Unanswered Questions: Shriners — Part 7

Investigative reporter Sandy Frost continues her examination of alleged financial corruption in the Shriners' organizations with Part 7, "Unanswered Questions." The Burning Taper published Part 1, Part 2, and Part 3 in May and June, 2006. Links and commentary to Parts 4, 5, and 6 were published in July.

Unanswered Questions by Sandy Frost

This story began unfolding four months ago, after Vernon Hill, a Shriners whistleblower, tried to find an investigative journalist willing to look into his allegations that the top echelon of the Shriners Hospitals for Children, a 501c3 non profit charitable group, was corrupt. To date, six investigative articles have been written. Here is Part 7.

- What does “non profit” mean? -

Imagine if you will, a box labeled “Fraternal, 501c10, Shriners Temples” and another box labeled “Charitable 501c3, Shriners Hospitals for Children.” The first group oversees the individual temples of which Shriners are members and, according to their articles of incorporation, oversees and controls the second group, the Shriners Hospitals for Children. Both have very distinct non profit classifications per the IRS. As such, each group is supposed to function separate from the other, though in this case, it appears that the fraternal controls the charitable.

Non profit status confers the following benefits on both groups:

(1) exemption from federal and state income tax
(2) ability of certain non-profits to make purchases without paying state sales tax
(3) ability for certain non-profits to receive tax-deductible contributions

Non profit groups have strict disclosure guidelines, especially when it comes to their taxes. Certain questions on the IRS non profit 990 tax return forms provide important indications of how a group is doing. Or tell who the group is affiliated with. Or answer if they lobbied or if they had real estate transactions between the corporation and directors, officers or employees. Or if they amended their governing documents.

- Article Highlights -

Here are the highlights of the previous six articles. A comparison of similar questions asked by this writer, the General Accounting Office (GAO) and Senator Chuck Grassley, chairman of the Senate Committee on Finance, follows.

1) A series of investigative articles published by the Orlando Sentinel in 1986 reported that in 1985 the Shriners kept 71 percent of the $21.7 million raised to pay for clubhouse expenses, including the upkeep of private bars, restaurants, golf courses, conventions, travel, entertainment and fund raising. Less than 2 percent, or $346,251, went to the medical care of the children.

2) Shriners whistleblower Vernon Hill has worked with a former IRS agent and accountant, Paul Dolnier, for the last year and a half. They ordered and analyzed thousands of pages of Shriners tax returns which led to Dolnier presenting evidence of alleged charity fraud to the chief investigator, auditor and counsel for Pennsylvania’s Charitable Special Investigation unit during a six hour meeting in spring of 2006.

3) Non profit watchdogs like Give.org (non-profit arm of the Better Business Bureau) and American Institute of Philanthropy are howling about how the Shriners Hospitals for Children seem to be “hoarding” money that could be used on the medical needs of more sick children. The Shriners control over $9.5 billion dollars, which is eleven times their current operating budget.

4) After corporate corruption cases like Enron and Worldcom, business experts emphasize the importance of conflict of interest policies for a corporation’s board of directors, officers and trustees. In the case of the Shriners, there have been years of 100% overlap between those on both the Shriners’ 501c10 fraternal board also sitting on the Shriners’ 501c3 charitable board. There have also been years when hospital officers sat on both boards.

5) The lack of disclosure on the Shriners’ tax returns of real estate transactions involving Lewis Molnar, recently retired CEO of Shriners Hospitals for Children, Charles Cumpstone, recently retired executive vice president and Donald W. Peirce, a recently deceased employee. The last real estate transaction took place in 2003 and was not reported to the IRS.

6) On October 17, 2000, a Resolution was filed with the Polk County Clerk, Florida, that grants the Shriners’ top echelon unlimited power to execute all types of financial transactions without accountability to or oversight by internal governance committees. This change in governing documents was not reported to the IRS.

7) In 1998, the Shriners had a beginning cash balance of $354 million. By the end of the year, they lost over $351 million or 99.1% of what they started with. In 2001, they lost $614 million in investments. And in 2002, the Shriners lost nearly 16% of their investments, down by $1+ billion dollars or $1,045,760,830.

