63950 ENVIRONMENT DEPARTMENT WORK IN PROGRESS HANDBOOK ON GOOD PRACTICES FOR LAWS RELATING TO NON-GOVERNMENTAL ORGANIZATIONS (DISCUSSION DRAFT] Prepared for the World Bank by The International Center for Not-for-Profit law May 1997 .& ENVIRONMENTALLY SUSTAINABLE ~ ~ DEVELOPMENTVICEPRESIDENCY THE WORLD BANK Ii!iIlIII == ============= ACRONYMS/ABBREVIATIONS! GONGO Government-Organised NGO MBO Mutual Benefit Organisation NGO Non-Governmental Organisation PDO Public Benefit Organisation QUANGO Quasi-Non-Governmental Organisation VAT Value Added Tax ! Copies of the Discussion Draft are available from the World Bank's Environment Department, Social Policy and Resc:tt.lement Division (NGO Unit). HANDBOOK ON GOOD PRACTICES FOR LAWS RELATING TO NON-GOVERNMENTAL ORGANIZATIONS TABLE OF CONTENTS Introduction 1. Background to the World Bank's interest in NGOs 1 2. Background to the Handbook 4 3. Sources and Methodologies 6 Chapter A: The Relationship of NGOs to Society 9 1. Why Refonn Laws relating to NGOs 9 2. Reasons Why a Country Should want to have a Strong, Vigorous, and Independent NGO Sector 9 Chapter B: DefinitioWl and Terminology 19 1. Definitions and Terminology 19 (a) Nongovernmental Organization (NGO) 19 (b) Mutual Benefit vs. Public Benefit 22 (c) Membership and Non-membership Organizations 23 (d) Law 25 (e) Decree or Order 25 (f) Rule or Regulation 25 (g) Governing Documents 25 (h) Establishment 26 (i) Termination 28 (j) Liquidation 28 (k) Dissolution 28 (I) Board of Directors 28 (m) General Assembly ofMembers 29 (n) Endowment 29 (0) Subsidiary 29 (P) Affiliate 29 (q) Branch 29 (r) Tax Preference 30 Chapter C: Relationship of NGO Laws to Other Laws 31 2. Relationship ofLaws Governing NGOs to Other Laws in a Legal System 31 Chapter D: Legal Existence ofNGOs 34 3. Establishment (Registration or Incorporation) 34 4. Responsible Governmental Agency 41 5. Amendments to Established Status 44 ii 6. Amendment in the Event ofImpossibility 45 7. Public Registry 46 8. Mergers and Split-ups 47 9, Termination, Liquidation, and Dissolution 47 Chapter E: Structure and Governance 49 10, Minimum Requirements of Governing Documents 49 II. Optional Provisions and Special Requirements 50 12. Liabilities of Officers and Directors 50 13. Duties ofLoyalty, Diligence, and Confidentiality 51 14. Prohibition on Conflicts ofInterest 52 Chapter F: Prohibition on Direct or Indirect Private Benefits 54 15, Prohibition on the Distribution ofProfits 54 16, Prohibition on Private Inurement 54 17. Prohibition on Self-Dealing 56 18. Prohibition on the Reversion of Assets 58 Chapter G: Activities and Operations of NGOs 60 19. Economic Activities 60 20, Licenses and Permits 60 2 L Political Activities 61 Chapter H: Fund Raising 64 22, Solicitation - Limitations, Standards, and Remedies 65 Chapter I: Reporting 67 23. Internal Reporting and Supervision 69 24. Reporting to and Audit by Supervising Agency 70 25, Reporting to and Audit by Tax Authorities 74 26. Reporting to and Audit by Licensing Agencies 75 27. Reporting to Donors 75 28. Disclosure or Availability ofInformation to the Public 76 29. Special Sanctions 77 Chapter J: Taxation 79 30. Income Taxation Exemption ofNGOs 81 31. Income Tax Deductions or Credits for Donations 83 32. Taxation ofEconomic Activities 86 33. VAT and Customs Duties 87 34. Other Taxes 88 iii Chapter K: Foreign NGOs and Foreign Funds 90 35. Establishment and Supervision ofForeign NGOs 90 36. Foreign Funding 92 Chapter L: Other GOINGO Relations 95 37. QUANGOs and GONGOs 9S 38. Governments Grants and Contacts 96 39. Transfer of Assets and Services out of the Public Sector 96 Chapter M: Self-Regulation 99 40. Self-regulation 100 iv APPENDICES Appendix I: Economic Activities and Taxation 103 A discussion ofeconomic activities ofNGOs and taxation of income from such activities. Appendix H: Report of the Working Group on Self-Regulation 110 This report was adopted by the Conference on Regulation Civil Society held in Sinai, Romania, May 12-15, 1994. Itwasallended by representatives ofmore than 100 NGOs throughout Central Europe. The Report sets out recommendationsfor self-regulation by NGOs in seven different areas (governance, organizational integrity, management practices and human resources,finances, communications to the public, fundraising, and program), and also contains recommendations for the role ofumbrella organizations in setting and enforcing self-regulatory standards for groups of NGOs. This report contains a useful listing ofwhat can be accomplished through self-regulation Appendix ID: Charity Accounts - The New Framework 114 This pamphlet published by the Charity Commission ofEngland and Wales describes different reporting requirements for charities, depending on size. Appendix IV: Statement of Purpose and Standards of National Philanthropy orthe National Charities Information Bureau (NCffi) 119 NCIB is a U.S. watchdog organization that has been evaluating US NGOs for 77 years. The purpose ofNCIB is to promote informed giving by prOViding information to the public about whether large US charities that regularly seek public support meet NCIB standards in nine areas (board governance, purpose, programs, information, finanCial support and related activities, use offunds, annual reporting. accountability, and budget). Appendix V: NGO Acronyms 125 This list ofvarious acronyms by which NGOs are known around the world was compiled by Adil Nqjam. Appendix VI: Contributors 126 A list ofindividuals whose work or personal contributions have aided the development ofthis Handbook. HANDBOOK ON GOOD PRACTICES FOR LAWS RELATING TO NON-GOVERNMENTAL ORGANIZATIONS Introduction. 1. Backgroynd to the World Bank's interest in NGOs. The World Bank, in common with other development agencies, has become increasingly interested in the work of non-governmental organizations (NGOs) over the past decade. The proportion of Bank-financed projects which involved NGOs in one role or another increased from an average of 6% from FY73 to FY88 to 48% in FY96. 1 While early NGO involvement was mostly oriented to more cost-effective or more poverty-targeted service delivery, and was often a very minor aspect of the project in question, in more recent years NGO roles have both widened and deepened. This diversification of roles was described first in 1989 in the Bank's Operational Directive on NGOs. 2 Subsequent Bank policies stressed the important contribution of NGOs to issues relating to indigenous peoples, resettlement, poverty reduction, and gender. 3 This enhanced collaboration (involving, as it does, the government in question) has enabled the Bank to identify important NGO contributions to development beyond their capacity to deliver services. Some NGOs have important specialist knowledge, for example regarding environmental issues. Some NGOs work in close partnership with poor communities and are able both to help foster participatory development approaches and to identify priority concerns of poor people. Other NGOs help strengthen civil society through informing and educating the public, for example concerning their legal rights or entitlements to services or by helping attune government policies and practices to the needs of poor citizens. This diversity has led to expanded forms of cooperation between the Bank and NGOs including government-Bank-NGO collaboration in projects.' It has also contributed to the Bank's policies regarding 1 Cooperation between the Wodd Bank and NGOs • FY96 Progress Report (199D. 2 Operatjonal Directiye 14.7Q. "Involving NGOs in Bank-Supported Actiyities," August 1989. 3 Ibrahim Shihata, The World Bank in a Changing World, Vol. II, Chapter 6, The World Bank end NGOs,1995. • Carmen Malena, WOrking with NGOs: A Practical Guide to Operational Collaboration between the World Bank and NGOs, 1995. DISCUSSION DRAFT 2 information disclosure and public consultation.' For example, in the preparation of Environmental Assessments (required for all projects which potentially have a major environmental impact), the Bank requires "meaningful consultation between borrowers and affected groups and local NGOs,· based on timely public disclosure of relevant information. 6 Based on its own experience, the Bank strongly advises governments to involve NGOs in the preparation of National Environmental Action Plans and in designing poverty reduction programs. For this reason the Bank further "encourages govemments to be responsive to NGOs that request information or raise questions about Bank-supported activities".' Involvement of NGOs in Bank-supported activities is also a primary way of achieving participatory development, which has been proven by experience to help attain the Bank's goals of economic and social development. Participation is the term used by the Bank to describe the process by which stakeholders in development - the Bank, the borrower, and those who are directly or indirectly affected by a development project - influence and share control over 8 development initiatives, and the decisions and resources that affect them. The Bank also advocates participatory approaches to government in the design as well as implementation of the projects it finances, on the ground that this enhances development effectiveness. 9 In order for the Bank to be able to work effectively with NGOs, and to benefit fully from the contributions they can potentially make to successful development, it is essential in any particular country in which the Bank works that NGOs that are or might be involved in projects financed by the Bank be freely established and operate without undue constraints; that such NGOs be independent of the government; and be transparent and accountable. Only if all segments of society that are or might be involved in projects financed by the Bank can create and operate NGOs freely will the NGO sector reflect the full range of relevant viewpoints and expertise pertinent to a wide variety of development projects. Similarly, NGOs need to have both the full range of powers, privileges, and immunities enjoyed by other juridical persons in the , Ibrahim Shihata, Ibid. 6 Operational Directive 4.01, Environmental Assessment, September 1991. '00 14.70, ibid. I See Participation Leaming Group Final Report (World Bank). As the Bank has recognized, parlicipation is, in tum, intrinsic to good governance, which is essential for successful development. See Govemance: The World Bank's experience. p. 42 (The World Bank; 1994). 9'Prohibition of Political Activities in the Bank's Work," Legal Opinion of the Senior Vice President and General Counsel, presented to the Bank's Board on July 12, 1995. DISCUSSION DRAFT 3 society and independence from government. When NGOs are transparent and have well developed mechanisms for accountability (to their beneficiaries as well as to their funders), the integrity of each NGO and of the sector itself is ensured. There is then a greater likelihood that the NGOs represent accurately the views of the poor .10 The Bank also advocates to member governments that they use participatory approaches in the selection, deSign, implementation, and evaluation of development programs, on the grounds that this enhances development effectiveness. 1I On certain matters, such as the preparation of Environmental Assessments, the Bank requires consultation with local communities and local NGOs. 'Such participation and consultation, to be useful at all, require a reasonable measure of free expression and assembly" and hence it would be legitimate for the Bank in extreme cases to deny loans relating to these matters where such freedoms are not afforded. 12 The Bank's recognition that a strong voluntary sector makes an important contribution to equitable and sustainable development is reflected in its work on "good governance.' This work also recognizes that the voluntary sector (including NGOs and other elements of civil SOCiety) is much stronger in some countries than in others, for many reasons. •A powerful factor clearly is government hostility or encouragement. . .. Government policies determine the enabling environment for NGOs and the roles that they assume."13 These policies include rights regarding freedom of speech or association, regulatory policies, fiscal policies, funding and partnership relations, and policies regarding consultations with the public and with NGOS.1 4 Some governments welcome certain NGO activities (particularly poverty reduction) but not others - including functions which may be auxiliary to favored activities, such as related advocacy. "Some governments are suspicious of NGOs precisely because of their advocacy for the poor."ll The Bank advises governments, however, to welcome a wider role for NGOs and to allow and foster "a strong civil society participating 10 A constant challenge for the Bank and others is to detennine whether and the extent to which an NGO really listens to and speaks for those whom it purports to represent and benefit. A related difficulty arises when northern NGOS purport to represent Southern interests. 11 'Prohibition of Political ActivHies in the Bank's Work,' legal opinion by the Senior Vice PresJdent and General Counsel to the Bank's Board, July 12. 1995. 12 Governance and Development, Wol1d Bank. p.29. 1992. 13 Governance and Deyeloprnent. Ibid.. 14 John D. Clark. The State and the Voluntary Sector. Wol1d Bank. 1993. Il Governance and Democracy op. cit. Supra; Governance in the Wol1d Bank's Experience, November 1993. DISCUSSION DRAFT 4 in public affairs: 16 because of the capacity of civil society organizations to mediate between individuals and the State. to inform public debate. to perform social functions. and to hold governments accountable: l7 2. Background to the Handbook. Because of the growing conviction that a healthy NGO sector makes a strong contribution to development. the Bank has initiated various studies of national NGO sectors. a This work has frequently identified the imprecision. restrictiveness, arbitrariness, or unpredictable application of laws relating to NGOs as major problems hampering the development of the sector and preventing individual NGOs from achieving their potential. On the other hand. where NGO laws are lax or non-existent. it is easy for unscrupulous individuals to take advantage and to bring the sector as a whole into disrepute. These stUdies have led the Bank to be convinced of the utility of a handbook on good practices regarding NGO laws. They have also yielded a body of evidence relevant to such a task. Hence, in 1995, the Bank commissioned a specialist NGO - the International Center for Not-for-Profit Law (ICNL) - to embark on a major study of existing practice, to distill from this important principles for legislation. and to offer lessons of good practice ­ recognizing that the characteristics of the NGO sector and society vary from country to country, as does the capacity of governments to implement detailed legislation. This Handbook is the result. The Bank believes that it is timely because many governments - mindful of the increasing prominence of NGOs - are currently introducing laws governing NGOs. Often these laws are oriented towards restricting activities and strengthening government control rather than enabling NGOs to operate independently on the basis of accountability and transparency and encouraging effective self-regulation of the NGO sector. The Bank believes that restrictive NGO laws are inappropriate and would, in the long term. erode public support and confidence in national development objectives. The Bank hopes that this Handbook will prove useful in the drafting and debating of new or revised legislation. The Bank also recommends that 16 "Prohibition of Political Activities in the Bank's Work", legal Opinion of the Senior Vice President and General Counsel to the Bank's Board. July 12, 1995. 17 Governance in the World Bank's Experience, November 1993. 18 See for example: The Role of NGOs and Community-Based Groups in Poverty Alleviation in Uganda, World Bank, 1994; John D. Clark and Barbara S. Balaj, NGOs in the West Bank and 2m. World Bank, February. 1996; Pursuing Common Goals (a study of NGO-govemment relations in Bangladesh), World Bank, 1996; see also John D. Clark, The Slate and the VoIUnlarv Sector, ibid. DISCUSSION DRAFT 5 governments consult fully with the leaders of major NGOs and NGO networks in the revising of NGO law. The basic emphasis of this Handbook, therefore, is to argue against stringent govemment controls (for the reasons stated above) and instead to encourage an unfettering of the NGO sector so that it can enhance its contribution to national development. The Handbook does recommend the introduction of laws where they are non-existent at present, but such laws should be designed to foster an environment of independence, professionalism, and transparency within the sector and enhance the climate for self-regulation. This Handbook does not present a model law because the legal systems of the world differ in large and small ways, and local traditions of law drafting are also varied. It is intended, however, to set forth principles which would enable any interested and informed reader to evaluate an existing NGO law or draft a better one. Arty NGO law should, of course, be suitable to the circumstances of the country and should be prepared in consultation with representatives of the NGO sector. Although the Handbook applies to NGOs generally, it should be bome in mind that civil society has enormous diversity. Within civil society are advocacy groups, some of them challenging fundamental govemmental policies, as well as social service agencies carrying out programs under contract from the same govemment. There are groups representing minorities and cultural societies; there are women's rights groups and gardening clubs. There are professional societies that look inward to the needs of their members and policy organizations that seek to create a policy dialogue on issues of public importance. Some are large, but many are small. All of them, however, contribute to the general interest society has or ought to have in pluralism, tolerance, the protection of human rights, the alleviation of poverty and suffering, the advancement of science and thought, the preservation and advancement of culture and art, the protection of the environment - and all of the multifarious activities and concems that go to make up a vibrant civil society. The aim here is to suggest principles which, if enacted into law, would permit, encourage, and protect, all the diverse organizations that make up civil society. Although the Handbook favors self-regulation, it also recognizes that some degree of state regulation is necessary. That regulation, however, should never jeopardize the independence and freedom of the sector and should in all cases be proportional to legitimate public interests in the operations and activities of NGOs. The drafters of this Handbook have bome in mind throughout the drafting process the economic and social development purposes for which the Bank is interested in NGOs, as well as the reasons why any country, north or south, poor or rich, democratic or not, should want to have a vigorous, independent NGO DISCUSSION DRAFT 6 sector. Those considerations, which are set out in this Introduction and in Chapter A, have provided the basis for determining what has been included in the Handbook. Finally, one point deserves emphasis over all others. Having good laws for NGOs is a necessary but not a sufficient condition for the existence of a strong. independent. accountable. and transparent NGO sector. If such laws exist. it is a virtual certainty that numerous NGOs will spring up and flourish. as the experiences of many countries around the world attest. What is additionally necessary, however. is that the laws be adequately understood by the governmental officials who administer them. the lawyers who advise NGOs, and the judges who hear NGO cases. Understanding is not enough. however, unless it is accompanied by vigorous and fair enforcement. Laws on the books are dead letters until they are brought to life by understanding and enforcement. J9 3. Sources and Methodologies. This handbook is the fruit not just of the ICNL contract with the Bank. but of many years of research by many lawyers (particularly within the ICNL network). The concepts developed have been vigorously debated at numerous conferences with lawyers, NGO leaders, and government officials throughout the world. Inevitably, much of the information and experience used draws upon the experience of countries with long experience with NGOs. but careful effort has gone into both analyzing NGO laws from developing countries. 20 and to assessing whether long established laws in some regions are culturally relevant elsewhere. One purpose of the Handbook is to survey the wide range of issues and subjects that should be dealt with in any comprehensive and well crafted set of laws governing NGOs. Some of the principles deal mainly with the procedures that should exist. not the substantive rules of law. In addition, instead of being J9 Enforcement eannot be fair, of course, unless there are adequate means of administrative and judicial appeal. See Section 2(b). 