Reporting Financial Misconduct at Uncommon Agenda
Jack looked at his computer screen and read the e-mail again. And again. He felt a mix of emotions, among them apprehension, anger, disgust, fear, rage, and astonishment knowing that his life was about to change as a result of reading the content of this electronic message that was intended for his best friend rather than himself. He knew immediately that nothing good would come of this, but that it would be difficult to predict what would happen other than that it would definitely be bad.
Jack was the IT Director for Uncommon Agenda, a nonprofit, 501(c)(4) tax-exempt advocacy organization based in Washington, D.C. with field operations in six states. Nonprofit organizations granted tax exempt status under this provision of the Internal Revenue Code are designated as “social welfare” organizations rather than charities. Although 501(c)(3) organizations are permitted by law to lobby, they are prohibited by law from doing so in a “substantial” amount. In contrast, social welfare organizations are permitted to lobby to the extent they desire, and most of these organizations are formed for the primary purpose of lobbying and advocacy.
One major disadvantage of exemption under 501(c)(4), however, is that those who contribute to these organizations are not eligible to deduct contributions to them on their federal income tax returns. However, many such organizations have affiliated 501(c)(3)s that accept tax deductible contributions and then transfer those donations to fund the operations of the (c)(4). Unlike their charitable counterparts, social welfare organizations may engage in partisan political activities and support candidates for office, although there is a substantial excise tax associated with such expenditures. Many 501(c)(4) organizations, such as Uncommon Agenda, do not engage in overt partisan activity, and boast that their good government activities are nonpartisan.
The mission of Uncommon Agenda was to build support for public funding of Congressional campaigns. It worked in coalition with like-minded organizations to advocate for such funding. Although the organization solicited memberships from the public at $25 annually, most of its funding came from several large foundations that shared the vision of the organization to end the rampant abuses of campaign financing by lobbyists and others with a direct interest in legislative decision-making. Critics charged that special interests skewed public policy toward the privileged, and that the current system of campaign finance ultimately cost the public billions of dollars in wasteful spending of tax dollars and tax expenditures.
Uncommon Agenda was located in a slightly run-down office building on Connecticut Avenue in Northwest Washington, near the zoo. On most business days, the office was a beehive of activity, the phones ringing, meetings being held to plot strategy, fundraising plans being developed, and 20-something staff members who had only recently served as college interns on the Hill contacting Congressional staff to seek support for the latest version of a bipartisan public campaign financing bill.
Oblivious to most of the activity were a couple of support staff who were not directly engaged in the quest to achieve reform of campaign finance laws. One of these was Jack, the IT Director, who had a nondescript office far away from the main entrance. There was no window; his office was in an inside corridor, deep in the bowels of the 7th floor. Jack’s office was lined mostly with software rather than books. Stacked high in a corner was a pile of boxes that held an assortment of equipment one might expect to find in the office of the IT head—assorted mice, cables, wireless modems, old keyboards, laptops that were in various stages of disrepair, and tools.
On most days, Jack was not particularly busy. He may have had some staff training to demonstrate to a group of employees how to use the organization’s upgraded software, or to orient a new hire about how to use the existing packages that were on the network. He was also responsible for keeping the Web site in working order and sending out bulk electronic newsletters and fundraising e-mail. On occasion, things got really busy. When that happened, such as when the system server went down or if there was a Denial of Service attack on the Web site, he was expected to work through the night when necessary to get things back in order.
But nothing in his five years in this position prepared him for the situation he found himself in today.
It was mid-March, and Washington was experiencing unseasonably hot weather, coaxing the cherry blossoms to bloom a few days earlier than the official start of the Cherry Blossom Festival still two weekends away. In mid-February, a man’s heart might turn to thoughts of love. But in mid-March, it turns to college basketball. Even the President interrupted dealing with an economy that was tanking and crises around the planet to fill out his NCAA brackets along with millions of others.
On Friday afternoon, Jack had received a call on the office intercom system from Steve Pearson, the Vice President for Operations, about a problem he was having accessing his e-mail. Steve was a congenial colleague, as well as a personal friend from Jack’s grad school days. It was not unusual for Steve to join him and one other colleague, Bill Higgins, who was V.P. for Human Resources at Uncommon Agenda, to hang out together on Friday nights. They usually frequented a couple of clubs in Georgetown and got drunk together. Lately, Steve had been paying the entire tab for the three of them, explaining that he had just come into a windfall when a childless, distant aunt had died and left her nephews some money.
All of them had come to the organization at about the same time, when it was first formed with a seven-figure combined grant from three national private foundations. Steve had joined the staff first and had suggested that Jack consider leaving his job in New York to fill an opening for IT Director.
