The U.S. Agency for International Development (USAID) has come under scrutiny by the Trump Administration, which has dismantled the department, shifted oversight to the U.S. Department of State and cut funding for more than 80% of contracts and programs.

Amid allegations of excessive waste, fraud and abuse in U.S. foreign aid, a related but less discussed topic is the regulation of U.S. charities, the cost to U.S. taxpayers, and the impact on children overseas.

Michelle Oliel is the deputy director of the Lori E. Talsky Center for Human Rights in Michigan State University’s College of Law. Here, she answers questions on nonprofit regulation.

How has the Talsky Center been involved in accountability in charitable giving?

The Talsky Center for Human Rights at the MSU College of Law has been at the forefront of addressing fraud, corruption, human rights violations and finding sustainable solutions to global challenges that promote and protect the rights of all people. This work has prompted us to assess and work with organizations to better their practices in line with human rights standards. It has also prompted us to take action and ask difficult questions about the effectiveness of some U.S. charities and the role they may play in perpetuating human rights violations abroad. While it is important to acknowledge that not all 501(c)(3) organizations engage in fraudulent or harmful practices, we cannot ignore that many of these charities are founded by well-meaning individuals who may lack the necessary expertise and knowledge to tackle the complex issues facing vulnerable communities, which in turn, can expose children and vulnerable people to risk. 

In one case, also reported by the Washington Post, the Talsky Center supported U.S. whistleblowers and survivors who exposed serious allegations of fraud and sexual abuse at an orphanage in Kenya. The story behind the investigation was recently published. This investigation followed another high-profile case involving sexual abuse at the same orphanage. The perpetrator later died by suicide after being charged.

Despite whistleblowers raising concerns with the relevant state Attorney General, no action was taken against the U.S. nonprofit mentioned previously, and it is unclear if the Internal Revenue Service (IRS) looked into the matter. The organization in Kenya continues to operate and its US-affiliated charity retains its tax-exempt status in America.

One of the primary problems with international development is due to the lack of effective regulation for 501(c)(3) organizations working abroad. Many U.S. charities, though well-intentioned, often implement ineffective and even harmful interventions. Addressing this regulatory gap should be a priority. 

How are charities regulated in the U.S.?

Section 501(c)(3) of the United States Internal Revenue Code grants tax-exempt status to certain non-profit organizations, allowing them to operate exclusively for exempt purposes without paying federal income tax. In return, donations to these organizations are tax-deductible (subject to certain limits), which is meant to encourage charitable giving. However, this also means that US taxpayers are effectively subsidizing these organizations' activities, often with little scrutiny of their operations, programs, or the consequences of their practices.

While the IRS regulates taxation, charitable corporations are typically overseen at the state level. When both regulators fail to act, organizations can continue to operate without meaningful consequences, soliciting donations, sending funds and benefiting from tax exemptions. This lack of effective oversight propagates abuses, creating a ‘free-for-all' environment. This is the elephant in the room we should be talking about, as well as the ineffective and insufficient methods currently in place to challenge such abuses and the safeguarding reports that often go unanswered.

This lack of oversight comes at a significant cost — not only to the American people, but also to children, families and communities overseas. 

What is the extent of U.S. contributions to charity?

Americans are exceptionally philanthropic. In 2023, individuals, bequests, foundations, and corporations gave an estimated $557.16 billion to U.S. charities. Individuals contributed the largest share ($374.4 billion), according to Giving USA. These charitable donations are largely distributed at the discretion of the U.S.-based charities. However, there is often little transparency or accountability when it comes to the operations of many of these charities. 

There are an estimated two million nonprofits in the US, with 1.48 million holding tax-exempt status for charitable, educational and religious purposes. According to the U.S. Treasury., contributions to tax-exempt entities will cost taxpayers over $62 billion this year alone. Over a decade, this figure could exceed $1 trillion. 

Why is action needed?

