Grantmakers seeking to fund international charitable work must be familiar with Equivalency Determination (ED) and Expenditure Responsibility (ER) as tools for establishing the charitable purpose of their beneficiaries and their programs. However, many grantmakers are not aware that there is an additional Executive Order (22 U.S.C. 288) which enables grantmakers to treat an organization as equivalent to a public charity if it is “a foreign government, or any agency or instrumentality thereof, or an international organization designated as such by Executive Order.” In practice, this means that neither Expenditure Responsibility nor Equivalency Determination are required, but there are still important steps that the grantmaker must follow to ensure compliance with IRS regulations.
Although government entities hold this equivalency and other privileges and immunities that accompany it, funders should always remember that equivalency is not a license to give. All of the risks inherent to international grantmaking still apply–and in some countries, granting to government entities can be higher-risk than giving to NGOs.
Which “foreign government entities” are considered equivalent?
There are a few broad categories of organizations that hold this “equivalent” status in the United States:
- “Foreign government, or any agency or instrumentality thereof.” This is a very broad category, and it can include entities such as (though not limited to):
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- Cities, towns, municipalities
- Public universities, elementary schools, or high schools
- Public museums and libraries
- Government-run hospitals
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- “International Organization designated by Executive Order.” The President of the United States has the authority under 22 U.S.C. 28 to designate specific organizations to be entitled to certain privileges, exemptions and immunities, including equivalency for the purpose of charitable activities. The most up-to-date list can be located on the U.S. House of Representatives Code website. Most notably for charitable activities, this includes (though not limited to):
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- United Nations, which includes UN entities such as UNICEF, UNHCR, and UNDP, among others.
- Regional Development Banks, such as the African Development Bank, Asian Development Bank, and the Inter-American Development Bank
- Food and Agriculture Organization
- International Committee of the Red Cross
- Global Fund to Fight AIDS, Tuberculosis, and Malaria
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Benefits of “equivalency” status: One of the great benefits of working with foreign agencies or government units that have this status is that the normal Expenditure Responsibility reporting rules do not apply. CAF America still collects grant reports from these entities as a best practice, but grantmakers are not required to collect reports through the life of the grant as they would normally be required to do under ER. This is particularly relevant for the purchase or construction of capital assets, which normally requires the collection of reports through the useful life of the asset. For the construction of a hospital or for the purchase of expensive medical equipment, for example, this could mean the collection of reports for 10-50 years! This would not be required for government or international entities that fall into this category, which broadens the type of charitable activity you could support.
Other important due diligence considerations
Grantmakers may take this “equivalency” to mean that it is easier to make grants to international government entities or that this status serves as a “license to give” because ED and ER are not required. But it’s important to recognize that even aside from the two documentation requirements described above there are additional steps that must be taken during the due diligence process to ensure compliance with U.S. regulations:
- Anti-Money Laundering, Anti-terrorism, Sanctions Compliance: The provisions of the PATRIOT ACT, the Bank Secrecy Act, and the Sanctions enforced by the Office of Foreign Assets Control (OFAC) still require intensive reviews of any foreign grantee to mitigate Money Laundering and Terrorist Financing concerns. CAF America conducts screens board members, senior staff, and the organization name to ensure compliance with these requirements, both before the grant is paid and on a regular basis throughout our relationship with the organization.
- Anti-bribery: The Foreign Corrupt Practices Act (FCPA) prohibits transactions that would result in bribery to a foreign official. This is something that needs to be considered in every cross-border grant, but if you’re making a grant to a government entity, the exposure to possible bribery increases. In order to mitigate the risks of bribery in your grantmaking, it is important to understand the purpose and motivations of the grant payment as well as identify any Politically-Exposed Persons that are leaders of the organization.
- Political Activity: U.S. charities are prohibited from participating in political activity and can only participate in lobbying as an insubstantial part of their activities. One of the important steps in confirming the charitable purpose of the grant is ensuring that the grantor is not funding any political or lobbying activities, the risk of which increases when working with a government entity.
Conclusion
Making grants to foreign government entities may seem daunting, however utilizing the expertise of an experienced grantmaker can take the burden off of the donor. Intermediaries such as CAF America have the knowledge to choose the correct path to effectively make the impact desired by the donor without increasing the level of risk or administrative burden. Despite a government entity’s status as “equivalent,” proper due diligence is recommended to ensure regulatory compliance and risk mitigation for the grant. By following the steps outlined above and with a grant agreement in place, donors can make charitable grants to organizations that have been offered this coveted “equivalency” status through U.S. Executive Orders. If you have any questions or would like further information, please reach out to CAF America via email at info@cafamerica.org or myself at kelsey@cafamerica.org.