Jack was not particularly interested in the nonprofit sector in general, or the organization in particular, when he applied for that position. He would have been just as happy working for IBM or Microsoft. What attracted him were the downtown Washington, D.C. location and the likelihood that he would have a comfortable salary and not have the pressure of working in a typical corporate environment. He had interviewed elsewhere, but was attracted to the casual working atmosphere and the likely prospect that he would be in charge of the department. Actually, he would be the only member of the department, without the annoyance of having to supervise others and with no one looking over his shoulder all of the time. The people he saw in the office seemed quite happy with their jobs and were devoted to the organization’s mission. This was certainly in contrast to where he had been working at the time, which he referred to as a software sweatshop where he was required to meet a quota of several thousand lines of code each week.
When Steve, one of his roommates while he was a graduate student getting his MBA from Columbia, told him about the position opening up at Uncommon Agenda, Jack had been flattered and had been delighted to consider leaving the Big Apple. He and Steve were buddies, and Steve had covered for him many times with a girlfriend who was insanely jealous of Jack seeing other women during his relationship with her. Steve had been counted on by Jack to tell more than a lie or two to preserve the relationship, and Steve never let him down. Without Steve around at Uncommon Agenda, Jack might well have left for something else.
It had only been minutes earlier that Jack felt that his life was being turned upside down. It had all started when he had heard a buzzer in the office indicating that he was being called on the intercom system. It was Steve. He expected Steve to review the plans they had for cruising Georgetown the following evening in Steve’s new BMW, but instead, it was to relay a problem Steve was having with accessing his e-mail.
“I haven’t received any e-mail for four hours now, and I know something is wrong,” Steve told him. Almost all of the communications between them during office hours were by e-mail, but without access to that mode of communication, Steve resorted to the more primitive intercom system.
“Let me check it out,” Jack had said, planning to see if anyone else in the office was also having this problem. Jack himself hadn’t noticed any problem accessing his work e-mail, although such e-mails were infrequent except when there was an IT problem. He, like most staff of Uncommon Agenda, kept a separate e-mail account for his personal mail. There was a written policy that every staff member was entitled to an organization e-mail account, and the organization would respect the privacy of e-mail sent and received on work computers. The few restrictions on this use were that the organization’s computers could not be used for illegal purposes, to access pornography, or to violate copyright laws. Jack had thought this policy was flawed, since how would he or anyone in the organization determine if anyone was using the office computers inappropriately without first violating the privacy explicitly provided by the policy? In five years as IT Director, this issue had never surfaced.
Jack always encouraged new staff members to avoid using Uncommon Agenda e-mail accounts for their personal e-mail, and only a handful of staff members did not have separate accounts for their personal e-mail. This was not only recommended to maintain privacy, but to save on bandwidth. With the capacity to download not only music clips but even full-length movies, Jack felt the obligation to conserve organizational resources and not overload the capacity of the server.
Jack was not working on anything in particular when Steve called, but he was still annoyed that he would be diverted from watching some of the action in the first round of the NCAA basketball tournament that was being streamed in real time to his cell phone. A number 15 seed was hanging tough against a number two. Ah, the benefits of technology, Jack thought.
From his office, Jack had begun troubleshooting this new glitch, and came across nearly a score of e-mails that were caught in the network’s spam filter that appeared to be potentially legitimate e-mails. Clicking on one of several addressed to Steve, it was clear that this particular e-mail to Steve wasn’t spam, with a .ch country code top level domain name that he didn’t immediately recognize.
Reading the e-mail, he quickly confirmed his suspicions that it was not spam. What it appeared to be was a confirmation of a bank transfer involving a transaction from the Washington Capital Bank and Trust Company to a bank in Switzerland. Reading it more closely, the transfer appeared to Jack to involve a transfer of $8,000 from an account belonging to Uncommon Agenda to a numbered account. Jack was quite certain that Uncommon Agenda didn’t use banks in Switzerland, and that the organization certainly wouldn’t use a numbered account. Uncommon Agenda publicly and stridently railed against the lack of transparency of the way cash for political campaigns was funneled into the system. In any case, even if the organization had a legitimate reason for getting involved in having a numbered Swiss account, it would be unlikely that Steve would have had the authority to move funds from the organization to such an account. Clearly, the Chief Financial Officer, Carol Henfield, would be the individual from the organization with authority to move funds in this way. Knowing Carol, it was quite unlikely that she would have anything to do with numbered Swiss accounts, even if the money was her own personal funds. This was not consistent with her personality, which was doing absolutely everything by the book. While liberal in ideology, she was so conservative that he surmised that she never failed to look both ways even when crossing a one-way street.
Jack’s policy was to routinely delete the master file of copies of e-mails every month. Curious about this discovery, however, he searched in the database of archived organization e-mails and looked at more e-mails to Steve. For each of the previous four weeks, the number of weeks that old e-mails were still available in the system (other than on the computers of those who received them, unless they were deleted by those individuals), there was a receipt from this bank for $8,000 of funds transferred out of an account in the name of Uncommon Agenda under the total control of Steve, to the numbered account.
