Raul Larios

Is Fraud at Non-profits Significant?

Met Council LogoI recently completed a professional certification at New York University in Non-Profit Accounting & Government Reporting, and the subject that troubled me the most is the rising incidence of fraud at tax-exempt organizations (TEOs). Since 2008, most nonprofits are required to file the new revised IRS Form 990 and disclose any “significant diversions” of their assets. By significant, the Internal Revenue Service means losses of $250,000 or more suffered by the tax-exempt as a result of theft, fraud or embezzlement.

Analysis of this new IRS data reveals that the number (and dollar amounts) of reported diversions is huge, especially here in New York. This was brought to light a couple of months ago by Joe Stephens and Mary Pat Flaherty at the Washington Post after an extensive review of thousands of non-profit filings from 2008 through 2012. (You can read the full story here.) They found that TEOs have been scammed out of hundreds of millions of dollars. And we’re not talking about small, under-staffed TEOs. The victims range from AARP ($250,000 embezzlement) to the Maryland Legal Aid Bureau ($2.5 million). Here in New York, the victims range from well-known hospitals such as Vassar Brothers Medical Center in Poughkeepsie ($8.6 million) to such venerable Ivy-League institutions as Columbia University ($5.2 million).

However, one significant diversion in New York that you will not yet find in a public Form 990 because it is so recent is the case of the Metropolitan Council on Jewish Poverty. Just a few months ago, the Board of Directors of the Met Council (as it is commonly known here in New York) received an anonymous letter alleging an insurance kickback conspiracy between its CEO William Rapfogel and its insurance broker, Century Coverage Corporation. Apparently, Century was inflating the premiums on the insurance plans it sold the Met Council, to the tune of $5 million.  Supposedly, the CEO was kicked backed over $1 million in cash, with his co-conspirators getting the remaining $4 million. Allegedly, some of that $4 million was then funneled back to City and State politicians who had steered government grants to the Met Council.

For those of you not familiar with the non-profit industry in New York City, the Met Council was one of the most venerable and respected social service groups in the Jewish community, with an annual operating budget of approximately $27 million (according to the most recent Form 990 publicly available, which is for year ended 6-30-2011).  Nearly $12 million of the Council’s expenses that year were financed with state and local government grants (in other words, with your taxpayer money).

According to the New York Times, long-time CEO William Rapfogel was so respected in the Jewish community that he was sometimes referred to as “the prince of the Jews”. He was also extremely influential in City and State government circles. He was close, personal friends with the powerful Speaker of the New York State Assembly, Mr. Sheldon Silver, and with many other lawmakers whose friendship he cultivated over the years, and who have directly or indirectly steered millions in City and State grants to the Met Council.

By the way, the owner of insurance broker Century Coverage (a prominent Breslov Hasidim by the name of Joseph Ross) pleaded guilty shortly after his arrest in November. He is said to be cooperating fully with the authorities in the hopes for leniency. Both the current Met Council CEO (William Rapfogel) and the former CEO from 1989 to 1992 (Rabbi David Cohen) were arrested, as was the former CFO from 1991 to 2009 (Herbert Friedman) on a long list of charges including grand larceny, money laundering, criminal tax fraud, conspiracy and falsifying business records. It seems that the scam has been in place since the early 1990’s!

Upon discovery of the embezzlement, the Board acted correctly in firing Mr. Rapfogel and informing the authorities. It should come as no surprise to you that government regulators temporarily froze millions in grants and contracts that had already been approved for the Met Council, pending an investigation. But what should surprise you was how quickly the charity was cleared of any wrongdoing (in less than 60 days).

Even more surprising was that the State required only a few basic reforms of the non-profit, such as putting in place a code of ethics, and policies for conflicts of interest and anti-nepotism. Also, it’s to appoint 2 new independent directors and submit to monitoring of its compliance by an outside inspector general.

That’s it…?!  You might be wondering how could such a large tax-exempt organization not have a code of ethics, or policies to deal with conflicts of interest and anti-nepotism in the first place?  And more importantly, would these reforms have even prevented the fraud?

Equally troubling to me is the fact that the scam was only discovered thanks to an anonymous letter — and not through the Met Council’s auditors or the Board’s audit committee or any government oversight. It’s in these failures by the auditors, the Board and the government agencies that awarded the grants where the real problems lay, not in some deficient code of ethics.

In my opinion, the State should have fired the auditors and all the Met Council’s senior accounting & finance leadership, as well as replaced the entire Board of Directors. In addition, it should have appointed an independent inspector general to investigate and reform its own State agencies that awarded these grants without the proper oversight. Only then are you truly starting to address the problems.

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January 21, 2014 Posted by | New York | , , , , , , , , , | 7 Comments

   

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