20 A:s an integral part of this project, the Wond Bank and ICNL are developing an archive and database on NGO Jaws from countries around the wor1d. The database and archive consists of (1) copies of laws govemlng NGOs (often in both English and the local language; sometimes only in English or only in the local language), (2) draft laws (generally in English), and (3) country reports (generally in English; sometimes in the loeallanguage) - I.e., reports prepared by lawyers or other experts in the relevant country describing the NGO laws of that country and how they work. This archive and database Is growing rapidly. The Intention is that it will be available at the Bank, for use by Bank staff, and at ICNL, where it will be accessible to the public. DISCUSSION DRAFT WorldBankHandbook The Council of Europe imposes an obligation on each member state to respect these rights. The African Charter on Human and Peoples' Rights of 1981 provides somewhat ambiguous support for the freedom of association. 30 The American Convention on Human Rights of 1969 provides for broad protection of the freedom of association in Article 16, while the American Declaration of the Rights and Duties of Man of 1948 guarantees the "right to associate with others to promote, exercise and protect his legitimate interests of a political, economic, religious, social, cultural, professional, labor union, or other nature: There are no similar regional covenants in Asia or the Middle East. (iii) Constjtutional Protection. The constitutions of virtually all countries guarantee the freedom of association H In almost all cases, however. the provisions do so with a limitation that individuals are free to associate for "legitimate purposes' or a proviso that the freedom must be exercised "according to law' or some similar phrase, without placing clear limits on what the relevant law can restrict. 32 In sum, laws permitting NGOs to exist and operate freely are indispensable to the full and meaningful implementation of the freedoms of association and speech, and it can be argued that international law imposes an obligation on countries to enact sound NGO laws. b. Pluralism and Tolerance. There are many differences among the members of any society, and individuals and groups have diverse interests and needs. Laws permitting NGOs allow individuals and groups to pursue their 2\> Under Article 25, an NGO may file a petilion claiming to be a victim of a violation of the Convention. In Lavisse v. France, Appl. No. 14223188. 70 Decisions & Reports, pp. 218, 237. the European Commission on Human Rights indicated that if an organilation was prevented from canying oul Hs lawful objectives by a refusal to let it register lbe established!. that would constHute an Interference wHh freedom of aSSOCiation. 30 Article 10(1): "Every individual shall have the right to free aSSOciation provided that he abides by the law." 31 The Saudi Basic Law is an exception; it does not recognize the freedom of association. In the Turkish Constitution, Article 33 provides that associations must receive govemmental approval before they may be formed. In the Ukrainian Constitution. Article 36 guarantees freedom of association only to public associations and political parties. In contrast, the Constitution of The Philippines explicitly encourages the development and particlpation of NGOs at ali levels of decision-making in that country. The same is true of the constitutions of Bolivia. Brazil, and Colombia. 32 For example. the Constitution of Egypt provides in Article 55: 'Cililens shall have the right to form societies as defined in the law. The establishment of societies whose activities are hostile to the social system. clandestine. or have a military character is prohibited.' DISCUSSION DRAFT World B4nk Handbook on NGO !AWj 13 individual interests (e.g., sport, folk music, preservation of a particular language or culture) and thus support the development of pluralism and tolerance within society. It is important to emphasize that pluralism and tolerance are not the same thing as a commitment to democracy. Thus, a country could endorse the creation of good NGO laws in order to achieve the first economic reasons set out below and to permit pluralism and tolerance without committing itself to democracy as a form of political government. In other words, NGO laws are not solely a feature of democratic governments; such laws also have a meaningful role to play in other societies as well. 3) c. §ocial Stability and the Rule of Law. Unavoidably, there are differences among individuals in any society, and it is inevitable that these differences will find expression in one way or another. This is, essentially, the opposite side of pluralism; not only is diversity desirable, it is unavoidable. In any given society people come from different ethnic backgrounds, speak different languages, and practice different religions. They have different sexes, different ages, and pursue different professions and avocations. These differences will come out, sooner or later, and they will be expressed in a licit or an illicit manner, either legally or illegally. A principal and appropriate role for laws for the NGO sector is to permit and encourage the existence of such organizations and to afford them legal protection while at the same time providing the public with protection against misconduct and abuse by requiring appropriate transparency and accountability, especially regarding the use of public funds or funds donated by the general public, and by encouraging self­ regulation within the NGO Sector (see Chapter M). Thus, rather than driving a group underground (in order, e.g., to preserve their language and culture), the laws for the NGO sector allow that group legal existence and the protection of the law, so long as the NGO that the group forms meets generally applicable standards of legality and responsible behavior. The NGO laws, in other words, provide an essential safety valve for social pressures and energies that build up inevitably in any SOCiety. The existence of numerous and diverse NGOs is Egyptian Law 32 of 1964 implements this constitutional provision by stating in Article 2 that, "Every SOCiety formed that violates public order or morality, or for an illicit reason or objective, or whose purpose impairs the security of the Republic or the govemment's republican form or its social system, shall be null: The German Constitution guarantees the freedom of association to legal entities as long as they operate within the law. See GG art. 19 par.3. 3; It can be argued that, although democracy is not necessary for the existence of a sound, vibrant, and independent NGO sector, the existence of such a sector is essential to the long term success of democracy. In addition, a strong and vigorous NGO sector may be necessary in a democracy to allow minority groups to esoape excessive majoritarianism. DISCUSSION DRAFT World 84nk Hondboolt fHtNGO Law. 14 characteristic of peaceful and stable societies where there is ingrained respect for the rule of law..l4 d. Efficiency. Private. voluntary organizations can often be efficient pertners for governments in the provision of public goods and services. In other words, in many cases they cen provide such services with higher quality and lower cost than can the government. There are several reasons for this. One is the fact of volunteerism itself. To the extent that individuals devote time and energy to the solution of public problems (e.g.• assistance for the elderly or the handicapped) on a free and voluntary basis. there is a cost savings. This kind of relationship to service provision is in sharp contrast to often over-staffed and expensive government bureaucracies. 3~ More importantly. to the extent that public goods and services are provided by NGOs rather than by a governmental agency. there can be cost savings that result from competition. Although the NGO sector is not the market sector. there is real competition for grants. contracts. and donations. NGOs that demonstrate the ability to deliver high quality goods and services on a cost­ effective basis will be preferred by both private and governmental donors.36 As a result. many governments look to NGOs to provide a wide range of basic services31 • Finally. there is the factor of market knowledge. A small. locally based NGO may often know the real needs of the people to be served. and how best to meet those needs. than a large and often distant governmental agency. 34 In a demoCf8tic society NGOs can provide Individuals and groups with the ability to pursue Interests or goals not supported by the majority of people and to provide for themselves those goods or services for which the majority Is not willing to pay. 3~ Unfortunately. many govemment agenCies that fund NGOs to provide Important social services do not exercise any effective supervision over the quality and effectiveness of the services being provided. See United Nations Economic and Social Commission for Asia and the Pacific (ESCAP). Elseallncentives and Other Measures to SuPPOrt the Growth and Viability of NGOs for HRP. p. 27 (1994)(hereinafter cited as ESCAP. Elscal Incentiyes). In Hong Kong, however, NGOs are held to specified standards and the govemment carefully monitors NGO output and performance as a condition for further grants. .Ili. 36 Unfortunately. corruption also plays a role in the selection of NGOs in some cases. See ESCAP. fiscal Incentives. p. 27-28 (1994). 37 In Hong Kong all recognized social welfare, rehabilitation. and community development services run by NGOs are government funded, In India the current national development plan envisages a govemment-NGO partnership In the implementation of poverty alleviation progrems. explicitly recognizing that NGOs can act as catalysts and can organize beneficiaries. Involve people In planning and development, and provide the necessary support to make development a reality. By contrest, in Malaysia there is little collaborative govemment-NGO wort and virtually no NGO participation in planning, implementation. or evaluation of national social development programs. 'There ... remains, in general, a dearth of effective wortlng arrangements between government organizations and NGOs in many ESCAP countries [Asia and the Pacific)." ESCAP. Fiseal Incentives. p. 14,27 (1994). DISCUSSION DRAFT 15 NGOs, in other words, are often more efficient because they may have superior knowledge of the public needs to be met and may be more responsive in meeting them. 38 For all of these reasons, NGOs are often important partners with governments in the provision of needed goods and services39. Accordingly, the traditional tendency to see NGOs and governments as occupying separate "sectors· and being natural antagonists does not reflect reality. In rich and poor countries around the world, NGOs often work in close partnership with local and national governments. For many NGOs this means that governments are the most important source of support and funding. 4ll But it is a truly two-way street. NGOs provide indispensable information to governments and are often the most fruitful source of innovative suggestions for improving social programs. There is also keen interest in many countries in using NGOs to accomplish a transfer of formerly state-operated social and cultural organizations into the not-for-profit sector, and some countries have created special NGO laws for that purpose. 41 It should also be noted, of course, that relations between governments and NGOs are often adversarial or competitive. A principal purpose of many advocacy NGOs is to point out the shortcomings of governments and to advocate for changes in policy. Many governments dislike such criticisms and 38 It Is also true that in many Instances NGOs are more efficient than private enterprise organizations. Because Individuals wondng for NGOs usually ask and receive less in compensation than those in comparable jobs in the for-profit sector. an NGO's costs may be lower. In addition. many NGO benefit from the service of volunteers and often receive contributions. in cash and in kind. to support their activities. Finally. an NGO that is exempt from income tax has an advantage over a taxable for-profit entity engaged in the same enterprise. 39 A widely cited example of NGQ-govemment partnership is the Janasaviya Trust Fund in Sri Lanka. Between 1991 and 1994 it pooled money from govemment and private sources to allocate funds among small projects and grass-roots organizations. Its objectives were to promote employment through rural works programs. affect the human resources development of beneficiaries, support the institutional development of its partner organizations, enhance the nutrition of children, pregnant women, and lactating mothers, and provide credit for income generating projects. ESCAP, Fjscallncentives, p. 37 (1994). See generally, Lester M. Salamon & Helmut K. Anheier, The Emerolng Sector; An overview (The Johns Hopkins University InstRute for Policy Studies 1993) (hereinafter Emeroing Secton. 4ll In Hong Kong most NGOs obtain 70-80 percent of their income from direct public funding. In Singapore the government aSSists NGOs to recruit staff, allocates disused govemment buildings at nominal rents, helps NGOs obtain premises within housing estates, and funds up to 50% of capital and operating costs of facilities run by NGOs for social welfare purposes. By contrast, in countries such as Laos and Mongolia that are going through severe cutbacks in government expenditures, NGOs that have traditionally been funded by the state are suffering badly. ESCAP, FiscallnceOllves. p. 28 (1994). 41See Kalia W. Simon, Privatization of Social and Cultural Services in Central and Eastern Europe; Comparative Experiences, 13 S.U.lnt'l L.J. 383 (1995). DISCUSSION DRAFT 16 find various ways, including repressive laws, to silence advocacy NGOs or shut them down. Such tactics are short-sighted. It is in the long term interest of governments everywhere that there be vigorous and responsible debate on governmental policies, at least if the government believes that its goal is to more fully and adequately meet the real needs of the people rather than merely to perpetuate its power. Only through constantly testing various policies in the "market place of ideas' can there be any assurance that governmental pOlicies will improve over time.'2 Finally, in many developing countries governments and NGOs are competitors for development assistance money. About US$2.5 billion per year of official development assistance (ODA) goes through Northern NGOs, and in addition, an increasing number of donors now have programs to fund Southern NGOs directly.43 In many countries the balance between ODA money going to governments and gOing to NGOs shifts significantly over time, and there is constant competition between the two sectors to obtain a -larger slice of the pie:44 e. Public Sector Market Failure, The phenomenon of market failure is wall known in discussions of the private, business sector. The law of supply and demand is an extraordinarily powerful force in the production of goods and services in a cost-effective way, a way that usually meets the needs or desires of individuals and organizations with quality and responsiveness. There is often "market failure," however, in the provision of generally needed public goods or services, such as parks or highways. Public goods are necessary because they enhance the quality of life (e.g., parks) or constitute part of the economic infrastructure that is necessary for the business sector to flourish (e.g., highways). An essential role for government is to identify those areas of market failure where there is a real need for public goods, and to meet those neads. There is a similar kind of "market failure" in the provision of public goods. No matter how intelligent, dedicated, hard-working, and public-spirited the 42 'It Is Important for govemments to appreciate ... that NGOs ... have a watchdog function, which may place them at odds with govemment agencies. In fulfilling that function, they can playa valuable IOle in identifying malfunctions within govemment agencies whose own intemal monHor1ng systems may not be operating efficiently, and they can provide a vent for discontent when the political process falls short of meeting the people's expectations. In receiving ... legal status, NGOs are provided wHh a much-needed formal assurance regarding their political posHion. That procedure can set the stage for constructive NGO operations, both as 'service' and 'advocacy' organizations, in a climate conducive of govemment-NGO cooperation.' ESCAP), fiscal [ncentiyes, p. 16. 43 John O. Clark, NGOs and the WoAd Bank. World Bank 1996. 44This may lead to Inappropriate attempts by govemments to create special registration and control procedures for development NGOs. See Note 79 below. DISCUSSION DRAFT World Bo"" Hartdbook QIf NGO Law. 17 officers and employees of any government are, they simply cannot and do not anticipate all of the public goods and services that are desired by the citizenry. For example, there might in some African or Latin American country be a substantial number of citizens who have a passionate interest in Japanese art, and who would be willing to provide substantial funds and services to assure the creation of a museum for Japanese art. It is unlikely that government offiCials. however. will be able to identify this, or thousands of other desires and interests of society, and meet those needs in a responsive, adequate. and even-handed manner. Laws that permit individuals and groups to come together to meet the gaps created by market failure in the public sector playa vital role in enriching society and assuring that those public goods and services to which individuals are willing to devote their own resources will be provided. f. Support for a Market Economv. The third economic justification for NGO laws is that they provide indirect support for the success and growth of market economies. There is some evidence that market economies flourish best where social stability. public trust of institutions. and respect for the rule of law exist." These societal values are fostered by laws for the NGO sector. This view is perhaps best documented in the work of Prof. Robert Putnam of Harvard University. Based on intensive sociological research in the North and South of Italy over a twenty-year period. Prof. Putnam concluded that the best predictor of future economic development is the existence of strong civic traditions of cooperation. social networks. trust, and a commitment to social good - a interconnected set of conditions that he refers to as 'social capital:4 48 Discussion. If one or more ministries or agencies of the government is given discretion to terminate an NGO. seize its assets. or take over its operations. the possibility of that happening has a chilling effect on the independence of NGOs. In order to assure a vigorous and independent NGO sector, the law should provide for warnings before senctions are imposed and for intermediate sanctions (e.g.• fines. suspension of government grants or contracts) for various types of violations. as well as the ultimate sanction of termination. 1I9 Termination of legal existence. or the freezing of essets or assumption of control of an NGO. should be used only as a last resort. It should be possible for the government to take one of these actions only for the most serious and blalant violations. and then only if the NGO has been given an opportunity to correct its behavior." There should be a right of judicial appeal from a decision to terminate an NGO. and termination should not become effective until the appeal is completed or the time for appeal has lapsed. 119 The Internal Revenue Code In the United States has recently been amended to provide for a penalty tax if a 'disqualified person' (e.g.• an officer or director) of a public charity or a sodal welfare organization (I) receives unreasonable compensation. (II) sells. purchases, or transfers property to or from the organization other than at fair marXet value, or (iii) enters Into a financial arrangement under which he or she receives a percentage of the organization's revenues. A disqualified person Is subject to an Initial penalty tax of 25% of the amount involved. and a 200% tax If the violation Is not corrected. See Section 4958 of the Intemal Revenue Code. Prior \0 the enactment of these Intermediate sanctions, the only sanction for abuses of this kind was disquallficetion of the organization O.e., toss of tax exempt status), a sanction that was rarely used because of the disproportionate and often misdirected Impact of the sanction. .. By contrast the NGO Coordination Board in Kenya, which has jurisdiction over NGOs, can cancel or suspend the charter of any NGO on 14 days notice for any breach of the terms and conditions according to which it was established, without having to allow correction and without first using intermediate sanctions. In Egypt the Ministry of Social Affairs can dissolve an NGO for any legal violation or cencel any decision of an NGO's board of directors that it believes violates Law 32 - albeit that NGOs may appeal against such decisions to the administrative courts. No appeal Is allowed In Bangladesh from a decision to terminate an NGO, although a proposal to allow appeals is pending. DISCUSSION DRAFT World BaM HOIId/;ooe "" NGO LawI 49 Chapter E. Structure and Governance. Section 10: Minimum Reauirements q(Governinq pocuments. The laws governing NGOs should require certain minimum provisions in the governing documents of an NGO. such as that the highest governing body (assembly of members or board of directors) must meet with a given frequency, that the governing body is the sole body with power to amend the basic documents of the organization or decide upon merger, split up, or termination, that it must approve the financial statements of the organization, and so forth. Discussion. The governing documents of an NGO should be required to state the purpose(s) of the organization and set forth the basic governance structure. For example, they should identify the highest governing body of the NGO (assembly of members or board of directors) and stipulate the minimum number of times it must meet. The basic powers of the highest governing body should be spelled out, together with any restrictions on its power to delegate duties to others. For example, the governing documents might appropriately reserve to the highest governing body the right to amend those documents or to merge or terminate the organization. Any restrictions imposed by law on the organization, such as a prohibition on the distribution of any profits, should be stated in the governing documents. Doing so ensures that the board of directors, which is typically composed of individuals who are not conversant with NGO law, has ready access to, and hence at least constructive knowledge of, the limitations imposed by law on the organization. The minimum contents of governing documents vary from country to country and local tradition will playa large role in determining what kinds of proviSions must be included in the governing documents. 