China Development Brief, No. 52 (Winter 2011)
The issues raised here have been raised in one form or another in a number of past CDB articles. They all address the central question: what should be done to promote the healthy development of the philanthropy, civil society sector in China?
In the year 2011, many memorable events in the public interest sector involved scandals. These events were so numerous that it would be no exaggeration to label 2011 as civil society’s “Year of Scandal”. Reports in the media have shed light on the sector’s dark underbelly. These scandals were not isolated incidents scattered throughout the year, but rather had accumulated, all coming into the light of day around the same time. With each scandal and the public attention that followed, the NGO involved was able to use outside pressure to promote better behavior within the sector. As the dust settled toward the end of the year, the fickleness of the media and internet users took effect. When the carnival surrounding the scandals was over, the public’s attention waned leaving unanswered the question of who will address these problems.
A Look Back at the Scandals
The debate and heated emotions that followed these “scandals” are manifestations of a crisis of confidence that exists due to state-sanctioned monopolies and a long-standing lack of transparency in the sector. The biggest scandals of the year were all connected with public foundations1.
The organization most affected by the scandals was the Red Cross Society of China. The Red Cross was at the center of a series of scandals, including the 10,000 RMB tent incident during the 2008 Sichuan earthquake relief effort, the 2011 Shanghai Luwan District Red Cross 10,000 RMB banquet, and finally the “Guo Meimei” scandal in June of 2011. These scandals took the crisis of public confidence in the Red Cross Society of China to new heights. However, if the issues of tents and banquets are a matter of how to best spend the money donated to the organization, then they are not comparable to the Guo Meimei scandal which involved dealings between the Red Cross’ commercial wing and a subordinate company. There are those within the industry who believe that the Red Cross, and other foundations that are intimately involved in commercial activities, are violating their core principles, such as not using the foundation’s brand or intellectual property for commercial gain. Perhaps more dangerously, they are allowing the banner of a charitable organization to be used by those acting for personal gain. To use the name and logo of the Red Cross for commercial profit-making activities raises legitimacy and boundary questions for the organization. The “Guo Meimei incident” once again shows that those who seek profit under the name of a charitable organization will eventually be discovered. Behind a flashy exterior, one will nearly always find a scandal.
Another foundation which became the object of media attention is the Henan Soong Ching Ling Foundation. The charity – which operates in rural China and has attracted a large number of donations in the name of covering medical costs for those unable to afford insurance – at first attracted media attention for the way in which it used its funds to loan money and invest in internet companies, commodities (namely steel), the property market and commercial trading, among other ventures. This public interest organization also commissioned a statue of Soong Ching Ling in a prime location in the city of Zhengzhou as part of a real-estate project involving 400 million RMB in the foundation’s “self-raised funds”. This grand project seems more the work of a large commercial empire than a charitable organization. Speaking at the “Charity Forum” in Shanghai on December 1, the director of the Ministry of Civil Affair’s Department for NGO Management, Sun Weilin, admitted that “individual foundations are keen to engage in commercial activities, and some even show a profit-seeking tendency.”
The Lu Meimei incident trumps these scandals. Dubbed the China-Africa Project Hope, this scandal implicated the World Eminence Chinese Business Association and even the China Youth Development Foundation2. Profit-making conferences and entrepreneur clubs are all commercial operations that run into problems when they try to put on a “charitable” face, thereby arousing public indignation. On November 27, just as chatter on the internet was dying down, CCTV disclosed a new scandal involving social organizations registering offshore to attract donations and avoid inspection and taxes on their operations on the mainland.
As China’s second largest charitable organization, the China Charity Federation (CCF) cannot be overlooked when discussing the year’s scandals3. The CCF wrote receipts totaling 15 million RMB for a manufacturer of solar panels, a sum which carries a handling charge of 50,000 RMB. The manufacturer made no such donations, however. According to current regulations, only a select number of qualified charitable foundations have tax deductibility on donation receipts4. CCTV reported that for the sum of 15 million RMB, a tax deduction of 2 million RMB could be claimed. The corrupt use of this provision not only leads to the loss of tax income for the state but also damages the image of China’s charitable sector in the eyes of the world.
