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The Arizona Republic exposes some high-overhead charities

SHOWCASE | May 11, 2009

Working a year on the story, the newspaper uncovers a network linked to a Phoenix televangelist that, on paper, sends donations from one charity to another, taking out great chunks of money along the way.

By Nonna Gorilovskaya

The Arizona Republic spent a year investigating a network of 22 charities linked to a Phoenix televangelist, Don Stewart. The resulting series documents how the charities spent most of their cash donations on overhead and inflated their bottom line by passing the donations—on paper—from one charity to another, inflating the value and claiming credit for donating goods that they never really handled.

The charities took in $28.8 million in cash revenue during the tax period 2003-2005. Of that money, $16.7 million, or 58 percent, went to cover salaries and other expenses. Five million of the cash was donated to other charities in the network, often run by the executives and other employees the Don Stewart Association and their family members. In all, according to the Republic’s investigation, three-quarters of the funds never got to recipients outside the network.

Twenty-one of the 22 of the charities in the network take part in the Combined Federal Campaign, which enables federal employees to donate part of their paychecks to charities.

The Republic’s investigation has already led to the shutdown of a Canadian charity that facilitated the paper transfers, and Arizona Attorney General Terry Goddard has said he will be looking into the issue.  

The series, which ran in the Republic over four days in May, includes an interactive graphic through which readers can follow the money for each charity and the relationships within the network. Click here for a link that connects to all the pieces, including four main news stories and more than 20 items in all.

Robert Anglen, who joined The Republic in 2004, was the reporter for the series. Earlier, he began an investigation of Taser International that linked the stun gun to multiple deaths and to injuries of police officers. In 2007, he exposed financial improprieties in the Maricopa Community Colleges system that led to the forced resignation of two college presidents.

Here is a Q&A I did with Anglen, shown at right, by telephone on May 7th.

What made you look into the story?

About two years ago, we got some information that suggested that there were charities that were tied to a religious organization, but they weren’t making that clear. There was nothing suggesting in any paperwork that these charities were owned or operated by anyone tied to a televangelist. They had names like Cancer Aid and Research Fund and Alternative Cancer Research Fund.

I looked at where money from one charity was going, and I looked at the recipients. I opened their 990s [IRS Form 990 is the financial report filed annually by tax-exempt organizations to maintain their status. It requires them to detail which groups they donate money to but not to reveal their donors.]. I found that the people operating one charity were related to the people receiving the money. Well, that’s a giant ringing bell. So then I started looking at the charities that those charities gave money to. Pretty soon, I had hundreds, if not thousands, of donations being moved through these charities. Then, it began to click into place that these charities were operated by this close-knit group of people. I identified a network of 22 charities in the stories.

What did you find out?

The names and mission statements of these charities suggest that they are focusing on a disease, like a cure for cancer. Well, it turns out that 76 percent of cash that was donated to these groups went to either expenses or donations to other charities in the network.

What’s the Don Stewart Association and how are these charities connected to it?

The Don Stewart Association is a televangelism ministry in Phoenix. Don Stewart is what’s commonly called a faith healer. A sort of a throwback to revival preaching is what he does.

The people operating these charities were, at the first rung, executives of the ministry. They were the executive director, the chief financial officer. Then their wives had their own charities and their children had charities. Other employees had charities, and their relatives had charities. The last tier were people who were associated with the organization or who had given donations to the charities operated by these people.

What were some of these charities’ objectionable practices?

This network of charities was using tactics to inflate their books. First of all, multiple charities were taking credit for the same donation. So, if one donation went to a homeless center, at least two charities were claiming that the money going to the homeless center was their donation. The second thing that they were doing was that they were taking credit for millions of dollars of donating goods and supplies to international foundations overseas, foreign countries that they never touched…

Ultimately, the donations would get to a mission in a foreign country, but the people who were taking the credit for donating it really had nothing to do with getting it there. They didn’t physically collect it. They didn’t physically store it. They didn’t physically distribute it. What they did in exchange for this paper ownership—that’s what they call it, “paper ownership”—is write a check to the person donating it to them to cover shipping costs. Ultimately, a charity might pay a thousand bucks and take credit for a million dollars in donated supplies. The shipping fees were roughly 1 percent of the actual donation that was being credited.

It was also happening on the local level. The Don Stewart Association owns a food bank. The employees of that food bank created charities. The food bank would donate food on paper to those charities and then those charities would take credit for donating the food when, in fact, the food was being donated by the food bank itself.

And that’s legal?

That’s legal. In total, they [the network of the 22 charities] claim to have $154 million in revenue. If you strip out the paper goods, what they’re left with is about $29 million dollars in cash. Of that, 5 percent went to a charity that we could identify as being outside the network.

