History of Anonymous Giving

The Price of Privacy: What’s Wrong with the New Shadow Giving System

Editors’ Note: David Callahan adds to HistPhil‘s forum on anonymous giving.

The world of philanthropy is becoming less transparent, and that’s not a good thing. Recent years have seen the rapid growth of a shadow giving system that funnels billions of dollars in gifts in ways that leave no fingerprints. The disclosure rules that have governed private foundations for more than half a century are so easily bypassed as to be largely irrelevant. Even today’s biggest philanthropists only have to disclose their identities if they so choose, and more are opting to remain behind a veil of secrecy—including many who are pushing for public policy changes that affect all of us.

This growing darkness comes at a moment when the wealthy, and elites broadly, are viewed with strong suspicion by a public that believes America is rigged against ordinary people. And it comes at a time when philanthropic giving is being increasingly weaponized by savvy donors engaged in ideological and interest group warfare. Never before has politics been so entwined with philanthropy as it is today, and never before has so much giving occurred in secret, through an emerging shadow giving system.

The Shadow Giving System

How much dark philanthropic money are we talking about? It’s hard to say, exactly, given the laxity of disclosure rules and donors who keep finding new ways to operate with less transparency. Any individual donor can directly give unlimited sums to any nonprofit with no requirement for either party to publicly disclose these transactions. Some of today’s largest policy and advocacy groups—such as the ACLU, the Sierra Club, and the Heritage Foundation—have lately seen big jumps in revenues. But good luck pinpointing exactly who is fueling their growth. While much attention has been focused on the dark money flowing to 501(c)4 groups—donations that aren’t tax-deductible because they often support election-related activities—charitable gifts to 501(c)3 organizations can also be hard to track.

Yet the biggest story here is the stunning rise of donor-advised funds. DAFs must reveal where their grants go, but they don’t have to say which of their clients provided those gifts and few DAFs reveal such information voluntarily. Just 10 years ago, DAFs moved a total of around $7 billion in grants. In 2016, they moved more than twice that amount. Of the top 10 grantmakers in the U.S. today, more than half are DAFs—all moving money in ways that don’t reveal their donors. Earlier this year, even close observers of the DAF world were surprised to learn that a DAF managed by Goldman Sachs had quietly become among the largest such entities in the U.S., thanks to big infusions of wealth by billionaires that include Steve Ballmer and Laurene Powell Jobs. All this represents a dramatic shift from an earlier era of philanthropy in which top donors created private foundations that operated with relative transparency.

Today’s donors aren’t just more likely to choose opaque DAFs as their giving vehicles; more are also choosing even less transparent entities such as LLCs. At least four top billionaire donors that we know of—Mark Zuckerberg, Pierre Omidyar, Steve Ballmer, and Laurene Powell Jobs—manage their social impact efforts through LLCs. I say “that we know of” because some mega-donors fly under the radar altogether. A few years ago, an investigation by Bloomberg BusinessWeek revealed that a trio of hedge fund managers had funneled billions into anonymous philanthropic trusts. The largest of these had reported assets of over $9 billion, making it one of the biggest pools of charitable capital in the nation. Among these donors was David Gelbaum, one of the all-time top contributors to the ACLU and Sierra Club.

Some donors even keep philanthropic wealth offshore. In late 2017, after the Paradise Papers leak, it was revealed that the hedge fund wizard James Simons has a foundation with assets of $8 billion based in Bermuda. That entity has an endowment more than twice the size of the well-known Simons Foundation, which funds science research and is based in New York. It’s impossible to know where grants from the offshore foundation have been going, since such entities have no public disclosure requirements. Nor, for that matter, does anyone know how many charitable trusts exist offshore or how much wealth they hold.

The large-scale shadow giving system is a new thing, and its emergence is helping destroy the implicit civic compact that historically has surrounded private foundations. That compact has been pretty straightforward: The law allows wealthy people to shelter vast fortunes from taxation in foundations to use as they wish for charitable purposes. But, in return, these entities have been required to pay out some of their wealth every year and to abide by disclosure requirements that allow the public to find out what foundations are doing: how much they pay their board, staff, and vendors; how they invest their money; andmost importantly, where grants are going.

