6 steps for building a strong philanthropic due diligence program 

_{Guest blog from BWF • July 31 2024}

Fundraising is an inherently risky enterprise because relationships are inherently risky. Major and principal gift fundraising are even more risky because these practices focus on the cultivation and recognition of high-profile relationships for the organization. When a high-profile donor is linked to a scandal, the organization is likely to be attached to that scandal. Philanthropic due diligence focuses on identifying and mitigating risks as part of the fundraising relationship-building process before such problems arise.  

While the actual activity of philanthropic due diligence centres on a specialized research and vetting process, at the end of the day, philanthropic due diligence is much broader than that. Philanthropic due diligence mitigates risk for fundraisers, for the board, and for the organization. The implementation of a strong due diligence program extends well beyond the research and vetting to encompass all parts of the fundraising office and more. Legal, financial, reputational, ethical, and dependency risks are all significantly heightened for not only your organization but also your board and staff personally, when you do not have a strong philanthropic due diligence program in place. 

There are 6 core building blocks of a strong philanthropic due diligence program: 

• Know your risks 

• Have a policy 

• Invest in a program infrastructure 

• Create transparency and accountability 

• Train, and then train again 

• Prepare with a crisis communications plan 

Know your risks

Different nonprofit organizations will have different risks. International organizations tend to face a higher risk of money laundering while art organizations face a higher risk of handling fraudulent, stolen, or unethically acquired property. Large organizations may face a higher risk of working with vulnerable donors while smaller organizations face higher dependency risks. Each organization is different so the first step of any program should be to assess what risks your organization is and may be likely to face. 

Fundraising risks take many forms, but they may be bucketed into a handful of overarching categories: 

• Reputational risks 

• Legal risks 

• Financial risks 

• Dependency risks 

• Exploitation risks 

Reputational risks are the ones to make the headlines, stir protests, and create both internal and external debate. We all remember the controversies around nonprofit organizations involved with such illustrious donors as the Sackler family, Jeffrey Epstein, and Bill Cosby.  

Two things about these relationships make them especially tricky. The first is that they can take organizations by surprise, coming to light years after a relationship with a donor has begun. The second thing is that there is no right answer for managing controversial donations. Not everyone will feel the same way about how to handle a controversial donor.  

Legal risks are more cut and dried when it comes to decision-making, but they can be challenging to spot. What’s generally important here is that organizations have strong training and a set procedure in place to identify and minimize illegal donations. Gift processors, event planners, front-line fundraisers, and researchers are all important in spotting issues, but they often lack the training and/or status needed to identify and alert others of potential fraud.  

It’s estimated that most nonprofits lose an average of $100,000 in donations annually to fraud, and that does not account for the bank fees that organizations often pay on top of the donations they must return, even when already spent. 

Financial risks, the third and likely most familiar category, involve making sure donors have the financial means to deliver on their commitments so that organizations minimize the acceptance of and embroilment in pledges which are never fulfilled.  

Dependency risks are the other side of financial risks. These are the risks that arise when an organization becomes overly dependent on the finances of a supporter and/or their network and maintains a destructive relationship because of that dependency. These risks may be real, but problems can also arise from those that are simply perceived. Here whistleblower policies, conflict of interest policies, a strong infrastructure with accountability and training are critical.  

Exploitation risks are those risks faced when working with vulnerable populations and people. Art and educational institutions, especially, are becoming more sensitive to the issues around accepting donations of or capitalizing on artefacts which resulted from the exploitation of populations during times of war or colonization. Organizations are also becoming more aware of the need to be more inclusive of people with mental and physical impairments, whether temporary or permanent. To facilitate full participation of vulnerable populations, extra measures need to be in place to ensure supporters are welcomed without being exploited.  

Have a policy

Most organizations operate with the belief that philanthropic due diligence is not an issue for them. That is, until it is, and then the damage has been done. For leadership to protect the organizations which have been entrusted to their care, and even their own positions, fundraisers must know who the organization is willing to partner with, and that’s a decision the board–not staff–should be put in the position of making. 

Many gift acceptance policies address philanthropic due diligence in a clause or section, and organizations have traditionally seen this as sufficient, but gift acceptance policies are not the same thing as a philanthropic due diligence policy. Boards are beginning to see the advantage of articulating a separate, strong and comprehensive philanthropic due diligence policy to guide their organization’s program. 

