Making International Grants. Tax-exempt 501(c)(3) public charities must take special precautions when making grants to foreign organizations. Though currently less encumbered than private foundations, public charities have become increasingly more regulated in foreign grantmaking since September 11, 2001.
When a public charity disburses funds to an individual or organization, foreign or domestic, it must be for exempt purposes. If the recipient is a foreign organization that has a US Determination Letter, a presumption will be raised that the funds will be used for exempt purposes - the same as if the recipient were an exempt domestic organization. The result is a reduced burden on the granting charity to monitor the use of funds by the grantee.
If, however, the foreign grantee does not have a US Determination Letter, the public charity may still support that grantee (Rev. Rul. 68-489), but the burden shifts to the US charity to show that the foreign organization's activities are consistent with the US charity's exempt purpose and that the US charity was not merely a conduit from individual donors to the foreign organization (which would not be deductible). This independence is established when the US charity maintains discretion and control over its grant funds. The IRS determination of proper "discretion and control" has proven to be a fact-intensive one, decided on a case by case basis.
Therefore a public charity involved in foreign grantmaking is advised to establish and adhere to clear grantmaking procedures in its bylaws, documenting its efforts to maintain discretion and control. With these in place, the charity is afforded greater protection from an adverse IRS ruling in the event of an audit. Some "best practice" principles to guide the formation of these grantmaking policies are:
Board requires written grant proposals from foreign grantee
Board pre-approves all foreign grants and only after detailed review of the grant proposal and further investigation if necessary
Board reserves the right to refuse grants that are requested from foreign organizations, withdraw approval of a grant, or even request to receive a refund of any unused grant funds
Charity and foreign grantee have a written agreement as to the use of the funds
Grants are given only for projects that are actually in furtherance of the US charity's exempt purposes, avoiding support for mere administrative expenses of grantee
Board distributes grant funds on an "as needed" basis
Foreign grantees do not receive any funds earmarked for them by donors; disbursement should come from the charity's general fund
Board requires periodic accountings of grant funds by the foreign grantee
Board members, committee members, or volunteers conduct regular on-site visits to project locations to ensure the funds are being used in accordance with the terms of the grant agreement
In addition, the US Treasury released a 2006 updated version of "Anti-Terrorist Financing Guidelines: Voluntary Best Practices for U.S.-Based Charities" in an effort to ensure that funding is used for the proper exempt purposes of the US charities, helping them avoid abuse by fraudulent or terrorist organizations. The paper addresses principles of accountability and transparency in governance, financing, and programming. It can be located at: http://www.ustreas.gov/press/releases/reports/0929%20finalrevised.pdf.