There are also some events worth mentioning here that have played a “supporting role” during this year of scandal. Notable incidents include: Chen Guangbiao’s charity projects, which gave inaccurate financial reports, and led to suspicions of his projects operating for profit instead of for charity; the Liao Bingxiong Foundation which admitted to financial irregularities and actively publicized their “in-house scandal” in which the cashier used his position to take funds totaling nearly 800,000 RMB; the grassroots virtual NGO Gesanghua which created a stir in August with financial irregularities and falsification of member names; and finally, the resurfacing of an old and large legal case involving the founder of China’s Youth Development Foundation, Xu Yongguang, and Fang Jinyu, a former reporter for Southern Weekend newspaper, relating to foundation investments. There were even the unsubstantiated rumors of a face-to-face meeting between the parties5.
Teaching the Public to “Vote With Their Feet”
According to figures provided by the Zhongmin Charitable Giving Information Center, a GONGO established by the Chinese Ministry of Civil Affairs, the Guo Meimei incident of June 2011 led to a significant drop in charitable donations. From March to May, charitable donations totaled 6.26 billion RMB, while figures for June to August fell to 840 million RMB, a decline of 86.6 percent. Meanwhile, there was no significant drop in donations made to government agencies. While Ministry officials have said that the Guo Meimei incident would hurt the charitable sector, one thing to note is that mainstream media commentary on these scandals led to a decline in the number of donations for GONGOs, but had little effect on grassroots NGO fundraising.
On July 7, the Chinese Red Cross made a commitment to the public to become open and transparent. It would open donations up to public scrutiny, and make its financial management more transparent. On July 15, the Ministry of Civil Affairs issued “Guidelines for the Development of the Charitable Sector in China,” as well as a draft for public comments of “Guidelines for Information Disclosure of Public Interest Charitable Donations,” committing to the next step of issuing related laws and regulations. The Ministry, on behalf of the State Council, previously drafted “Opinions of The General Office of the State Council on Accelerating the Development of the Charitable Sector.” The next step will come with the publication of “A Guide for Standards on Enterprise Participation in Charitable Activities”6.
As early as March 2011, the China Foundation for Poverty Alleviation was among the first to open its books to public scrutiny7. After the Guo Meimei incident in June, the China Foundation Center held a conference on “Transparent Public Interest Supporting a Harmonious Society” to mark its first anniversary. The event highlighted transparency and credibility as the main themes and promoted greater accountability in the foundation sector.
October 30 marked the second anniversary of the establishment of the One Foundation-sponsored NGO Self-Regulation Alliance (also known the Union of Self-Disciplinary Organizations or USDO). The Alliance has grown over the last two years to include 67 public interest organizations, most of them grassroots organizations. On November 18, USDO put forth a model of financial transparency to encourage public interest organizations to make public their financial information. The hope is that this model can be used by NGOs to promote self-discipline and thereby protect build themselves from the constant questions being asked of the sector.
Whether as practitioners or laymen, reasonably or unreasonably, the public’s questioning of these scandals has undeniably challenged the transparency and credibility of government-run charitable organizations. Xu Yongguang vice-chairperson of the Narada Foundation, pointed out that these various incidents all “involved very different backgrounds, problems, causes and characteristics”. Xu further noted that the Guo Meimei incident is an example of a failed effort by the Red Cross to engage in commercial activities, while the Henan Soong Ching Ling Foundation scandal was due to poor decision-making. In his words, these highly visible events led to a public debate on “regulating the commercial operations of public interest organizations.” Xu Yongguang attributes the crisis of public trust in government-run charitable organizations to the fact that the charity system does not distinguish GONGOs from grassroots organizations. This view of an industry insider, though, is completely lost_in the wider public debate8.
The development of each public interest organization follows its own logic. Sustainable development cannot mean zero-cost operation completely detached from business interests. Investment and innovation in the public interest should move forward; the trick is to know what is and is not acceptable. Facing such widespread public discussion, public interest organizations cannot afford to miss this opportunity to inform the public and media of the actual working conditions, activities and regulations governing those working in the third sector. Such action is essential to addressing the broad generalizations critical of the monopolistic and opaque nature of the sector. It would not only improve the environment for the sustainable development of the sector, but also would help avoid misunderstandings from developing in the online community, and enhance the public’s ability to make informed judgments about the challenges facing the public interest sector.
The Power of Accountability
Although 2011 has been named as “the year of scandal”, in fact, incidents in the public interest sector actually began to attract the attention of the mainstream media as early as 2010.
In September 2010 Jet Li appeared on CCTV’s interview program “Face to Face” commenting on the possibility that the Red Cross Society of China might break off its relationship with the One Foundation. Li stated that the issue was “unimaginably severe,” and this instantly became a focus of media attention9. On September 29th, two of the world’s top millionaires, Warren Buffett and Bill Gates, came to Beijing to invite 50 Chinese tycoons to attend a Charity Dinner; On July 7th, the Ministry of Civil Affairs in conjunction with five other ministries issued “Implementation Measures on the Use of Donated Funds for the Qinghai Yushu Earthquake Relief Effort” which caused confusion and even opposition among the more than ten national charitable foundations.10.
