the sanctions under Executive Order 13224, there are other sanctions regimes. For instance, one sanctions regime focuses on the Taliban, while another focuses on Drug Traffickers. There are also a series of sanctions regimes against various countries, including Iran, Iraq, Liberia, and Libya, to name a few.
[22] The regulations issued by OFAC implementing Executive Order 13224 can be found at 31C.F.R., pt. 594.
[23] 50 U.S.C. § 1705(a).
[24] Id. §1705(b).
[25] Id. §1705(a); 31 C.F.R. §594.701(a)(1).
[26] 50 U.S.C. §1705(b); 31 C.F.R. §594.701(a)(2). Note that for multiple violations criminal penalties are limited to $250,000 for an individual and $500,000 for an organization. 18 U.S.C. §3571.
[27] 31 C.F.R. §594.409.
[28] Id.
[29] 18 U.S.C. §§2339A, 2339B.
[30] Patriot Act §810(c), (d). Under the increased penalty structure, the maximum term of imprisonment was increase from 10 to 15 years and if the death of any person were to result from a violation of either of Sections 2339A or 2339B, then a court could impose a life term of imprisonment.
[31] Patriot Act §805(a)(2).
[32] Suppression of Financing and Terrorism Convention Act §202(a).
[33] 18 U.S.C. §2339C(a)(1)-(3). Presumably, providing financial support to support terrorism would be a type of "material support" as defined under 18 U.S.C. §2339A. However, Congress wanted to guarantee that such financial support would be criminalized and thus added Section 2339C as a separate, financial crime.
[34] Id. §2339C(d). Imprisonment could last up 20 years, depending on the type of violation.
[35] Id. §2339C(f).