Pitfalls for Nonprofits that Receive Federal Funds: Lessons Learned from ACORN

On the heels of an embezzlement scandal, in September 2009, allegations of voter registration fraud and other questionable behavior by employees of the Association of Community Organizations for Reform Now (“ACORN” or the “Organization”) surfaced following the release of several undercover videos. The alleged conduct of ACORN employees gained national attention, led to federal legislation prohibiting the distribution of federal funds to the Organization, and ultimately led to the Organization’s bankruptcy and dissolution in 2010. The downfall of ACORN serves as an important lesson to all nonprofit organizations.

ACORN and Its Downfall

Founded in 1970, ACORN, a tax-exempt nonprofit organization, was a collection of community-based organizations that advocated for low- and moderate-income families on issues ranging from affordable housing to neighborhood safety, as well as other social issues. At its peak, ACORN reportedly had over 500,000 members across more than 1,200 neighborhood chapters spread throughout more than 100 North and South American cities. As ACORN grew it was not without issues, especially in its later years, when its founder’s brother embezzled funds and allegations arose that the Organization allowed tax-deductible charitable contributions to be used for political purposes.

In the wake of the release of several videos in September 2009 that depicted conservative activists eliciting damaging responses from ACORN employees, a nationwide controversy erupted over, among other things, taxpayer funding of such an organization. Due to the groundswell of public sentiment and fueled by election-year politics, in a fiscal year 2010 appropriations bill, Congress prohibited the awarding of federal funds to ACORN and ACORN-related organizations. As it turned out, after Congress took action, the videos were discovered to have been “heavily edited,” and were ultimately discredited.

Not surprisingly, in the wake of the federal prohibition, grant money from state agencies and private donations dwindled. As a result, it took only a little more than year after the by-then discredited videos were made public for the Organization to file for bankruptcy, effectively shutting down the 40-year-old organization.

GAO’s Review of the Agency Response to the Defunding of ACORN

As part of the Consolidated Appropriations Act of 2010, Congress directed the Government Accountability Office (“GAO”) to conduct a review and issue a report on the federal funding to ACORN and related organizations. The GAO issued a preliminary report on June 14, 2010 that addressed three topics:

1. From fiscal years 2005 through 2009, how much funding did federal agencies award to ACORN or any potentially related organizations, and what was the purpose of the funding?
2. To what extent did federal agencies’ monitoring of ACORN or potentially related organizations’ use of federal funding detect issues identified by inspector general and internal audits?
3. What federal investigations or prosecutions were conducted of ACORN or potentially related organizations from fiscal years 2005 through 2009, and what were the nature and results of these investigations and prosecutions?

The GAO issued a final report in June 2011, which includes the final results of these objectives as well as results of a fourth objective, which Congress had subsequently requested – How have federal agencies subject to fiscal year 2010 provisions barring the distribution of appropriated funds to ACORN or its affiliates, subsidiaries, or allied organizations implemented those provisions?

In sum, with respect to each topic, the GAO made the following findings:

Lessons Learned

While the ACORN matter involved just a few employees of a multi-national organization and a “sting” operation, the conduct of these individuals and the subsequent groundswell of public sentiment, coupled with the political climate, caused irreparable harm to the already embattled organization. Therefore, while a few employees do not speak for a nonprofit organization, in today’s around-the-clock news cycle environment, where each federal dollar is closely scrutinized, they can certainly lead to its demise. As a result, it is important for nonprofits funded, even in part, through taxpayer dollars to be mindful not only of inappropriate conduct and bad press, but the mechanisms available to the federal government to take action, and of course, the tools available to such organizations to mitigate such action.

In the past, the federal government primarily relied upon the Executive Branch’s prosecutorial powers to punish bad actors and unscrupulous organizations. However, the ACORN case is particularly telling as it shows Congress’s inclination to punish for perceived violations of law. This includes the severe action of imposing statutory funding restrictions, as well as consistent efforts to impose mandatory suspension/debarment actions for certain misconduct. As a result, nonprofit organizations need to prepare themselves for not only criminal and civil defense, as well as heightened congressional scrutiny.

No nonprofit is immune from individual employees making bad decisions. Organizations must prepare themselves to be able to address and mitigate governmental action on all fronts. Many nonprofits believe they are prepared or have adequately protected themselves after the fact by hiring well-known defense counsel. While experienced counsel can be useful, there is much an organization can do preemptively to curb misconduct and also assist and better enable the organization’s counsel to defend the organization should a situation arise.

Essential to every nonprofit organization should be an appropriate compliance and ethics program suitable to the size and sophistication of the organization. Often times, such programs may be viewed as cumbersome or burdensome, however, such programs can be creatively crafted to fit within existing practices or require only minor adjustments. At a minimum, these programs should include (to varying degrees of particularity and complexity depending on the organization):

• Documented policies and procedures, including codes of ethics and conduct, organizational conflict of interest policies, as well as appropriate program- and funding-specific policies and procedures;
• Training that educates and emphasizes employees on the organization’s policies and procedures and to advise employees of who to contact with questions or concerns;
• Internal monitoring to ensure the organization’s policies and procedures are effective in advising and assisting employees in conducting their business appropriately;
• Channels for employees and others to report potential issues;
• A crisis communication plan; and
• An individual appointed with overall responsibility for ensuring the adequacy of the compliance and ethics program, including ensuring that the policies, procedures, training and monitoring functions are adequate and to conduct and/or oversee investigations of potential issues.

Having a suitably tailored compliance and ethics program in place can help provide a nonprofit with a defense that it did as much as could reasonably be expected of the organization and that the organization itself, notwithstanding a few bad actors, is a reputable and responsible steward of taxpayer dollars.

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¹ While $3.8 million is not insignificant, the GAO noted that the number was perhaps larger than that during the time period under review because agencies were not required to collect information on sub-awards until after October 1, 2010.

² In only one case was an issue discovered by an inspector general also detected by the agency’s monitoring processes. In this case, the agency recommended ACORN for suspension and debarment.

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Mr. Tenenbaum chairs Venable’s nonprofit organizations practice and Mr. Locaria is a member of Venable’s government contracts practice, working frequently with nonprofits in connection with federal grant and contract issues. For more information, contact Mr. Locaria at dnlocaria@Venable.com, or at 202-344-4000.

For more information about this and related nonprofit industry topics, visit www.Venable.com/nonprofits/publications.

This article is not intended to provide legal advice or opinion and should not be relied on as such. Legal advice can only be provided in response to a specific fact situation.