91 Usually the founders are given considerable discretion to determine, for example, what the voting rules of the organization are, so long as they are spelled out. Often it is necessary, in order to obtain tax preferences or receive a grant from a donor, to have certain limitations or prohibitions in the governing documents. For example. the purposes may have to be limited to public benefit activities and there might have to be prohibitions on the distribution of prOfits. 91 Under Article 60(1) of the Bolivian Civil Code, the statutes of an association must contain the objective of the association, the endowment, the source of its donations, and the framework for the management and administration of the same. Article 60(2) provides that the statutes must determine the condition for the admission and exclusion of members and the rights and obligations of members and the procedures for terminating the association. The Civil Code of Ecuador gives members of an association great leeway in drafting the statutes ofthe organization, but once adopted, the statutes must be followed, and punishments ara provided for deviations from the statutes. DISCUSSION DRAFT 50 These provisions generally have to be put in the statute. These are not strictly speaking legal requirements, but they must be satisfied in order to obtain certain benefits. Section 11: Optional Provjsions and Special Requirements. Laws governing NGOs should give an NGO (through its founders or its highest governing body) broad discretion to set and change the governance structure and operation of the organization. Discussion. The highest governing body of an NGO should be allowed, consistent with the terms of the governing documents, to adopt rules, regulations, bylaws, or resolutions that govern the details of the operation of the organization. It should also be able to increase or decrease the number of directors from time to time, perhaps within limits specified in the statute, and to create or eliminate officerships. The general point is that a basic structure be set out in the governing documents outlining the purposes and governance of the organization. Since organizations change and grow over time, there also needs to be flexibility on non-essential matters. It should not be necessary to amend the governing documents to make relatively small changes in the organization (e.g., creating a finance committee or adding two new seats to the board). Section 12: Uabilities of OffICers and Directors. (a) Laws governing NGOs should provide that officers, directors, and employees of an NGO should not be personally liable for the debts, obligations, Or liabilities of the NGO. Discussion. Of course, officers or directors may by private contract become liable for the debts or obligations of an NGO, such as when a director guarantees a loan incurred by the NGO. Further, individuals remain responsible for their individual acts even when the organization they work for has derivative liability. For example, if an employee of an NGO injures a third party while negligently driving his or her car, under some legal systems the NGO employing that person may be responsible for the harm caused if the employee was driving in the course of or arising out of his or her employment. (The doctrine of respondeat superior.) The fact that the NGO was derivatively liable, however, would not relieve the individual of liability as well. (b) Officers and directors should be liable to the organization and/or to injured third parties for willful or grossly negligent petformance or neglect of their duties. DISCUSSION DRAFT 51 Discussion: In the usual case the improper act or omission of an officer or director injures a third party, who sues the NGO. If the NGO is required to pay, it should have a right to sue the officer or director for dereliction of duty. Many systems allow the claim by the NGO against the officer or director to be tried in the same suit as the claim by the third party. The officer or director should not be liable if he or she acted reasonably and in good faith. v.! To prevent an injured third party from being without remedy if the NGO has been terminated or become bankrupt, the third party should have the right to sue the offending officer or director directly. Section 13: Duties of Lovalty, Diligence. and Confidentiality. (a) The law should provide that officers and directors of an NGO have a duty to exercise loyalty to the organization, to execute their responsibilities to the organization with care and diligence, and to maintain the confidentiality of non­ public information about the organization. Discussion: This rule is similar to the rule for officers and directors of other legal persons. It may be provided for in a law separate from the law governing NGOs, or simply be an established doctrine in the legal system. (b) The NGO itself, or any affected person in the society, should be allowed to sue for redress of any violations of these duties. Discussion: In addition to NGOs having the right to sue to protect their interests or seek redress, in some systems the public prosecutor or state attorney general has the right to sue on behalf of the NGO. Since many NGOs are small, weak, and unable to look after their own rights, especially when it comes to bringing legal actions, this is a desirable feature of a legal system. The question of when a person is sufficiently affected by a violation of an officer or director's duty is one of "standing.' A lawsuit may only be brought by someone who has ·standing" to do so. Standing rules differ among legal systems, but most systems require that a plaintiff show a direct and personal interest before he or she can initiate a lawsuit. Standing rules are also crucially important to the ability of NGOs to use lawsuits for advocacy purposes. For example, an NGO might want to challenge a legal restriction that impedes the ability of women to obtain access to bank loans or limits their ability to engage in business. Unless the NGO has v.! By contrast, under the laws of Uganda an officer concemed with the management of In NGO can apparently be held personaUy liable for the payment of a govemment fine levied on the NGO, and can also be jailed for up to twelve months for failure to pay iI. DISCUSSION DRAFT 52 'standing" under the rules of the particular society, however, it would not be able to bring such a lawsuit. Accordingly, in many legal systems the NGO must find a particular woman or group of women to challenge the restrictions, and provide the legal representation that they need to do so. Section 14: Prohibition on Conflicts of Interest. (a) Careful consideration should be given to the extent to which the law should provide that officers, directors, and employees of an NGOs must avoid any actual or potential conflict between their personal or business interests and the interests ofthe NGO; laws affecting conflicts of interest for officers and directors of for-profit entities may be adapted to apply to NGOs. Discussion: Because of the many differences between the structures and activities of NGOs, and because of the innumerable ways in which individuals may be involved with an NGO and also with another entity that relates to that NGO in some way, it is nearly impossible to stipulate with specificity the kinds of conflicts that should be avoided. 93 One possible approach is to prohibit conflicts of interest in general terms and allow courts to determine on a case-by-case basis whether there has been a violation. It would also be possible to require NGOs to adopt specific conflict of interest provisions in light of their particular facts and circumstances. In some legal systems the obligation to avoid or correct a conflict of interest is an established doctrine of law that has general applicetion to anyone in a fiduciary poSition, and thus no special rules are required for NGOs.94 Finally, in some legal systems it might be appropriate to spell out the difference between MBOs and PBOs and require a higher standard of conduct for officers and directors of PBOs. 93 Apparently to prohibit conflicts of interest, laws in some countries prohibit a member of the board of directors of an NGO from being on the board of another NGO in a similar field. Although sitting on the boards of competing organizations can place a director in a conflict of interest, the fact that two organizations operate In the same field does not make such conflicts certain. And, when conflicts arise, the cure is often to have the Individual disclose the conflict to both organizations and recuse himself from any decisions as to which there might be a conflict. Resignation is a last resort. The absolute prohibition rule is a good example of an overty simplistic approach to a sublle and complicated set of problems. The pending foundation law in Peru, by contrast, reflects a much more sophisticated approach In Its attempt to delineate situations that may create conflicts. 94 For example, In a number Of countries laws require any person elected or appointed to a high position in the government to resign from any position as an officer or member of the board of directors of any organization, whether for-profit or not-for-profit, which might be affected or benefited by the decisions that person might make while In office. Whether required by law or not, this is a salutary practica and precludes a kind of conflict of interest that is all too common In many countries. DISCUSSION DRAFT 53 b) Potential conflicts may be avoided through recusal procedures. Discussion: For example, if an individual sits on the boards of two NGOs that occasionally compete for governmant contracts, the individual could, with the knowing consent of each organization, recuse him- or herself from any decisions by either NGO relevant to the particular government contract, and avoid sharing any information learned from one NGO about it with the other. (c) An NGO should be entitled to sue for redress of any harm caused by a conflict of interest. DISCUSSION DRAFT 54 Chapter F. Prohibition on Direct or Indirect Private Benefit. Section 15: Prohibition on the Distribution of Profits. Laws governing NGOs should provide that no net earnings or profits of an NGO may be distributed as such to any person. Discyssion: As discussed in Section 19. NGOs should be allowed to engage in economic activities so long as the principal purpose of the NGO is to pursue a public purpose or the mutual benefit of its members. If an NGO does derive net prOfits from an economic activity, they must be used for the public or mutual benefit purposes for which it was formed, and they must not be distributed to any person. Thus, it is permissible if eamings and profits from an economic activity allow an MBO to provide higher and greater benefits to members. but it should be impermissible for any NGO to distribute profits as such - e.g.• dividends or excessive compensation. The law should prohibit either the direct or indirect distribution of net eamings or prOfits. For example, putting a child or spouse of the president on the payroll of an NGO when that person performs little or no useful work is simply an indirect way to distribute prOfits to the president. On the other hand. not all economic transactions with key individuals are impermissible. For example. if the founders of an NGO loaned it money in the early days. it would be permissible for the NGO to repay the loan with interest when it is able to do so. This principle - the principle of non-distribution - is the single most important feature distinguishing NGOs from for-profit entities. Section 16: Prohibition on Private Inurement. a) The laws governing NGOs should provide that officers or employees of an NGO may be paid reasonable compensation for work actually performed for an NGO, plus reimbursement for reasonable expenses and reasonable fringe benefits. Directors would generally not be compensated. Discussion: What constitutes reasonable compensation, reasonable expenses. and reasonable fringe benefits may be possible to determine only in facts and circumstances of a particular situation. 91 More importantly. it would 91 "Reasonable" is a tenn widely used and understood in the English language and in common law countlies. It Is not a tenn that has an established use in civil law systems. In those systems, the better tenn would probably be the lotallanguage equivalent of "usual and customary." This is just one example of how difficuH it is to translate the concepts expressed in this Handbook into other languages. DISCUSSION DRAFT World BMkHtmdbocle 011 NGO Lawn 55 generally be inappropriate for any agency of the government to intrude into the affairs of an NGO to determine what is 'reasonable" compensation, expenses, or fringe benefits, or to set maximum salary scales. Legitimate concerns about such matters are best left to self-regulatory mechanisms such as those discussed in Chapter M and Appendix 2. Despite the frequent reference to NGOs as the 'voluntary" sector, and though many NGOs receive valuable assistance from volunteers, it is quite permissible for employees of an NGO to be paid a reasonable salary and to receive the normal employee benefits (e.g., paid vacations, health and pension benefits, if not provided by the government). There is a strong and salutary tradition, however, that salaries in the civic sector are typically less generous than those in the for-profit sector. There is also a strong tradition that members of the board of directors of an NGO should serve on a voluntary basis and without compensation, and this tradition should be maintained and strengthened. It is appropriate where feasible and when they have limited personal means to reimburse members of the board for reasonable expenses incurred in their work as members of the board. 96 When a member of the board of directors, with the prior approval of the board, performs special tasks for the organization (e.g., as a lawyer or technical specialist), it is appropriate to pay that person reasonable compensation for the work performed. In the case of some NGOs, however, where directors are required to attend frequent meetings and devote many hours to their responsibilities for the organization. it may be appropriate to pay reasonable compensation. On all questions of this sort the overriding principle is the best interests of the NGO. Sometimes conserving funds is in the NGO's best interest. Sometimes paying higher compensation to attract the most able individuals is in the NGO's best interest. For many NGOs the issue of unreasonable compensation is never presented. for they either lack resources to pay excessive salaries and benefits, or they have strongly internalized the tradition of compensating and rewarding employees on a modest scale. In the interests of good governance and the integrity of the sector, however, it is good practice for any NGO to adopt and publicly declare a policy permitting the payment of only reasonable compensation. expenses, and fringe benefits. It is not uniformly the case, however. that NGOs exercise restraint and follow good practices in the area of compensation. In some industrialized 96 In some cuHures It is acceptable for members of the boan:l of directors to receive a 'per diem' or 'gratification' payment for attendance at boan:l meetings. without the necessity of demonstrating actual expenses. DISCUSSION DRAFT 56 countries where national wealth is great and the resources of many NGOs are ample, there is a growing tendency for NGO salaries to approach salaries in the for..profit-sector. Further, in any country it is possible for NGOs to be abused, and excessive compensation or compensation for work not performed is a popular abuse. Accordingly, it is strongly recommended that laws governing NGOs, the activities of which significantly affect the public interest, require public disclosure of the compensation of (i) the highest paid individuals employed by the NGO and (ii) any compensation, as an employee or othelWise, paid to a member of the family of a founder, officer, or director of the NGO. In most countries the antiseptic effect of public disclosure will cause most NGOs to exercise restraint on these sensitive issues. (b) The laws governing NGOs should provide that the assets, earnings, and profits of an NGO may not be used to provide special personal benefits, directly or indirectly, (e.g., scholarships for relatives) for any person connected with the NGO (e.g., officer. director, employee, founder, or donor). Discussion: It is difficult to craft precise rules in this area because the variety of ways in which officers and directors might seek to obtain improper benefits from an NGO are legion and various. Moreover, it is often difficult to detect or correct abuses. For example, if an MBO provides special health benefits to all members it may be permissible for the president to receive those benefits as well. However. if an MBO provides special benefits for any member that has a rare illness or disease, but only the president has that illness or disease, providing the benefit to him or her may constitute an improper personal benefit. This is an area where it may be necessary to put general standards in the law and let the regulatory agency and the courts apply them on a case-by­ case basis. (c) In the case of an MBO, benefits may be made available to members if they are available on a nondiscriminatory basis to all members (e.g., special educational materials or insurance plans). Section 17: Prohibition on Self-Dealing. (a) Laws governing NGOs should provide that any transaction (e.g., sale, lease, or loan) between an NGO and any person connected with it (e.g., officer, director, employee, founder, or donor) must be consummated, if at all, at arms'­ length and for fair market value. Discussion: "Self-dealing" is a term coined in common law systems to describe situations where those in a position to influence or control an organization cause it to undertake a transaction that constitutes an unreasonable benefit to the individual, often to the detriment of the DISCUSSION DRAFT WorldBankHandbookon NOOLAW3 57 organization. 97 For example, the founder of an NGO might cause it to purchase an asset from him or her at an inflated price, or purchase an asset from the NGO at a price that is only a fraction of its real price. Such transactions are similar in purpose and effect to an influential person causing an NGO to pay excessive travel and entertainment expenses for the president. They drain assets out of the NGO, tarnish the image ofthe sector, and should be prohibited. Self-dealing is a form of conflict of interest. See Section 14. If a transaction involving self-dealing is proposed for an NGO, there should be full disclosure in advance of all material facts concerning the transaction to the Board, and the interested director, officer, or employee should be excluded from the discussion and decision on the matter. The basic principle is that a person affected by a decision to be taken by an NGO should not be present during the discussion and decision-making, so that there will be a minimum of constraints to candid consideration of issues, and those making the decision will not be inhibited from taking the right decision by the presence of the person who is affected by it. 98 (b) It may be appropriate to prohibit entirely certain kinds of transactions that have a very high potential for abuse. Discussion: Some types of transactions are by their nature of so little relevance to the mission of an NGO and so likely to involve abuse that they should be prohibited altogether. One example might be loans by an NGO to an officer or director. Another might be the sale of assets between an NGO and one of its officers or directors when it is difficult to determine the fair market value of those assets. (c) An NGO should be entitled to sue for redress of any harm caused by self~ealing. Discussion: Restitutionary remedies have been worked out carefully in most legal systems. Generally speaking, they involve putting the parties back to where they would have been, as nearly as may be, had the transaction in question not occurred. This may involve rescisSion of the transaction plus transfer to the NGO of any profits made by the offending individual while he or she held the asset. 