BBB's charity ratings, seal of approval under fire

• Some question whether BBB fees for accreditation seals are a conflict
• How's a charity rated? Depends on who's doing it
• Scrappy CharityWatch founder takes on competitors, who cry foul

The Blinded Veterans Association says its goal is to "help veterans and their families overcome the challenges of blindness," according to its website. Services include helping them take advantage of Department of Veterans Affairs services and employment training.

Go to the Better Business Bureau's website and you'll feel assured the group is worthy of your donations. It is both accredited by BBB's Wise Giving Alliance charity-rating service and has the group's seal of approval.

The American Institute of Philanthropy's CharityWatch, however, gives the group an F. The other leading charity-rating service, Charity Navigator, awards it zero stars out of four.

"There are 158,000 veterans that are legally blind, but only 20% of (the association's) budget is spent on field services to help blinded vets," says CharityWatch founder and President Daniel Borochoff. "The rest was primarily used for mailings and public service announcements. Is this really how a blinded veteran, who can't find a job or even pay his gas bill on time, wants his charitable aid to be spent?"

The differences between the groups' ratings underscore one of the challenges facing BBB as its 100th-anniversary year draws to a close. Just as it was dogged by "pay to play" allegations about its business ratings two years ago, some question whether BBB's charity ratings really have teeth, and if the up to $15,000 it receives annually from charities that pay to use its seal of accreditation influences its decisions. The questions come as many charities, particularly smaller ones, struggle to raise money as the proportion of people's incomes devoted to charitable giving remains stagnant.

As people decide where to send their year-end charitable donations, Borochoff doesn't think BBB's ratings should guide them.

"How can you be a watchdog when you are getting paid by the very groups you're supposed to be rating and monitoring?" he asks.

Borochoff was profiled last spring by the Chronicle of Philanthropy, which highlighted his success in exposing the questionable finances of Greg Mortenson, founder of the Central Asia Institute and co-author of the book Three Cups of Tea. The article also noted that Borochoff's accusation that the Disabled Veterans National Foundation was spending most of its money on fundraising led the Senate Finance Committee to investigate the group. Borochoff's "fiercely independent status" makes him a more believable charity evaluator, he says. More than 95% of CharityWatch's funding comes from individual contributions, which is mostly the $50 annual membership fee, which includes access to its latest ratings and advice.

When he was Connecticut Attorney General in late 2010, Sen. Richard Blumenthal, D-Conn., reached agreement with BBB that it would stop giving extra rating points because businesses were paying members. Now he says BBB's financial relationship with the charities it rates "unquestionably" raises concerns about "credibility and possible conflicts of interest."

"State attorneys general should be looking hard at this practice to make sure it is disclosed prominently and transparently," says Blumenthal, adding that "there may be a role for congressional oversight." "There's a very strong interest on the part of state attorneys general and consumer protection agencies in ensuring that contributors are not misled by ratings and by financial incentives."

Consumers searching at BBB's Give.org for a charity would see a prominent accreditation seal if the charity paid the licensing fee to use it. But they'd have to look for the link on the homepage to learn how the charity seal program works.

"A charitable donor is forced to do some independent research to understand what he or she is seeing," says Rick Cohen, former executive director of the National Committee for Responsive Philanthropy, now the national correspondent for Nonprofit Quarterly. "It's not that they are withholding the information, (but) it does confuse the issue when you have a seal, and when it is not clearly evident to consumers that the seal was purchased."

Art Taylor, CEO of BBB's Wise Giving Alliance, says its ratings are unaffected by its seal sales. In a statement, he noted that the Wise Giving board of directors approves the practice and is headed by David Ormstedt, who chaired Sen. Blumenthal's charity bureau when he was attorney general.

"There is a strict separation between the people who do the accreditations and the ones who work on the seal programs," Taylor says. "The only way they can sell a seal is if they get a notification that we have a new charity that meets our standards."

