Sunday, June 18, 2006

Conflicts of interest among the Shriners? (part 3)

This is part three of a continuing series investigating alleged financial improprieties of the Shrine, written by investigative reporter Cassandra (Sandy) Frost.

The Burning Taper published Part 1, "Shriners in Hot Water Again?" on May 14, 2006, and Part 2, "Did Shriners Retaliate against Whistleblower?", on June 17.

Conflicts of Interest? Shriners (part 3) by Cassandra (Sandy) Frost, first published June 15, 2006, by

It’s hard to write a lively story about technical things like conflict of interest for boards of directors and group oversight. What’s important is that the technical is presented in an easy to read, easy to understand format.

To recap, twenty years ago, the Orlando Sentinel discovered that the Shriners were using sick and crippled children to raise money that didn’t find its way to the hospitals. Whistle blower Vernon Hill, himself a Shriner, had heard similar rumblings as he spent time in Shriner Hospital waiting rooms after driving children for treatment. He has spent the past four years asking similar questions and, a year and a half ago, he met and joined forces with Paul Dolnier, a former IRS revenue agent and accountant with a Master’s Degree in taxation.

Dolnier spent six months analyzing Shriners’ tax returns that are now posted and grouped by state on the Charity Watch website at Dolnier’s analysis revealed that the same thing might be happening again. When he had the opportunity, he reported his documented findings to three special investigators from the State of Pennsylvania.

Today, corporate governance and in particular, how boards of directors function, is in the spotlight after companies like Enron and WorldCom were caught committing white collar crime and defrauding investors, clients and employees out of millions. Consequently, the Sarbanes-Oxley Act of 2002 became law. It calls for both for profit and non profit corporations to establish and enforce, among other things, conflict of interest policies for their boards.

Remember, there are two groups; the Shriners Hospitals for Children, the charitable 501c3 group, and the Shriners Temples, the fraternal 501c10 group. The two are supposed to, per IRS regulations, operate separately and be independent. The fraternal group is incorporated in Iowa; the charitable hospital group is incorporated in Colorado. Both groups have a board of directors; the charitable hospital group also has officers.

For the year 2004 – 2005, both boards had the same 14 men on them. Six of the seven hospital officers also sat on both boards. A call to Shriners headquarters indicated that the board/s of directors’ policies are not available to the public.

According to the Colorado Revised Nonprofit Corporation Act, 7-1228-501, Colorado Revised Statues, a “conflicting interest transaction” is a contract or transaction between two (nonprofit) entities that have the same people serving directors or officers.

The Charities Review Council defines conflict of interest as:

“Outside interests: a contract or transaction between the organization and an entity in which such person is a director, officer, etc.

Outside activities: the responsible person’s serving as a director, officer, for an entity that competes with the organization in the provision of services or in any other contract or transaction with a third party."

The remedy, according to the Charities Review Council, is that the person with the conflict of interest shall not be counted for the purposes of a vote; the person with the conflict of interest may not vote on the contract or transaction and shall not be present in the meeting room when the vote is taken unless it is a secret vote.

The answer to the question “Do those on both boards have a conflict of interest?” seems obvious. Maybe the real question is “What are the Shriners doing to comply with the Sarbanes-Oxley Act to avoid the appearance of conflict of interest among their common board members and officers?”

Additionally, the Shriners (charitable) claim to maintain a separate legal and financial identity from the Shrine temples (fraternal). This “separation” qualifies both for their individual tax-exempt statuses from the IRS.

Yet, according to annual reports filed with the Iowa Secretary of State in June of 1995 and 1996, the fraternal group’s nature of activities engaged in during the past year was described as:

“Fraternal order operating under the lodge system for the exclusive benefits of its members for the purpose of maintaining, controlling and supervising any and all charities, benevolence and charitable hospitals, including Shriners Hospitals for Crippled Children, maintained and controlled by the Imperial Council of the Ancient Order of the Nobles of the Mystic Shrine for North America which may be it hereafter established.

Signed, Jack H. Jones as Secretary”

This supervision and control by the fraternal over the charitable was formalized in the group’s restated Articles of Incorporation that were filed with the Secretary of State in September, 1996. Article III includes items:

“3. To maintain, control, conduct and superintend any and all charities, benevolences and hospitals now established, maintained and controlled by The Imperial Council.

5. To create and maintain a charitable and educational fund, a representative fund, a library fund, an Imperial Council fund, a fund for the purchase, erection, operation and maintenance of Shriners Hospitals for Children, and other benevolences, and any other fund or trust necessary or convenient in carrying out any of the purposes, benevolences or charities now established, or which may be hereafter authorized by the Imperial Council.”

Does this mean that the Shriners temples (fraternal) now control the Shriners Hospitals (charitable) $9 billion in assets?

These questions might be left to others as they look into these two red flag issues. There are more inconsistencies that will be explored in the next few articles but for now the question appears to be:

Are these two standards of governance as they seem?

All copies of material reprinted or duplicated from “by Sandy Frost” must include the following credit line:

From Copyright © 2006 by Sandy Frost. Used by permission.

Part 1: Shriners in hot water again?
Part 2: Did Shriners retaliate against whistleblower?
Part 3: Conflicts of interest among the Shriners?

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