97 For example. the laws of Malawi allow a trustee to purchase something from the NGO of which he is a trustee only if the price is certified to be the best available in the market. os Similar procedures are ordinarily followed where a board member is reelected to the board. DISCUSSION DRAFT WorldDanIi: Handbook on NGO Laws 58 Section 18: Prohibition on the Reversion of ASsets. (a) Laws governing NGOs should provide that no PBO should be permitted to distribute assets to its members, officers, directors, employees, donors, or founders upon the liquidation or termination of the NGO. Discussion: The law should permit an NGO, in its governing documents or by resolution, to designate another similar NGO to which any assets remaining after the payment of all debts and obligations should go. In some situations, large donors may have imposed a contractual obligation that funds received from it be returned in the event of termination. A good practice is for an NGO to select another NGO engaged in the same or a very similar kind of activity to receive its assets upon termination. In the absence of any such deSignation, at least in the cese of a PBO, the assets should revert to the government or a government fund that provides grants to NGOs. Depending upon the other rules chosen in a particular country, it may be necessary to protect against the danger of "downstream" terminations. For example, consider a possible cese in a country that accords greater benefits to PBOs than to MBOs. If a PBO in this country received substantial public donations and government tax breaks, there might be a temptation to terminate it and have all of its assets transferred to an MBO. That MBO might later be terminated (under the rule discussed in (b) below) with its assets going to members. This would obviously be an abusive transaction. One way to prevent such transactions would be to preclude transfers to NGOs of a type that are entitled to fewer benefits under the law than the type to which the terminating NGO belongs. (b) An exception permitting distribution of assets to members upon termination after the payment of aI/liabilities of the NGO may be appropriate in the case of an MBO (see Section 1(b)) which never received signifICant contributions from the public (i.e., persons not affiliated with it as founders, donors, officers, directors, employees, or members) or significant grants or grants, contracts, or tax preferences from the government. Discussion: Some MBOs never benefit from governmental or public support or subsidy, and when they terminate it should be permissible for the remaining assets to be distributed to the members. For example, if a sailing club is formed and sailboats are purchased for weekend races using member contributions, when the club is disbanded, it should be permissible for the boats and other assets of the club to be distributed to members in some equitable fashion. DISCUSSION DRAFT 59 This is an area in which it is possible to argue for many special rules and exceptions. Each of the possible exceptions has a rational basis, but the tradeoff for crafting highly particularized rules is that the law becomes very complicated. On the other hand, any simple rule involves inevitable unfairness. Under the recommended general rule reversions would be prohibited from any terminating NGO that had had tax exempt status. It could be argued, however, that such a bar should not apply if the organization can demonstrate that it never received any advantage from its tax exempt status (e.g., never had any receipts that would have constituted taxable income if it had not been exempt.) Or, a reversion from a terminated NGO could be allowed if the tax authorities first collected all of the taxes that would have been paid if the entity had not been tax exempt. Tax recapture rules of this sort, however, are notoriously complicated and difficult to administer. Further, if an NGO separately accounted for all contributions from the public or the government, and could show that all such sums had been spent on appropriate programs, it can be argued that there should be no bar on reversions. This approach, however, would require special accounting over the life of the NGO. Because of the complexity involved in any of these special rules, the preferable course may be to simply prohibit reversions. DISCUSSION DRAFT 60 Chapter G. Activities and Operations of NGOs. Section 19: Economic Activities. An NGO should be permitted to engage in lawful economic, business, or commercial activities for the purpose of supporting its not-for-profit activities, provided that (i) no profits or earnings are distributed as such to founders, members, OffICers, directors, or employees, and (ii) the NGO is organized and operated principally for the purpose of conducting appropriate not­ for-profit activities (e.g., culture, education, health, and so forth). DiscussiQn. There are a number Qf technical problems that must be sQrted Qut in dealing with the issue Qf econQmic activities of NGOs. These issues, and the clQsely related and even more technical issues involved in the question of whether and how to tax the profits from such activities, are dealt with in detail in Appendix I. Here it is sufficient to nQte that it is a gOQd practice tQ allow an NGO to engage in an active trade or business for the purpQse of raising mQney to support its not-for-profit activities, so long as its principal purpose is not that trade or business activity but rather the carrying out of the not-for-profit purposes for which it was formed. 99 Of course, as discussed more fully in Section 15, it should not be permissible to distribute the profits. Allowing NGOs to engage in an active trade or business is especially desirable in many countries going through social and econQmic tranSition, for the profits from such activities may provide essential support for the development Qf a strong and responsive not­ fQr-profit sector. Section 20: Licenses and Perm;ts. Any NGO that engages in an activity (e.g., health care, education, banking) that is subject to licensing or regulation by a government agency should generally be subject to the same licensing and regulatory requirements and procedures that apply to similar activities of individuals, business organizations, or public agencies. Discussion: If an NGO wants to run a nursing hQme for old people, it should be held to the same standards requiring professional staffing, sanitary conditions, and SQ forth that apply to any other organization. The same should apply tQ any other activity for which the government has generally applicable rules and regulations, such as environmental protection rules. tn shQuld be noted, though, that some countries allow special and somewhat more lenient rules for certain kinds of NGO. For example, alternative schools might not have 99 The Ugandan law on NGOs does not rafer to the primarily nonprofll or noncommercial aspect of an NGO. In the Arab wand, on the other hand, the NGO laws generally recogniZe that this is an important element of an NGO. DISCUSSION DRAFT WorIdS.""Handbook"" NGO lAw, 61 to meet the same strict curriculum requirements that apply to regular schools, as is the case in Hungary. Section 21: Political Activities. (a) In general, NGOs are not political parties and should not be allowed to engage in the kinds of activities normally the province ofpolitical parties, such as fundraising to support candidates for public office or registering candidates to qualify for public office. Discussion: This guideline assumes that there is a separate law or laws governing political parties, political fundraising, elections, and political campaigning, and is intended to ensure the integrity of such law or laws. (b) NGOs are offen key participants in framing and debating issues of public policy, and they should have the right to engage freely in research, education, and advocacy on issues of public debate, even where the positions they take are not in accord with stated government policy. Discussion: As background to the issues that arise under this heading, it is important to remember that under intemationallaw and the laws of virtually all countries, the right of freedom of speech is enjoyed by individuals not by legal persons. 100 In some countries legal persons are recognized as having free speech rights, either in their own right or by derivation from the individuals who belong to them, such as in the case of an MBO. Even when NGOs are accorded broad free speech rights, it may nonetheless be appropriate to impose reasonable restrictions with respect to time, manner, and place, so long as those restrictions are not more than those necessary to achieve or protect a demonstrable public interest. Any such restrictions, of course, should be no more onerous than similar restrictions imposed on other legal persons. In many countries there are quite strict limitations on the extent to which NGOs are permitted to engage in public advocacy on issues or in criticism of the government and its policies. 101 In other countries NGOs are robust participants 100 As discussed above, there are some substantial arguments that NGOs must be recognized as having rights such as freadom of speech In order that the rightS of individuals to freedom of association be adequately implemented. See Chapter A (d}(l). 101 "(WJhile stated policy is invariably supportive of NGOs, its implementation may not be; NGOs that get involved in issues on the political 'cutting adge: particularly if they take on a strong advocacy role, can expect to be viewed as disruptive and threatening, with constraining or repressive action coming swiftly behind." ESCAP, El§callncentlves. p. 18 (1994). In Malaysia the law hes been changed to impose state control over NGOs engaged in political activities. NGOs are classified as ·societies, " which must be established with the Registrar of Societies. Amendments to the Societies Act in 1981 divided the country's NGOs into DISCUSSION DRAFT 62 in advocacy and criticism of the government. In many countries NGOs are allowed to support or oppose particular candidates for elective or appointive office. 101 In others they are not. In some countries certain kinds of NGOs are forbidden from lobbying their government. Under other possible rules, no endowed foundation would be permitted to lobby the government, or could do so only if it disclosed how much funding it received from the government. Under the rules in force in some countries, NGOs may engage in advocacy on public issues but only if they speak out of their own expertise or knowledge and only if their advocecy is rational. The question of politicel activities raises many sensitive issues. Views and practices differ widely. Some rules, such as several discussed above, involve considerable complexity and confer on government bureaucrats the discretion to determine when political activities of NGOs are permissible and when they are not. On the other hand, rules prohibiting any political activities by NGOs would dramaticelly lessen the extent and sophisticetion of public debate on important issues. In many societies NGOs provide the only voice for many poor, vulnerable, or minority groups. It is preCisely these groups that are or may be most affected, positively or negatively, by development. Development that focuses on poverty alleviation and sustainability requires governments to adopt practices and policies that encourage accountability, transparency, and inclusive decision making, as well as integrity, for experience has shown that good governance is essential to sound development. What this means at the very least is that independent NGOs that represent groups affected by development projects - such as the poor, women, ethnic minorities, etc. - should be allowed to participate fully in the processes by which development projects are selected, deSigned, and implemented. Otherwise there will not be the kind of partiCipation that the Bank has learned from years of experience is necessary for successful development. IOJ It is difficult to imagine that NGOs can partiCipate in development as the independent voice of affected groups unless there are sound laws that permit them to be established easily and that protect their right to engage robustly in research, education, and advocacy, even when that means criticizing or opposing 'friendly' and 'political' societies. The laHer are required to obtain the Registrar's approval for foreign affiliation and fund raising. Certain categories of people are barred from holding office in those NGOs, and the Registrar's decision to register or de-register them has been held to be unchallengeable In court. 102 For example, in Malawi and Brazil NGOs may participate in the political process, including supporting candidates and lobbying the legislature. Nepal and Turkey forbid NGOs from participating in political activities. Similar rules apply to aSSOciations in Bulgaria and foundations in Lithuania. IOJ See Govemance: The World Bank's Experience. p. 42 (The World Bank; 1994). DISCUSSION DRAFT WOI'/d Btmk Handbook on NGO Low. 63 government policies or actions. It is also difficult to imagine a tegal environment in which NGOs are allowed to participate fully in the selection, design, and implementation of development projects that did not also allow them wide freedom to criticize other policies and actions of the government. 104 One subsidiary rule deserves attention. There have been instances in which agencies of the government have used NGOs to lobby parliaments for issues of interest to those agencies. This sort of subterfuge is not desirable. On the other hand, an NGO should not be precluded from educational and advocacy activities aimed at its government simply because it receives a grant or contract from some agency of the government to carry out a particular government program. Accordingly, though governments should have their own internal rules restricting agenCies from funding NGOs to lobby other arms of the same government, NGOs that have contracts with or grants from government should be allowed to conduct educational and advocacy programs aimed at that government so long as they separately account for the contract or grant money received from the government. In any democracy the composition of each elective body is crucial to the determination of policy. In democracies, accordingly, an NGO should not be barred from endorsing or supporting candidates on grounds relevant to the purposes for which it was formed. 10! Any other rule would deprive voters in a democracy of access to essential information and research that will be relevant to voter choices. For example, in many democracies NGOs keep a 'scorecard" on the policy pOSitions taken and votes cast by candidates or prospective candidates for office. For example, an environmental organization might publish a chart showing the extent to which particular candidates for office supported or opposed policies deemed by it important to the protection of the environment. Although such information constitutes no more than the opinion of that environmental organization, to many of its members and to members of the larger public, such information might prove quite influential in helping voters to determine for whom to vote. If NGOs were not allowed to engage in such activities, individual voters would be deprived of i~rtant sources of research and information relevant to intelligent citizenship. I 104 It should also be bome in mind that, as key actors in civil society, NGOs have a central role to play in monitoring and criticizing individualS and organizations in the private sector as well as politicians and govemment agencies. lOS In the United Slates, public charities qualitied for federal income tax exemption under Section 501 (c)(3) oflhe Internal Revenue Code - a large but limited set of US NGOs· is prohibited from participating or intervening in any political campaign on behalf of or in opposition to any candidate for public offICe. 106 Understandably, in any given country it will be appropriate to place limits on the activitias of NGOs in support of or in opposition to candidates for public office in order to preserve the integrity of the political party laws. In other words, NGOs should not become the functional DISCUSSION DRAFT 64 Chapter H. Fund Raising. Discussion: After registration, fundraising is perhaps the most burning issue for NGOs throughout the world. Without a strong practice of charitable giving, NGOs in many countries live a precarious life. Some get contracts or grants from the state budget. (The GONGO problem is discussed in Section 37.) Others are supported by external donors, including bilateral and multilateral donors and private foundations. A strong, independent, and vibrant civic sector will not emerge in the long run if NGOs continue to rely upon foreign funding or their own governments. One extremely important source of funding for NGOs in many countries is profits from economic activities. The issues relating to economic activities and their taxation are dealt with in Sections 19 and 32 and Appendix I. What is needed in addition, however, is grass-roots, community-based funding. Significant efforts are being made in countries around the world to develop this kind of financial support. 107 Leading foundations that support the development of civil society internationally, such as the Ford Foundation, the Charles Stewart Mott Foundation, and the Rockefeller Brothers Fund, have made sustainability one of their key issues. In short, it is clear that efforts need to be intensified to develop broad-based, citizen participation in funding of NGOs around the world. Another source of funding that should be encouraged is that which can be provided by corporate foundations. So long as legal entities are permitted to establish NGOs, see Section 3(e), business entities that want to demonstrate their commitment to the communities in which they work can establish a corporate foundation to fund worthy causes. Even if all that is contributed by a company to its foundation is 2-3 percent of its net profits, that can be a substantial sum of money in the case of a large business enterprise. In more mature societies, corporate foundations have played an important role in providing funding to indigenous NGOs. In fact, a strong partnership between business and civil society can be beneficial to both parties. NGOs can obtain money and in-kind assistance for equivalent of political parties. Thus, an NGO might be foreclosed from raising funds for a candidate or assisting him or her to be listed on the ballot, but that does not mean that it should not be allowed to express its preferences for or against particular candidates. 107 'Central fund-raising bodies, such as the Community Chests of Singapore and Hong Kong, which not only collect but also channel and monitor funds flows, can remove much of the burden of fund-raising from individual NGOs, introduce greater expertise into funds-collection and constituency-building schemes, ensure accountability, build donor confidence and encourage the capacity-building of NGOs and their staff.' ESCAP. FiScal Incentives. pp. 39-40 (1994). The Community Chests of Singapore and Hong Kong are affiliates of United Way Intemational. DISCUSSION DRAFT 65 the good work that they do. Business enterprises can receive recognition for being "good citizens,' not mere profit-making machines, an important consideration for any enterprise that intends to have a long and successful presence in a particular country. Another way in which businesses and NGOs can cooperate is through ·sponsorship." If a business is supporting an NGO (e.g., a soccer team) basically to obtain recognition in the community (e.g., "The Reebok Championship"), it is appropriate to categorize the activity as advertising rather than a contribution to charity. Within broad limits, most countries recognize advertising expenses as legitimate expenditure that can be deducted in calculating the income taxes of a business, so no new rule is required. Section 22: Solicitation - Umitations. Standards. and Remedies. (a) An NGO should be prohibited from engaging in any misrepresentation in connection with the solicitation of funds from others, each NGO should be required to divulge, in connection with its fundraising. the extent to which its funds are used to defray the direct and indirect costs of fundraising, and licensing is appropriate for public fundraising. Discussion: It should be impermissible for an NGO to solicit funds using the name of another entity or to misrepresent the purposes for which the funds will be used. If a fee is paid to a fundraising organization, the amount of it should be disclosed. It is appropriate to require a license before there can be charitable solicitation in a public place. loa Charity solicitors going door to door should be required to display their permit, and mail solicitations should be permissible only if a licanse is obtained. The point of all these requirements, of course, is to protect the public from fraud and misrepresentation. 109 The ways in which the public can be taken advantage by unscrupulous NGOs are myriad, so this is a very fruitful area for self-regulation, to protect the image and standing of NGOs as well as to protect the public. See Section 40. 