8) Fraternal Articles of Incorporation state that “The objects and purposes of this corporation and business to be transacted by it are…to maintain, control, conduct and superintend any and all charities, benevolences and hospitals now established, maintained and controlled by the Imperial council and to create and maintain a charitable and educational fund…for the purchase, erection, operation and maintenance of Shriners Hospitals for Children.” This does not match what the fraternal organization states as their purpose on their tax returns.

9) Over the past three years, Hill and others have asked Shriners leaders questions like “Where does all the money go?” Instead of receiving any answers, these Shriners have been ignored, kicked out, removed from committees and in the case of Hill, sent a “cease and desist” email from Shriners corporate attorney. Is there further punishment for such actions? According to Shriners ritual, the punishment is "In willful violation whereof may I incur the fearful penalty of having my eyeballs pierced to the centre with a three-edged blade, my feet flayed, and I be forced to walk the hot sands upon the sterile shores of the Red Sea until the flaming sun shall strike me with livid plague, and may Allah, the god of Arab, Moslem and Mohammedan, the god of our fathers, support me to the entire fulfillment of the same. Amen. Amen. Amen." (1)

10) It appears that the “Cease and desist” email sent by the Shriners corporate attorney to Hill violated the “Whistle blower Protection” provided by the Sarbanes-Oxley Act. In July, 2003, the Sarbanes-Oxley Act was signed into law after corporations like Enron were caught illegally pursuing annual profits rather than maintaining sound business practices. The law calls for new standards for governance, financial transactions and audit procedures. It calls for the establishment of an independent audit committee, policies that address insider trading and conflicts of interest, spells out the responsibilities of auditors, requires certified financial statements, mandates the disclosure of tax returns in an “easily accessible way,” provides whistle blower protection and addresses document destruction so as to prevent criminal obstruction.

- Unanswered Questions -

Two sets of questions have been emailed to the Shriners Director of Public Relations; the first sent on 7/11/06, over a month ago and the second sent on 7/28/06, nearly three weeks ago. To date, both remain unanswered.

The first email asked about the Shriners hiring a lobbyist named Hershel Gober, former Director of Veterans Affairs for the Clinton administration. These questions included “Why was this relationship reported to the U.S. Senate but not disclosed on the 2005 tax returns?” and “Why would Gober, as confirmed by Gober himself, lobby against the Sarbanes-Oxley act on behalf of the Shriners Hospitals for Children?” Other questions include:

1) Specifically, what are the points of Sarbanes-Oxley that the Shriners lobbied against?
2) What did the Shriners hope to accomplish by lobbying against Sarbanes-Oxley?
3) Who was involved with the meetings set up by Mr. Gober?
4) Who is currently lobbying on behalf of the Shriners?
5) Are the Shriners still lobbying against Sarbanes-Oxley?

Are these issues that address non profit transparency and accountability important? The General Accounting Office and Senator Chuck Grassley, Chairman of the Senate Committee on Finance, seem to think so. The second email sent to the Shriners asked questions similar to those asked by a July 28, 2006 General Accounting Office (GAO) survey and by Senator Grassley.

According to the GAO survey cover letter:

“As a part of Congress’s continuing efforts to oversee the activities of the nonprofit sector, you asked us to review executive compensation issues at selected private, nonprofit hospital systems to gain an understanding of the policies and practices related to the salaries, benefits, travel, gifts, and entertainment expenses paid by these hospital systems. Our study’s key questions were as follows:

• What corporate governance structure do selected hospital systems report as having in place over executive compensation?

• What is the basis for the compensation and benefits earned by, awarded to, or paid to the executives as reported by selected hospital systems?

• What internal controls do selected hospital systems report as having in place over the approval, payment, and monitoring of executive travel and entertainment expenses, gifts, and other perquisites?”

