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Do You Know Your Donors? Mitigate Donor Risk for Nonprofits

July 21, 2023 (5 min read)
Donor due diligence will protect your nonprofit organization from taking unnecessary risks with donors.

It goes without saying that for nonprofit organizations, fundraising is a massive component of labor. And while anyone can imagine that the organization of galas, coordination of annual drives, and communication with regular donors are all key parts of the job, there are still many aspects that go overlooked—like donor due diligence.

In this blog post, we will explore what it means to go beyond recruitment and fundraising, and to know the backgrounds of your donors, including the opportunities and risks they bring.  

Why you need to research your donors

At surface level, you might assume it’s important to know your organization’s donors because it helps you cater to the needs and desires of their biggest givers. If you know what donors are passionate about, you can craft your experiences and asks directly to their interests to increase the likelihood they commit to a donation. However, understanding your donors is far deeper than that: knowing your donors is crucial to protecting your organization’s reputation and legacy.

Understanding who and where your money is coming from is ultimately a part of due diligence, and organizations risk legal action or reputation pitfalls if they skip this crucial step. For instance, if one of the donating agents works for a group that is on a country’s sanctions list, your organization would then be at fault for conducting business with them and could face fines or other regulatory actions.  

MORE: Why donor due diligence is crucial for your nonprofit’s success

Types of donor risks for nonprofits

There are more risks than simply the legal ramifications when it comes to third-party donations, too. You should also be cautious of the kinds of values upheld by the businesses and individuals who choose to fund them, as to avoid partnering with unsatisfactory donors who could have lasting impacts on your organization’s image and longevity. Here are a few of the major ways a problematic donor could affect your organization.

Risk 1: Working with organizations with low ESG scores

For socially-conscious nonprofits, partnering with or accepting a donation from an organization that has a low ESG score, or one that is being accused of negatively impacting the environment, could lead to undesired public scrutiny and a loss of donors.

For instance, if an environmental nonprofit accepts funds from an executive working in the oil industry, it will look to the public as though the organization signs off on oil practices—or worse, that the organization works with and provides benefits to the oil sector.

This could lead to public protests, boycotts, and, at the very least, major misunderstandings of a company’s true ethos.

How to avoid it

By screening for ESG ratings using a due diligence tool, you can assess the ESG impact for most major companies. This includes regular checks and alerts on ESG ratings from news articles, media mentions, or other data sources like legal cases.

While monitoring it on your own could be cumbersome, a due diligence tool can help fundraising teams verify that their donor list is in line with their organization’s values and wouldn’t cause a public relations crisis in the future.  

MORE: Top 4 features every research software needs

Risk 2: Partnering with problematic stakeholders

When screening new board members, not doing thorough research on their employment and wealth history could produce problems in the future if their wealth is ever scrutinized or seized due to illegal actions. This means you need to screen public records beyond the scope of corporate research to get a complete picture of your prospects.

For example, consider the case of a nonprofit hiring a board member who is tied into money laundering. The organization might have trusted the board member based on his public image and relationship with other teammates. However, without conducting a thorough background check, they missed that he was participating in illegal activity, and donating some of his unlawful earnings to the organization itself.

This might lead to major upset, both internally and externally, as well as legal action against the non-profit as you would be held liable for not doing effective due diligence or prospect research.

How to avoid it

As with monitoring for ESG ratings, a due diligence tool that is crafted for finding individual records, such as bankruptcies, criminal records, court records and M&A transactions, can scan efficiently scan any potential partner.

This allows you to double check that the money you’re receiving comes from a reputable, safe source, and that the potential board members and stakeholders are all following the law so they will not put your organization—and ultimately your mission—at risk.

MORE: 6 quick tips for qualifying potential donors

Risk 3: Taking money from sanctioned organizations

If a nonprofit is taking money from international donors without proper vetting, they could open themselves up to costly and time-consuming scrutiny from regulators for accepting donations from sanctioned individuals or organizations. Not only does this impact a company’s reputation, but it could lead to serious legal repercussions.

There are national and global sanctions that every business, including nonprofits, must abide by--like the U.S. Securities and Exchange Commission (SEC)’s list. These sanctions are meant to protect entities by blocking trade or business transactions that would result in theft, bribery, money laundering, or even conspiring with terrorists. Accepting money from a listed organization–whether purposeful or accidental—will result in fines and potential jail time for the decision makers.

How to avoid it

You might have already guessed that the best way to prevent working with sanctioned organizations is by researching each donor and cross-checking them with sanction lists using a dedicated tool. Make sure your due diligence software includes global lists, such as the OFAC and FBI lists in the U.S. and the HM Treasury in the UK, to ensure you are not missing any information.

By monitoring these lists, organizations are doing their due diligence to protect themselves, their stakeholders, and the broader community.

MORE: Trends for nonprofit development professionals in 2023

Why robust donor due diligence and screening is imperative to your success

Your goal as a nonprofit organization is to have a positive impact on the world, and you do your organization and mission a disservice if you neglect to do your due diligence.

While it can be time consuming, the benefits in ensuring your donor compliance through a robust donor due diligence strategy will far outweigh the costs. This is especially true as software, like Nexis Diligence+, makes it easy to scan for ESG scores, criminal records, and sanction lists to keep its donor pool protected from potentially dangerous third parties.

Combined with a robust donor prospecting tool, due diligence technology ensures you find the best—and safest—donors for your organization, ensuring you can continue your mission for years.