108 In Egypt an NGO cannot solicit contributions without a license. but the soliCitation law has a 'Catch 22' quality to it. An NGO can only receive two licenses per year. and each expires after three months. Accordingly, an NGO can only raise funds 6 months out of the year. In the Netherlands, fund raising is largely regulated by a private body called the Central Bureau of Fund Raising. which restricts fund raising activities of its members in a similar fashion. Since the organization grants a "seal of approval" to entilies, as a practical matter organizations that are nol members have very little ability to raise funds from the public. See Wino J. M. Van Veen. "Self·regulation of fundraising: The Dutch Example,' unpublished paper on file with ICNL 109 There must be a balance. of course. between the need to protect the public and the creation of needless or expensive licensing or other bureaucratic burdens. For example. an NGO in South Africa must nol only have a license to solicit contributions. it must also publish a plan of solicitation in a national newspaper. which is quite expensive. DISCUSSION DRAFT 66 In some countries there are strict statutory rules on the amount or percentage of funds an NGO may expend on administrative or overhead expenses or fundraising - e.g., 20%. Almost without exception, these rules are unsuccessful. In the first place, the legitimate overhead expenses of NGOs vary widely. Art NGO engaged in running field projects for agriculture may have a very low costs of central administration and overhead, whereas an NGO formed primarily to engage in research and education may have very large central administration and overhead costs. Rigid, mechanical rules fail to respond to the great diversity among NGOs and drive many NGOs to adopt "creative' accounting measure to force their costs within the rule of the statute. Here as elsewhere there is great advantage in requiring public disclosure and letting the public decide whather or not to support an NGO with high administrative or fundraising costs. Of course, it is essential first to have generally accepted standards for cost accounting, so that fair comparisons can be made between organizations. Many countries have not yet adopted accounting principles for NGOs, and doing so should be a priority. The next step is to require public disclosure of such key numbers as top salaries and the percentage of revenues spent on overhead and fundraising. A good practice is to require NGOs to make such information available to actual and prospective donors when soliciting donations from the public. This is, once again, an excellent area for self-regulation. See Section 40. (b) LotterieS, charity balls, auctions, and other occasional activities conducted primarily to raise funds for an NGO are a form of fund raising and should not be regarded as economic or commercial activities. See Section 20. Discussion; Activities of this sort are occasional and are presented and advertised as fund raising activities. For these reasons they should not be treated as economic activities. DISCUSSION DRAFT 67 Chapter I. Reporting. Discussion: Under many existing NGO laws there is minimal reporting but one or more govemment agencies has considerable discretion to determine whether an NGO should be established or terminated. Some laws give govemment agencies wide discretion to determine what activities may be engaged in by an NGO, what funds it can seek or accept, and so on. In a modem society it is not feasible to receive the benefits of having an NGO sector, see Chapter A (2) above, and regulate NGOs in this fashion. If there were numerous NGOs, as there must be in order for a society to reap the rawards of having a vigorous and independent NGO sector, the bureaucratic task would be overwhelming. Some countries exercise little or no supervision over NGOs once they are established. This is not a good practice. Fraud and abuse are possible in the NGO sector, as elsewhere, and vigilance is necessary if violations of the law are to be prevented or minimized. As the Chief Charity Commissioner of England and Wales has said: 'We must be skeptical of the 'halo' argument. Not all charities are good. Charities are frequently inept, inefficient, unprofessional, and even corrupt.· IlO The basic trade-off for relatively easy establishment of NGOs is accountability and transparency. In exchange for protection of the laws allowing easy establishment as a legal person, an established NGO should accept reporting requirements and enforcement mechanisms that are appropriate and proportional to the legitimate interests that the public may have in its operations and activities (see below). The basic tools for achieving accountability and transparency are a variety of reports. Some reports go only to the govemment and some are available to the public. H would be nice if there could be a single and simple form of reporting for all NGOs and for all of their activities. Unfortunately, the activities of NGOs are too numerous and diverse, and the legitimate interests of the govemment and the public are too diverse to make this possible. Still, to the maximum feasible extent, reports should be as simple to complete and as uniform among agencies as is possible. There should, of course, be penalties for failing to file reports, for failing to file them on time, or for filing false reports.1I1 Finally, whatever reporting requirements are imposed on NGOs 110 Speech by Richard Fries at the South Asia Conference on Laws, Rules. and Regulations for the Voluntary Sector, March 6-10.1996. a conference sponsored by ICNL. CIVICUS, and VANI. the Voluntary Action Network of India. 1lI Although the essence of accountability is to ensure that NGO funds have been used in accordance with applicable standards. accountability transcends financial integrity: "NGOs are also accountable \0 their immediate beneficiaries for the substantive selVices that they provide. More broadly. they are accountable to the ultimate beneficiaries. the public-at·large.... As a DISCUSSION DRAFT W.,./d BOIIIt Handbook ""NGO Law. 68 should not be more onerous than comparable reporting requirements imposed on other entities, such as for-profit companies. It is appropriate for the reporting requirements to be less onerous for MBOs than for PBOs, and small organizations should be given simplified reporting requirements or exempted altogether. More generally, the nature and extent of reporting requirements should be appropriate and proportional to the legitimate interests that the public may have in the operations and activities of the particular NGO. II2 For example, for an MBO with no activities affecting the public interest, it may be appropriate to require no more than an annual report indicating that the minimal activities required to maintain legal existence (e.g., annual meetings of its board of directors have occurred.) On the other hand, it may be appropriate to require extensive financial and operational reporting from a large PBO that receives significant tax preferences, govemment grants, or donations from the public. Furthermore, it is not sufficient for the govemment to require the various reports, as suggested below. These Reports from an established NGO should receive adequate scrutiny. Important questions that are raised by them or by complaints from members of the public should trigger mail or telephone inquiries, or even on-site inspection and audit in appropriate cases. In short, in order to prevent misconduct and abuse, the NGO laws must be fairly and vigilantly enforced as well as being well conceived and drafted. There is, of course, the ever-present danger of over-regulation by the govemment, or, indeed, the use of reporting and audit requirements to harass NGOs that are critical of the govemment or otherwise unpopular. ll3 There is no certain protection against govemmental abuse, and it exists to some extent in every SOCiety. One of the most important reasons why every country should have basic condition for ensuring accountability, all NGOs should be required to open their accounts to public scrutiny." ESCAP, Fiscal Incentives. p. 41 (1994). 112 "To ensure that NGOs function effectively, it is necessary for govemments to restrain themselves from the temptation of seeking to influence or otherwise involve themselves too closely in NGO affairs. . .. It is therefore in the interest of govemments to encourage the activities of NGOs without restflcting their independence of action." ESCAP, Fiscallncenlives p.4 (1994). 113 "Govemment-imposed NGO regulations and reporting requirements must strike a balance between nurturing NGO growth, and guarding against corruption, management iII-discipiine and other malpractice. Restflctlve laws and procedures designed for the political control of NGOs clearly hamper legitimate NGOs.... Where regulations and reporting are most lax, the door Is open for unhealthy and even corrupt NGO activities which may taint the sector as 8 whole. Where the expansion of the sector has been most rapid (e.g., South Asia and certain African countries) there is considerable concem about the rapid ascension of "bogus" NGOs which serve their own Interests rather than those of vulnerable groups." John Clark, "The State, Popular Participation, and the Voluntary Sector," 23 Workl Development 593, 598 (1995). DISCUSSION DRAFT 69 sound administrative laws that permit actions by organs of the govemment to be challenged in court, and independent judges to hear those appeals, is to provide a correction for govemmental abuse and a deterrent to future abuses. See Section 2(b) above. It is also important to emphasize that information about NGOs, and about the rules that apply to them, should be in the public domain and available to any person. Many govemments want to have reports from NGOs, but are reluctant to make any of them public. Of course, it is essential to protect truly confidential or proprietary information from public disclosure, but the public is entitled to have basic information about NGOs. In this connection, it is far more important that information be available to the public about PBOs than it is about MBOs. The activities of PBOs - and the public interest activities of MBOs - affect the public interest, and the public is entitled to know about them. When significant tax preferences have been extended to PBOs, where they have received govemment grants or contracts, or where the PBO has been supported by public contributions, the public is entitled to a high level of accountability and transparency. Moreover, it is in the interest of the govemment to insist on public disclosure of basic information about PBOs and the publiC interest activities of MBOs. When information is available to the public, interested citizens often scrutinize it carefully and frequently discem improper activities or operations that escape the attention of bureaucrats, who typically do not have adequate time and resources to exercise adequate oversight of NGOs. Making basic information public promotes self-regulation by the sector and enables each citizen to contribute to the monitoring and oversight necessary to bring to light misconduct or abuse. Making basic information public can also deepen public knowledge about the contribution of the NGO sector to civic life and national development. Section 23: Internal Reporting and Supervision. (a) The highest goveming body of an NGO (the assembly of members or the board of directors) should be required to receive and approve reports on the finances and operations of an NGO. (b) Some organ ofthe NGO (e.g., an audit committee of the board) should be required (and each member of a membership NGO should have the right) to inspect the books and records of the organization. Discussion. In a number of civil law countries, it is mandatory that an NGO have an audit commission - an organ independent of the Board (though its members may be drawn from the Board) - which has the responsibility and DISCUSSION DRAFT 70 authority to conduct annual or special audits of the finances and operations of the NGO to assure compliance with legal and ethical standards and the policies adopted by the Board. (c) An NGO with substantial activities or assets should be required to have its financial reports audited by an independent certified or chartered accountant. Discussion, What constitutes a level of activities or assets sufficient to trigger a requirement for an independent accountant's audit mayor may not be specified in the law. As a matter of good practice, members of the goveming board should realize that most of them do not have the time or the competence to analyze the financial records of an NGO that has grown to any significant Size. As soon as the organization can afford the services of an outside auditor to perform this task for the benefit of the board the better. Further, NGOs quickly find that responsible funders require independent financial audits of the books of an organization before they will make grants 10 it. Finally, when an NGO receives significant tax preferences or govemment contracts, it is typically required to have audited financial statements. Section 24: Reoorting to and Audit by SuperviSing Agency. (a) Any established NGO that has activities that Significantly affect the public interest should be required to file reasonably detailed reports annually on its finances and operations with the agency responsible for general supervision of NGOs. In certain specialized Situations more frequent reporting may be appropriate, Discussion. It is necessary that the laws or regulations applicable to NGOs state clearly what organizations must file reports. Below a certain level of activity, there is no real point in requiring reports. What the appropriate level of activity is before reports are required is a judgment to be made by the law writers in each country in light of local circumstances and traditions. 114 (b) All reporting requirements should make appropriate provision to protect the legitimate privacy interests ofdonors and recipients of benefits as well as the protection of confidential information. 114 In Ethiopia onerous reporting requirements are imposed as a way of asserting govemment control over NGOs. Every established NCO must submit a detailed plan of operations descrlblng what the NGO is going to do and how it is going to accomplish its objective two months before the end of every year. The reports are reviewed and approved or not by the Relief and Rehabilitation Commission, In addition. relief NGOs must give monthly inventory reportS to local administrators. Other NGOs must file these reports quarterly. DISCUSSION DRAFT World.BouHondboolc on NGO Lawl 71 Discussion. Countries vary considerably in the extent to which there are laws protecting the privacy of individuals. The reporting rules for NGOs in any country should obviously be conformed to the privacy laws, if any, in the country in question. In addition, it is appropriate for those establishing reporting requirements for NGOs to incorporate principles that protect individual privacy and any confidential or proprietary information from public disclosure. As discussed above under Section 17, however, there are certain kinds of personal information that might be required to be disclosed in order to prevent abuse. For example, in order to let the NGO "market place" sort out whether particular organizations are paying unreasonably high salaries to key officers, it should be mandatory that the salaries of the most highly compensated individuals be disclosed. Again, in order to prevent conflicts of interest and self­ dealing, and to let the market place of NGOs determine what activities are appropriate, it should be mandatory to disclose any sums paid or loaned to family members of directors or officers of an NGO. (c) The supervising agency should have the right to examine the books, records, and activities of an NGO during ordinary business hours. Qiscussion. There should be protections in place to prevent the supervising agency from using the pretext of an audit of an NGO to extract information about one or more individuals. III Further, as soon as the investigators have reason to believe that criminal conduct may be involved, they should be required to notify those that are the target of the investigation that it has taken on criminal overtones, so that the target can take appropriate action to protect its interests. (d) Small NGOs should be allowed to file simplified reports. Discussion. What level of reporting is appropriate for NGOs of various sizes and types of activities is a complex issue that depends very heavily on the peculiar facts and circumstances in a given country. As an example of one approach, attached as Appendix'" is a description of the reporting regime developed in England and Wales by the Charity CommiSSion, which imposes different levels of reporting requirements on charities, depending on size. (e) All reporting NGOs should be subject to random and selective audit by the supervising agency, and very large NGOs should be audited annual/y. III NGOs have reported that the Jordanian legislation permits the unlimited inspection of their books and records by the authorities. See Abdallah EI Khatib, Relations Between Govemment and Nongovemment Organizations (1989). DISCUSSION DRAFT World B.oI:Handbocic on NGO Law. 72 Discussion. It is under this heading that the gravest shortcomings of government are evident. It is a relatively easy matter to pass laws. It is a very difficult and challenging one to administer and enforce them fairly and effectively. In most countries inadequate resources have been allocated to enforcing the legal requirements imposed on NGOs. Too often when problems arise - such as tax abuse by a civic organizations - the temptation is to change the law. For example, in Bulgaria and Ukraine when tax abuse was discovered in a number of civic organizations, the governments revoked tax exemptions for all NGOs. What is usually needed is not more laws or different ones but belter enforcement of the laws already on the books. (f) MBOs can generally be exempted from reporting requirement, or required to file simplified reports, except to the extent that they engage significantly in public interest activities. Discussion. It is widely argued in civil law systems that there is no need for membership organizations (associations) to file reports because the affairs of the organization are adequately monitored by the members. It is certainly true that ultimate governing body in a membership organization is the assembly of all members, but to argue from that fact to the conclusion that no public accountability is necessary is no more persuasive than arguing that foundations do not need to file reports beceuse the board of directors, the ultimate governing body of a foundation, has a duty to supervise the activities of the organizations. Experience shows that members frequently do not do a very good job monitoring the affairs of a membership organization. 116 This may be of no great consequence if the organization is not engaged in activities affecting the public, but that is the whole point of distinguishing, on the one hand, between membership and non-membership organizations, and, on the other hand, between MBOs and PBOs. See Sections 1(b) and 1(c) above. A membership organization can be either an MBO or a PBO, and a PBO can be formed as either a membership or a non-membership organization. Further, just as a PBO may also serve some membership interests, a membership organization may engage in significant public interest activities. Reporting requirements and enforcement should be most rigorous when the public interest is involved. Moreover, the public does have a legitimate interest in assuring that members of a membership MBO not be taken advantage of by its officers. In light of these considerations, and in the interests of not imposing pointless or burdensome reporting requirements, it would be reasonable to have different reporting standards for each of three different groups: (i) small MBOs and PBOs (ii) large MBOs with no significant public interest activities, and (iii) 116 See note 63 above. DISCUSSION DRAFT World Bank Handbook on NOO LAW$ 73 large PBOs and MBOs with significant public interest activities. 