China’s public interest sector has developed to the point where it is capable of greater accountability. This is particularly true of the private foundations which have developed into a force that can contend with government monopolies, both because of their sheer numbers and their self-awareness. Since the Sichuan earthquake of 2008, grassroots resources in the form of public donations have been growing quickly, increasing the competition between foundations for these resources. Public foundations qualified to engage in disaster relief grew from three to 1511. Public foundations have diversified, and private foundations developed rapidly. As a result, the old, established foundations face greater challenges12.
More than three years after the Wenchuan earthquake, the charitable and public interest sector have become topics of great public interest. Social media and microblogging (weibo) have relied on their large community of users to reveal scandal after scandal. Microblogging has become the new, emerging “social power” darling. The academic Kang Xiaoguang has said of the current climate, “the era of public opinion has arrived”. Mainstream media has continued with follow-ups and in-depth reporting on subjects covered in micro-blogs, which has alleviated public suspicions towards both the internet and traditional media. For these reasons, media involvement in public affairs is a case study in the public “voting with their feet”.
Different Voices on the Gesanghua Case
Of all the scandals that occurred in 2011, only the case of Gesanghua might be considered controversial. The controversy did not come from the public, however, but from within the NGO sector.
The Philanthropy Times published an article entitled “Gesanghua Accused of Faking Membership Numbers and Causing Financial Chaos”. The article used the PRC’s “Regulations for the Management and Registration of Social Organizations” as a platform to ask the following questions: Can local social organizations recruit a large number of members from other regions? Is it acceptable for members to not pay their membership fees? and Whether to ban social organizations that obtain registration permits by falsifying membership lists as a way to get around geographic restrictions on membership13?
The article highlights the problems relating to the Gesanghua case, including shoddy financial accounts; questions of how tolerant managerial structures can be; whether the annual report has to accurately reflect the real conditions of an organization; and how relevant agencies can regulate social organizations which exist virtually on the internet?
It is quite common for civil society organizations to exist in a grey area. Many NGOs are forced to either accept restrictive regulations or exist as an illegal organization. Regarding the Gesanghua financial scandal and the issue of managing membership-based organizations, Lu Ping, the editor of the independent newspaper Women’s Voice, believes that a newly-registered NGO with no full-time professional staff will need to rely on “long distance book-keeping”, so why should mistakes in the account book not be forgiven? She went on to argue that the Philanthropy Times report revealed no indication of any corruption, embezzlement, or abuse of power. What the public really cares about is making good use of its money. With respect to financial transparency, government agencies have failed to establish a model, and indeed they might learn something about financial transparency from NGOs.
A NGOCN forum post pointed out that the media should “have a constructive attitude and a view of the overall system” but those with some understanding of the realities of the public interest sector know that the problems in the Gesanghua case, such as legal status, mismatching accounts, and membership are a common problem facing many NGOs. They are also urgent problems that must be dealt with in order to further the development of civil society. Would it not be more instructive for the public, if the media had the right attitude and vision to aid in the construction and development of civil society organizations and address the issues relating to their regulation and management?
In September, Hong Bo, Gesanghua’s director, responded on her micro-blog account: “I hope that in the future, when friends come to write the history of the development of grassroots civil society that they will write about the vitality, frustration, pain, and helplessness of our organization, and how we confronted these challenges with our blood and tears, and survived. I stand in the future looking back upon today.” Sympathy and understanding of the need to survive illegally, and the helplessness this causes among such organizations, has created sympathy and support for Gesanghua within the third sector.
The media reported in September that the Narada Foundation spent 100,000 RMB to support a third party organization to carry out an assessment of Gesanghua. On December 18, the “Qinghai Gesanghua Educational Assistance Seminar” was held in Beijing. During the discussion, the independent assessment agency Recende officially released the “Qinghai Gesanghua Educational Assistance Organization Assessment Report.” The report was an assessment of Gesanghua’s current organizational structure and administrative capacity. The report was divided into five sections: the organization’s legality and risk associated with the organization; its information disclosure situation and mechanism; its major management expenses; its organizational governance structure; and its management of volunteers. The assessment report will soon be published on relevant websites, including recommendations for Gesanghua’s future development which was discussed at the conference.
