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Excerpts from the JRL E-Mail Community :: Founded and Edited by David Johnson
#12 - JRL 2006-124 - JRL Home
Date: Sat, 3 Jun 2006
From: "Paul Backer" <backerpaul@gmail.com>
Subject: Charity's [501(c)(3)] bright future in Russia. maybe.

I would like to submit the attached piece on RF NGOs and the impact of the new NGO law.

Paul Backer, J.D.,
LL.M. Securities Regulation,
LL.M. International Finance
Admitted, NYS Bar
Managing Partner
Tenafly Group


Charity's [501(c)(3)] bright future in Russia. maybe.

As an attorney providing pro bono counsel to nonprofits (NGO) in the Russian Federation (RF), it is impossible to be unaware of the tensions between NGO and the RF government. The NGO see the government as curtailing social advocacy. The government views NGO as hostile and a hotbed of tax fraud. Press coverage of the recent RF NGO regulations fuels the fire by painting the picture of a government seeking to regulate the NGO out of existence. That is not the case.

The new regulations do impose new burdens and raise policy concerns, but they are not an insurmountable obstacle to the growth of Russia's charitable and cultural sector. Unregistered RF NGO illegally operating in Russia for years, paying salaries and rents in cash and not paying taxes will be strongly impacted. However, despite their laudable goals these organizations were systematically violating RF laws long before any new regulations.

Further, the new regulations fail to reflect international best practice of lower NGO compliance burdens. International corporate governance experience proves the greater effectiveness of stricter policing of fewer, well defined regulations than of enacting amorphous masses of new regulations and reporting largely for the sake of reporting.

Inadequate NGO regulatory and reporting capacity is not unique to the RF. U.S. 501(c)(3) [tax exempt charitable and scholastic] NGO are notorious for poor accounting and business practices. Even the largest nonprofit 501(c)(3) organizations with annual budgets of hundreds of millions of dollars and armies of accountants seem incapable of rudimentary financial management and corporate governance. The seemingly perennial scandals surrounding United Way and Red Cross funds may provide an example.

NGO inability to adequately manage funding and compliance may be unavoidable. Those dedicating their lives to helping the poor, treating the ill, promoting the arts, etc. have skillsets and interests very different from those needed for accounting and compliance. The new reporting requirements run a very real risk of demanding more from people who despite their literally best intentions may be incapable of complying.

For the NGO that were already somewhat meeting their compliance burdens, the new regulations are not 'life and death'. As applied to an NGO advised by my firm, they will have to re-register, and we worked to develop software to help them comply with new reporting requirements. The additional cost for the client of re-registration was $730 [about 2 billable hours], registration from scratch would have cost under $1500. The cost of developing the reporting tool was under $12,000, so the 'use' fee is $1,250 a month, including 2-3 hours input from a junior attorney per month. Alternatively, preparing the reports solely by internal staff would require less than 50 hours a month. The audit house that worked with this client's taxes, prior to the new regulations charged $1,400 a month and subsequent to the new regulations the fee was set at. $1400 a month.

At the risk of adding salt to NGO wounds, reporting under the new regulations may ultimately foster the managerial discipline and transparency needed to attract meaningful RF corporate sponsorship. Currently, RF companies able to sponsor charitable projects are reluctant to donate, because they lack confidence in NGO governance. NGO must build relationships with RF corporate sponsors, because despite disproportionate press coverage, foreign funding is a modest and shrinking share of RF charitable funding.

The key legal issue was raised by Mr. Andrei Kazmin, the Chairman of the Board of Russia's Sberbank at a forum attended by the Deputy Prime Minister Dmitry Medvedev (as reported by Kommersant newspaper on April 13, 2006). The issue is making charitable giving by corporations non-taxable to the receiving NGO, same as the 501(c)(3) NGO treatment in the U.S. Taxing NGO donations as income effectively transfers compliance and regulatory burdens from corporate donors who are best situated to absorb them to NGO which frequently lack accountants or reporting frameworks.

NGO compliance under the new regulation should encourage the government to promote corporate giving by no longer defining donations received by NGO as taxable NGO income. Effective partnerships between RF NGO and companies result in more children getting textbooks, more diabetics receiving insulin and more of the elderly, adequate medical treatment. The NGO are good at that. The government should give NGO a chance to do what they are good at.