California A.G. files cease & desist order against 3 large charities alleging donated medicine was overvalued

As mentioned previously, the conflict over donated pharmaceuticals has heated up again. It seemed to have faded away over the last couple of years but has now gained renewed visibility.

The California Attorney General has filed cease and desist orders against three large, high-profile charities who received between 70% and 98% of their revenue from medical GIK.

A complaint was filed against another charity for overvaluation of GIK. That charity essentially conceded the accusations in a stipulated settlement, agreeing to terminate the charity’s existence. That action is discussed here.

The three large charities are Food for the Poor, Inc., MAP International, and Catholic Medical Mission Board, Inc.

The cease and desist orders can be found at the AG’s web site:

This is a long post, approaching 2,200 words. Might be worthwhile to get a fresh cup of coffee before diving in.

 

Background

This post will walk through a number of key comments in the cease and desist orders, which I’ll referred to as C&DO. Because the C&DO are roughly parallel to each other, I’ll walk through the MAP order and add comments on the CMMB and FftP order where it is helpful. The CMMB C&DO does not have the comments regarding state charitable filing requirements.

The first amended C&DO is dated March 12, 2018. In contrast, the complaint against National Cancer Coalition and the related stipulated judgment were filed March 8. I’ll make a wild guess that the original C&DO for MAP, CMMB, and FftP were also dated the 8th with the first amended C&DO dated the 12th.

I think it is safe to assume that all three charities will be filing an appeal well before the 30 day deadline arrives for such appeals.

Focus of the MAP C&DO is fiscal years 2012, 2013, 2014, and 2015. Those are the same years of concern in the FftP C&DO.

If you want to look up the MAP and FftP filings in the state of California, you can do so at the following site, using either the name or the listed charitable registration numbers:

  • Registry of Charitable Trusts lookup page
  • CT 103136 – MAP International
  • CT 086331 – Food for the Poor
  • Catholic Medical Mission Board is exempt from registration with the California AG since it is a religious organization

Paragraph 4 provides this description of typical transactions:

  • U.S. pharmaceutical company offered MAP a donation of large quantities of pharmaceuticals, many of which were close to expiration;
  • MAP advised Food for the Poor or other partner charity of the available pharmaceuticals, quantities, and expiration dates after MAP received them from the pharmaceutical company;
  • Food for the Poor or other charity partner advised one of its foreign-organization “beneficiaries” of the available pharmaceuticals and the foreign organization accepted or rejected the offer;
  • Food for the Poor or other partner charity notified MAP of the foreign organization’s acceptance;
  • The drugs were shipped from MAP’s warehouse to the selected foreign end recipient

Comparable comment exists in the FftP and CMMB C&DO.

 

Ministry responses

I reached out to all three charities before publishing this post, seeking their response.

Food for the Poor provided the following comment:

“Food For The Poor upholds the highest standards of integrity and honesty, and is exploring all available options in relation to the cease and desist order. We believe we have done nothing wrong and we are actively working to resolve the Attorney General’s concerns,” said Food For The Poor Executive Director Angel Aloma.

MAP International provided the following comment:

The California Attorney General’s office is concerned that MAP International, along with a several other international faith-based charities, is placing a value on the cost of certain US-donated gift-in-kind medicines that doesn’t comply with US accounting standards, and then using this value in communications with the public.  Since 1954, accountability, transparency and integrity have been among MAP’s highest values in all aspects of our work, including in our accounting and financial practices. We are confident in the integrity of our practices in this area and look forward to resolving this matter quickly.

Under California law, MAP’s financial statements must comply with U.S. generally accepted accounting principles (GAAP), including with respect to the accounting value of US-donated medicines.  MAP’s auditor, a nationally-recognized accounting firm that specializes in tax exempt organizations, has certified without qualification for many years, including the years in question, that our valuation of in-kind gifts has been fairly presented, in all material respects, in accordance with GAAP.

Catholic Medical Mission Board did not provide a response by the time this post was published. If a comment is received, the post will be updated.