Gift Acceptance Policies

Philanthropic Due Diligence Policies

Outlines and grants authority to who may accept gifts on behalf of your organization. Details the types of donations your organization will and won’t accept, especially “non-standard contributions” as defined by the IRS. Describes how pledges will be managed and credited. Delineates expectations and management of gift agreements and receipts. Explains protocols for donors needing to secure an appraisal for a gift of real property. Summarizes ethical obligations of the fundraiser and the rights of donors recognized by the organization. Includes a clause, in alignment with the due diligence policy, which will allow the organization to refuse donations that pose potential risks which are not deemed to be in their best interest.

Defines the guiding values and principles of the organization that determine their willingness to accept or reject donations. Details the primary types of risks and donors of concern to the organization. Outlines and grants authority to who reviews and make decisions when donors or donations pose potential risk. Explains what triggers due diligence reviews. Describes the information collected on potential donors and how it will be stored and protected. Delineates how the organization will dispose of donations already accepted that later become problematic. Addresses how high risk donations, like naming rights and anonymous donations, will be managed.

Thresholds often structure philanthropic due diligence processes. Our survey found that 68% use financial thresholds, where the lowest activation level is typically set around 25,000 (62%), and the highest activation level is often set at over 100,000 (67%). Thresholds can be a good thing, but they can also create risks in themselves. While thresholds are there to ensure teams don’t become overwhelmed, they can also cause damage. Thresholds assume a higher donation equals higher risk. While a 25,000 gift might not be classed as high value, can you be confident the donor carries no risk at all? We’ve seen many clients drop their thresholds as a result of automating the process with AI. The greater efficiencies in due diligence research provided by AI allow organizations to do an initial scan of donors at the 10,000 level in minutes, thereby significantly reducing their risks and time invested in problematic donors. 

Invest in a program infrastructure

BWF, Pyro.Solutions, and Xapien recently conducted an international survey of nonprofits, and the results point to the importance of investing in a solid philanthropic due diligence program infrastructure. The financial investment does not need to be large, but it should be distinct to make an impact. Survey respondents were more likely to feel due diligence is taken seriously when their organizations have an official budget line for it. Similarly, those respondents who said Yes to having a formal Gift Acceptance Committee to manage due diligence decisions (which has no budget cost) were also more likely to feel their organization takes due diligence seriously. 

The infrastructure required for a strong philanthropic due diligence program includes four standard elements: a policy to guide it, procedural documentation to support it, trained staffing to implement it, and technology solutions to optimize it. Philanthropic due diligence research is different than traditional prospect research. It requires different training and tools to perform it. This is where the investment makes a difference.  

AI has significantly increased the efficiency and effectiveness of due diligence research. The survey respondents’ prevailing opinion of AI is that it will positively help them in their roles, with very few concerned that it would replace their roles entirely. We agree with this assessment. Specialized due diligence research solutions like Xapien, FAMA, and LexisNexis can speed the research process significantly, but the results need to be compiled and verified before risk assessments can be made.  

Investment in such technological solutions may not make sense for all organizations, but that does not eliminate their availability. Specialized due diligence research contractors, like BWF, make a due diligence program with full use of specialized technologies accessible to organizations with budgets of any size. 

Create transparency and accountability

Organizations with the strongest philanthropic due diligence programs are fully transparent and accountable for their programs. While it is critical to always maintain donor confidentiality, programs should have clearly documented policies and procedures that are well-known to leadership and staff and easily available for review by supporters. 

Everyone should understand what types of relationships and risks the board and the organization plans to avoid. Having your philanthropic due diligence policy online, alongside your Gift Acceptance and Donor Privacy Policies, will facilitate such transparency.  

Leadership and staff should be equally clear as to who is responsible for what due diligence decisions. Establishing clear triggers for research and levels of decision-making ensure that the process will run smoothly. The lack of consistent triggers and levels in the recent due diligence survey reflects the nascency of due diligence programs worldwide. While there is some room for customizing programs based on risks faced, organizations should avoid assigning sole responsibility for decision-making to one person. Such authority has led to both corruption of the process and jobs lost by well-meaning leaders. Organizations are never so small that they cannot manage a Gift Acceptance Committee to share the accountability. 