Charity monitors, including the Evangelical Council for Financial Accountability here and many in other countries, sell their seals, adds Bennett Weiner, Wise Giving's chief operating officer.

"National charities that display the BBB Wise Giving Alliance seal can do so with pride," Taylor is quoted as saying on the Blinded Veterans website. "Not only are they attesting to their organizations' adherence to sound standards, they are helping to increase donor confidence and strengthen public trust in giving."

Long history, new changes

BBB's charity ratings date back to World War I when, Taylor said, the business group was asked to also help people weigh the increasing number of solicitations, especially for war relief. This service used a variety of names over the years until, in 2001, BBB merged its charity arm with the National Charities Information Bureau and began calling the new entity the Wise Giving Alliance.

About 10,000 people make small contributions to the Wise Giving Alliance and about 20 companies give it "a little bit of money," says Taylor. The rest of its budget — or 67% — comes from sales of the accreditation seal.

If charities meet BBB's 20 standards for accountability, they are identified as being accredited on its website. The charities can then pay a sliding scale of up to $15,000 annually for the right to display the seal on their own sites and marketing materials. The seal is a "very popular product" for charities that want to "distinguish themselves," Taylor says.

Of the approximately 1,260 charities BBB attempts to evaluate, it accredits about 500, and fails about 300. Most of the rest refused to provide information despite BBB's requests, while about 80 other reviews are in process.

BBB has been working to improve its ratings, says Taylor, who announced plans at a charity conference in October to review the truthfulness of fundraising appeal letters. BBB is helping consumers by looking beyond charities' financial ratios — which CharityWatch focuses on — to include issues of governance and other types of accountability, Taylor says.

While they give the issue different weight, charity evaluators agree that it's key for donors to know how much of their money goes toward more fundraising and how much is spent on programs. It can mean the difference between feeding the hungry or funding for-profit telemarketers.

This area is so important that New York Attorney General Eric Schneiderman has been reporting annually on how much of the money outside charity telemarketers get of the money donated. The latest report, out this month, shows many charities only get about 20% of the money raised by some telemarketers.

"Donors expect that their hard-earned dollars will make a difference and not line the pockets of for-profit fundraisers at the expense of charity," says Schneiderman. "Our office will continue to investigate these telemarketing campaigns to ensure that contributions are being used to further charitable programs and services."

The New York attorney general's charities bureau found two key problems. One was that charities were signing agreements where they are guaranteed a low percentage, sometimes as little as 10%, of the money raised — and nothing more. Another is when charities get charged simply because a telemarketer makes contact with a potential donor, even if they turn down the request.

But what can get even more complicated — and be as controversial — is what charities categorize under "fundraising." The three ratings groups treat a practice known as joint cost allocation differently. This is the practice of dividing fundraising costs, such as those for solicitation letters, between education programs and fundraising on tax forms. Many charities say if they send a letter asking for money that explains a problem and asks people to do something about, it's fundraising and education. Borochoff says it's only fundraising if it's asking for money. BBB and Charity Navigator look at each case individually.

CharityWatch's "deeper level of financial analysis best answers what donors most often want to know — whether a charity is financially efficient and getting most of its funds to bona fide programs," he says.

Yet Ken Berger, CEO of Charity Navigator, says he believes such solicitations can qualify as education, but says "we have discovered some real serious abuse."

"What may appear to be technically legal, doesn't pass the smell tests," he says.

BBB says it is the harder grader sometimes — refusing to accredit groups if they don't meet any of its accountability standards. Some charities, including the United Spinal Association and the American Institute for Cancer Research, fail CharityWatch's ratings yet are accredited by BBB. The Wise Giving Alliance refused to accredit groups including the Farm Sanctuary and Conservation Fund, while CharityWatch rated each an A, and Charity Navigator gave them three and four stars (out of four) respectively.

BBB says it refused to accredit the Conservation Fund, for example, because it didn't have an effectiveness report or policy and wasn't fully transparent about the cause-related products it sells and how many must be sold before the charity makes money.