 

Accounting issue

A key point for this entire issue is found in paragraph 5, which says some portion of the donated medicine was “expressly prohibited” from being distributed in the United States. For another portion of medicine there is with a strong expectation the medicine will not be distributed in the U.S. based on past experience. (A later comment asserts the majority of medicine had an explicit prohibition from distribution in the U.S.) Specific comment is:

Some of the U.S. pharmaceutical company donors to MAP expressly prohibited the pharmaceuticals from being distributed and used in the U.S. Others did not expressly prohibit the distribution and use of the pharmaceuticals in the U.S., but expected that they would be used only outside the U.S. This expectation was based, at least in significant part, on many prior transactions with MAP, on MAP’s charitable purpose (international aid), and because MAP provides very minimal assistance in the U.S.

The MAP C&DO lays out in paragraph 10 the state’s accounting argument for overstatement of donated medicine:

Under GAAP, charities can only claim the “fair market value” of gifts in kind, which is defined as “the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.” (FASB ASC 820-10-35-2.) GAAP also requires charities to use the “principal market” in valuing assets or, in the absence of a principal market, the “most advantageous market” for the asset. (FASB ASC 820-10-35-5.) Importantly, charities must have access to the principal or most advantageous market in valuing the asset. (FASB ASC 820-10-35-6A.) For example, if a charity receives a donation of pharmaceuticals from a U.S. pharmaceutical company that prohibits distribution in the U.S., then the U.S. is neither the principal nor the most advantageous market. The U.S. is the prohibited market. Finally, “in the absence of evidence to the contrary, the market in which the reporting entity normally would enter into a transaction to sell the asset or to transfer the liability is presumed to be the principal market or, in the absence of a principal market, the most advantageous market.”

This comment is laid out in paragraph 10 of the FftP C&DO and paragraph 6 of the CMMB C&DO.

I am guessing the AG’s explanation will be the focus of arguing and extended discussion on this blog and elsewhere. Will come back to this at a later date.

Paragraph 11 asserts “at least the majority” of the donated medicine was prohibited by the donor from being used or distributed in the United States. The C&DO argues this means it is inappropriate to use the high U.S. market prices when the far lower international prices should have been used instead. The C&DO asserts this

…resulted in the public dissemination of materially false figures throughout MAP’s Forms 990 and attached schedules.

 

Asserted impact on specific shipments

Paragraph 12 of the MAP C&DO claims two specific examples of particular shipments that the AG asserts were overstated:

MAP 2013 shipment to Guatemala: MAP valued the pharmaceuticals Ciprofloxacin and Tramadol at $321,588 (total), using U.S. prices; using appropriate international prices, the total value was less than $46,000.

MAP 2015 shipment to Guatemala: MAP valued the pharmaceutical Erythromycin Ethylsuccinate at $2.48 million, using the U.S. price. The true fair market value was less than $119,000, using the appropriate international price.

Paragraph 12 of the FffP C&DO claims two examples:

Food for the Poor 2012 shipment to Nicaragua: Food for the Poor valued the pharmaceutical Simvastatin at $924,671 (total) using U.S. prices; using appropriate international prices, the total value was less than $5,000;

Food for the Poor 2013 shipment to Guatemala: Food for the Poor valued the pharmaceuticals Ciprofloxacin and Tramadol at $553,627 (total), using U.S. prices; using appropriate international prices the total value was less than $46,000.

Paragraph 10 of the CMMB claims two examples:

CMMB 2012 shipment to Nicaragua: CMMB valued the pharmaceutical Simvastatin at $924,671 (total) using U.S. prices; using appropriate international prices, the total value was less than $5,000.

CMMB 2015 shipment to Haiti: CMMB valued the pharmaceuticals Enalapril (10 mg.) and Didanosine at $206,660 (total), using U.S. prices; using appropriate international prices, the total value was less than $75,000.