Jack was in shock that his long-time friend and colleague appeared to be an embezzler. Could there be some other, innocent, explanation for these transfers? Not likely, but it was possible. Embezzling would explain a few things, such as the new BMW.
But the more pressing concern was what he should do with this information. Steve was his best friend in Washington.
What if there were others in the organization involved in this other than Steve? Would his job be at risk if he reported this to the CEO? He remembered something from a recent staff meeting about Uncommon Agenda being in the process of creating a whistleblower policy. Doing so had been motivated by something that had appeared on the revised 990 annual tax return for tax-exempt nonprofit organizations. This meant that Uncommon Agenda did not currently have such a policy in force. Someone had mentioned at the meeting that there was a federal law on whistleblowing that applied to nonprofits, but that it was quite inadequate to protect anyone except under the most limited of circumstances.
Curious, he Googled “whistleblower” “nonprofit” “federal” and came up with something called the “Sarbanes-Oxley” law enacted in 2002. Yes, that was the name he had heard at the meeting! Finding the full text of the law, he searched on some terms and found the following:
Sec. 1107. RETALIATION AGAINST INFORMANTS.
(a) IN GENERAL- Section 1513 of title 18, United States Code, is amended by adding at the end the following:
(e) Whoever knowingly, with the intent to retaliate, takes any action harmful to any person, including interference with the lawful employment or livelihood of any person, for providing to a law enforcement officer any truthful information relating to the commission or possible commission of any Federal offense, shall be fined under this title or imprisoned not more than 10 years, or both.
He interpreted that to mean that if he reported Steve’s e-mail to law enforcement authorities, he would have protection to keep his job. But if he reported this to anyone inside the organization, he would be at risk. You would think that the organization would rather have misconduct reported internally so they can deal with it, or cover it up better, he thought.
Jack, still shocked that his buddy appeared to be siphoning off funds from their employer at potentially the rate of $400,000 annually, took out a pad of paper and started writing out some of his options.
Among the eight options he considered:
1. Confront Steve. Offer to keep quiet in exchange for a share of the funds.
2. Confront Steve, and simply demand that he stop embezzling, quietly make restitution, or risk being turned in to the authorities.
3. Confront Steve, and convince him to come forward to the organization voluntarily and admit what he was doing, leaving Jack out of this.
4. Take the matter to the organization’s CEO and CFO without informing Steve.
5. Take the matter to the law enforcement authorities without informing Steve.
6. Let someone know about this within the organization anonymously.
7. Do nothing.
8. Seek advice from a third party, such as a friend or attorney, before taking any action.
Jack’s consideration of how to deal with this quandary was interrupted as he saw Steve stick his head into his office.
“Any progress on getting my e-mail?” Steve asked.
“Not yet,” Jack lied. “Anything interesting going on?”
“Well, I might not make it for drinks tonight, or at least until much later. There was a front page New York Times article this morning about campaign financing, and I’ve been getting lots of calls from the press as well as my field office folks.”
“I didn’t see the Times today. What was in it?” Jack asked politely, not sharing that he hadn’t read the front page of the Washington Post that day, instead focusing on the NCAA pairings on the sports page.
“The article estimated that Obama raised an estimated $300 million for the general election, outspending McCain by about 3-1. This was after he had first pledged to accept public financing, and he eventually reneged on that commitment, becoming the first major party candidate to finance his general election campaign with private contributions. McCain only got $84 million for the general. Anyway, the Times story estimated that Obama raised an estimated $750 million during the entire campaign from close to four million contributors. Had he not done so, he might have gotten his butt kicked.”
Jack listened, feigning interest, but he couldn’t care less about campaign finance, somewhat ironic since that was the raison d’être of the organization that employed him. He admitted to himself that he considered the entire issue to be really boring.
But the good news was that he wouldn’t have to decide what to do about Steve’s “problem” today, and he could simply hang out in his office and watch some of the late first-round tournament games, or just go back to his apartment. And decide what to do.
1. How “private” should personal e-mail be if it is sent and received from a nonprofit organization’s account?
2. What are the pluses and minuses of each of the eight options on Jack’s list?
3. What are the limitations of federal whistleblower protection for nonprofit organizations? What might be appropriate in an organization’s whistleblower policy?
4. What are some of the objectives of having an organization whistleblower policy?
5. If you are the CEO of this organization and Jack comes to you and spills the beans, what would your response be?
6. What is Jack’s legal responsibility, if any, to let someone know about this? What is Jack’s ethical responsibility?
7. How important is it to nonprofit organizations that their staff be committed to the organization’s mission and comfortable with the culture of the nonprofit sector, in light of the fact that nonprofit organizations more than ever employ staff who could work in business just as easily, such as Webmasters, accountants, IT professionals, and marketers?
Note: This case originally appeared in “The Nonprofit Management Casebook: Scenes From the Frontlines.”