Orphanages supported by well-meaning American volunteers and donors have long been the human rights crisis flying under the radar. The majority of children living in orphanages globally have one or both living parents. Many of those families could stay together if the right support was provided. More than 80 years of research shows that removal is harmful to children. Where removal is deemed in a child’s best interest, States should provide appropriate alternative family-based care which is suitable and necessary to meet the particular needs of the child. Poverty is not a reason to justify separation but should signal the need to provide support to ensure family unity.

Efforts to address harm to children in the name of charity and the misuse of donor funds and to hold organizations accountable in U.S. courts have faced significant obstacles. The Talsky Center has supported whistleblowers who filed a class action lawsuit against an Illinois-based faith-based charity, which allegedly engaged in exploitative practices. This included building orphanages that were not necessarily protecting children but rather separating them from their families to create profit-making orphanages in Kenya. This is a form of child trafficking, which takes place in countries beyond Kenya as also reported by the CNN Freedom Project. The case was dismissed by an Illinois court, which ruled that U.S. racketeering laws did not apply to foreign actions. As a result, the facts of the case were never properly addressed by the court. The organization continues to operate and receive donations from generous Americans who are in turn entitled to tax deductions.

Another troubling case involves a U.S.-registered affiliate of an international charity that runs so-called ’children's villages’. Reports of children of detainees disappearing in Syria and the involvement of the charity (also registered and funded in the U.S.), backed by Asma al-Assad, wife of the ousted Syrian president Bashar al-Assad have been reported. The problem, however, is much bigger when it comes to this organization, which works in 130 countries. Revelations in Syria follow an internal independent special commission investigation which revealed that the organization had covered up child abuse and corruption among other violations in its worldwide network of “children’s villages”. They issued a public apology in 2021. The most recent publicly available report to the IRS indicates that the US-affiliated charity received more than $5.6 million in donations in 2023, a sharp decline from the more than $13 million it raised in 2022. While  noting reporting support to children’s villages across the globe, the report also states that its mission is “to ensure that every child belongs to a family.” To be clear, “children’s villages” are neither villages nor do they provide children with a family. They are residential care institutions. Apologies, however, don’t reverse the harm caused to children, families, and communities — especially when safeguarding and protecting children is central to its work.

In 2022, the Illinois-based organization reported raising more than $5 million and spending more than $4 million. Of that, slightly more than half was allocated to “children’s homes” in “East Asia and the Pacific, Russia/neighboring states, South Asia and Sub-Saharan Africa”. Nearly $200,000 was spent on travel expenses, while other expenses included over $44,000 for meals and entertainment and more than $124,000 for "compassion" expenses. These expenditures raise important questions about the amount that actually benefits the intended beneficiaries — particularly when there are reports of child exploitation from the very donors and volunteers who gave their money and time. 

While efforts to combat the exploitation of children in orphanages, including those funded by U.S. taxpayers are ongoing, they are often undermined by efforts of churches and other charitable groups, some of whom may be unaware of the potential harm of their interventions. In Kenya, for example, the National Care Reform Strategy for Children seeks to reduce the reliance on institutional care in favor of family-based solutions. It’s clear that Kenya has made significant strides in improving child welfare, and many local organizations are fully committed to ensuring children grow up in family settings. Let’s be honest, others are contributing to the problem on the taxpayers’ dime. 

What future changes need to occur?

It is important for all involved — faith-based organizations, charities, volunteers, donors and governments — to consider how their actions may inadvertently hinder progress and cause harm to children who could otherwise benefit from directing access to family care.

So, why are taxpayers still funding organizations that may contribute to exploitation, abuse and unnecessary institutionalization, rather than supporting programs that help children grow up sustainably in families? It is time to question whether both the IRS and state regulators are doing enough to ensure that organizations are held accountable for funding such actions which are not in line with U.S. policy.  

The lack of effective oversight is not only costly but also undermines public trust in organizations that operate ethically and invest in communities to make a real, positive and sustainable difference in people’s lives. Immediate action is needed to protect children and ensure the integrity in the use of American taxpayers’ money at all levels. Examining and reforming how 501(c)(3)’s can operate internationally is essential to ensuring ethical and effective aid.