117 Organizations in group (i) could be exempted from filing reports, those in group (ii) could be required to file and make public basic reports that would allow members of each MBO to monitor more adequately the way in which the organization is being run, and organizations in group (iii) would be required to file detailed reports. Taking these suggestions in order, the purpose of exempting all small NGOs is to eliminate burdensome reporting requirements that might stifle new or small organizations. As long as the activities and assets of an organization are limited, its ability to have a negative or harmful impact on anyone is limited. What constitutes a level of activities and assets that is too small to require report filing can best be answered in the particular context of each country. Even though an organization does not receive money directly or indirectly from the state or the public, it may engage in activities that affect the public interest. For example, a gardening club may decide that it wants to replant the flower beds in a public park. Although a state hard pressed for funds to maintain the public parks may gratefully accept this offer of assistance, the commissioner of parks and ultimately the public are entitled to know exactly what sort of replanting the gardening club has in mind. As another example, a professional association of doctors or nurses may decide that they want to provide free medical care to homeless people, but the state is entitled to put in place mechanisms and procedures to assure that the public interest is protected - that the care given to these homeless people is appropriate and that it is given by properly trained professionals under suitable conditions and with adequate facilities. When an individual or a group wants to undertake an activity that affects the public, it is customary to require that an advance permit or license be obtained. If the organization wants to engage in a particular activity that affects the public on a continuous or permanent basis, it is customary for it to have to file annual reports and be subject to periodic inspections. For example, operating a shelter for abused or abandoned animals usually requires a license and is subject to annual reports and inspections. When a group decides not only that it is going to establish itself formally as an NGO but that it will principally or exclusively undertake activities that affect the publiC interest, it is then appropriate to require it to file annual reports, not just on selected activities, but on all of its activities. It may continue to be subject to the jurisdiction of a particular ministry of the state (e.g., the Ministry of Health for running a clinic for homeless people), but it will now come under the general reporting requirements and supervision of the organ of the state responsible for NGOs. Similarly, large 117 For a discussion of how to detennine whether an organization is a PBO or an MBa, see section 1(b) above. DISCUSSION DRAFT 74 MBOs that engage in significant activities affecting the public interest on a continuous or permanent basis should probably also come under the regular reporting requirements applicable to large PBOs. Translating the above principles into clear and administrable reporting rules is not necessarily easy, but it is easier if the general framework is borne in mind. Finally, it bears repeating that the responsible organ should reserve most of its audit, investigation, and oversight resources for group (iii), the large PBOs and large MBOs with significant activities affecting the public interest. Section 25: Reporting to and Audit by Tax Authorities. (a) It is appropriate for separate reports to be filed with the taxing suthority(ies), though efforts should be made to make these reports ss consistent as possible with the financial reports filed with the general supervising agency. Discussion. The reporting burdens imposed on NGOs should generally not be any more onerous than those imposed on business entities, and often they can be less onerous.1I8 The principle problem in most developing countries is not that tax reporting is too burdensome, but that the tax authorities do not adequately enforce the tax laws as they apply to NGOs, often for lack of adequate resources. 119 (b) It is generally inappropriate for the taxing authority(ies) to examine any aspects of an NGO other than those directly related to taxation (including whether the requirements for exemption from taxation have been satisfied). (c) Small NGOs should be exempted from filing tax reports, or allowed to file simplified ones. 118 South Africa provides a rare example of what would seem to be Inadequate reporting. The only raporting requirament for NGOs is an annual tax report, which is not accessible to the public. 119 "In many developing ••. countries, however, large numbers of NGOs .... may not register wHh the tax authOrity. Often the Information flow between the NGO-reglstering and tax-collecting authorities is slow or Incomplete, so that the laHer may no know the names of registered NGOs or may not even leam of new registrations as they are Issued. The fact that many NGOs combine charHabie and other activHies makes It particularly difficult for the fIScal authorities to trace the flow of funds. Furthermore, as the revenues of NGOs are usually quite small In comparison with those of business enterprises, they may not be regarded as meriting close attention, particularly when the determination of taxable income is left to the local assessor. It Is therefore likely that many NGOs escape the tax net altogether, simply through their non-filing of tax retums." ESCAP, Fiscal Incentives p. 15 (1994). DISCUSSION DRAFT World Bonk: Ha1flibooic on NGO u."s 75 Discussion. All but the smallest PBOs should be required to file tax reports, for these reports will be a basic tool by which the responsible organ can monitor tax preferences received by the organization. Such reports also allow a financially sophisticated agency to check what has been done with any moneys received directly from the state or the public. There should not be a general exemption from tax reporting for MBOs that do not engage in significant activities affecting the public. Even if an MBO does not receive direct or indirect benefits from the state or the public, it may be engaging in economic activities on which taxes should be paid. With respect to tax auditors going beyond the purposes of their audit, it is customary within any government for there to be information sharing agreements. For example, it would generally be improper for the tax authorities to share specific information about the taxes of an individual or a legal entity with other organs of the state. If in conducting a tax audit of an NGO, however, the tax auditor discovers information that indicates that there has been a violation of the employment laws, it should be appropriate for the tax authority to notify the ministry of labor of the possible violation. It should always be inappropriate, however, for the taxing authorities to take the excuse of a tax audit to conduct a general examination or appraisal of an NGO or its activities. Section 26: Reportina to and Audit by Ucensing Agendes. (a) Any NGO engaged in an activity subject to the licensing or regulatory control of an agency of the state should be required to file the same reports with that agency as individuals or business entities are required to file. (b) A licensing agency should have the dght to audit and inspect the NGO for compliance with applicabte licensing or regulatory requirements, but should not generally examine or supervise other aspects of the NGO. Discussion. A licensing agency may get involved with an NGO in connection with a single activity (e.g., a permit to parade down a prinCipal street) or in connection with a continuous or permanent activity (e.g., running a medical clinic for homeless people). The nature of the organization's relationship with the licensing agency, and hence the extent of reporting and disclosure, will vary with the duration of the activity as well as its importance. Section 27: ReDOrtinq to Donors. Substantial donors to an NGO should be entitled to contract for disclosure of information adequate for the donor to assess the suitability of the NGO for receipt of donations and the users) to which donations, or that particular donor's donations, are put. DISCUSSION DRAFT World Bank Handbook on NOOLaw, 76 Discyssion. This is a matter of good practice and not a guideline for a legal rule. Generally speaking, it should be up to each donor to require whatever information it needs from an NGO, including the right to conduct an audit. 120 If a substantial grant is made, the grant should specify the reports and accounts that must be filed. By imposing appropriate contractual conditions, each donor can adequately protect itself. Obviously, courts should enforce such contacts. Section 28: Disclosure or Availability of Information to the Public. Any NGO with activities that significantly affect the public interest should be required to publish or make available to the public a report of its general finances and operations; this report may be less detailed than the reports filed with the general supervisory agency, the taxing authorlty(ies), or any licensing or regulatory body and should permit anonymity for donors and recipients of benefits as well as protection of confidential information. Discussion. The public at large has a legitimate interest in the activities of PBOs and MBOs with significant public interest activities. Moreover, interested members of the public or the media are often more likely to detect and disclose impropriety than overworked government regulators. 121 It should be emphasized that what is at stake is not simply the financial integrity of an organization. Adequate disclosure can also go far towards providing the public a base of knowledge against which jt can determine whether and the extent to which an advocacy NGO really listens to and speaks for the group it purports to represent and benefit and whether it has a solid base in research and experience for the claims and statements that it makes. All of this requires that the public and the media have access to adequate and accurate information about NGOs. As leading regulator in Australia has said that, "The best regulation is ensured by open databases and a free press." 122 The specific rules adopted to implement this principle should not require large or needless expenditures by PBOs to disseminate their public reports. Some legal systems allow an annual publication in a newspaper or journal generally used for publishing legal notices, Under other systems a copy of the 120 The Law of Georgia on Grants, however, codifies as law specific legal relationships between the donor and the entity receiving the grant. 121 In Kenya the public has complete access to NGO reports and files maintained by the Non­ Governmental Organizations Coordinating Board and for a fee can make copies of them, In Malawi the Registrar keeps all NGO records. Although there is a fee for accessing them and for copying them, these records are available to the public, 122 Speecll of David Pollard, Director of Information for the Australia Securities Commission at the South Asia Conference on Laws, Rules, and Regulations for the Voluntary Sector, Marell6­ 10. a conference sponsored by ICNL, CIVICUS, and VANI, the Voluntary Action Network - India, DISCUSSION DRAFT 77 report is filed with the responsible organ, which places it in a public reading room, while the NGO is required to provide a copy to any member of the public who request it, charging no more than a reasonable photocopying charge. l23 Large MBOs with no Significant public interest activities are of interest to those who are part of it. Accordingly, as discussed above under Section 30, it is appropriate for the responsible organ of the state to specify particular kinds of information that must be contained in reports prepared annually by such an MBO and to require that the reports be available. For example, the responsible organ might specify the accounting principles according to which the annual financial reports must be prepared, whether an independent audit is required, and might require that certain kinds of information must be disclosed, such as the salaries of the highest paid officers and employees, whether any family members received payments or loans, whether any sales transactions involving officers and directors had occurred, and so forth. By simply making available to those who are part of an MBO information that would allow them to take corrective action, the reporting requirements would serve their purpose. Section 29: Special Sanctions: In addition to the general sanctions to which an NGO is subject equally with other legal persons (e.g., contract or tort law). it is appropriate to have special sanctions (e.g., fines or penalty taxes, involuntary termination) for violations peculiar to NGOs (e.g .• self-dealing or improper solicitation). Discussion: In any modern legal system, where the principal method of supervision of NGOs is performed by reports filed by NGOs and reviewed and checked by the government, many of the special sanctions for NGOs relate to these reports and the supervision resulting from them. For example, given that the board of directors is given primary responsibility for supervising the activities of an NGO, there should be sanctions to back it up. In Sections 12, 13, and 14 there is discussion of the duties directors and their liabilities for failing to act with loyalty or diligence, or acting out of a conflict of interest, and so forth. In addition to these sanctions, considerations should be given to adoption of a rule that would trigger termination of an NGO if its board of directors or assembly of members did not meet for several years or failed entirely to exercise any oversight over the organizations. Of course, any step as drastic as the proposed liquidation of an organization should not be allowed to occur without adequate notice and an opportunity to correct, and should not be final until appeal rights have been exhausted or the time to file an appeal has expired. See Section 9 above. 123 In Zambia an NGO is required to supply any individual with copies of its certificate of incorporation and articles of incorporation within seven days of receiving payment for making copies. DISCUSSION DRAFT 78 With respect to reports to be filed with the responsible organ, with any licensing agency, and with the tax authorities, there should be fines for failing to file a report, filing a report late, or filing a false report. If an NGO fails to file the basic annual report for an extended period of time (e.g., 2-3 years), the responsible organ should commence proceedings to terminate the organization, again with adequate provision for notice and administrative and judicial appeals. As discussed under Section 12, third parties should be allowed to sue an NGO for harm done by it to them, and they should be allowed to sue officers and directors if by error or omission they caused or contributed to the harm. As discussed in Appendix I, if a the principal purpose test is adopted in a legal system with respect to economic activities, an NGO could lose its status as such if its principal activities over a period of years were primarily economic activities. It should, of course, be allowed to be re-formed as a business entity. Self dealing, private inurement, or improper solicitation of contributions are examples of special rules pertaining to NGOs that could appropriately be enforced by means of fines or penalty taxes. 12<1 12<1 See Note 76. There should not. of course. be duplicative criminal sanctions, as has been proposed In Pakistan. DISCUSSION DRAFT 79 Chapter J. Taxation. Discussion: The distinction drawn in Section 1(b) between mutual benefit organizations (MBOs) and public benefit organizations (PBOs) is of great importance in the area of taxation. By definition, a PBO benefits the public or some defined segment of it. Accordingly, PBOs are generally regarded as entitled to greater benefits from the state than are MBOs, which primarily serve the interests of their members. Tax preferences are one of the principal benefits extended to NGOs, and in most legal systems they are extended preferentially or even exclusively to PBOS.I 25 Most legal systems do not use the terms MBO and PBO as such. These reflect an attempt to generalize and put on a sounder theoretical footing the actual, more fragmented practices that exist in various legal systems. Most tax laws focus on the functions or purposes of an organization in determining whether it is entitled to tax preferences. For example, the tax laws of a particular country might extend the privilege of receiving tax deductible contributions or property tax exemption only to organizations formed for the primary purpose of advancing education, health, science, culture, or the relief of poverty. Over the years other purposes may be added to the list, such as the protection of the interests of minority groups or the environment. As a legal system matures it is often the case that the law writers realize that a common theme runs through the list of purposes or activities they have crafted over the years and that no mere listing can capture all of the possible kinds of organizations that deserve preference and support from the state. It is common, then, to find, tacked on to the end of such a list, a final, catch-all category such as ·or any other organization formed primarily for the benefit of the public: In such a catch-all the unifying principle emerges and, in a sense, informs the entire list. It is education, health, and scientific organizations that serve the public interest that are entitled to a tax preference. The officials in charge of determining eligibility for tax preferences can now test each organization seeking a tax preference by the more expansive criterion of whether it is formed primarily to serve the public interest. In other words, is it a PBO? It should also be emphasized that the selection of the agency to make the determination of whether an NGO is a PBO or not is crucially important. 12$ In Cameroon. however. no NGOs receive any tax benefits. In both Japan and SOuth Africa the types of organizations that may receive tax exemptions are very limited. For exampte. in SOuth Africa tax exemptions are limited to institutions and funds that are ecclesiastical. charitable, or educational in nature, and of a public character. In Israel, on the other hand. all NGOs ara exempt from corporate taxes. DISCUSSION DRAFT World Bank Handbook on NGO Law! 80 In the actual state of development of the tax laws of any country, lists of purposes or activities rather than principles predominate. And the lists vary.'2A> The kinds of organizations that qualify for a sales tax exemption may be different from the kinds of organizations that qualify for customs duty preferences. This is the natural result of the ad hoc way in which tax and other legal rules develop. It is useful, though, to look at the entire collection of tax rules affecting NGOs and determine whether a more consistent set of rules founded in principle could be carried consistently across the entire landscape of laws. The strong suggestion here is that the distinction between mutual benefit and public benefit organizations and activities has enormous analytic power and can be used to rationalize what otherwise might be a rather jumbled and inconsistent set of rules. The focus of the sections that follow is on the special tax preferencas that should or might be extended to NGOs, or at least to PBOs. Something that deserves special mention is that, virtually without exception, tax preferences are voluntary and are extended only to organizations that want and seek them. A special application must be filed in virtually every system in order to establish entitlement to one or more tax preferences. This means that any organization that prefers to operate without out the higher level of oversight and scrutiny that accompanies tax preferences can choose not to subject itself to the process. Since tax laws. like other laws. can be used improperly to harass unpopular NGOs, this option to either seek or avoid tax preferences is of fundamental importance. Another point also deserves special emphasis. Aside from the possible imposition of penalty taxes as a sanction for the kinds of special problems that occur in the civic sector, see Section 29, there should not be special taxes or tax rates imposed on NGOs. As the introductory material makes clear. most NGOs add something of benefit to society. and society benefits enormously from the existence of a strong. vibrant. and independent civic sector. The interests of society in having a strong civic sector would be undermined and frustrated by the imposition of special taxes or tax rates on NGOs. In fact, as societies mature they generally embrace indirect methods of macro-managing the institutions of society, and fiscal preferences have proven to be a powerful tool for encouraging the constructive development of the NGO sector while avoiding 12A> Although not desirable. there may be a list of purposes or activities. It is clearly not a good practice. however. to list by name or specific deSCription the organizations that are entitled to receive tax benefits. Such lists nearly always derive from special or pOlitical preferences rather than from any consistent set of principles. DISCUSSION DRAFT 81 dlsaimination, excessive governmental bureaucracy, and market distortion that results from excessive direct intervention by the government. 121 Section 30: Income Taxatjon Exemption ofNGOs. Every NGO, whether organized for mutual benefit or for public benefit, and whether a membership or non-membership organization, should be exempt from income taxation on moneys or other items of value received from donors or govemmental agencies (by grant or contract), membership dues, if any, and any interest, dividends, rents, royalties or capital gains eamed on assets or the sa/e ofassets. Ci§QJssion: Since NGOs as defined here prectude the possibility of personal benefit or the distribution of profits, there is a powerful argument that they are not proper objects of an income tax in any system. l21 Income taxes are imposed on the 'profits' of legal entities because they are surrogates for the individuals who own them or who can receive a distribution of profits from them. In countries, such as New Zealand, which have fully integrated their corporate and individual income taxes, there is no need to impose separate income taxes on corporations. There is a single income tax and it is imposed on corporate profits once, at the shareholder level and at shareholder rates. Profits at the corporate level are subject to a tax, but all dividends are "franked" -that is, the shareholder receiving franked dividends is entitled to take a credit against his or her own taxes for the taxes paid at the corporate level. NGOs, as defined here, stand on an entirely different footing. They are not 'owned" by anyone and cannot distribute prOfits as such. Whatever profits they may earn from economic activities are reinvested or spent on appropriate nonprofit activities. They are not surrogates for the shareholders who own them, and thus it can be strongly argued that they should not be subject to income taxation at all. Unfortunately, most countries around the world assume that NGOs, like for-profit entities, are natural subjects of taxation, and that not applying tax to them is a matter of grace and exemption. 