But bad charities could easily generate effectiveness reports, Borochoff says, and BBB doesn't evaluate the quality of the reports. Cause-related marketing probably only matters to those who buy the products, he adds. What donors really need to know about a charity, he says, is whether it is being honest about how money is being used, that the money is supporting true charitable programs and that financial statements aren't using creative accounting.

Doing enough for animals?

Some of the groups that were rated poorly by CharityWatch — and often Charity Navigator, but not BBB — did not respond to requests for comments. The leaders of Blinded Veterans Association did not reply to e-mails seeking comment. A woman who works in fundraising for the group refused to give her name and said asking for a phone rather than in-person interview amounted to entrapment.

Wayne Pacelle, CEO of the Humane Society of the United States, however, was happy to discuss what he says is misplaced priorities on the part of charity-rating groups. Pacelle says "no group in the field of animal protection comes close" to HSUS when it comes to impact.

The amount spent on fundraising as opposed to actual programs is a "very interesting and useful ratio to look at, but it falls far short of any serious-minded analysis of a charity," Pacelle says. A better barometer, he agrees, would be looking at a charity's influence.

Charity Navigator and the Wise Giving Alliance are both working to come up with ways to rate charities' influence, but CharityWatch has no current plans to take that issue on. Cohen says this would get closer to answering the big question most donors have, "Is my money really going to make a difference?"

Pacelle says HSUS' "size and experience" have allowed them "to take on the pork industry, curb the Canadian seal hunt and to shut down puppy mills."

But Borochoff says someone who really wanted to help animals should contribute elsewhere. While BBB accredits HSUS, which paid for its seal, CharityWatch gives HSUS a D in large part because so much of every dollar donated goes to raise more money.

"If you like getting those mailings and want to pay for more of them, support the Humane Society," says Borochoff. "It you want to give more for programs or services that benefit animals and advocate better rules and protections for animals, they are not a good target because the portion of their budget they give to these programs is too small."

Nathan Winograd, an author and prominent advocate of "no-kill" animal shelters, says the disagreement is emblematic of a larger problem with HSUS.

"Only the leadership of HSUS could contrive fundraising letters as program expenses," Winograd says. "If they actually spent as much time, energy and money on saving animals as they now only pretend to, not only would they not have to cover up their failures to do so with these kind of mental gymnastics, they could truly be the heroes they now only pretend to be."

Helping children around the world – or not

The IRS fined the charity Food for the Hungry earlier this year and said it needed to adjust its tax form because it stated the value of medicine and other goods was about $76 million when the goods were actually only worth about $92,000, the IRS said. Borochoff cites this as another example of the kinds of fudging he calls the charities on.

World Emergency Relief and its Children's Food Fund, which did not respond to requests for comment, also gets an F from CharityWatch. Borochoff says the group provides so little information about what it does on its tax forms that they could be hiding what they are really doing in the countries in which the groups operate.

"You can't trust them — they are not being specific at all," says Borochoff. A potential donor should ask, "Why are you hiding this information?"

Borochoff acknowledges that he's been able to extend the reach of his paid-only publication by being quoted in the media. Charity Navigator and Wise Givings' ratings can be accessed for free. And Borochoff can be quotable, calling Charity Navigator "robo-ratings" and BBB a trade association.

Berger bristles at the criticisms Borochoff has leveled at Charity Navigator and even the BBB, though they're actually competitors, too. The three groups together rate no more than 7,500 of the 1 million charities in the U.S.

"To throw stones is not productive," Berger says. "There's more than enough for all of us to do."

Given the small number of charities rated and their very different missions and sizes, Cohen questions the value of ratings at all. And he worries "people are often misled to think that the groups you should give to are the groups that have these ratings."

"There are many, many more charities that are quite valuable and quite productive," Cohen says. "Use ratings as a tool, but nothing takes place of getting to know the charities on your own."