The Price of Privacy: Four Problems With Anonymous Giving—and a Case for Reform

Close your eyes for a moment, and imagine that the Gates Foundation was instead called the Good Foundation, and nobody knew the donor behind this operation—even as its vast grantmaking affected the lives of millions of American school children and people in poor countries. Does that sound unnerving to you? It does to me. But such an enterprise would be perfectly legal under current law and we may well see something like it in coming decades. In fact, last year, Fidelity Charitable—the largest of the donor-advised funds—gave out nearly as much in grants as the Gates Foundation without revealing whose money was fueling these gifts.

The world of philanthropy is becoming less transparent, and that’s not a good thing. Recent years have seen the rapid growth of a shadow giving system that funnels billions of dollars in gifts in ways that leave no fingerprints. The disclosure rules that have long governed private foundations are so easily bypassed as to be largely irrelevant. Even today’s biggest philanthropists only have to disclose their identities if they so choose, and more are opting to remain behind a veil of secrecy—including many who are pushing for public policy changes that affect all of us.

This growing darkness comes at a moment when the wealthy, and elites broadly, are viewed with strong suspicion by a public that believes the system is rigged against ordinary people. And it comes at a time when philanthropic giving is being increasingly weaponized by savvy donors engaged in ideological and interest group warfare. Never before has politics been so entwined with philanthropy as it is today, and never before has so much giving occurred in secret.

How much money are we talking about? It’s hard to say, exactly, given the laxity of disclosure rules. Any donor can directly give unlimited sums to any nonprofit with no requirement for either party to publicly disclose these transactions. Some of today’s largest policy and advocacy groups—such as the ACLU, the Sierra Club, and the Heritage Foundation—have lately seen big jumps in revenues. But good luck pinpointing exactly who is fueling their growth.

The stunning rise of donor-advised funds offers some fix on the extent of philanthropic giving that can’t be traced back to specific donors. While DAFs must reveal where their grants go, they don’t have to say which of their clients provided those gifts, and few DAFs reveal such information voluntarily. Just 10 years ago, DAFs moved a total of around $7 billion in grants. Last year, they moved twice that amount. Of the top 10 grantmakers in the U.S. today, more than half are DAFs—all moving money in ways that don’t reveal their donors. This represents a dramatic shift from an earlier era of philanthropy in which the top grantmakers were private foundations that operated with relative transparency.

Today’s donors aren’t just more likely, it seems, to choose opaque DAFs as their giving vehicles; more are also choosing even less transparent entities such as LLCs. At least three top billionaire donors that we know of—Mark Zuckerberg, Pierre Omidyar, and Laurene Powell Jobs—all operate through LLCs. I say "that we know of" because some mega-donors fly under the radar altogether. Not long ago, an investigation by Bloomberg BusinessWeek revealed that a trio of hedge fund managers had funneled billions into anonymous philanthropic trusts. The largest of these had reported assets of over $9 billion, making it one of the biggest pools of charitable capital in the nation. Among these donors was David Gelbaum, one of the all-time top contributors to the ACLU and Sierra Club. How many more big piles of money are stashed away like this, and how they are used? Nobody knows.

This large-scale shadow giving system is a new thing, and its emergence might logically lead to a reappraisal of the disclosure requirements that surround philanthropy. So far, though, no such rethinking has occurred. And whenever stronger rules are proposed, they are attacked in the name of philanthropic freedom. Donor privacy, the argument goes, is a sacrosanct cornerstone of such freedom. It allows citizens to exercise their rights to free speech and association without fear of reprisal or ostracism.

The desire for donor privacy is understandable, but a purist defense of such privacy is misguided when it comes to giving that affects public life. Like other forms of freedom that Americans cherish, philanthropic freedom cannot be absolute. It must be balanced with other values citizens care about—such as accountability, fairness, civility and a respect for the truth—and stronger disclosure rules in philanthropy are needed to achieve that better balance. It’s not good for civil society to have a growing river of dark money flowing into nonprofits, and ultimately, it’s not good for philanthropy, either; it's a sector that depends on the public’s trust and support to thrive.

To be clear: Many forms of anonymous giving are not problematic, especially giving to traditional charitable organizations such as hospitals and museums. But when donors use their gifts to sway public policy, it’s critical that their fellow citizens know who they are. Why is that? I can think of at least four problems with anonymous giving.

Bad Behavior

When people can express themselves anonymously, they are more likely do so in ways that flout established norms. If you don’t believe me, click away from this article for 30 seconds and visit any comments section on any media site, or maybe take a look at your Twitter feed. The nastiest, most disrespectful voices are nearly always anonymous. Meanwhile, over on Facebook, where people must reveal their true identities, you’ll see far less of this kind of thing.

Transparency is one of the most basic ways to enforce shared norms in any community. And when it’s absent, you see more bad behavior. It is no coincidence that American politics has become ever more vicious and debased amid a flood of dark money into the system. Today, donors can bankroll any manner of vituperation and defamation without risking being named and shamed. That’s wrong, and now we’re seeing more philanthropic dollars deployed in similar fashion—whether it’s funding character assassination of public figures, spreading disinformation, or fanning hatred. To prevent the further debasement of civil society, we need more transparency to enforce basic norms and standards.

Murky Motives

When someone is trying to convince you of something, it’s natural to want to know who they are and want they want. That information is essential for judging the credibility of the message you’re hearing. A message that’s coming from someone with a self-interest or ulterior motives is rightly judged as less credible than a message from an impartial observer. Any smart consumer of information knows this. Today, though, it’s getting harder to be such a consumer—because it’s harder to follow the money trail of who’s paying to make what arguments, and why.