129 \21 See ESCAP, Fjseallocentlyes, p. 19 (1994). In South Africa a special lax is imposed 00 donations to NGOs that do not meet a very nalTOW definition of public interest NGO. 121 Sri Lanka Illustrates that there can be positions in between treating NGOs as full taxpayers and exempting them. In that country Income tax on charitable institutions is levied at a concesslonal rete of 10 percent on Income in excess of Rs. 42,000 per annum, and this tax can be waived for charities providing institutional care. The theory behind this rule is that better accountability will be assured if sizable charities are required to file tax returns, even though the tax rate is quite low. 129 A typical example of how difficuH it Is for NGOs to obtain tax exemption is proVided by Thailand: In that country NGOs registered as foundations or associations may seek tax exemption If their purposes are charitable, which means that they are related to religion, education, heaHh. or social walfare. No NGO can qualify for tax exemption until it has opereted for three years. though this rule may be waived by Ministry of Finance. Outing the prior three DISCUSSION DRAFT W...1d Boolt; Oil NGO Low!J 105 The guideline set out in Section 19 states that an NGO should be permitted to engage in lawful economic, business, or commercial activities provided (i) no profits or eamings are distributed as such to founders, members, officers, directors or employees, and (ii) the NGO is organized and operated principally for the purpose of conducting appropriate not-for-profit activities (e.g., culture, education, health, etc.) The test set out in the guideline is known as the "principal purpose" test. It looks to whether the principal activities and expenditures of the organization are for non-commercial purposes. Under it, an NGO that persistently spent more than half of its efforts and money in an active trade or business activity would be subject to termination as an NGO. It might, of course, be allowed to reestablish itself as a for-profit business entity. The principal altemative test is the "destination of income" test. Under this test, so long as all of the profits eamed from the active conduct of a trade or business are committed for and actually used to carry out the principal purposes for which the NGO was formed, the organization would be regarded as an NGO, and would be entitled to any advantages that go with that status, such as tax exempt status. 162 Thus, an organization that spent 99% of its time and assets making profits from a purely commercial activity, such as manufacturing noodles, would be treated as a tax exempt NGO if each year it gave all of its profits to charitable causes. 163 Although these issues are complex and difficult, on balance the better practice is to permit NGOs to engage in an active trade or business, but to require that its principal purpose not be that trade or business but rather the carrying out of the purposes for which it was formed as an NGO. There are two principal reasons that support this conclusion. First, it is desirable in many emerging economies to allow NGOs to engage in an active trade or business to support their NGO activities, but it is not necessary to adopt the destination of income test to achieve this end. Although the destination of income test is adopted in many countries, it can cause the public to conclude that many NGOs are just commercial enterprises set up as tax dodges. This image, once created by a handful of NGOs, affects the entire sector and gives it a bad reputation. On the other hand, forbidding all commercial activity, as is done in some countries, deprives NGOs of a source of income that is sorely needed where there is no tradition of charitable giving or no private wealth to support NGO activities. 162 For example. there are no restrictions on the economic activities of NGOs in Malawi, and no income tax is imposed on income so long as it is davoted to the noncommercial purposes of the NGO. 163 If the active trade or business is carried out indirectly. through a subsidiary. the legal system might regan! the subsidiary as a for-profit business entity. but simply exempt it from income taxation. The result is the same: the activity is permitted and the profits are not taxed. DISCUSSION DRAFT 106 Second, once it is decided to rule out the extreme positions - no economic activities, on the one hand, or permitting economic activities to be the principal activity of the organization, on the other - the issue becomes purely a tax issue. With respect to tax, practices vary. Some countries tax all profits from economic activities, some tax none, some tax only those that are 'unrelated' to the principal purposes of the organization, and others use a mechanical rule to allow some but not all income from business activities escape taxation. Other approaches are also possible. In other words, once the extreme positions are removed, the issue becomes a tax issue on which practices vary considerably. Pursuing further the question of taxation, the choice of tax rules will depend largely upon the extent to which a particular government wishes to encourage NGOs, and the extent to which it is concerned that exempting the trade or business activity of an NGO puts for-profit entities engaged in a similar trade or business at an economic disadvantage. If a country chooses the destination of income test rather than the principal purpose test, it will exempt all profits earned by an NGO engaged in an active trade or business. A variety of approaches have been taken. For example, Poland exempts all income from active trade or business activities, but only if that income is devoted to the civic purposes for which the organization has been formed. l64 Bulgaria, by contrast, taxes all net income from economic activities, regardless of its use. 16$ In a country with a developing market economy, it may be appropriate to strike the balance in favor of tax exemption, for these are also countries where the civic sector is also just beginning to flourish. NGOs in such societies are often desperate for money simply to survive, and the profits from economic activities may make the difference between continued existence and termination. In such societies it is also possible to argue that there is such a need to develop economic activities independent of the state that all entities, whether NGOs or business entities, ought to be encouraged to engage in them. The question of unfair competition can become a serious issue, but typically only in a matured economy where the scale and number of economic 164 Although the substance of the rule is the same for both aSSOCiations and foundations in Poland, associations get the benem of the rule only if they engage in economiC activities through a wholly owned subsidiary, whereas foundations are exempt on activities that they carry on directly. In India an NGO registered as a SOciety or trust must show that 75 percent of its income in the year of receipt was applied for the objects for which the organization was formed during the previous 3-4 years in on:ler to obtain registration under the Income Tax Act (1961) as a charitable institution and obtain income tax exemption. 16' In India 25 percent of the income of a charitable organization need not be spent on its charitable activities; It can be held on deposit with scheduled banks or invested In publiC sector companies. Investment in private companies, however, is forbidden. DISCUSSION DRAFT World lkutk Handboolr. "" NGO Law, 107 activities by NGOs begins to pose a threat to private enterprise. Obviously, if a large and well-heeled NGO can engage in a particular activity (e.g. book publishing) without paying taxes, it has an economic advantage over its for·profit competitors. When this point is reached in the development of an economy, the one possible response is to tax such profits, at least if they are unrelated to the purposes of the organization. Ill<> There are strong arguments, however, that militate against imposing taxation on the active trade or business income of an NGO merely because failing to do so would give it an advantage that for-profit organizations do not have. Although exemption from income tax gives a clear advantage to NGOs, for-profit entities have capital advantages not open to NGOs that may more than offset the income tax advantage. Thus, an NGO cannot raise capital for expansion or modemization of its facilities by going to the capital markets. For­ profit organizations can and do raise billions of dollars for improvements and working capital from the private and public debt and equity markets by issuing shares, bonds, and debentures. NGOs are foreclosed from these markets, and even typically find it extremely difficult to negotiate a bank loan. In short, the "level playing field' argument frequently cited by for-profit organizations may not be all that it seems. NGOs operate their trades and businesses at a material disadvantage compared to for-profit organizations, and exemption from income tax may in fact best be seen as a "rough justice' way of giving NGOs a "level playing' field which, on the capital side, is tilted heavily in favor of the for-profit entities. If a country makes a decision to tax the trade or business income of an NGO, it may nonetheless exempt such income if it is derived from "related' activities. This approach makes a great deal of theoretical sense. Often the most effective way in which an NGO can achieve its purpose is to pursue it through economic means. For example, the most effective way in which to disseminate information about a particular kind of art or culture that an NGO wants to promote may be to publish and sell a high-quality magazine devoted to that topiC. If the primary purpose of the organization is to promote the particular kind of art or culture, it is not primarily seeking to make a profit, and no profits are distributed, then publication of the magazine is simply the method that has been chosen to pursue the elvic purpose. Publishing a magazine is a means for achieving the end of promotion of art or culture. Exempting income from such related activities makes good theoretical sense. Ill<> In Singapore profits from a trade or business are exempt ooly if they arise out of activities carried out in conformity with the primary purpose of the NGO or if the activities are carried out by the NGO's beneficiaries. ESCAP, Fjscal Incentives, p. 22 (1994). DISCUSSION DRAFT World Bank Handbook on NGO Laws 108 Unfortunately, it is extremely difficult to distinguish "related" economic activities from "unrelated" activities, and hence this rule is very difficult to administer. For example, if a museum sets up a shop on its premises to sell copies of the outstanding works in its collection, or perhaps books that picture them or postcards that replicate them, this can easily be argued to be "related" to the museum's activities. What, though, if the museum opens a chain of retail stores which generally sell books related to art and culture, most of which have no connection with its collection? Is it engaging in an 'unrelated" activity, or has it simply broadened its purposes and chosen to pursue the broader purpose using economic means? The fact that a distinction between related and unrelated economic activities is very difficult to apply is demonstrated by the fact that very little revenue is raised by a tax that is imposed only on "unrelated" activities. 167 If the principal purpose test and the rule exempting related income are both adopted, it is then necessary to determine how economic activities undertaken in furtherance of the purposes of an NGO - "related" economic activities as that term is being used here - are to be counted in determining whether the principal purpose of an organization is to engage in economic activities or to pursue civic ends. To the extent that economic activities (e.g., publication of a magazine or of books) is simply a chosen means by which most effectively to pursue a given end (e.g., promotion of a particular art or culture), there is a strong argument that they should not be counted as economic activities which would disqualify the entity for status as an NGO if they constituted the principal activity of the organization. One must be careful here, however, for if "related" economic activities constituted, say, 99 per cent of the ectivities of an NGO, one would in effect have come back to the "destination of income" test, under which economic activities can constitute the entire active work of an NGO so long as a/l profits go to a civic purpose. Crafting administrable rules that adequately response to these considerations is not easy. A mechanical test for determining the difference between economic activities that are taxed and those that a~e not - or between economic activities that are permitted and those that are not -- is a far simpler way to go. For example, in Hungary a foundation is exempt on the net profits from economic activities to the extent of the greater of 10 million forint or 10% of total revenue. This works fine as a tax rule, for the only consequence of exceeding the minimum in any year is that taxes must be paid. Another type of mechanical test 167 Although US NGOs generate over US$1 trillion in revenue each year, fewer than five per cent report unrelated buslness income, and in 1994 the amount of tax paid on this income was a relatively inslgnificant US$373.4 million. 'Tax Exempt-, U.S. News and World Report, pp.36-37, October 2. 1995. DISCUSSION DRAFT WorldBankHa1ldbookOlfNGOLmn 109 is illustrated by South Africa, where 75 percent of net income on economic activities must generally be spent on charitable activities by the end of the year following the year of receipt in order for all of the income to escape income taxation. l61 A rule such as this inevitably creates administrative burdens, for income from economic activities must be segregated from other income and 'stacked' as to year of receipt. Presumably, 'older" income is deemed spent before 'newer" income. The principal purpose test discussed above essentially proposes a mechanical approach for determining eligibility for classification as an NGO. Thus, if more than 50 percent of the revenues or expenditures of an NGO are attributable to economic activities for a significant period of time (e.g., 3 years), the organization is reclassified as a business entity. So long as 'related' economic activities are not disregarded, this mechanical test will generally be adequate to permit significant economic activities, while not risking the reputation of the sector, as does the destination of income test. 168 From 1991 through 1995 Poland had a rule taxing all income, including grants and donations, unless It was expended on charitable activities by the end of the year following the year of receipt. This rule was repealad, in part because it precluded any possibility of building up an endowment. DISCUSSION DRAFT 11" Al'l'ENDIX II Page 1 of 4 WORKING GROUP ON SELF-REGULATION aroup JMdcr'f; K.:1~rin3 Kos:ttJova, Valentjn Germ,n}', The Netion should .dopt long and I. The Baird should provide: effective: /e3de...11ip short term progr:1m5 rh:u ;ue coordinated. whel"'e'Vt:r to ensure the survival :md growth of the :lppropr'::ue. ~'ilh the :lClivilies :lnd programs of org:tnization, including support for fundr2tsing. olh..r nOI...(or-pro(ir org.niz>lions, including Ihose effective r1S=1 m.n.gemenl••nd enhoncing pUblic .bro.d. im:1ge of the org:anlz.:uion. . F. The org:anization should be3r in mind in J. The Board should .dop. cle.r. wtill..n nsfes the conduct of its progr:tms ::md :activities th;l.t providing [or po... nlial confli<:u over le.d.....hip how II Is p ..rceiv..d by olhers will hov...n Imp.ct ::and for efficient aod productive meetings. on the public attitude tO~rds the sector and the K. The: Bo.rd should conside:r cncouroglng l..v..1 of public tru.!. th .. fuU ..S! 1c:vc:1 of p.rticip.lion of its m..mbc:rs 1. The SI.ndardl .r.. inl..nde:d to apply 10 thtouSh del..gotion of rc:sponsibilil;I:S 10 working :::IUOCL:UlOns ;1$ well as found:Uions or other not­ committees (e.g., fundt:lislng, Hn:1nce. recruitment for-profit org::aniz:nioN. It is under.uood that in of new members or volunteers. pr08r.lm 3n 3ssoci:ltion [he 3ssembly of members is Ihe dev..lopm..nt, communiQlions). supreme 3uthoritl.. and that :In 3uoci:nion may L. The Boord should .ctively .nd carc:fullr or not :llso have ;J bo:u'd of direaors. When ::an exercise its responsibility for s~lecti.ng· :lnd :::IssOC:i:ltion has :l board of directors. b:ls ic policics orienting ne'" Bc»rd members. With p:utaculaf of th.. kind sel forth in Ihe St.nd.rds m.y ::attention to reOecting the organiz:tion's • ppropri3l.. ly be decided by th .. g..nerol 3Ssembly constituencies and !1v~iding overt discrimin:.uion . of m..mbers or the booed of directors. dep.. nding on Ihe p.rticulor S1.tUI...nd byl.,.,s of th.. Ill. Organizational integrity organil:.1tioo. Throughout. wh..n th .. Sl3ndards A. The otg.niz:>tion should com.ply with all re:fet 10 the 'Boatd'. Ihal re:fere:nce should be applicable lows .nd re:gul.lions. understood to refer in the case of an ;.tssocQlion B. The otganiZ:>lion should cmtbUsh " cleor 10 either Ihe go:o..",1 ..sembi), of members Ot Ihe wriuen policy prohibiting conflic.u of interest of board of dire:clors••s .pproptiote, memb..rs of Ihe Bo"rd. offic.. rs. ..m.ploy..es. coruult:lnts. !1nd volunteers. Among the II. Governance rc:1.lionships thol should be considerc:d in A. The org.niZ:>lion should h.ve • multipc:rson articulaling this policy.re: Ihe following: goveming Boord thot d",..rmines Ihe orgonlz:lIion's 1. Wheth.. r m..mbers of th.. Board should minion .nd go.ls .nd rc:vise them periodically. receive compens:ttion for services provided to or B. The otg.nizotlon should .Iso have • for the 0tS:mizalion. m:ln:lging board that executes :tnd Qnies out 2. Whethet memb..rs of Ih.. Board should Ihe ptogroms .nd ptojects of th.. inslilution, receive reimbursement for re:uonZlble expenses c. The Bo..d should .dopl • eI....ly writt ..n incum:d in connection with attend!lince :11 meetings st.temenl of Ihe re:sponsibillti ..s of th.. Boord of Ihe Boord, m..elings of Bo"rd commitle,,'. or members .nd th.. chler .."eculiv.. ollk..t. ineluding services rend.. r..d to or on beh.lf of the :l prohibition of conflicts of in.terest 3nd rules on orl:lniz:ltion. Ih.. process of decision-m.king .nd deleg.llon 3. Whether m.. mbers of th.. Boord. officers, of 3uthoriry. employees. consult:tnts. or employees should D. Th.. Bo~rd should h."...ccess 10 .nd usc compete 'With the organization for c:onlr:tc:ts. :111 nt:cess3ry inform:;1Uon th31 will en:tble it to funding. or otl\ .. r ben..l1ts or .d\,.nl3g"" on bc:h.lf c:;1rry out lIS responsibilities, of themselves or anoth.er org:lniz.:ltion. E. The !lo.rd should be: re:sponsible for .dopling 4. Whe,her members of Ihe Boord. omc..". :1 strategic pJ::!:n :lnd providing the means for its emplo~·ees. consuit:.:mts, or vo.unteers should do implement:ttion and ev:t)U:ltion. or 53}' :tnything Ih:lt is contt:Jry to the intereSts of F. Th .. Boord should carefull,· select .nd fully the org.:Jniz:tion. other th!lin as required by lal\>' support the chief exccutive officer :lnd review Ot in ordet '0 prolect himself or herself from his or her perform:tnce periodically, lou, d.m.ge. or Ii.bilil)'. G Th. Bo.rd should ensure Ihot .dequot. C. The org.ni%:llion should opc:r:ue ...111e""ls training is prOVided. both for its 0"-0 members with the highest level of tran5p!liren~' c:onsr.Slent :tnd the Sl;Ifr 3nd volunteers of the org:uuz:lllOO. "'ilh tulfilling Its ••senli.l mission .nd go.Is. H. Th .. organizalion's stotule. or bylo"'s should D. Excepl wher.. doing '0 is (j) iII..g.!. (Ii) provide !Ii transparent process for the election contr:trr to an intern:ttion:J1 tre:lty or convention ::&nd replacement of officers ::loci: members of the th:tt h~s been r~tified by the relcv:lnt government. Boord. Or (iii) inappropri:tte in light 01' the misSion :and 66 /REGULATING CIVIL SOCIETY APPENDIX 11 Page 3 of 4 gO:1I$ of the org:tniZ:ltion. the org:tniZ:1110n should development, providing jntern~1 :lnd exu:rn:d :l:dopt tm :lnti-discrimtn::nion policy requiring th.:1t: recognition of achievements. etc.) I. no person sholl be denied the benefits of E. The org:lnlz:uion should ende!lvor [0 obtain the or8.:1niz.:uion. :tnd and provide whene\'er possible ;ldequ:lte t~ining 2. no person m:ty be excluded from for the Boord. the ..