Strengthening Grantmaking Through Comprehensive Due Diligence

Private foundations play a vital role in supporting the charitable sector and driving social change through strategic philanthropic initiatives. However, this opportunity carries significant responsibility to ensure grants are made thoughtfully, legally, and strategically. Due diligence serves as the cornerstone of responsible grantmaking, enabling foundations to mitigate risk, maintain IRS compliance, and maximize programmatic impact.

Understanding Grantmaking Due Diligence

Due diligence in grantmaking encompasses the systematic evaluation of potential grantees and proposed projects to ensure alignment with the foundation's mission, adherence to legal requirements, and demonstration of organizational capacity to achieve desired outcomes. While often viewed primarily as a compliance function, effective due diligence also serves as a relationship-building tool. Transparent and respectful inquiry processes signal professionalism and commitment to shared success, making the experience collaborative rather than burdensome for prospective grantees.

Essential Elements of Grantmaking Due Diligence

1. Legal and Regulatory Compliance

• Tax-Exempt Status Verification: Confirm that prospective grantees maintain recognition as 501(c)(3) public charities or other eligible entities through verification using IRS databases or third-party resources such as Candid (GuideStar Charity Check).
• Expenditure Responsibility Requirements: When making grants to non-public charities or foreign organizations, foundations must follow IRS expenditure responsibility protocols, including pre-grant inquiry procedures, execution of written grant agreements, maintenance of separate fund accounting, and receipt of detailed grantee reporting.
• Anti-Terrorism Compliance: Screen all grantees against the Office of Foreign Assets Control (OFAC) and other relevant watchlists to ensure full compliance with anti-terrorism financing regulations.

2. Mission and Strategic Alignment

Evaluate whether the prospective grantee's work directly supports the foundation's strategic objectives and programmatic priorities. This assessment should include review of the organization's historical performance, impact measurement systems, and demonstrated expertise within relevant issue areas. Consider how each grant contributes to the foundation's broader grantmaking portfolio and long-term strategic vision.

3. Financial Health and Organizational Governance

• Financial Analysis: Review audited financial statements, IRS Forms 990, and organizational budgets to assess fiscal sustainability, liquidity, and sound financial management practices.
• Governance Evaluation: Examine board composition, leadership structure, policy frameworks, and transparency practices to ensure strong organizational governance.
• Conflict of Interest Protocols: Verify appropriate conflict of interest policies are in place and confirm absence of self-dealing arrangements or insider transactions that could compromise the foundation's tax-exempt status or reputation.

4. Programmatic Capacity Assessment

Evaluate the organization's demonstrated ability to execute the proposed project successfully by reviewing staffing expertise, operational infrastructure, and historical program outcomes. Consider factors such as project scalability, sustainability planning, and long-term organizational viability.

5. Comprehensive Risk Assessment

Identify and analyze potential reputational, operational, and financial risks associated with each grant opportunity. Consider geographic, political, regulatory, and sector-specific challenges that may impact project success. Develop appropriate risk mitigation strategies and contingency plans to address identified concerns.

6. Documentation and Recordkeeping

Maintain comprehensive records of all due diligence activities, grant agreements, progress reports, and relevant correspondence. Ensure documentation systems support IRS reporting requirements, facilitate external audits, and preserve institutional knowledge regarding grantmaking decisions.

Professional Support for Your Foundation

Due diligence practices are essential for private foundations to fulfill their philanthropic missions responsibly while protecting tax-exempt status and avoiding potential excise tax exposure. Citrin Cooperman's dedicated Not-For-Profit Industry Practice professionals are available to work collaboratively with your foundation to establish robust policies and procedures that support responsible grantmaking and sustainable organizational growth.

For assistance with developing or enhancing your foundation's due diligence framework, please contact your Citrin Cooperman professional.