More donors, both individuals and corporations, are bankrolling voices in the public square that are not what they seem. Repeatedly, we’ve learned that supposedly neutral experts are, in fact, on the payroll of donors with a vested interest in the issues under study. A case in point is large-scale giving by fossil fuel companies, and their owners, such as the Kochs, to policy groups working to obfuscate information about climate change. A more recent example is the revelation of Coca-Cola’s extensive and hard-to-trace giving to nutritional experts to underwrite dubious research. The examples go on, and it’s not just financial interests at play. Other donors have partisan goals, such as the philanthropists bankrolling baseless claims about voter fraud with the goal of passing ID laws that suppress minority voting.

When wealthy donors speak loudly in the public square, using nonprofit proxies, citizens deserve to know who they are, along with what motives they may have—and all the more so when donors are using tax-subsidized dollars. There is a compelling public interest at stake here, one that trumps the ideal of donor privacy. Too often, it has turned out that such privacy is desired for the wrong reasons.

Conflicts of Interest

A related problem with secretive giving is that it can be done for transactional reasons, with donors using charitable dollars to gain access, induce favors, and curry influence in various ways. Self-dealing by foundations or donors—i.e., giving for direct financial gain—is also vastly easier to get away with in the absence of disclosure. Both of these risks emerged as campaign issues in the recent election.

While none of the “pay-to-play” charges surrounding the Clinton Foundation really panned out, they did underscore the potential for real abuses when you mix philanthropy with politics and power behind a veil of secrecy. Despite the obvious potential for conflicts, the Clinton Foundation had no legal obligation to reveal its donors. The foundation eventually did so, voluntarily, but even then, it didn’t reveal key details about when large gifts were made and for what purposes. Questions linger as to whether some of these gifts were transactional—aimed at gaining influence with one of the powerful couples in America—and understandably so.

Meanwhile, we learned that Donald Trump had used gifts from his foundation to settle two lawsuits against him, in what some experts said amounted to self-dealing. However, these troubling allegations only emerged after months of digging by an investigative reporter at the Washington Post. That’s wrong. You shouldn’t need a crack journalist on the case full-time to figure out what a foundation is doing. Ideally, it should only take a few clicks of a mouse.

And let’s not forget the troubling way that Michael Bloomberg anonymously channeled over $200 million to nonprofits around New York City, through the Carnegie Corporation, while also serving as mayor. While Bloomberg’s name wasn’t attached to these grants, this giving was an open secret—and was seen by some critics as a way to gain allies, or at least silence, among groups that otherwise might have challenged Bloomberg, especially in his bid to change New York’s election laws to run for a third term. (Bloomberg ended his giving shortly after he secured that third and final term.)

Eroding Public Trust

Most Americans don’t think much about philanthropy, but they got quite an earful about shadowy foundations during the 2016 election. It’s hard to imagine they were reassured by what they heard. In fact, though, the public is largely clueless about the larger picture I’ve described—a rising tide of giving done in secrecy and divorced from any definition of generosity most ordinary people would recognize.

Historically, American philanthropy—and the tax deduction that fuels it—has enjoyed strong public trust on the assumption that charitable gifts are exactly that: selfless acts that are meant to improve society. The more the public comes to understand what’s really going on these days, the more its trust in philanthropy is likely to erode. We don’t just live in a populist moment right now, we also live at a time when demands for accountability have challenged one sector after another, from Wall Street to higher education to professional sports. Maybe these twin energies will bypass philanthropy, leaving the sector to do as it pleases, but I wouldn’t count on it. Philanthropy is one of the most elite and unaccountable corners of America right now; it is an obvious target for more oversight, and rightly so.

As I’ve argued before, philanthropy’s leaders should get ahead of the curve, and be leaders in reform. That is always better than having changes forced upon you down the line, after problems have festered and finally triggered a regulatory reaction—or overreaction, as is sometimes the case. Embracing greater transparency is a good place to start.

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In principle, mandating more disclosure of charitable gifts is easily done. Congress could simply require that all parts of the 990 tax forms be publicly released. Now, 990-B forms—which list all gifts to a nonprofit over $5000—are kept confidential by the IRS. Releasing these forms would bring a revolution in transparency to the sector, especially if donor-advised funds were simultaneously required to reveal which donors made what gifts through these entities.

In practice, though, we want to approach this challenge with great care and deliberation. The details are tricky here. For one thing, anonymous giving to most nonprofits—those engaged in traditional charitable activities—is not problematic and there is no compelling public interest in forcing these groups to reveal their donors. Another issue to be taken seriously is the fear among donors backing controversial causes that disclosure of their identities will lead to threats or reprisals.

In regard to the first issue, one possible solution is to reclassify 501(c)3s engaged in public policy and advocacy work as 501(c)4s or 527s, and only require disclosure from these groups. Drawing these new lines won’t be easy, and would be extremely disruptive to the existing order, as many nonprofits would lose the ability to receive tax-deductible gifts. How to treat universities that receive grants for advocacy and policy research is also a nettlesome question. But I think this shift is both feasible and desirable. I’ll say more about the challenges of reclassifying nonprofits in another post.

As for disclosure-related fears of donors, I don’t see a clear solution here, except to ask them to live with it on those occasions that arise. Or perhaps allow waivers. On any given controversial cause, you’ll find nonprofit leaders and staff who are public-facing and visible. If they can take the heat, the donors backing them should be able to do the same. And if the donors can’t, they can choose not to give. A little less philanthropic money flowing into today’s polarized policy and advocacy battles probably wouldn’t be a bad thing.

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