A while ago, I related to this forum a “developing story” in the USA (see here) involving the Central Asia Institute and its founder Greg Mortenson; the multiple allegations (of fraud, deceit, breach of contract, racketeering, and unjust enrichment on the part of Mortensen and CAI) were significant and posed, once again, serious questions about the accountability and transparency of the not-for-profit sector in the USA as well as the enforcement mechanisms that are in place over there. I also argued that similar questions could be asked about accountability and transparency of the not-for-profit sector here in Australia. I did so already in earlier contributions (see here and here.)

Last week the Montana Attorney General, Steve Bullock, issued a report of his office’s investigation into CAI and Mortenson. You can find it, in all its depressing glory, here. It is likely to become a classic case study of what goes for accountability and transparency and enforcement in some quarters. It poses more questions than it answers.

The AG’s report essentially confirms many of the allegations. Arguing that CAI/Mortensen have accomplished some good, and – given a chance — might do some more, the AG has put in place a “settlement” that allows CAI/Mortenson to get things right in the future. Or at least right enough for the Montana Attorney General not to bother them. Essentially, more than a decade of flaunting accountability and transparency, and more than a decade of questionable spending of literally tens of millions of dollars, will be forgiven as part of the settlement. In the words of the AG:

“We concluded that the board of directors failed to fulfill some of its important responsibilities in governing the nonprofit charity. Further, Mortenson failed to fulfill his responsibilities as executive director and as a member of the board.
Despite policies that committed him to do so, Mortenson failed to make contributions to CAI equal to the royalties he earned on the books the organization purchased. Nor did he and CAI devise an equitable way to split the costs to advertise and promote the book, which was required by his 2008 employment agreement. Mortenson also accepted travel fees from event sponsors at the same time that CAI was paying his travel costs. Moreover, he had significant lapses in judgment resulting in money donated to CAI being spent on personal items such as charter flights for family vacations, clothing and internet downloads.
Despite consistent and repeated warnings about a lack of financial controls for the money CAI spent abroad and here at home, the board of directors failed to close those gaps over a period of nearly ten years.”

This strikes me as way too gentle a way of putting it, given that in 2002 Mortenson essentially forced out three members of the supervisory board that demanded accountability and transparency. And that a couple of years later the CFO resigned in response to Mortenson’s continued refusal to do what ought to be done. Lapses in judgment? Oh, please … Again, in the words of the AG:

“Between 2001 and 2011, CAI had three independent audits of its financials. The audits performed for the 2003, 2009 and 2010 fiscal years revealed material weaknesses in CAI’s financial and internal controls. Rather than address the deficiencies found in the 2003 audit, the board discontinued auditing its finances. The same material weaknesses appeared in the later audits. The CAI board also was expressly told of financial deficiencies and problems with internal controls by its former chief financial officer during the CFO’s employment with the charity. Those problems were further detailed and reiterated in a memorandum supplied to the board when the CFO resigned in 2004.”

It ultimately took The American Institute of Philanthropy, an independent charity watchdog, and a CBS program, “60 minutes”, to raise public and effective concerns about CAI’s lack of accountability and the dubious role that Mortenson played in it all. The “60 Minutes” program, apart from alleging mismanagement of funds, also alleged that Mortenson fabricated some of the stories in his books including “Three Cups of Tea”.

It is noteworthy that these allegations — which continue to stand — were not investigated by the Montana Attorney General, as were issues that are within the domain of the taxing authorities.

Three comments come to mind immediately:

First, why did it take an independent charity watchdog and a CBS program to finally (well, let’ s hope) put a stop to years of mismanagement and material weaknesses in financial and internal controls? And, by all accounts, millions of misappropriated funds on the part of Mortenson? Where was the Montana Attorney General during the past decade?

Second, while it is somewhat understandable that the Montana Attorney General now tries to right things (at the expense of getting things right), it sends a devastating signal to the not-for-profit sector in the USA as a whole. Essentially he invites every not-for-profit, and for-profit-in-disguise to follow the example of CAI/Mortenson. Predictably, the Montana Attorney General’s report, and decision, will become a template for those not-for-profits trying to avoid proper accountability and transparency.

Third, the CAI/Mortenson story is an ideal test case for the Australian Charities and Not-for-Profit Commission (ACNC) Implementation Taskforce (for its website see here) to understand whether its intended (enforcement) model has bite. It now seems obvious that the ACNC will be little but a variant of the Charity Commission for England and Wales. I have argued elsewhere (see the references above to my earlier CET contributions) why this model is flawed and can, and should be, improved on. I do see nothing in what is currently known about the ACNC that convinces me that something like Mortenson/CAI could not, or is not already, happening here. The recent series of investigative reports of The Daily Telegraph (See here and here and here and here and here) and the responses of advocates (see, for example, here) are not reassuring.

As is a recent submission to the Treasury of the Community Council of Australia (for its website see here). Its ”informing principles for new fundraising regulation” say, among other things, this:

“2. While increasing the transparency of charities is desirable, no evidence has been presented to indicate the Australian public lack trust in charities or are concerned about information asymmetry. The goal of any new regulation should not be seen as addressing a market failure, but of promoting more charitable giving.”

I am not sure in what reality the authors of that principle live. Surely it is a parallel universe to the one described in the Daily Telegraph investigative reports. Or, for that matter this study of fraud in Australian nfps: BDO study. And, surely, it does not match my own experiences last year when I tried to identify, on a very happy occasion, deserving not-for-profits.

It is discouraging, and from my perspective very short-sighted indeed, for the Community Council of Australia to dismiss the serious lack of accountability and transparency that does afflict the Australian not-for-profit sector, and the lack of public trust that begets.