~ff. ,nd volunteers. p::lt1:icip:nion in the org:tniz:ulon, :md G. The org:aniz;uion should ende::avor to recruit 3, no person m.:1}' be otherwise subject to 3nd retain $tart' th:lt combines prore.uioJUl discrimin:ttion by the org:Jniz;ltion. competence ,\fith commitment to serve. on the b:lsis of race. color, n:](ion:11 or ethnic H. The org:mization $hould seek to :1Chieve origin. 3ge. religious or poUtic::l1 belief or :lffiB,'ltion, effectiveness of the leadership through ;l h3ndic3p. or sex. democr:nic decision making process* oriented E. The org:mization should pursue ,llnd m:1int:lin to""','lrds the motiv:ltion and commitment of the policies ,'lnd pr::lctice.s th::lt enh:mce the st:1ff :md volunteers. independence of the org.:1niz.:1tion, F. The org.:1ni2oltion should seek to recruit a V. Finances B03rd tholt is composed of conlperent 3nd A. BeC::lUse not-for-profit org::aniz:nions hold ttu$tworthy jndividunls th:tt represent the funds given by donors for the benefit of others. otg:Jniz:ltion', con$tituencies. lhey $hould conduct 311 financial aCtivities in an G. The org.:mil:ltion should recognize it$: open, honest. and :lccurate nlanner :and in fe$ponsibility (or f::lising the ;1w:ueness of ,ccord.nce ..11h the highest possible st.ndard<. governments ::and the business sector of the respecting ::Iny donor reque$t for priv:u:y. import. nee .nd the rolc of the not..{'or-prollt B, Org.ni.:ltioN should purch.se goods ,nt! sector in civil society. ;:and develop underst:lOding. services ::n tht: lowest reolson;able prices and trust. ;mcl cooper,Hion among governments. the m:lke its progran15 and services 35 inexpensIve: business sector. :lnd the not-far-profit sector. ond effiCient os possible. H. The org3niz::atton should seek to preVent \. For "".mple. by m."imizing the use of ..buses in the not-for-profit sector. volunteers, l.:lbor costs are minimized and suppon IV. Management practices and for the progr:lm is incre:1sed :u volunteers become advoc:Jtes for the org:miz:ttion. human reSOurces C. Bec;Juse resource ::are usu:lIly limited, [he A. In order promote :,tnd effectu:ue sound org.ni:rntion should m~nage its propert), ,,00 mnn.:tgement policies. once the mission :tnd gOlls funds corefully .nd creotivcly, have been set by the Boord. the chief executi\'C 1. Although nl~nogement expenses should be officer should choose the mC!l5U res most effecth'e kept to :1 re:lSOn3ute minimum. the org!lniZ;ltion tar :mOJining those goals ;and fulfilling th:u mission, should ret:tin ~'ell qU::llified firuJnci31 profeSSionals B. l>eriodic~llIr the or~:lnil::l\jon should :luess :1$ employees. consuh~nts. or volunteers. the results of itS actjyity by est~blished D. The org:Jni%:Jtion should maint;tin detailed mC;;JSU rements ~lnt.1 comp;1fC them 1\"ith set ::and '-Iccurate books :and records ot" tIS n~nc(:s sl:lnd:lrds. and should pro\'ide regul:lT, 3ccur::afe, :Jnd C. Following :lssessment of effectiveness .:lnd .lppropriately detailed repon:s to the govern.l1lt.tnt. results. :lnd t:lking into ;tccoum the present 5OCi:Jl. the public. :Jnd lt5 donor.s. technological. econonlic:J1. :Jnd politlOI f:lctors. L Such reports must mcet the reqUirements the org:tnt2:ttion shouJd either continue its :lcchity of governmcnt re~ul:ltions and such other st;;lndams or. if needed. m:lke corrections to its objectin:$ ~s ~re :Jppropri:lte for the p;lnh:uhlr or~:.lniz:ltion. or aCIi\·jtit;'s. ,2, In order to incre:lse the credibility of th~ D. The org:,"iz~Hion should h.::we cienr, ~\'ell organization ~'ilh its rounders. the or~unjz:1tion defined ,,:rinen poliCies and procedllres rel:Hm~ should provide them ~'i(h timely. :Jccur::lte. and to I!mplo\"(!cs :lnd Yoitlnreers. del~lilcd inforn1;.ltion. :IS required. L The policy of Ihe org:lnization for st:l!T :::and .5. Org:tniz.1tions should t;lk..: c.are not to expend "olunteer moth':ttion shOUld tJke infO re50Urces l.lnneces.5:\ril~· for rech.lnd:.nt Or inL'$sentij! considcrOltion. on the on('" h;.,md. those rJCtors retention. prep:.r::ltlon. or pro\'ision of fin.mcl:l) :lllo"'lng $;ltIsf~ctorr t\'orkm,g conditions {de:uly d;):l.:t. defined org:lniz:llion~tl structure. physlc:l1 conditions. compens.'ltion .Jnd benefits. consider:lle VI. Communications supervision. person.:Jl H:;:Hlons!lIps. I!lC.' as ~\:e!l A. Tht: or.'{srapJzJ'. sec/OJ: .:::and progt:.lms, issut!S (e.g., fund-raisiug). etc. 1. Reasons.' The re::lsons for communic:::uing 1. Umbre:ila org:lniz;Jtions should advoc:ne include••dvoc:.cy of 'he v"lue••nd go.Is of ,h. the V::llues. 80315. !lnd interests of their members, otg:lniZ3tion, infoml::1tion for intern!ll ::and extern:s~ .nd repr"sent them in appropri:lte. governmenf>l. constituencie,. cte'Jtion of t'::svot:lble :1uitude.s public••nd other foru"",. ''''''''rds the orpniZ3'lon .nd its go.ls .nd 2. UmbreU. org.ni%:ltions should promote purpo•••. cooper:!tion .nd networking .mong their members 2. E:ct(ff7UJ1 communications: D.pendins upon :lnd other not-for-profit organiz!ltioru: !1nd seek the n::lture or the org:lOiZ:ltion. communicuions to elimi",,,e duplication of effortS. progt:llftS. should be directed loadly. n.,lon.II)'. region.lly. ::1nd activities. .ndior internJltion.U)'. and should be directed to 3. Umbrell. org.ni%Otlons should provide governments, the business communitl", other not­ service!, including infoml:ltion (e.g., HiJr.lries. for-profit org:lniz:ulolU. ~ndior the gen=1 public. n"",sleners. d:u.b:ues. etc,). mining. consulution. :1. InteNla! cnmmunicDliotts.· Communiotions profeSlionol and technicol.dVice. group disoounts. should be directed to all of the orpnization's etc, . constituencie5 ::Ind stockholders. including the vide A. The organization should h.a\"e: ::l written • ccrtifiQtion thot it 11:1••dopted .nd .dheres to fund r:lising polic::l'~ intended to assure its the S13nd.rds. institution::sl ::sdvan<:emcnt and nn:lnci::ll c, Require C!::Ich member org::1niz::ltion sust:lin:lbility. periodic:dly to supply to the umbrella oljl:lnizations B. The org.nization should h.ve .n .nnu.1 the written st::lternents :.lnd reports th:l! denlonsU':ue plan or action for "'J.ising funds th:lt includes :1 its compliance with the St:lndards. solkil.alion process. identillc::ltion of pouible d. ReguJ3rly conduct inquires to ::lSSurc that sources of incom~. :l diversity of fund r:listng member org::lnWtions adhere to the.: St~nd:lrds. methods, a m:lster list or uonors :1nd prospective C'. In\'C5tiS31C ::Iii significant compi:linLS tlUlt a donors (ongoing. cUnlul:ltivc, :1nd confidential) member org:lniz:ltion is not in conlpliance """ith • nd " pl.n for tr~ining of board. st.rr.•nd the St:lnd.rds . volunteers in fund r.Jising. f. Provide Ie """ """"" .00000llont ... be """'" /N,od.tdlQ chotgeJ ror a ~ dille ~' olt" S9N1cm. • 'he a..,bbllll)' of llCCQun15 10 .he public, 2. nU! new legat requm:ments are contained In Fl.Iftta hrQm1Oflanconbeobtot'ledffan the COfMlIssfoneB' offtces at; • Part VI of the Charltles Act 199' (IS ,me""""n and ReplatlonJ. mode under Port VI. lbe Sf Alb,.,..1_ 2n< .... ""H U\ H ... l 11", Ad and the Regulations .., OUt ~'" 11", AnnUli Retum will COIlIIIln rat".• mlnllllum legal r"'lul""""nu for chlrMle. In Infonmtlton "" lIIe chadfy 10 eMbI. us 10 leep Ilngland Ind W.les. n., dudfy SORP the Register up 10 date. II will a"'" help ""to ",,,,mmendo best pnalce for .11 -harltles In lIIe monilor brg., charities. United kingdom .nd ti" 'Irebnd. We e.xpcc_ II di2fllies In EI1&1~.It" .t•. u ""'alea to Indep""tIenl a.mllUltion Is • IeM """""'. rolla'" the Ch:ulty SORP Of to "..-ovltJe :oil do! f""" or scrutiny thIn an audit. Enmln... ""I'<1d ."".natlon of the reason. f.,.. Iny deplr1Ure ",h..ber oreclflc ........ whldr ar. Idendlled In from It. the Regulations hltft: come to their anemlon. Th fteR\Jlatlon" set out the requirements fur an ~. Genend direction. for .he conduct cl ...mlne,'. report .nd ..... will also be lssnlng Independent eundna.lon. Ind guidance on d", guidonce 10 lru..... on lhe ..I.alen of selection or Independent e..ndnero will be enmlnetS and directions (Of eurnlners on publl$hetl by the CornlJllsolmo.. before I March C'afl}'lng out :an e,,::-'nfn:lllon. 1996. Regur.llons prescdblng .h.form or the annual return 10 be sen, by large. "'gIs!e~ ch.rille. 10 us, and lhe Inf""""lIofI to he Who do rhe new 7. M051 chontle......fTeaed bUI In dllT...,.1 Conilined In the return, ",II Iiso be 1II1t1e before proris/on. apply lot way.. '11", following .'" some of !he m.ln thlt dllle. ••nallons but Ih",e are others. If you .... l1li"'" ....."'" y",,' charlty nt. In pie... call Ihe hclpll... III... at Il.e end cl Illis leallet. AIm 5. (huh""' ha"" long hid In obllglllon 10 ket" IccounUng ,eemd. ""d to """""" OCCOIlnL. I,,~ 8. Chartllble COIftpInles mu.. pr.,,"re Ihere Is now • detall.d sblUloly f••mework for accounts under III. Componles AdS Ind must n thb and for Ih. p"'p.r.ulon or onnull reports. It I«OU"'" and repotIS with Campanl.. House. '0 Is deslgn.d meet !he need fo. pUblic 11", oOOIV"""pll.11on n:port requlre...nlll ror chantabl. componle. are genemUy the same .. acroulllobility ror !he large r.sources held by ch.nll•• wld,out adding unftec....rily 10 lhe ror 011"" C<>m,,"n"" •• cepllhat .he e<>mpilaUor. burden on truaIees. Thai Is wby !he report Ih",.h01. . '10,000 01 I umJ In rho lealkt may he helpful. ••ked to do so. Tho requl......nts for Ih" annu' ."d t!xprenlolU The Annual Repon wlO be • concise but repo" .... II""", In the Otarltles Act. Th. _I.. Ch.rlIY SORP applies 10 C<>mJl2n1e:1 a. well .. comprehensive review of lhe .ett.lIles of the unincorporated (h.tIIles. charity. 11.e Regulation. set Ol~ !he ....Ic ''''lIlI,emeniS with more t1ell1ded guidance In lIle ~~ Chorlty SOlII'. Re~lsle.ed d ••,ilies whhln Ih" £10,000 d,,,,,,i>okl will nnly need 10 C(lInpkt<: • <0" m ID z NO slmpllRed ......Ion. H .... 0>( ... 2 !I \.I1H H .... H '" 9. Exempt charitle. will sen....lI, have to keep IS. Neither IIIt:OIIIe tlor espenditure O'I'.r proper ""coun,lng m:ord5 and prepl.., 'HI,Ooo. statements of ICCQ'Unf ::a5 befme. They mu!tt now provld. Uon. TI",y J • It. ~imple tllnnual re1urn must be &tnt to m. mly register If IMy choose. jn whkh cue Ihey are treated as any Ofh~r regltJtNcd charity, If I • 11tt"tf!'!11 no trqulrement 10 h:IVi::' the .hey do no! 'l1enditure met audllcd for ;Qt k2St 3 yea". . '150,000 (but Income over !he prevlou. I~. Inco_ nor 0..,.. ",000. Without 1 th•••hold). permanent endowment and the UM! or • Aca..nts mutil he prepared on the accrual, hasls. """,patlon of land such chlrltl.,. .'" not reqtdred to reBl"er. If they choose to do .., dley f.U within d", ne.1 h.nd bill othe,w!>ic h... "my • Arollt"" mUIII he subfect 10 outside ""mllny bul tnntee. may elmo", ,he b.sIc ol.lp'lons "",n.k.ne" ., J"""srupl. 12 .bove. Indel>enc.lent eumln:rt!on talher ihan .utln -u> DI-u Ul-U 4 5 .. rn -> z .... ,- "'::: '" -'0 ­ >< .... ~ ,. • An onnllol report mum. be prep.red. Ch.rlty AecountJ Ind l I e " " , e (produced by the Home OfDce).. .• " ,..dudd a • /\! counts, report and annual return must be co,.,y of the Regulatlona, n!'rev.ln( eunct!J rrum senl to us wld1ln 10 moolh.., Ihe leglslollon and a rommen,"ry. Copl. . . re o••noble lrom H"ISO (Ielephone, 0171 87} 9090, lB. 'ncome or expenditure o.er '250,000 In f.. 0111 87, 8200). the Clment yeo. or either of the two previous ye.r•. A..n.ble In Janu.,.,. .. A<..'t.."OtJO(': mu'ii( be pter~d un the lal"tnlal" We will be I••ulng die following to help charl,'.. ba."Is. meet Ihe new requirements. Every J'C'gbtered too ..ony e""mpI charitle. will be sen' '~e • Accuun15 must be audlled by an auditor "1'1''''1''''''' lealie, In J.nUlry. All will be who ;. quallOed to oudM Ih. acooun!!! of avallabre rrom us on request. companies, I. leaII.. CC52 dhected 01 charities "'hh Income • An annual report must be prepared. Of expendkure not over £10,000. • Ao:uunt'. report and IMul1 return nlunl be 2. l.e:lllel CC'3 tontalnlng Jpe<:1I'tc .d.lce ror scnt In ,,, within 10 mortth,,,, ch.mle. In eadt cI' !Ill! other Income/expendft.... hands. }. A ... ndard IctOOn15 form Y'II*. p","", _ .. _ Dyted _ GIomoIgan o.mom StwopIhIr. ....tfQfd!lhtre kent - Nn.tf CMirities tnfwmltion .".., iii • nonpf'Oftt oroanluUon ~ tr.n b INtt NelS SlaAdft.t;. Nell . . . nor .......1 """,.",.lI:a to wtth an mo.".,..,tM. ¥ellun..., board of dlradarl. f'ePOft abQ.Il ~ious, hW'nI:I fJI' poIftIc:a! ....... ab.. and sb'!;" 01' kltc:ar .... !UllOM (1\Jd\ .. --o-,~. ~ UtnritII. H:..j. Hela I'IPGI"'I on . . 0..-,.1 ~Ic:y: Trw NNonai 0Wt1ift InlOr'r'Mllc:r\ $l.nIu" point of 'IiIM ts I(IdW: . ..,... Met tunan ....... er::tMilin r:I .... or ..... gat I ; iii an:! -'of~~I ........... tlMlM1'I't'~.,...,.....AUfarc:t of pWIbIi; a..w:. bot ~ to ~ I'Ity MIh .,.,.~. iMliiuliCN which ""* oon~ natIonaIy him . . ~ JU*:. NCII 00t1 not ~ OOf'tI:ionl from Iht groups .......... NCII ~... NICic:wIII c.hartil. ~ 10 II Me taI:Iic ~ (Iiat~ "'aUvnal ••\'"iriea C.M....: MIItrf orpnizaticns __ • MItfIOtr of .1'1.... On MD4' 7) Ud iftIOI'nta c;ontribukn I'rlOugh _1*POtl* .bout~ ~ •. Henll', fWPOrt ~ .... nalimal and .. II'IUiMa at • ~ otgIIItIiz:atir ...... TM: eval,,**- on .... ~ M piIQI'I ma1~ at M1 ..... O"",.. 1on ,",,,, U.M 1hIUng. Nia ft9 nept.iw alOnlRcMc., HCI8 40a not ICMH (1) 0. ...... ,... '''''* in.,.,....of .... NIIioNI. «(2) ndrI:InIIf I)I'OOI'PI .... W:.u aNt fund-tai&1ng ectMtiu .,. . . . .niIItf ~ btlll.lPPCllft from'" ..netMr l:I ;t¥t 10 "Irf p.~~, COnIribull;Wt..,. ~ tD 1aMiIiIr.. atts. CIt (3) . . IWI:klUI MIl OW CIIPKIY . , .. . . . , CDtIIIn:i .......... A.....-CII _ _ _ . . "" _ _ ...,.,... t:ze tNtN.... ...tth Na& Stlndtrcta ItId then t*ide b I'MI:mMtvu he ~ ttnce of In 0IpI tration'l cornpr""," ~ (It~ frOm 0... StanOatdl. "T'tw ."... ~ MWCI .bovt. n. naticNII ~ ........, u Inforrnltlon wei ~ CI:Ifltlined MIWn .. turn8hed to ..... ~ In NAl'IOIW. selMCE CENTERS. _ _ _ - . _ ­ rnawng Informed 4ec:iSions .nd fa not ~ to endOrM (It ~ IN crpo *~ftil'Ig. ~'Hr'Ii'lIP 1:rainItIg. ,...."". t $ con,. program ......... nization. mw.1Wson wrrICh oawrOtQlniZ:dona. In sum....... ftItionIlltIII:f ill . . . . . He'll foCuses I1J, repQning on ~n~ which haft IINnuIatH breed con­ ... not"d by NCl8 as. aI.ngae enUry. Coft1llbNft ~ In 1C*Ifii;:'" tribtAor inl-..t Ir1 ~ itJl1IPOflI.. NelS ~., with or;anintiC:lnt to ialaa IhOuId ~t irIfotrnation dilWClly r.om eooa. TABLE 1 • MEET ALL STANDARDS n.. tonMag or;arti.aatlona mMt HCII.. n1n. ltan...... An .... se- CCIIM Indica•• tNt HQB'I 1'V.lUalion i& of 1M NAtiONAL SE~ II cain. Fire Soy> .nd G... KrI_ ~ MO (NSC) 0 e..- - VSCE CENTER ONLY, and . . . not "tdu4. chapWB or -"II. . . . II Canol... .. An au.rtak Indic:atH mat. I'MW .valuation ~ fWClHlIIy bMn conIp....CI. • Canc:er Jqlurch Foundation of AtnariCa • C....... Rlt..orth Fund of ... _~_ • _ .. 10 _ r y and Sat. Co,,,,ocepUan l_nollOnallfonnolly Association (or Voiunt.t:ry Su-gieal Contr.ceptlon~ • cancer RHtarch fnstiMe • Action on Smoking ,nd Heeft.h =- Ad\tocates far Youth (formertf c.ntet for PopuIatJon OptiOI'\S) II CARE • Ca1a1yot lor W_n II AItlt::a Fund (Am.tUn Committa. on Africa) II C."""'. _ _ a Unllocl_ ~.Con_ 0 • Altic:atl \,\Iildlife Found.liM .. C._lor CommuniI)' Chonll" ' • AI,",,",' • C._Ior_ eon..MIion a /4FS Intercultutal Programs • ClIiId FonrI . , _ • ALM IntefnatlOnal (American Leprosy ~Uulonl) • ClIiId _ l.IIogue of Amllico • ALS ~ ~ Woocbnd Hilts, CA [NSC) • ChiIdnIar::h (~ _ _, USA) ·C_ • ",-SAC-&' Jude Ch"""n·. R....rch H _ I ' • ChiIdnn I _ a d • • AlZheimer', OiHase and. Related Disord.,. AISOdIation • Cllndren 1-.._1 (Holy L.alld Chrioli'on Mio_) • Atreriea the eeau!HuI Fund • ~.& Oeftnae Fund • Atnerk::;:an Cancer Society CIIIIcnn'. Fund • American CMIliberties IJnionlACLIJ Foundation II CItiz...• _nonl. F~ of _ o s ! ' _ ...N (NSC) • American Diabetes Asloc:iMlOn .~I"''''''''''''' • ;t..mencan Farmland Trust • CCnoonium 10( _ ... Study in M.anaG­ • American FOreSts (American F'orestry Assodation) • Co.n:IIO"I Economic Priarlin • .American Foundation for AiDS R••!Nf'Ch II COI.!!l<:iI on F_ign _1iOn& • American Found.1iOn for tMe eUnd • eo..n.nt House • American Hurt A$soei.tion • ~& .. COIiIio FounrIrolion.f .....rieI (/I:IrII1OIIy NrIII. "",",-lor .. Arnenean Humane. Ahocielion _ ""d CoIltiol • AtNtriean Indian araCSWtB Camer • Cyslic Rt> of ~ . _ YcI1<. NY INSCl 12~ APPENDIX IV Page 2 of 6 MEET ALL STANDARDS GocK)wi! Industries Int.rt\ltlot'\8! ~ St~hMda, MO (NSC} • GuicIIt Cog -...,dolion to< !he e.m< • • NatiOnal Reetwatlotl and P.tit Assoe.iltkm . __ • _1(.0..emotion .....,"" National Ut1Wl Fallow'S _,~"'_al • • Nationll ~n league * New York. NY (NSC} N.nve Atntf1c:lm R:igFU Fund • • a-.Holy I.IIIId (Child.." ._MtiONI) • Nature conllNancy • N.tunli RuOUA:a Defel'\l8 Council .. • ~h • HunsIor YGIIIh F o u _ Pn:ljoct • Near East Foundation • CoundI ,.,. ... • • Ono' Heallll _ .. Cfo'_) • PoI>jeet COI\CIIt"n Inlemational • Pn>jeet Hope • • Llleracy - . _ "' ............ Unua PO\JIirlg''''- Of _ _ """ .......... • Puerto Rican Legal DefI!!lflH and EcU::atioft Fund • • Americe Lupus Foundation of SyraCUM, NY (NSC) • Rail.-to-- • Traila Conse"",nc:)' Raif"lfOtw,CiI Ac:tion Network • M,rch or F_tion Fcunct.ation Me_·W,"" or America • Phoenix. AZ (NSC)' • • Recosociation • 0._. DrsI~ Siemo Club • NAACP l.egal Oefen. . .nd Education.1 Fund • • SIena Club F_1lon Siena Club Legot Fund • • Nallonal 4-H Council Nollonal _ Coondl Icr - . In EnginHtlng • • SIoriglll F_do«on 1 __ SIOfT CommorMeIilh Schoo.. • Nelion.1 of Business • Alliance NetSc:trr4ai AssocI,Hon for v~ Handtcapped • Sunshine F'ound.b:>n .. • • Nllienal .t.udubcn Society N,tionaJ Breille Association • • Technoset'V"e • Trust for Public Ulnd • • Netiort,l Center for Learning Oiubilil.ie. c.- NIIiOnaI ling 10, .... Ind E>qo!oiIed C"'_ • or UnitoriIIn UniY_ I - . UoIon Coocetned I_. • • NdonIJ Coaeition lot \he Homeless • • ~ • • NeIie..1 C....,..... to P_n, CNId A........ Chicago, 'L (HSO) J-. NIIIionIII Conference of Chlillions end • United " - COIItQo F..... UniIod Wrj ot Am_.",... ndria. VA (NSC) • _ . 1 Council Icr Adoption N _ I Ca,mciI on "'" AQInQ • • USC (Un'ad Service OIgonlza,lons) U,S. Comml... kit FI,fIJg_ (Immigration OM RofIJg.. Servtcos til • Nltlonal Counei.on AJcohoUsm .nd Drug Oepenaenc::e .. N8!W York, NV{NSC) • _nea) U.S. Olympic CCM'I1nlIItoe • Ed."",,,," NOlional eoun... on Economic (foNnerty Join. CeunoI on • ECIOnomic Educ.ation) N'tional Crime F'l'1Mtntion Council • VITA (Voa..ntG.,. in Technical AAi5tance) • • Nation.1 Down Syndrome SOCiety Nltional Easter Seal Sodety • • • Wildernen Society W\IdIW. _MOtion TIUllIIn_1II • • N,tional 'Executive Servk:e Corps Nltional FFA Foundation, Inc:, • • World Concern World Educodon • • Nltklnal HwnophiJII FounolliOn • NltIOt\IIl Hispanic SChOlalOhio FU!\d • • WortdE"''lI''''''YR.fiof W01'kI Lternino Inc. (formel1y E.xDeriment in Intemational Living) • • National ttO$pa Orglt'lWlbOn NatiOnal Jewisn Center for Immunology and Respiratory MediCiI'M • • Won.:! Neighbo.. Worid ResOUTC::1$ Institute • • Nltionel Kidney Foundation Nltlenal Medical FelbwShips • • Wortd Vision World Wildlife Fund, Inc:, • • Nltional Mental Healm AssOCielion. AIe.lndria, VA (NSC) Nltional Muftj;)le Se:teto. Society • VldCA Of "'. Unit"" S.IIO•• CI\Icago, .L (NSC) • • NlliOnIil Neurofibromatosis FOUndltion Nltional Osteoporosis Foundeton • • VWCA or ''''' U.S.A.. NllIOnal aoord ...... VOt1<, >ff (NSC) You1h fOr UMer&tandmg • • NatlOr'l~1 Pam end Conser4m AssociatiOn National P$orilsis FOUnddon • Zero p(l~lal.ion Growth 121 APPENDIX IV. Page 3 of 6 TABLE :2 • 00 NOT MEET ALL STANDARDS The WOIIriI'l9 iIlI ~ OI'1I*mubOtiS ~ by HeIS ~ 00 not ne. "0' conduslon ~ tnf1)/'me~ ,.qw-d by the Sioandar<.(_} a1M' haa ~et' . ._01__. I'I1ftt OM or motIt HeIB $\and.at'\1. aM OtQ¥riz.:I~" wt\iI;:h Mv& not ~ not bfMn Cie.ny pre"",~ Of h.u nQ! ~ prtNided. inlctrrwbOn I.e NelS 0It3;m. ,.~ teQUeltS, An ..t.ri4k n indic.aaa that HeIS ,.ctuetta tor Infonftaticn unan.w.Nd -InfOrmation twqUMttt<:IfOt • • MW ..,.11I.Uon k.u "unity a..n camp.tu, JWVUI8r...-.luaticn has not beet\ ~ do.,.."..iId ~ M 01'9'" • • ~1.S tM SlIndotrd X =. [)o;u not m..t this Slanli.anl: "lion', ~ III IUppfy iniortnaDcr'! YOluntarlly ~ftIM itS.beM;al in ,.. OvnIiOt'l(S) &. raiHes InlMl'\I.lIMa! N'oal'i¢an Health ~i$ttt'l~ fOfo'nlil:llQn M'1utw:nia Ckwvis F!llJl"lIWItiOn 01 Amtrica \Jfited CeJetnJ P.!sr Ano::iIIItion:Io • W.~on, AmIltl1C1I"1 p~ OI"Uf! Asso::Ia'.lon NAAJ::P S~ Cor\lnbul)On FI.I~ O.C, lNSq City 0' kope NelioNiI FeOenbcn of li'l. elW'!od VOIul'!iflt'\\ cd ,Americ:.a 124 APPENDIX IV Page <5 of <5 'ne ~..q) "',tion.! CharlUesWhO were cencerned tnal Ametic".ansinwe,.. by d naDonat ~.ders Inforl"\'l.l.ion Bur.au fQunded Wft 1918 gN~ 10 hetp giv.rt, NelS ha' been .....luating national c.hentabht Otgeniza­ iio!'\S agalt"\$t its Standards fat 1B y.ars. Us present Standards Ire Vle nillions of (lohI"S 10 et\ ... '''form.,lon: P';oomOliQn, June! J'alltng. anQ puoilC IntormaUcn shOUkS nn.nctal statements wtUd"I describe aeeurateiy the ()I1lat'lizatiol'l's identilY, purpose, Pf'OgratM, and a, are ~red in eont'Ofmlty wIh generally acz:epled ac:a::n.mting p~ fNncial needs. pies (GAAP). leeotnpanted by. repor1 of 8n inoepenctant c.tttifIed pub.­ lie Ic:countant. and nevilWlld by the board: Ind !. Flnanelal Support and Ft.lllted Aetivltiu: The board is aocountable b. fully diSClo$8 ee;.,nomk I'HO\If'CaS and obIigaliions. anduaing InINoac­ for al authotiled' .ctivit"es oenel1Jting financial suppcJ1 on the organiza­ tioN '-David. 1992) CBMS Community Based Management Sy,wn (for uampk. HlUJIlil!. 1992) CBO. Community Based Organization (foruomple, F_I". 1996) DONGO. Donor Organized NODs (for uample. GordenaT and We..:. 1996) ENGO. Environmental NGOs (for e=mpt.. Naj