The occurrence and discussion of major incidents and even the resort to lawsuits may turn into an opportunity to promote institution building. However, so far no third party has done an independent investigation of the public foundations that were implicated in scandals this year. Although the sector continues to voice different opinions regarding the Gesanghua incident, financial support from the Narada Foundation and Recende’s assessment all serve to make the Gesanghua incident a rare and symbolic case study of how a scandal is managed.
This year’s series of scandals has intensified the crisis of confidence in public interest organizations. It has raised a series of questions, all related to increased transparency and openness and the governmental monopoly on resources. Currently, this social criticism remains just that — criticism. The question of how to resolve the issues brought to light by these scandals remains a matter for further discussion.
Editor’s Note: In other words, these public foundations all happened to be GONGOs that enjoy a privileged position in the philanthropic community because of their close connections with the government and their registration status which allows them to raise funds publicly. The scandals thus not only implicated the foundations themselves but the official system that allows these foundations to operate with little accountability or transparency. ↩
Editor’s Note: “Lu Meimei” (or what some call Guo Meimei II) is the name used tongue-in-cheek by netizens to refer to Lu Xingyu, the 24 year old daughter of billionaire Lu Junqing. Lu Junqing is founder of the World Eminence Chinese Business Association (WECBA) and acting chair of the China-Africa Hope Project which works with the China Youth Development Foundation (a GONGO with close ties to the Communist Youth League that started the well-known Project Hope in China) to build 1000 Project Hope primary schools in Africa. The Lus, WECBA and the China-Africa Hope Project caught the attention of skeptical netizens and the media in the summer of 2011 when it was revealed that Lu Xingyu was made the executive chairwoman and secretary general of the multibillion dollar Project. Allegations of nepotism and the status of WECBA and its raising of funds for charity quickly followed. ↩
Editor’s Note: The CCF is one of the largest GONGOs in the charitable sector and even though it is registered as a social organization and not a foundation, it is one of a very few GONGOs authorized to accept donations in the event of a disaster. For an in-depth look into the CCF, see an earlier CDB article, “Changes in the China Charity Federation System”. ↩
Editor’s Note: Currently, registered nonprofits must apply separately to the tax bureau for tax deductibility on donations. ↩
Editor’s Note: Chen Guangbiao is known for his flamboyant and idiosyncratic approach to giving that involves personally handing out cash to the poor. Gesanghua (or Gesanghua Education’s Aid) is a Qinghai-based NGO registered as a social organization (shetuan) that uses online donations to raise funds for children in western China to complete their schooling. The legal case involving Xu Yongguang goes back to his days with the China Youth Development Foundation and Project Hope. For one journalist’s expose about this case, see the China Media Project’s posting. ↩
Editor’s Note: These new guidelines and regulations have been covered in past Policy Briefs that can be found in the CDB website. ↩
Editor’s Note: See the CDB article, “The China Foundation for Poverty Alleviation Opens Its Account Books”. ↩
Editor’s Note: Xu’s view is a controversial but understandable one. He is essentially blaming the system for giving GONGOs a privileged position as so-called “non-governmental, nonprofit, charitable organizations” when they are in fact closely tied to a web of government and commercial interests and are allowed to operate with impunity and little accountability and transparency. In other words, they enjoy the privileges given to supposedly private, nonprofit organizations, and they enjoy the privileges that come with being part of the official system. In contrast, real grassroots NGOs that are truly private and nonprofit, but cannot register as nonprofits, enjoy none of these privileges. ↩
Editor’s Note: The One Foundation was at that time registered as a private foundation and was not allowed to fundraise publicly. Unable to register as a public fundraising foundation, the One Foundation had established a special fund within the Red Cross that allowed it to engage in public fundraising. Jet Li was complaining about the bureaucratic difficulties he was having registering as a public foundation. ↩
Editor’s Note: The measures regarding the Yushu earthquake relief authorized these 10 national public foundations to transfer their donated funds for the earthquake relief to the Qinghai provincial government. ↩
Editor’s Note: After the earthquake, public donations came flooding in, and the government expanded the number of public foundations that were authorized to fundraise in the event of a disaster. ↩
Editor’s Note: the author here is suggesting that changes in the foundation sector are putting more pressure on the more established, government-run foundations that engaged in traditional charity work. Private foundations, and even a few public foundations, are putting more emphasis on professionalism and innovation in their approach. ↩
Editor’s Note: Social organizations registered at the local level are technically supposed to only operate in that locality. Unconstrained by geography, virtual organizations like Gesanghua create challenges to these regulations. ↩