Senator Grassley had this to say about the study:

“We need to insure that charitable assets benefit those who need them most rather than those who need them least…In my experience reviewing charities that have failed their mission, poor board governance unites them all. When the board members fail to understand the gravity of the task before them, charities suffer…In 17 percent of the cases, the CEO or other top paid executives were voting members of the executive compensation body. In essence, they were voting to give themselves their salaries and benefits. Critical audits of personal entertainment expenses, spousal travel, automobile expenses, and social club dues are not being performed on a regular basis…”

On May 25, 2005, Senator Grassley sent out his own set of questions, asking non profit hospitals to account for activities related to their non profit status. “The Congress is considering the issues of tax-exempt organizations and particularly the duties and requirements of public charities in relation to the billions of dollars in tax benefits that tax-exempt organizations receive at the federal, state and local level,” he wrote.

Here are some of the unanswered questions emailed to Shriners Hospitals for Children. Those in common with the GAO and/or Senator Grassley are marked as such.

1) Is there a conflict of interest policy or other disclosure mechanism for Board Members, Officers, Trustees and others in high level positions for both the fraternal and charitable organizations to disclose any investments or others interests in companies or organizations who have patent licenses/agreements/contracts with Shriners Hospitals or that are the result of research done at any of the Shriners Hospitals or on behalf of Shriners Hospitals or by anyone associated with Shriners Hospitals? (Q7, Grassley)

2) None of the tax returns list expenses or expense accounts for any of the Officers, Directors, Trustees or Key Employees for either the charitable or fraternal organizations. Please provide the last three years of expense reports or other accounting information for these individuals. (Q21, Grassley. Q36, Q37, GAO)

3) Are there annual performance audits of the Board members, Trustees and Officers of both the charitable and fraternal organizations? (Q18, GAO)

4) When the officers, Directors and trustees serve on both the charitable and fraternal boards, are their expenses paid for in both capacities? (Q36, GAO)

5) Will you please provide a list of the board meetings for the past three years for both the fraternal and charitable organizations, to include date, location, who attended as well as expense reports or accounting for each of those who attended as well as for costs paid for by both organizations? (Q36, Q41, GAO)

Here are some of the unanswered questions raised in previous articles that were also asked by the GAO.

1) Does your hospital system make loans to its CEO or any of the other top four executives? (Q30, GAO)

2) Since January 1, 2004, has your hospital system made loans to its CEO or any of the other top four executives for the following purposes, specifically real estate? (Q 31, GAO)

On Monday, July 31, a call was placed to Shriners Headquarters to determine if Alicia Argiz-Lyons, the Shriners Corporate Director of Public Relations had received the emailed questions. She answered the phone and confirmed that the emailed questions had been received.

When asked about the conflicts of interest of real estate transactions between Shriners Hospitals for Children and Lewis Molnar (recently retired hospital CEO), Donald Peirce (IT employee who recently died) and Charles Cumpstone (recently retired executive vice president), Argiz-Lyons answered “One is dead and the two others are not here any more. And besides, they happened when the Shriners moved their headquarters.”

I then suggested that Argiz-Lyons answer did not negate the fact that these transactions happened and I suggested that she search the public records to locate the real estate records in question. I told her that the real estate transactions had not been reported to the IRS. Argiz-Lyons said that the IRS had “been down there for 18 months and found nothing wrong.”

She then asked me if I’d been to a Shriners Hospital for Children? I said no, I had not and certainly, the good that was being done on behalf of the sick and crippled children was commendable.

She then said “If you really want to help the children, you’ll stop spending all your time asking questions.”

As a professional courtesy and as the "fact checking" process I've used for the past five years, an email was sent to Argiz-Lyons on Friday, August 4, to provide her the opportunity to confirm or deny what had been said during our July, 31 conversation. To date, this, and the previous two emails, remains unanswered.

These unanswered emails seem to follow the Shriners Hospitals for Children pattern of stonewalling questions about their finances. The questions that need to be asked now are “Why do they refuse to answer the questions?” and “What might they be hiding?”

(1) The Encyclopedia of Fraternities, by Albert Stevens

All copies of material reprinted or duplicated from “by Sandy Frost” must include the following credit line: From http://sandyfrost.newsvine.com/ Copyright © 2006 by Sandy Frost. Used by permission.

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