Jeffrey M. Hurwit, J.D. (Founder, Hurwit & Associates)
Excerpts from a presentation ("Nonprofit Law: Legal and Governance Issues for NGOs Worldwide") given on June 8, 2010 at the 2010 online World Congress of NGOs.
Having discussed the legal duties of United States nonprofit boards, let us take examine how this impacts the relationship between United States organizations and NGOs outside the United States. Note that the same theme of stewardship and the same model really does continue.
Since I know that the laws and terminology of nonprofit cultures can vary so widely between countries, let us first make sure at the onset that we are all using in the same way two terms that are often confused.
Friends organization. One is the concept of a “friends organization,” sometimes called a supporting organization. (It also is often called a “friends of organization,” since so many nonprofits that support foreign charities have names that begin with those two terms, such as Friends of China Heritage Fund. However, there also are innumerable such nonprofits that do not have names that begin with those two words, such as Doctors Without Border/Medecins Sans Frontieres.) In the United States, the term friends organization has a technical legal meaning, which I am not referring to now. When I use the informal term “friends organization,” I mean an organization in one country -- say the United States -- that has organized funds for the purpose of supporting an organization in another country. This is commonly, for example, friends of a university or a museum abroad. So here I am talking primarily in terms of when funds flow from the United States to an organization supported abroad.
Chapter. Another contrasting term that is commonly used is the word “chapter.” This is a term used in the United States that quite often itself does not have defined legal meaning. It is often referred to around the world as an affiliate, partner, or even subsidiary organization. In this context, a chapter carries on the work of an organization in another area of the world, such as, for example, in Japan or the United Kingdom.
So, in the case of a chapter, the parent organization is in one country conducting operations abroad via a chapter, whereas a friends organization is channeling funds from one country to what I loosely call the parent organization.
United States Friends Organizations
With that distinction in mind, let us first look at the operation of a United States friends organization and the organization it supports. I would like to stress the importance of the rule in this area that, in order to fulfill the responsibilities of stewardship that we talked about, the board of the United States organization, even a friends organization, still has that duty to fulfill its stewardship duties in the United States. That is, it cannot simply pass on that role and responsibility to the organization that it supports abroad.
Now to be clear, the United States board could be comprised completely of non-US citizens or non-US residents. There is no requirement whatsoever in the United States law that there be a certain number of board members or that they are from a certain state or anywhere in the world. The point, however, is that the board cannot be controlled by a non-U.S. entity. Thus, the majority of the board of directors of a U.S. friends organization cannot be comprised of leaders of the board of a foreign NGO. Keeping in mind our discussion of stewardship and you will see why even U.S. friends organizations cannot simply act as a flow-through or a pass-through to support an organization. They must ensure that the assets that they raised are used for the benefit of the public in various countries.
You might ask, if funds are raised in the United States to support the mission abroad, why cannot the U.S. friends organization simply send the money to the foreign entity? This is the primary tension that arises between the organization abroad and its U.S. affiliate. The way to resolve this is for everyone involved to understand what U.S. law requires in terms of stewardship and to build an operating model around that.
Let me give you an example of how this might be done systematically with a minimum of effort for both parties, and in a way that recognizes that time is not an unlimited resource. Let us assume that there is a U.S. friends group that supports a Kilimanjaro school in Arusha, Tanzania. In this case, money is raised by the friends group to support the school. The proper next step is for the friends board to decide essentially to make a grant to the school for those same purposes. The school then agrees, by way of a simple grant agreement, to distinguish the transfer and distribution of U.S. funds to the foreign organization from simply a pass-through. (This can be done, by the way, in a very simple one or two page formally written letter.)
Through this grant agreement, the school agrees to use the funds for school purposes and importantly agrees to report back to the friends organization. They will write a report describing the expenditures and the accomplishments of the grant. If the friends organization sees that the funds are being used inappropriately, or is not getting a report, or is simply not satisfied for some reasons as it carries out its duty of stewardship, then it has the legal right and responsibility to refuse to make a grant. By doing so, it does fulfill its duty under the law, although that step is very rare.
Typically, this understanding of stewardship is recognized by both sides; it is not just the U.S. understanding its duties in stewardship. With this understanding in mind, the friends group and the entity in the other country -- the school in the example -- would develop a sound working relationship in a simple operating agreement. The agreement lays out in very straightforward, non-legalistic terms how this relationship is going to work: how there is the expectation that there will be a transfer of funds and a report on a regular basis. This will lead to a good relationship where there is an exchange of information and financials and hopefully an ability to work together in planning for major capital expenditures, school improvements, school needs. This can all be done while still observing that the organizations are legally separate and have different legal responsibilities.
A way I like to describe a friends organization is that it is like a foundation in that it makes grants, but it has only one possible grantee and that is the organization that it supports. It may decide not to support that organization at a given time or instance because it is not assured that the funds will be used for the benefit of the public. On the other hand, it does not have the right to give money to other organizations around the world. So it is somewhat like a foundation that has one grantee.