What’s Combined Federal Campaign and how does it figure into this story?

One of the chief reasons for doing these paper transfers is that inflates your bottom line. Almost all of the charities engaged in these transactions are members of the Combined Federal Campaign. It’s the world’s largest workplace charity drive and it took in $270 million from federal employees in 2007. These are employees who gave donations out of their paychecks in a mechanism similar to the United Way. It’s overseen by the Office of Personnel Management.

There’s not very much criteria for getting into the Combined Federal Campaign. It’s a horribly loose criteria, in my opinion. One thing you have to do is that you have to be a nonprofit, a 501(c)(3). You have to donate goods in more than 15 states or one foreign country in the 3 years preceding. It’s recommended now—it used to be a requirement but they removed it—that you have to spend 25 percent or less of your donations on administrative expenses. And that’s where the rub is. With these charities, if you strip away the paper donations, suddenly their expenses begin looking huge. They sort of dwarf the whole organization.

How was the story reported?

This was a painstaking process. The first thing was trying to track this network, to understand how donations were moved from charity to another and who was involved in each charity and what their relationship was to the person or persons making the donation. It took months of work just to piece that together. I created a database to track every single donation, every name of every employee and every address they ever used, where donations went and the name of every charity. It turned out that they were using different names for the same charity, different addresses for the same charity. Once I was able to pull that together, we took the databases, which were done primary in Excel and Access. Our data team is run by Ryan Konig. He was able to manipulate the data into social networking software. We actually took some existing software, fiddled our own software around that and laid these Excel spreadsheets into the social networking sites. What emerged, over time, was the visual image that you see on the Net that you can manipulate, where it let’s you link the money to the donations to the people.

How did Don Stewart Association react as you were reporting this story?

They hired PR people, they hired lawyers. I met with them multiple times. I went out to the houses of some employees. I had a lot of doors slammed in my face. What they tried to do is convince me that there was no story and if I reported on it, I would incur the wrath of God and, by extension, their lawyers as God’s agents on earth.

They insist they have done nothing wrong. Their explanation for doing these paper transfers is that they were doing it to create partnerships to give food overseas to the people who need it most. Now, how transferring paper goods from one charity to another accomplishes this, I am still unclear about.

What sort of response have you been getting to the series?

God hasn’t smighted me yet.

What about the readers?

Universally positive. I would say it’s probably running 50:1 positive. People are just very happy about the results of the investigation, the exposure. Even charities have congratulated me. We’ve heard from food banks who say that they are appalled by the paper transfers that we’ve exposed. The Arizona attorney general appears to be taking an active interest in this case. He has told us that he is looking into it. We’re interested in any federal reaction as well. We’re asking our delegation what, if anything, they might do about this to protect federal employees.

Why are the practices you documented legal?

That’s the $22 question. What my investigation revealed was that this is an accounting maneuver that was never, according to experts, intended to be used to justify a wholesale operation. It was a mechanism allowed under accounting principles for booking and receiving goods, but what has happened is that you have this network of charities actually building entire organizations around it and inflating their numbers by some $60 to $80 million dollars. It’s actually more than that.

There’s a legal loophole that has allowed this to happen. One thing that I do want to point out is the [response of the] Canadian government. One of the key suppliers of these goods on paper was a Canadian charity called Universal Aide Society. The Canadians shut it down within weeks of my contacting them. They said that the charity operated only as a middleman. It didn’t really own the goods and, by extension, it couldn’t transfer ownership of the goods to the charities that received them. If you take their definition, the people receiving these goods in the United States didn’t own them either. I believe that the IRS can investigate that. And if it uses the Canada Revenue Agency’s investigation as a template, it might come to the same conclusions. We have talked to an IRS expert [Marcus Owens], the guy who ran the nonprofit division of the IRS for years, who believes that this doesn’t pass muster, that it shouldn’t be legal. He believes that if these 22 charities were audited, they would all be found in violation.

How widespread is this problem?

We’re trying to understand the scope of it.  It is done with more than just the Don Stewart Association and the charities that were tied to that.

Are you doing a follow-up?

We’re working on it.

What advice would you give to other reporters working on this issue in their states?

Perseverance. Take it in chunks. Keep an open mind, but don’t be discouraged by the fact that the people you’re investigating say you are out of your mind. At any one time, this investigation could have folded. It was timely. It was expensive. It was frustrating because of its complexity. I was lucky in that my editor and the newspaper editor understood it, but it was really hard to explain in meetings. It would have been very easy to just bag the whole thing.

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