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Adopting Due Diligence: How to Begin Your Donor Due Diligence Strategy

August 29, 2023 (5 min read)
Donor due diligence best practices include monitoring negative news, watchlists, and legal documents for red flags.

While many nonprofits are well-aware of the importance of conducting donor research as part of the fundraising process, there are still plenty of aspects of due diligence worth learning about. Donors have the potential to bring financial or reputational damage to any institution, making due diligence imperative for safety and longevity.

A robust due diligence search should therefore be at the top of any fundraiser’s priority list. In this article, we’ll outline why due diligence is important, go over some common challenges to the due diligence process and give you best practices for risk management with donor due diligence tools.

Why due diligence is important for nonprofits

Managing risk and compliance for a nonprofit involves getting the full picture of any potential donor or partner. Just as for-profit institutions must ensure that their partners and employees are fulfilling the legal and ethical standards of practice, nonprofits need to do this as well. And, they must check that the donations they receive come from viable, trustworthy sources.

Due diligence involves checking for all kinds of red flags in a donor’s background, including their current and past affiliations and their business practices. For instance, if a university is about to accept a financial contribution from a local business owner but realizes that the donor’s business has public charges against it, the institution can avoid making the mistake of accepting money from a place that could cause major damage to their public image and perception.

Challenge of implementing a due diligence process for nonprofits

Although this process is necessary, conducting donor due diligence can pose obstacles. Nonprofits that lack resources like personnel, time, and money might have a harder time onboarding a formal due diligence process simply because they are stretched too thin. As nonprofit pros already wear many hats, taking the time to develop a due diligence practice may be outside of the scope of what’s manageable.

This makes sense because the sheer number of tools and amount literature on due diligence can be cumbersome to sort through. Even when a search is more narrowed down, there are often multiple, unreliable sources that might have incomplete data or confusing backgrounds.

Fortunately, there are plenty of streamlined best practices that can help a nonprofit begin the process of due diligence. After years of developing industry-leading due diligence technology, we’ve compiled our best practices for donor due diligence and where to get started so you never feel lost in a sea of overwhelm.

MORE: Why donor due diligence is the key to your nonprofit’s success

Best practices for beginning donor due diligence

Understand the backgrounds of your donors

First, conduct prospect research to know the background of everyone on your current donor list and your prospective donor list to make sure that your donors will be good associations for your organization. This will allow you to see if a potential donor’s connections contradict the mission of the nonprofit—for example, if they are employed at an oil company and wish to donate to an environmental organization. Checking for compliance with environmental, social, and governance (ESG) bills and the organization’s standards for ESG is a good way to make sure that you’re not becoming associated with someone who might oppose your company’s ultimate goals.

Donor prospecting and screening tools do this step for you by developing reports on what donors are involved in, where they work, any major donations they’ve given, who their associations are, etc. so that you can see the larger picture of how they’ve impacted your field.

MORE: 6 quick tips for qualifying potential donors

Monitor negative news

After the initial searches have been conducted, remember that circumstances may change. Ongoing efforts to continually vet donors, like monitoring news alerts, can help ensure that your thoroughly-checked sources are still viable and accurate throughout time.

Donor tracking tools will often set alerts for donors and affiliations to ensure fundraisers can stay up to date on media mentions for potential issues that might build into larger public stories or donor scandals. For instance, a nonprofit might set up an alert for each major donor’s name and see that one of their larger contributors was recently charged with embezzlement. This would give them the opportunity to sever the relationship and remove the donor from all future outreach campaigns to combat any negative association before it gets out of hand.

Check for regulatory infractions

Beyond wanting to avoid donors whose public actions don’t align with the nonprofit’s ethos, there is also the question of legality. In some rare cases, donors might be caught up in sanctioned businesses or be on watch lists, making it illegal to conduct business with them.

Legal liability checks are important and can be done with the help of due diligence tools that will watch these lists, as well as arising legal cases, to steer clear from anyone who might put the nonprofit in harm’s way. Fundraising employees can also manually check the sanctions lists at places like the SEC website for immediate access.

MORE: Ask the right questions for complete due diligence

Vet larger gifts

The above steps should apply to every donor, despite the size of their gift. However, high-profile or large gifts deserve enhanced due diligence because of the potential for larger public attention. One common example of this is with universities who accept large gifts from alumni, sometimes even naming buildings after those donors. That type of public awareness warrants a larger check to ensure that the prominent name will not be tarnished and leave the nonprofit in an uncomfortable place.

Why you should use a donor due diligence tool

While it may seem overwhelming, the important aspects of donor due diligence can, luckily, be accomplished with help from a third-party tool. Donor due diligence tools offer a streamlined way to keep all the necessary data in the same place, and they often are more accurate and easier-to-use search portals.

A tool like Nexis Diligence+® does this by increasing the breadth and reliability of data and streamlining search results to get exactly what you need. Searching through the open web might lead you to misinformation or multiple results under the same name, but all sources in Diligence are highly vetted and the tool can filter out duplicate results. What’s more, you get access to files that can’t be found on the open web, such as sanctions, legal cases, watch lists, and behind-paywall news articles to get a complete picture of your prospect.

Additionally, you can set up alerts in Diligence+ so you’re updated on the status of each donor without having to manually search their name every few weeks. This saves you time in your research process, allowing your team more time to connect with donors and make a bigger impact.

Create the full picture of your donor prospects and request a trial of Diligence+ for complete donor due diligence.