That said, not every prospect needs to go to your Gift Acceptance Committee. We often see a significant amount of back-and-forth with committee members conducting their own research and then returning with requests for additional information. Oftentimes, low-risk prospects become stuck in the queue for committee review while committee members and researchers go to and fro. “Initial due diligence,” which is enabled with modern due diligence tools, bridges the gap between early screening and thorough due diligence, allowing more prospects to be assessed than a human alone could manage. If no flags are raised, the prospect can move forward, while high-risk and nuanced decisions are directed to the gift committee. 

Train, and then train again

Identifying fraud and other illegal activity, understanding how to work with supporters with differing needs, uncovering potential red flags related to prospects, knowing what should be said and who should be saying it when a crisis hits your organization – all these things require training for all volunteers, leaders, and staff who may encounter them. And, then they need to know the process for handling the information they possess. 

Specialized due diligence training was shown in our survey to increase staff confidence in an organization’s due diligence process and the ability to respond to a PR crisis. If your organization invests in nothing else, specialized training appears to be the most powerful way to build staff confidence in both the program and their role in it. 

Be prepared

Nonprofit organizations are designed to benefit people and our communities, so it is a challenge to believe that our supporters are not always operating with the best intent—or even those that are may create a situation that is problematic for the organization. Unfortunately, history shows that organizations operating under the belief they are immune from problems are often the ones that face the greatest challenges when problems arise.  

There is a reason that the adage “plan for the best, prepare for the worst” has staying power. 

Unfortunately, when we asked survey participants if they were confident their department would know what steps to take in the event of a PR crisis, over half of the respondents responded as neutral or not confident. 28% of the respondents were fully not confident or not confident at all in their department’s ability to respond, with those in the U.S. expressing the least confidence. 

Past controversies have shown that delayed responses by organizations allow stories to linger in the press and fester on social media. The global PR and marketing agency FleishmanHillard estimated that a crisis communications plan can cost a company $60,000 to $500,000, depending on the size and scope of the company, but that unprepared companies can spend millions in mitigation and lose hundreds of millions in reputation and shareholder value. What’s more, a recent study by North Carolina State University found that an aggressive stance by either consumers or companies can lower corporate value.² Thus, being ready with an approach that is accommodating and recognizing of possible supporter concerns will best position organizations in the event a crisis occurs. 

Controversies and problems around donors are not new. The modern media age has simply amplified them and forced organizations to consider the existential risks such controversies and problems now pose. Philanthropic due diligence programs offer a solution.  

The recent international survey by BWF, Pyro.Solutions, and Xapien demonstrates that philanthropic due diligence programs do not have to be large to be effective; however, without one, organizations are exposed to significant risks. The stronger your program, the more effective everyone will be in establishing long-term relationships with donors that will last and benefit your organization. 

We invite you to access the full 2024 International Due Diligence Survey, which focuses on the U.S., Australia, and the U.K., as well as to explore our past due diligence surveys (2021 Due Diligence Survey – UK & Europe; 2022 Due Diligence Survey: UK & Europe vs. Australia). We also invite you to contact us to learn more about BWF’s end-to-end philanthropic due diligence services and Xapien’s specialized due diligence research product, which together offer a comprehensive approach to risk management and due diligence. 

About the 2024 survey sponsors

BWF 

BWF is a mission-driven for-profit company serving the nonprofit sector, offering a comprehensive suite of solutions that ensures all nonprofit strategic, technical, and functional needs are met. Our mission is to empower nonprofits to achieve impact and imagine new possibilities. Structured yet agile services in the core areas of campaign and fundraising strategy, operations and technology, fundraising marketing and engagement, and enterprise strategic planning allow BWF to deliver on its mission. Clients include universities, health systems, arts & culture organizations, faith-based organizations, and NGOs throughout North America, Europe, Africa, Australia, and the Pacific Rim. As a truly comprehensive solutions provider, BWF has a team of consultants with extensive background and experience in every facet of philanthropy. Learn more at bwf.com.

Pyro.Solutions 

Pyro.Solutions provides specialist training and wealth analysis technology for prospect research, having developed two first-of-their-kind resources for the sector—Code-fi and Nova—with users across the UK, the US, and Australia. Visit www.pyro.solutions to learn more.