Charity fraud: recognizing it and protecting yourself

Did you donate to a nonprofit that turned out to be a fraud? Or do you want to make sure it does not happen to you? Israel has clear laws that protect donors, but they do not work automatically. You need to know what to demand, where to turn, and when there is a real chance of getting the money back.

What is the difference between a badly run nonprofit and criminal fraud?

Charity fraud is making a false representation on purpose, to get a person to donate money to a body that does not act for the stated purposes. On the criminal side, section 415 of the Penal Law, 5737-1977 (obtaining a thing by fraud) deals with this directly. Stating a false fact with intent to cause a benefit to be handed over is punishable by up to three years in prison, and in aggravating circumstances up to five years.

On the civil side, a nonprofit that lies about how the money is used, about the organization’s purposes or about how effective its activity is, is exposed to claims for fraud under section 56 of the Torts Ordinance [New Version]. It is also exposed to restitution claims under the Unjust Enrichment Law, 5739-1979. In addition, if the nonprofit holds an approval under section 46 of the Income Tax Ordinance [New Version] (פקודת מס הכנסה [נוסח חדש]), which gives donors a tax credit, the Minister of Finance may cancel the approval. One case is when a material part of the institution’s activity is not for achieving the public purpose (section 46(a1)).

What can the Registrar of Amutot do, and what are its limits?

The Registrar of Amutot, which operates within the Ministry of Justice, is authorized under the Associations (Amutot) Law, 5740-1980 (חוק העמותות, התש״ם-1980), to supervise the activity of nonprofit associations and enforce their compliance with the Law. Under section 38A of the Law, the Registrar may demand from an association any document or information to clarify its financial report. Under section 40, the Registrar may open an investigation into its affairs and appoint an investigator when there is reasonable ground to believe that it is not complying with the Law, its articles or its objects. Compulsory dissolution is not within the Registrar’s own power: the District Court may order dissolution, for example when the association’s activities are carried on in breach of the law or of its objects (section 49).

A nonprofit whose annual turnover is above the amount set in section 19(c) of the Law must appoint a CPA, and its financial report is filed audited (section 37(a)). The reports filed with the Registrar are open to public inspection (section 39(b)). A donor who wants to check a nonprofit can view these reports at no charge through the online registry of the Registrar of Amutot. The donor can check whether the management expenses are reasonable compared with the declared activity.

7 signs that should raise a red flag before you donate

1. No up-to-date financial report in the Registry: every nonprofit must file an annual financial report with the Registrar, and it is open to public inspection. Its absence is a red flag. A nonprofit that did not file its financial report within 90 days of the set date is treated as a nonprofit that has stopped operating (section 59(a)(2) of the Amutot Law), and the Registrar may strike it off (section 59(b)).
2. Management expenses above 30–40%: a large gap between what goes to the activity and what goes to management deserves a check.
3. Vague descriptions of activity with no evidence, photos from the field or proven data.
4. “Donate now” pressure: an honest nonprofit is not afraid to give you a day to think.
5. An emotional campaign with no documents: moving photos are marketing, not proof of activity.
6. No proper management certificate from the Registrar of Amutot: you can check this in minutes through the online Registry of Amutot.
7. No section 46 approval from the Israel Tax Authority: when they claim the donation is recognized for tax purposes, and a check shows it is not.

Can you demand back the money you donated?

A donor harmed by fraud, that is, who donated money on the basis of a false representation, is entitled to sue for the return of the money on two main grounds. The first: unjust enrichment under the Unjust Enrichment Law, 5739-1979: the nonprofit was unlawfully enriched at the donor’s expense. The second: fraud under section 56 of the Torts Ordinance [New Version]: if it can be proved that the nonprofit knowingly made a false representation of fact so that the donor would act on it.

These claims can be filed in the Magistrates’ Court (for amounts up to NIS 2.5 million) or in the Small Claims Court (up to NIS 39,900) for smaller amounts. When many donors were harmed, a class action can also be considered. But it is possible only for a claim listed in the Second Schedule to the Class Actions Law, 5766-2006, or in a matter where an express statutory provision states that a class action can be filed (section 3(a)).

Who is personally liable when a nonprofit defrauds?

Board members and officers of a nonprofit bear personal liability when they are aware of the fraud and choose to ignore it. Under the Torts Ordinance, an officer’s negligence that allowed fraud could create personal liability. In aggravating circumstances, where the officer actively took part in the deception, the officer can be sued directly for fraud, even if they acted on behalf of the nonprofit.

On the criminal side, a member or employee of a nonprofit who gave the Registrar a false answer or false information when required to under the Amutot Law faces up to three years in prison (section 64). In addition, a manager who spent the nonprofit’s money for personal use is exposed to the offenses of theft by a manager (section 392) and fraud and breach of trust in a corporation (section 425) under the Penal Law, 5737-1977.

Want to sue? Where do you turn, and what happens next?

A harmed donor can act on several tracks at the same time. A complaint to the Registrar of Amutot: in writing, with records of the financial reports, the nonprofit’s publications, and evidence of the gap between promises and reality. A complaint to the Israel Tax Authority: asking it to review the nonprofit’s section 46 approval again. A report to the police: if there is prima facie evidence of criminal offenses (fraud, embezzlement), since the police are authorized to investigate and file an indictment.

At the same time, when the nonprofit harmed many donors, it is worth checking whether a class action can be filed. It allows group compensation without each donor filing a separate claim. But it is possible only for a claim listed in the Second Schedule to the Class Actions Law, or in a matter where an express statutory provision states that a class action can be filed (section 3(a)). So check first whether the cause of action falls into one of these.

A 5-minute check before every donation

1. Google + the Registrar of Amutot’s registry: search for the nonprofit’s name and check that it is registered and holds a proper management certificate.
2. Open the financial reports: they are available at no charge in the Registry. Check the share of management expenses compared with activity.
3. Look for outside reviews: forums, press articles, accounts of past donors.
4. Ask where the money goes: “Where exactly is my donation going?” An honest nonprofit will answer without hesitation.
5. Ask for details in writing: for amounts above NIS 500, ask for written confirmation of what the donation is for before you transfer it.