I am confident those valuation numbers from the Attorney General will be subject to heated discussion. There is a distinct possibility those examples were cited for the dramatic effect. On the other hand,  it is possible those are representative of shipments over the years. Regardless, in order to get a better picture of the allegations, here’s a recap of those amounts:

 

 per charity  per AG  difference  % of reported
    321,588    46,000      275,588 86%
  2,480,000  119,000   2,361,000 95%
    924,671      5,000      919,671 99%
    553,627    46,000      507,627 92%
    924,671      5,000      919,671 99%
    206,660    75,000      131,660 64%

 

State concerns over filed reports

To link state regulations with the reported financial information, the MAP C&DO makes the following assertion in paragraph 13:

MAP’ s false representations in its Forms 990 for fiscal years ended September 30, 2012 through September 30, 2015 (including Schedules B and M) constituted false or misleading statements in reports required to be filed with the AG’s Registry within the meaning of Government Code section 12591.1, subdivision (b)(2), California Code of Regulations, title 11, section 999.9, subdivision (c).

The MAP C&DO claims the financial statements and RRF-1 are not prepared properly with this comment in paragraph 14:

MAP prepared audited financial statements for fiscal years ended September 30th, 2012 through 2015, but they were not in compliance with GAAP. This was because each of those financial statements used U.S. market prices to value MAP’s pharmaceutical donations that were restricted for distribution and use outside the U.S. This violated GAAP as well as Business and Professions Code section 17510.5.

This brings the audit into play.

If the state’s assertions are sustained, that means the audited financial statements are misstated, presumably by a rather material amount. That in turn would affect the audit opinion for each year under challenge.

The RRF-1 filing is brought into play in paragraph 15:

In addition, the RRF-1 for fiscal years ended September 30th 2012 through 2015 that MAP filed with the AG’s Registry falsely indicated that MAP prepared audited financial statements according to GAAP.  These representations constituted false or misleading statements in reports required to be filed with the AG’s Registry within the meaning of Government Code section 12591.1, subdivision (b)(2), California Code of Regulations, title 11, section 999.9, subdivision ( c ).

 

Joint cost allocation

FftP is also criticized by the state for accounting of joint cost allocation.

Paragraph 15 of the FftP C&DO cites the organization’s 990 which says FftP is following SOP 98-2 (ASC 958-720). The C&DO asserts:

These representations were false because Food for the Poor failed to comply with SOP 98-2 and was prohibited from allocating fundraising costs to program expenditures. Specifically, Food for the Poor failed to meet the “audience” criterion required by SOP 98-2. This criterion requires that the recipients of a solicitation be selected based on characteristics other than their donation history. Food for the Poor has admitted that it selected the recipients of its solicitations “[b]ased on prior giving history.” This disqualified Food for the Poor from using joint cost allocation in its IRS Forms 990.

Paragraph 16 of the FftP C&DO asserts:

For the years 2012 through 2015, the total fundraising expense Food for the Poor improperly shifted to, and reported as, program expense was over $23 million. Food for the Poor’s false indications in its Forms 990 for fiscal years ended December 31, 2012 through December 31, 2015 constituted false or misleading statements in reports required to be filed with the AG’ s Registry within the meaning of Government Code section 12591.1, subdivision (b)(2), California Code of Regulations, title 11, section 999.9, subdivision (c).

This is a topic for discussion another day.

For the moment, I will note the audience criterion is a difficult one to meet.

I haven’t tied the 990 to the audited financials, but I’ll guess the allocation methodology used on the 990 is also used for the audited financials.

 

Actions sought by state

The AG is seeking a cease and desist order for the charities to stop making their claims of very high program service percentages.

The AG is seeking to revoke MAP’s and FftP’s charitable registration in the state. Paragraphs 23 through 28 of the MAP C&DO present the state’s position.

The state is seeking to impose the following penalties:

  • $158,725 – MAP C&DO paragraph 29
  • $409,575 – CMMB C&DO paragraph 17
  • $1,088,000 – FftP C&DO paragraph 34

 

Your thoughts?

What do you think about the cease and desist orders?

Did this post omit something of high interest?

Did I misstate anything?

Please let me know your thoughts and comments. Professional comments (with decision as to what constitutes ‘professional’ determined solely by me) are welcome.

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