Charities and the USA Patriot Act: Separating Reality from Fantasy

Some commentators appear to view the now 20-year-old USA Patriot Act (“Act”) as a calculated effort to make life miserable for exempt organizations.  While it is true that some aggressive interpretations of the Patriot Act by the private sector have proven burdensome for the charitable world, members of the “501(c) club” should not fall prey to the myth that the law is a yoke around their necks.  This blog will provide a basic primer about what the Act means – and doesn’t mean – for charities.

The purpose of the Patriot Act is clear, and it does not focus on charities.

The Patriot Act was signed into law by President Bush (43) in 2001 in the wake of the World Trade Center massacre.  The purpose of the legislation was to deter and punish terrorism, largely by investigating, monitoring, and controlling financial transactions around the world.  A word-search of the text of the Act reveals nary a reference to “charities,” “nonprofits” or “exempt organizations.”

Enforcement actions against charities under the Patriot Act have been very limited and have involved charities serving as “fronts” for terrorist activities.

Since the passage of the Patriot Act and related regulations and Executive Orders, the Treasury Department has designated a small number of exempt organizations as having links to terrorist activities.  These organizations are then subject to sanctions by the Office of Foreign Assets Control (“OFAC”) and almost invariably lose their status as an IRS-recognized charity.

Overwhelmingly, the bulk of enforcement actions under the Act have targeted individuals and for-profit institutions.

The Treasury Department has issued voluntary “best practices” for charities to avoid inadvertent participation in activities prohibited by the Patriot Act.

Some charities are heavily involved in domestic and foreign financial transactions, so it is possible that they could be unwittingly ensnared in activities prohibited by the Patriot Act.  Recognizing that reality, the Treasury Department has issued an extensive “best practices” document designed to assist exempt organizations in avoiding these problems.

Significantly, these practices are designated as “voluntary,” further confirming that the Act does not seek to impose regulatory burdens on charities.

Despite the voluntary nature of the practices, it would be prudent for all but the most locally-focused charities to review them.  The Treasury document can be found at various (but ever-changing) locations on the Web.  (Search for “Voluntary Treasury Guidelines” & charities.)   While a summary of the practices is well beyond the scope of this post, it is worth noting that charities funding extra-U.S. activities, whether directly or indirectly, need to be mindful about vetting the recipient(s) of that support.

The most obvious risk to charities under the Act is liability arising from the provision of financial and other kinds of support for terrorism. This would be a concern mostly for domestic organizations that have significant foreign activities, either directly or through associated organizations.

While the Act proscribes only certain forms of “intentional” conduct, the Treasury recommendations certainly anticipate that charities will exercise some degree of due diligence with respect to foreign transactions.  Legal liability aside, no charity wants to deal with the public relations nightmare of an inadvertent association with terrorism.

CCK TIP:  Charities that provide any funds (via grant or otherwise) for foreign activities should closely review the Treasury recommendations, especially those providing guidance on due diligence.  Organizations with a heavy foreign focus may wish to retain specialized counsel to develop procedures to avoid inadvertent violation of the OFAC regulations and related standards.

The Patriot Act does not forbid the receipt of foreign contributions.

Nothing in the Patriot Act or the accompanying regulations, executive orders, or guidelines requires the rejection of contributions or bequests from foreign sources.  If a charity already has a robust gift acceptance policy in place, handling such gifts should be “business as usual.”

Common sense and ordinary prudence should govern where mysterious, possibly anonymous, support arises from foreign sources.  For example, cryptocurrencies have become a significant medium for charitable giving.  Such gifts are difficult to trace if the donor does not self-identify. For example, in 2020, a French computer programmer made a Bitcoin gift of roughly $500,000 to various groups in the U.S.  Days later, the programmer committed suicide.  The FBI is now investigating whether the donations were part of a plot by foreign agents to violate U.S. election laws.

This case illustrates the importance – and the difficulty – of tracing the source of extra-U.S. support.  Again, acceptance of tainted funds carries some risk of liability and significant risk of embarrassment.

The Act does not require charities to disclose personal information about directors and officers to receive, e.g., inherited IRA funds.

The broadest effect of the Act on the charitable sector has been the widespread misinterpretation of the law by financial institutions.  Frequently, and maddeningly, charity officials are required to become, in essence, involuntary customers of the institution, providing personal identifying details, to secure the release of inherited retirement accounts.

Although some of the nation’s larger fiduciaries have agreed that direct and immediate distribution of such accounts to charities is in full compliance with applicable laws, the “open a new account” requirement is alive and well at many institutions.

CCK TIP:  Our firm, along with others involved in the nonprofit world, is working diligently to solve this problem for our clients.  It is one of many burdens that professional bequest management can lift from the shoulders of personnel in charitable organizations, allowing them to focus on activities central to their missions.