National Standard 20: The Community Foundation Oversees Grantmaking Due Diligence
A community foundation performs due diligence to ensure that grants will be used for charitable purposes and assesses the impact of its grantmkaing.
20.1 Provide a process, flowchart, or checklist for determining which grants require exercise of expenditure responsibility. These grants include donor advised funds and fiscal sponsorship arrangements. If this is detailed in your due diligence policy, please attach that as evidence. If it is a separate document, please attach the separate document. The reviewer is looking for a level of specificity that includes all of the necessary steps for expenditure responsibility, specifically:
- Conducting a pre-grant inquiry - including a reasonable investigation of the grantee - to ensure that the proposed activity is charitable and that the grantee is able to perform the proposed activity
- Executing a written agreement with the grantee that specifies the charitable purposes of the grant, includes provisions that prohibit use of the funds for lobbying activities, and requires the grantee to return any funds not used for the designated purposes
- Requiring the grantee to maintain the grant funds in a separate fund so that charitable funds are segregated from non-charitable funds
- Requiring the grantee to provide regular reports on the use of the funds and the charitable activity supported by the grant
- Keeping documentation about the grant with a brief description of the grant, amount, charitable purpose, and current status of the grant (Note the 990PF requires this information, however, the current and revised Form 990 for public charities do not have instructions indicating that such information should be reported on the Form, so the application of this requirement to community foundations with donor advised funds is unclear at this time)
Helpful Hints: Common responses that are not compliant:
- We only make grants to 501(c)3s – This language is insufficient for a policy. Both private foundations and supporting foundations are classified as 501(c)3 foundations, and grants to these foundations may require expenditure responsibility.
- We do not make grants that require expenditure responsibility – This language is insufficient for a policy. If the foundation does not make expenditure responsibility grants, your policy should state that you only make grants to 501(c)3 public charities classified under sections 509(a)(1) and 509(a)(2) and identify the process used by the foundation to verify a grantee’s status as one of those types.
- Determination Letters – Reliance on a foundation’s determination letter is insufficient as it will not necessarily indicate whether a foundation is classified under 509(a)(1) and 509(a)(2). For example, the policy should indicate whether you use GuideStar Charity Check, the IRS Select Check, or the Exempt Foundations BMF tool to verify a potential grantee’s tax status as 509(a)(1) or 509(a)(2).
Due Diligence Resources:
- Expenditure Responsibility Decision Tree: http://www.cfstandards.org/sites/default/files/resources/COF_ERDecisionTree.pdf
- California Community Foundation Grantmaking Due Diligence: https://www.calfund.org/document.doc?id=147
- Community Foundation of Western Nevada: http://nevadafund.org/wp-content/uploads/2013/12/Due-Diligence-policy-March-2012.pdf
- Northern California Grantmakers Due Diligence Done Well: A Tool for Grantmakers from GEO: http://docs.geofunders.org/?filename=GEO_Due-Diligence-Guide.pdf
- Southeastern Council on Foundations Due Diligence Tool from GEO: http://www.secf.org/assets/site/Grants/due_diligence_tool_for_grant.pdf