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Financial Planning > Charitable Giving

Chinese Surprised by U.S. Charities’ Lack of State Control

By Michael S. Fischer

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A Chinese delegation on a recent East Coast tour to learn about the U.S. nonprofit and charitable giving sectors couldn’t believe that government controls of these entities were as loose as described, according to Richard Gelles, dean of the University of Pennsylvania’s School of Social Policy & Practice, who met with the delegates.

“They kept asking the same question that they couldn’t believe our answer to: ‘Tell us again how the government controls your nonprofits and philanthropic organizations,’” Gelles said. “When we said they are required to file a [Form] 990 and to abide by the tax code, they couldn’t believe that the controls are that loose.”

Eileen Heisman, CEO, National Philanthropic TrustGelles and Eileen Heisman (left), chief executive of the National Philanthropic Trust (NPT) and a lecturer at the school, described their impressions of the meeting in separate telephone interviews with AdvisorOne. Neither professed to be an expert in Chinese philanthropic practice.

“They are very eager to learn about the role of the philanthropic sector and the nonprofit sector in terms of how it works with the government or separate from the government to address social issues and problems,” Gelles said.

The delegation comprised about 25 national, provincial and local government officials and academics, Heisman said, who were keenly interested in governance and transparency issues. A grant to the School of Social Policy & Practice funded the trip.

“They were fascinated with the idea of community-based boards, boards of citizens who had the best of intentions who would govern charities that didn’t have a connection to the government,” she said.

“They were interested that these self-governing boards actually work effectively and were willing to abide by the law in a way that allowed them to be freestanding entities. How do the boards replace themselves? What do they do? Who appoints them? How do you get to be board chair?”

Heisman said the delegates wanted to know what would happen if she as a CEO had a disagreement with her board chairman. They asked how her salary was different from a for-profit salary.

She said they were especially interested in transparency rules the IRS imposes on charities: Form 990, self-dealing, “all the rules that regulate charities and that people were willing voluntarily to comply with. I talked about how a government audit of records works.” NPT was audited about five years ago.

Chinese politics did not come up during the meeting. Gelles said there was never a direct conversation about what would happen if a nonprofit or philanthropic organization took a contrary position to the government. “But clearly, they are not comfortable giving that much freedom to organizations that could stir up trouble.”

The Chinese charitable sector today is bifurcated, with a number of large government-sponsored institutions “similar to the American Red Cross and the American Cancer Society” and a proliferation of smaller grass-roots groups, Heisman said.

The newly affluent in China “see Bill Gates and Warren Buffett as the prototypical philanthropists,” Gelles said. The delegation’s view of American philanthropy “is not the Ford Foundation, not the Carnegie Foundation; it’s a kind of noblesse oblige of the well-to-do to use their money for good. That’s their model: If I already have enough money, how do I use my money for good?”

But their efforts hit a wall of government rules and regulations for establishing a nonprofit and, more important, for raising money. Gelles said he tried to point out that if the government sponsors the nonprofit and allows it to raise money under government control, “it’s not like you’re donating to a nonprofit, it’s like another form of taxation.” That observation didn’t resonate with the group, he said.

Gelles said his school works with a foundation set up by Jet Li, the actor, filmmaker and martial artist. “They can set up the foundation, but they can’t raise money,” he said. “They’re limited to whatever Jet Li can give them. He can do some good, but he has to be careful and selective about what good he’s doing, and he’s a very little player compared to what the government is able to do with its government-sponsored nonprofit arms.”

As to how the nonprofit and philanthropic sectors in China are likely to evolve, Gelles said: “They’re going to try—because it’s part of the DNA in the culture—to encourage philanthropy with normal government controls. So, they will gradually loosen the regulations for establishing a philanthropic organization and a nonprofit organization.

“The ability to create a 501(c)(3) independent of the government is likely to be loosened. They may begin to loosen the regulations for who can solicit funding for a public charity. Those seem to be the more promising areas they’ll go down.”

Heisman noted a great interest among the delegates in the different giving vehicles the U.S. government allows to motivate donations. Donor-advised funds and charitable remainder trusts, in particular, piqued their interest.

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