Proactive Governance: Monitoring and Addressing Self-Dealing Risks in Private Foundations

by: Kyle Anderson
May 23, 2023
Castle Wall

Self-dealing represents an ongoing and significant risk for private foundations, touching upon a wide range of areas, such as credit cards, loans, compensation, investments, and more. Navigating these counterintuitive rules can be challenging, even for experienced foundation stakeholders with the best intentions. While self-dealing is defined by the Internal Revenue Code, its interpretation leaves substantial room for gray areas and potential complexities.

To stay compliant, it is crucial to have a clear understanding of the individuals and entities considered disqualified persons under the self-dealing rules. This includes directors, officers, substantial contributors, family members, and any entities they control. These parties are prohibited from participating in certain transactions with the foundation. However, with dedicated effort, it is possible to prevent self-dealing in private foundations. Here are some effective strategies to ensure compliance:

Educate Board Members and Staff: Provide suitable training and education on the rules and regulations surrounding self-dealing. Ensure that board members and foundation staff grasp the implications and consequences of engaging in self-dealing transactions. It is essential to clearly define who qualifies as a disqualified person and familiarize foundation stakeholders with the extensive list of prohibited transactions.

Conduct Due Diligence: Prior to entering into any transactions or relationships that could have self-dealing implications, it is crucial to perform thorough due diligence to identify potential conflicts of interest. Carefully review the backgrounds and relationships of individuals or entities involved to ensure they do not fall under the disqualified person category defined by self-dealing rules. Seeking expert advice before engaging in any questionable or uncertain transactions, even if they seem beneficial to the foundation, is imperative.

Document Transactions: Maintain meticulous and accurate records of all foundation transactions, including grants, investments, loans, and financial arrangements. Document the purpose, terms, and fair market value of each transaction to demonstrate proper governance practices, providing a strong safeguard against self-dealing concerns.

Establish Conflict of Interest Policies: Develop conflict of interest policies that require board members and key individuals to disclose any potential conflicts and recuse themselves from decision-making processes involving such conflicts. Implement a transparent and objective process for reviewing and addressing conflicts.

Regularly Review and Monitor: Conduct periodic reviews to ensure ongoing compliance with self-dealing rules. Continuously monitor the foundation's activities, transactions, and relationships to identify potential self-dealing risks or violations promptly.

By implementing these preventive measures, private foundations can safeguard their tax-exempt status and fulfill their fiduciary duties, maintaining trust and integrity within the organization and with external stakeholders.

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