Charity was used as cover for college bribery scandal, prosecutors say

On paper, the Key Worldwide Foundation might bring tears to your eyes — teaching empowerment to underserved girls, schooling homeless kids in entrepreneurship, bringing the Crips and Bloods together to play basketball “and develop consensus building programs to stop gang violence.”

But these feel-good, make-the-world-better initiatives — detailed in the nonprofit’s annual reports to the Internal Revenue Service — masked the foundation’s true purpose, federal prosecutors contend: providing a tax-free platform to launder bribes that bought rich kids spots in elite colleges.

Rick Singer of Newport Beach, the nonprofit’s president, stands accused at the center of a massive college-admissions cheating scandal. The group’s treasurer, Steve Masera, has been charged as well.

$7.1 million in revenue

Over four years, Key Worldwide took in $7.1 million, and spent $5 million of that — almost every penny going to its core mission of making the world a better place, at least on paper. It reported zero spent on staff salaries and fundraising in most years.

That “core mission” spending included some $662,000 for “developing and researching the student placement process at eastern US Tier One Universities, and the average cost per student,” and $1.74 million in direct donations to university athletic programs from USC to NYU to the University of Texas.

Much of that spending on “researching the student placement process” appears to echo what Key Worldwide paid to Gordon Ernst, its highest-paid contractor. Ernst, a former athletic coach at Georgetown University who currently is at the University of Rhode Island, was paid almost $1.5 million by the charity over four years, and also was charged in the scam.

The U.S. Department of Justice described the nonprofit’s role in the broader scheme this way:

“Beginning around 2013, Singer allegedly agreed with certain clients to disguise bribe payments as charitable contributions to the KWF, thereby enabling clients to deduct the bribes from their federal income taxes. Specifically, Singer allegedly instructed clients to make payments to the KWF in return for facilitating their children’s admission to a chosen university.

“Singer used a portion of that money to bribe university athletic coaches to designate the children as student athletes. Thereafter, Masera or another KWF employee mailed letters from the KWF to the clients expressing thanks for their purported charitable contributions. The letter stated: ‘Your generosity will allow us to move forward with our plans to provide educational and self-enrichment programs to disadvantaged youth,’ and falsely indicated that ‘no good or services were exchanged’ for the donations. Many clients then filed personal tax returns that falsely reported the payment to the KWF as charitable donations.”

Under penalty of perjury, the IRS’s nonprofit form says, all information included is true.

‘Disgusting, no defense’

“This is disgusting and there is no defense for the parents who were involved,” said Doug White, a philanthropic and nonprofit adviser in New York, on LinkedIn. “The others who were involved were criminally greedy.”

Robert L. Fischer, associate professor and chair of the Master of Nonprofit Organizations Program at Case Western Reserve University in Ohio, said this kind of fraud is shocking — but that tax fraud can be accomplished by for-profit and nonprofit entities alike.

“Less than 1 percent of all returns are audited by the IRS, and in 2017, the number I saw is that less than 3,000 nonprofits were examined or audited,” Fischer said. “The IRS has algorithms that it runs to identify returns outside normal bounds, but these only flag so many returns.”

Nonprofits are governed by volunteer directors who are supposed to provide oversight. “However, if a board is complicit in a fraudulent enterprise,” Fischer said, “this effectively nullifies the oversight role.”

White, meanwhile, reviewed the charity’s most recent filing — from 2016 — and noted that $825,000 was reported in “fees for services,” without any detailed explanation. “Might that amount have been paid to Singer’s for-profit company — a way for Singer to profit from his nonprofit?” White wondered.

He noted that Singer spent eight hours a week on the charity as president and CEO, for free, and the three directors, statutorily charged with overseeing things, reported spending no time at all — not even one hour during the entire year — on behalf of the charity.

“The foundation is essentially a sham,” he said. “The more the scheme got legs, the more money was involved, so that’s probably why the revenues increased in later years. If we had the 2017 and 2018 990s, we’d probably see increases.”

No money was spent on raising money, which is always a red flag, he added. “The foundation makes a joke of the idea of ‘core mission spending.’ “