Trust as a Method of Financial Management in Non-Profit Sector
by Misha Kordonsky , member of the National Ukrainian Journalist Association

Published in Altruism Technology on September 23, 2003. See original story in Russian

At the first glance, Ascent Russian Orphan Aid Foundation (AROAF) is no different from other 850,000 American non-profit charitable organizations. It is registered with the U.S. authorities, collects donations and makes disbursements, publishes reports on how the money is spent, and gets inspected by the IRS. Its main purpose - helping Russian orphans - is also not unique, with about 250 similar charitable organizations in the United States dedicated to the same cause.

"Our mission is to provide basic necessities such as food, clothing and shelter to Russian orphans and homeless children. We help them acquire skills necessary to become self-sufficient and productive members of society."

AROAF's projects are also typical of those undertaken by similar organizations:
• Construction of a shower and payment of electricity bills for Hope Family Commune, St Petersburg;
• Purchase of appliances for Orphanage for Infants, Vladivostok;
• Purchase of clothing for Homeless Girls Shelter, St Petersburg;
• Purchase of shoes for the Rescuers School, Samara;
• Please see current projects for more information.
(I have checked this information through my own independent sources in St. Petersburg and Samara before this article went into print.)

At the same time, I believe that AROAF is among the few organizations of the new kind. "Why choose our organization to make a donation? We guarantee than every penny of your contribution goes directly to an orphanage to help complete the project you support. You choose how to allocate your money. We ensure that your contribution goes directly to the children in need and keep you informed of all project details. All your contributions are tax-deductible."

Pledging to use "each penny" is not an advertising exaggeration in this case, but a reality proven by financial reports of this unusual foundation. According to my rough estimations, most of the other foundations contribute at most 20% of donations money to the beneficiary in Russia. More detail on that loss structure will be provided below. On the contrary, AROAF's principle is to convert 100% of all donations into goods and services that are used by the beneficiary. It is important to note that the goods and services are procured in Russia at local prices, where the dollar can be stretched much farther than by obtaining them in the U.S. Of course, there is no free lunch, and transactions without fees do not exist. However, in AROAF's case all the administrative expenses are paid with funds other than the donation money. Primarily they are covered by the organization's founder and director Kirill Bogouslavski, who has devised ways to keep the organization's costs down to a minimum.

A former Russian, but for a long time and very much an American, Kirill Bogouslavski made a career as a successful financial systems consultant. He advises Swiss banks and state governments in the US. It was he who found legal ways to allow more funds to reach Russian beneficiaries compared to an average non-profit organization. Perhaps those ways were easy to find ... but with hindsight, everything seems much easier. Globalization, despite some protests, is spreading around the planet. International electronic payment systems are improving and reaching the farthest corners on earth. Thousands of new banking services are being invented. Only a knowledgeable professional, or a tax collector, can quickly devise ways to harness these advances.

I will not bother you with farther technical details. If you are interested, Kirill is easy to find on the web at http://www.iOrphan.org and his email is . Even more important than Kirill's technical skills is the difference of his ideology from that of other non-profit organizations.

AROAF's lack of gargantuan spending that characterizes Russian non-profits and causes 80% of donated amount to be lost has to do less with understanding the intricacies of credit cards or tax issues, and more with trust and personal connections. It's a human way opposed to a paper trail way. All recipients of AROAF's aid are people who are directly involved with the orphans. Many of them are Kirill's good friends or friends of friends who came highly recommended. It is so much more effective to come, see what has been done already and look the person in the eye, than study the grant application. In this age of virtual reality there is nothing reliable than God-given intuitive perception of truth and honesty. There exist crooks able to deceive even in these emotions, but such good actors are probably one in a million, and chances of meeting such person working in a children's shelter must be miniscule. Besides, most pragmatic Americans will not make their decisions based purely on faith. Making first donation involves a certain measure of risk, but consecutive checking of facts by independent parties or an inspection trip (made by volunteer inspectors, who pay for the flight to Russia themselves) reveals what is being done, and in turn promotes the relationship and has a positive influence on donated amounts. Given the fact that Russian laws are relatively new and legal procedures are still forming, some aid recipient agencies are represented simply by a leader or leadership and not an organization. Often these agencies are not yet formal legal entities, in which case the first donation of several hundred dollars goes to registration and several dozen dollars more are allocated for the monthly bookkeeper's salary.

All AROAF staff are volunteers. The most difficult work that is usually done by a professional, such as financial management, accounting and taxes, is performed personally by the foundation's director. While AROAF is still relatively small, its success has stirred the social circles and attracted its first donors from Russia. After reading AROAF's advertising, a not particularly wealthy resident of St. Petersburg has recently donated $500, a huge sum for an average Russian (more than three monthly salaries). Transaction fees are often close to nothing, since donations are often personally collected in cash across each town.

Kirill's own Russian past has been instrumental in helping him develop the new social ideology. Born to a privileged Soviet middle-class family, he started to volunteer when he was twelve, at an organization that helped orphans. At that time there was no such word as a "volunteer" in the USSR and the government did not perform registration of grass-roots social organizations. In reality these organizations existed, albeit in an informal and illegal manner. They revolved within the realm of personal connections, sustained by a grass roots publisher "Samizdat". Perestroika allowed these organizations to become legal. Today, they continue to rely on the great amount of knowledge collected during those underground years, this vast social and academic experience adapted to the Russian realities of life. Kirill is a righteous heir to this knowledge, having lived through this past. With him, when he emigrated to the United States, he carried through the customs the most valuable building blocks for social and charity work: his personal connections, knowledge of people and trust. These blocks, when missing, are the most common cause for losses that occur between the donor and beneficiary in a given foundation.