We are now living in fast changing times, as more major donors abandon private foundations for less transparent entities—leaving the public, the media, and public officials increasingly in the dark about what philanthropists are up to. You might think that this sea change would elicit some real debate within and beyond philanthropy. But there hasn’t been much discussion of what’s happened or what it means. The mainstream foundation world talks a lot about transparency and often pats itself on the back for its progress in this area, like releasing evaluation reports or creating staff blogs to explain how grants are made. Meanwhile, though, the far bigger story has been a rapid shift toward a less opaque philanthropic sector that moves ever larger sums of dark money by growing legions of unidentified donors—many of whom are keen to influence public policy.

New reforms are needed to bring sunlight to philanthropy, but they won’t happen without a fight. Whenever stronger transparency rules are proposed, they are attacked in the name of philanthropic freedom. Donor privacy, the argument goes, is a sacrosanct cornerstone of such freedom. It allows citizens to exercise their rights to free speech and association without fear of reprisal or ostracism.

The desire for donor privacy is understandable in many cases. But a purist defense of such privacy is misguided when it comes to certain kinds of giving—especially large-scale strategic philanthropy that affects public life.

Like other forms of freedom that Americans cherish, philanthropic freedom cannot be absolute. It must be balanced with other values citizens care about—such as accountability, fairness, and civility—and stronger disclosure rules in philanthropy are needed to achieve that balance. It’s not good for civil society to have a growing river of dark money flowing into nonprofits, and ultimately, it’s not good for philanthropy, either. This is a sector that depends on the public’s trust and support to thrive.

To be clear: Many forms of anonymous giving are not problematic, especially giving to traditional charitable organizations such as hospitals and museums, or giving by small donors. But when major donors use their gifts to sway public policy, it’s critical that their fellow citizens know who these power players are and what they’re doing.

Why is that? I can think of at least four problems with anonymous giving.

Bad Behavior

When people can express themselves anonymously, they are more likely do so in ways that flout established norms. If you don’t believe me, click away from this article for 30 seconds and visit any comments section on any media site, or maybe take a look at your Twitter feed. The nastiest, most disrespectful voices are nearly always anonymous. Meanwhile, over on Facebook, where people must reveal their true identities, you’ll see far less of this kind of thing.

Transparency is one of the most basic ways to enforce shared norms in any community. And when it’s absent, you see more bad behavior. It is no coincidence that American politics has become ever more vicious and debased amid a flood of dark money into the system. Today, donors can bankroll any manner of vituperation and defamation without risking being named and shamed. The U.S. still has the remnants of a transparent campaign finance system; but any donor can choose to operate outside that system and many do. Sound familiar?

Yet while a surge of dark money flowing into politics is widely seen as a problem, generating calls for reform, there’s been little attention to non-transparent philanthropic giving. However, as I’ve detailed elsewhere, charitable dollars are increasingly deployed to achieve political goals—including mobilizing or suppressing voter turnout by specific groups, funding the character assassination of public figures, harassing elected officials with baseless litigation, spreading disinformation, and more. To prevent the further debasement of politics and civil society, we need more transparency for all forms of influence spending to help enforce basic norms and standards.

Murky Motives

When someone is trying to convince you of something, it’s natural to want to know who they are and want they want. That information is essential for judging the credibility of the message you’re hearing. A message that’s coming from someone with a self-interest or ulterior motives is rightly judged as less credible than a message from an impartial observer. Any smart consumer of information knows this. Today, though, it’s getting harder to be such a consumer—because it’s harder to follow the money trail of who’s paying to make what arguments, and why.

More donors, both individuals and corporations, are bankrolling voices in the public square that are not what they seem. Repeatedly, we’ve learned that supposedly neutral experts are, in fact, on the payroll of donors with a vested interest in the issues under study. A case in point is large-scale giving by fossil fuel companies, and their owners, such as the Kochs, to policy groups working to obfuscate information about climate change. Another example is the revelation of Coca-Cola’s extensive and hard-to-trace grantmaking to nutritional experts to underwrite dubious research defending the consumption of sugary beverages. Or consider an instance from the electoral arena, in which a Wisconsin foundation anonymously rented billboards in minority neighborhoods in Cleveland, Ohio with warnings about the penalties for voter fraud in the run-up to the 2012 election. The examples go on and on.

