Monday December 26, 2022
By Kelly Smith
Some nonprofits worry the fraud scandal has decreased donations and will lead to new legislation regulating nonprofits in Minnesota in 2023.
FBI agents raided Feeding our Future, Minneapolis, in January 2022. ELIZABETH FLORES, STAR TRIBUNE FILE
After reading the news about Feeding Our Future, the donor had a pressing question for Nonoko Sato: "How do we know an organization is fraudulent?"
Nonprofits across Minnesota are facing similar questions because of the Feeding Our Future investigation, involving more than $250 million in alleged fraud — the largest pandemic-related fraud in the United States, prosecutors say, and one of the largest federal fraud cases ever in the state.
As the legislative session approaches on Jan. 3, nonprofits also are bracing for new state regulations in response to the scandal. Sato, the executive director of the Minnesota Council of Nonprofits, said she welcomes strong oversight but worries about new "blanket rules" for the diverse range of nonprofits.
"These are individuals allegedly doing terrible things, and it isn't reflective of our sector," she said. "We have over 9,000 nonprofits in Minnesota ... 99.9% of us are actually doing really good work in service to our communities."
FBI agents raided Feeding Our Future's St. Anthony office in January 2020. So far, prosecutors have charged 50 people and seized $50 million in property. They say some staffers and contractors pocketed federal reimbursements intended to pay for meals for low-income kids, and instead buying luxury cars, lakefront homes and other items.
Nonprofit leaders worry the scandal is casting doubt on organizations largely reliant on public trust.
"There's just this little gray cloud over nonprofits," said Kate Barr, CEO of Propel Nonprofits in Minneapolis, which helps nonprofits with finances and loans. "Nonprofits are pretty much one of the most accountable sectors there is."
The fraud scheme has prompted scrutiny of the Minnesota Department of Education's oversight of the food program. It's also put Minnesota's Somali community on edge, with some families or businesses afraid to seek help. Aimee Bock, who led Feeding Our Future, focused on serving immigrants and contracted with many African immigrant-owned businesses. Bock, who is white, has pleaded not guilty to charges.
When the news surfaced last winter, Nasibu Sareva, CEO of the African Development Center in Minneapolis, feared African immigrant-led nonprofits like his would be even more heavily scrutinized because some of the suspects are African immigrants. He called donors to discuss how his 15-year-old nonprofit is accountable through tax forms and audits.
The center, which offers homebuyer classes, financial consultations and small business loans, hasn't been negatively affected so far, Sareva said. But some African immigrant-led businesses worry about anti-immigrant actions.
"Everybody can be put into this guilt-by-association same basket," Sareva said. "But there are really good organizations that have been doing great work to serve the community and abide by the rules."
This year, state Senate Republicans proposed additional financial audits of some nonprofits and barring newly-formed nonprofits from receiving state money. The proposals didn't pass, but Sato's organization is concerned legislators will "overcorrect" in the new year with tighter restrictions on state grants to nonprofits, both because of Feeding Our Future and a report expected in early 2023 by the Office of the Legislative Auditor on oversight of state grants.
Sato said she supports streamlining state grant applications, but added that more stringent restrictions could be a barrier for small nonprofits to apply for state aid.
More support needed
Feeding Our Future relied mostly on federal funding rather than donations for revenue. But some nonprofits are worried the scandal has also made donors more wary.
"Given the fraud we've seen, it could be a turnoff to individual donors," said Marcus Pope, CEO of Youthprise, a Minneapolis nonprofit that participates in the federal food programs.
Sato said she encourages donors to do their due diligence — vetting a nonprofit in simple ways including checking whether they're registered with the state Attorney General's Office and looking up their tax return with the IRS.
Some nonprofits report donations have dropped from historic high levels reached at the start of the pandemic in early 2020, perhaps because donors have struggled financially with high inflation.
In a survey by the state Council of Nonprofits, nearly a third of nonprofits expected to end the year in the red — more than last year. Grants have largely returned to pre-pandemic levels after a spike in aid, but nonprofits are still weathering higher costs. More than 70% say they've seen an increase in demand for services, or expect to see it.
"What we hope to prevent is any donors coming up for a reason to slow down in their support of a sector that, at this point, needs their support more than ever," said Jake Blumberg, CEO of GiveMN, which runs Give to the Max Day, the statewide "giving holiday" in November.
Donors shelled out $34 million last month to nonprofits and schools on Give to the Max Day, more than in 2019 or 2020 and just short of 2021's record. But Blumberg said donors should step up this week, at a time when many nonprofits rely on year-end fundraising.
Nonprofits, Pope added, are "a major contributor to the economy and address some of our most pressing issues in our community — and with limited budgets."
Pope said policymakers need to make sure fraud doesn't happen again, but he hopes they don't make changes based on a single case. Nonprofit leaders say the pandemic created the "perfect storm" for the Feeding Our Future scheme, with some meal providers submitting fraudulent invoices and making up names of children on rosters.
Federal waivers had loosened rules and oversight, including in-person site visits by officials. Schools closed, shifting focus instead to organizations to get food to families quickly.
"It was a window of opportunity that someone exploited," Pope said.
The more stringent rules and oversight have since returned. Barr said state agencies have ample regulations for nonprofits that receive grants, but not enough resources to assist nonprofits.
"I don't really think that we need new rules," Barr said. "We need help for organizations to follow the rules that there are."