Currently, the overwhelming majority of financial charity from the West is distributed in Russia and the former Soviet Republics through a system of funds and grants. This system, in its turn, requires fund machineries in both donor states and states-financial aid recipients. Today, nonprofit organizations in Russian speaking countries are playing the role of mediators. A potential aid recipient has to deal with a painstaking process of composing a grant application, which might consist of dozens of pages and sometimes has to be translated into English. The complexity of bookkeeping also poses a financial burden on recipients as they have to hire expensive accountants. In order to teach applicants bookkeeping, English and how to compose grant applications seminars and training sessions are held. In addition, there are organized expensive trips of grant recipients to Western countries. But what is even more costly and less useful is organized visits by foreign professionals who teach our applicants western techniques of social work. The problem is that these techniques do not work in an underdeveloped country with a different culture and poor legislation. Nonprofit organizations in Russian speaking countries have very insignificant tax concessions: paperwork costs more than concessions. With poverty in the background, well-equipped offices of nonprofit organizations, done in a Western style, are associated by corrupt officials with prosperous commercial firms. As a result, nonprofit organizations are extorted bribes, which they have to pay factoring in the chaos in legislation. All this costs significantly more than the sum of financial aid the recipients are given.

Nonetheless, this system is not so absurd. It was efficient not long ago for other purposes as well, however now it seems out-of-date. The nonprofit organization network in Eastern Europe was developed by a tremendous effort of western states in the late 80's - early 90's as one of the components of a global goal, which is to oust communism. Nonprofit organizations in the USSR and, later, in the former Soviet Republics advocated liberal values and made a tremendous contribution to establishing democracy. Today, this mission is accomplished, however, a corporate environment, which was "hardened by the battles with Communism" and which has been providing jobs for millions of people both in the West and in Russian speaking countries, refused to self-destruct. What took place was a typical collision, described more than once by American sociologists, e.g. Berrose Danem - with a philosophical depth and Northcote Parkinson - with humor. "Every young organization pursues a goal to conduct its business while every old organization pursues a goal of self-preservation". In poor countries, employees of nonprofit organizations are people with relatively high incomes, who are rightly called by the Russian sociologist Andrei Fadin "compador intelligentsia". They belong to the "middle class', which in Russian speaking countries accounts for 5-7% (in the US - 85%). They won't give up the source of their wealth - a monopoly distributing financial streams from Western donors - without a fight. One can't but note that today's corporate structure of nonprofit organizations in Russian speaking countries still implements important tasks, such as first of all political tasks - advocating Western culture and life style. Donors who are willing to donate their money for these purposes exist and will exist. But inefficiency of this system for donors who are willing to donate the money for other purposes is becoming increasingly realized in the West. More and more organizations like AROAF are emerging.

I am aware of a couple of more ... however, it is not at my discretion to write about them. I saw them with my own eyes pulling stacks of money out of their pockets and handing them without any receipt to an orphanage Principal, the head of a public organization or simply someone who helps the homeless. I have been offered the money myself but with prohibition on publicity. Unlike us, benefactors live in law-governed states, where fiscal services are ubiquitous. Tax legislation is the foundation for any state, and depending on how the laws are implemented one can judge the legality in this state. Even Germans, who are rightly proud of law obedience as their national trait, when they come to Russia and see orphans in our country ... sigh and get their illegal marks (now euros) out of their pockets. At the same time, practical Germans still manage to come up with plans how to minimize illegal activities. They load caravans of humanitarian aid as they do not trust transport firms: volunteers, often decent, honorable and respectable people in their country drive trailers themselves or drive in cars escorting a shipment. They do all the customs paperwork and personally deliver not only "second hand" goods but also everything else from food to furniture and construction materials directly to orphanages. They unload the shipment, grab the tools and start working: building in window frames, wall lamps, toilets, etc

Such approach is not typical of Americans due to geographic and different mentality considerations. They use dollars, but it's not the way of doing but rather a result that matters. I am sure that AROAF is not the only organization, which is going in this direction or has found other legal sociotechnological methods of loss minimization and increasing charity efficiency. Among staff of other American nonprofit organizations there are also very qualified financial managers, and it is quite a paradox that they were not aware of today's banking services and tax accounting methods. What makes AROAF and its leader different from them is spirituality instead of politicism. Once a "high" goal is set, there are always technological ways to achieve it. What Kirill Bogouslavski used to do in his earlier life helped him to find his new destiny. He abandoned a successful career as a financial advisor and became a professional employee of American Non-Profit sector.

At first I wanted to be involved in charity projects in my free time without leaving my main job and income source. My plans changed when I visited Russia in order to reestablish contacts with orphanages. I met many talented and devoted people, who are trying to help orphans and homeless children survive. But, unfortunately, all these people are stuck in the ruins and horrifying legal and moral degradation of Russian society and state. I decided to devote all my time and energy to running this fund. Helping orphans is now my life and mission. I feel that I have been chosen by God for this mission. I have never felt such fullness of life like I do now. I feel blessed to be a chance for saving these poor kids and an opportunity to serve them. I am simply an instrument in God's hands.

Techniques, developed by AROAF, can be applied not only in helping orphans but also everywhere where donors set not political goals but rather ideals of humaneness and Christian mercy.