When wealthy donors speak loudly in the public square, using nonprofit proxies, citizens deserve to know who they are, along with what motives they may have—and all the more so when donors are using tax-subsidized dollars. There is a compelling public interest at stake here, one that trumps the ideal of donor privacy. Too often, it has turned out that such privacy is desired for the wrong reasons.

Conflicts of Interest

A related problem with secretive giving is that it can be done for transactional reasons, with donors using charitable dollars to gain access, induce favors, and curry influence in various ways. Self-dealing by foundations or donors—i.e., giving for direct financial gain—is also vastly easier to get away with in the absence of disclosure. Both of these risks emerged as campaign issues in the 2016 election.

While none of the “pay-to-play” charges surrounding the Clinton Foundation panned out, they did underscore the potential for real abuses when you mix philanthropy with politics and power behind a veil of secrecy. Despite the obvious potential for conflicts, the Clinton Foundation (which is actually a public charity) had no legal obligation to reveal its donors. The foundation eventually did so, voluntarily, but even then, it didn’t reveal key details about when large gifts were made and for what purposes. Questions linger as to whether some of these gifts were transactional—aimed at gaining influence with one of the most powerful couples in America.

Meanwhile, the Donald Trump Foundation and the Trump family were recently sued by the New York’s State Attorney General for, among other things, using the foundation to advance Trump’s campaign goals. It’s also alleged that Trump used gifts from his foundation to settle two lawsuits against him, an illegal form of self-dealing. However, these troubling allegations only came to the attention of New York’s AG after months of digging by an investigative reporter at the Washington Post. That’s wrong. You shouldn’t need a crack journalist on the case full-time to figure out what a foundation is doing. Ideally, it should only take a few clicks of a mouse.

Eroding Public Trust

Most Americans don’t think much about philanthropy, but they got quite an earful about questionable foundation practices during the 2016 election. It’s hard to imagine they were reassured by what they heard. Meanwhile, it’s safe to say that the public is largely clueless about the larger picture I’ve described—a rising tide of giving done in secrecy and divorced from any definition of generosity most ordinary people would recognize.

The more the public comes to understand what’s really going on these days, the more its trust in philanthropy is likely to erode. Restoring greater transparency to the sector is an important step to help prevent that erosion, along with other reforms, like mandating payout by DAFs.

Remember, we don’t just live in a populist moment right now. We also live at a time when demands for accountability have challenged one sector after another, from Wall Street to higher education to professional sports. Maybe these twin energies will bypass philanthropy, leaving the sector to do as it pleases, but I wouldn’t count on it. Philanthropy is one of the most elite and unaccountable corners of America right now; it is an obvious target for more oversight, and rightly so.

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This isn’t the place to outline a full reform agenda to bring greater transparency to philanthropy. Rather, my point is that this issue needs to be on the agenda of the sector’s leaders, starting with the top trade associations, who should be proactively exploring how to advance greater transparency.

As I’ve argued elsewhere, it’s much better to be ahead of the curve on reform then behind it and risk having changes forced upon your industry down the line, after problems have festered and finally triggered a regulatory reaction—or overreaction, as is sometimes the case.

Bringing greater transparency to philanthropy is a challenge that must be approached with great care and deliberation. The details are tricky here. For one thing, anonymous giving to most nonprofits—those engaged in traditional charitable activities—is not problematic and there is no compelling public interest in forcing these groups to reveal their donors. Another issue to be taken seriously is the fear among donors backing controversial causes that disclosure of their identities will lead to threats or reprisals.

I don’t have all the answers here. But everyone who cares about a strong charitable sector needs to start engaging the question of about how to bring sunlight to philanthropy’s growing dark corners.

-David Callahan

David Callahan is founder and editor of Inside Philanthropy, and the author, most recently, of The Givers: Money, Power, and Philanthropy in a New Gilded Age.

 

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