Move America Forward has collected millions to send care packages to US troops. But its appeals often rely on images and stories borrowed without permission, and its assets have been used to benefit political consulting firms and PACs
This story was co-published with The Daily Beast
In February 2013, Move America Forward announced an ambitious fundraising goal. The charity, launched in part by one of the most prominent figures in the Tea Party movement, had adopted the 800 Marines in a battalion fighting in Afghanistan and wanted to send them all care packages.
"For some troops, these care packages are the only mail they will receive all year," the group said in one email solicitation.
The charity later described the fundraising drive as a rousing success: In less than five weeks, all 800 Marines in a 1st Marine Division battalion nicknamed Geronimo were sent care packages and notes in Afghanistan, it claimed.
But that couldn't have been true. The Marines of Geronimo weren't even in Afghanistan during Move America Forward's fund drive. Instead, they were deployed more than 3,000 miles away, in Okinawa, Japan.
Move America Forward calls itself the nation's "largest grassroots pro-troop organization," and has recruited a bevy of Republican luminaries, including former Presidents George H.W. Bush and George W. Bush and former Vice President Dick Cheney, to support its efforts.
Yet an examination of its fundraising appeals, tax records and other documents shows that Move America Forward has repeatedly misled donors and inflated its charitable accomplishments, while funneling millions of dollars in revenue to the men behind the group and their political consulting firms.
In several instances, the charity has taken images and stories from other groups and from veterans themselves without permission to use in fundraising appeals.
Last year, Move America Forward even solicited funds by claiming a partnership with Walter Reed National Military Medical Center, the largest hospital for wounded service members in the country. No such partnership existed, Defense Department officials say.
The charity's funds and other assets also appear to have been used to subsidize three conservative political action committees, records show.
Charity watchdogs have long criticized Move America Forward for spending too much on administrative fees and having little outside oversight. For instance, it earned zero stars out of a potential four from the rating organization Charity Navigator.
But experts on campaign finance and taxation say Move America Forward's practices may trigger more than bad ratings. Its activities could violate tax rules, which prohibit charities from engaging in partisan politics or overly benefiting the people who run them.
"They're playing audit roulette," said Marcus Owens, a lawyer who once ran the division on tax-exempt organizations in the Internal Revenue Service. Owens said Move America Forward reminded him of the Coalition for Freedom, a charity linked to then-Senator Jesse Helms that lost its tax-exempt status with the IRS largely because of its political activities in the mid-1980s.
"They're betting the IRS won't find them, or won't find them in time."
The driving force behind Move America Forward is Sal Russo, 67, the longtime political consultant who is listed on the 10-year-old charity's tax returns as chief strategist.
Russo is better known for helping to form the Our Country Deserves Better PAC, also known as the Tea Party Express, one of the largest Tea Party groups in the country.
Consultants from his Sacramento-based firm, Russo, Marsh and Associates, also set up two other PACs, the Move America Forward Freedom PAC and the Conservative Campaign Committee, to aid conservative causes and candidates.
Russo and his associates have previously drawn attention for lavishing funds raised through the committees on themselves, using this money on an Alaskan cruise and fancy hotels as well as paying themselves huge consulting fees.
Russo didn't respond to questions from ProPublica. Danny Gonzalez, a spokesman for Move America Forward, did not answer questions either, instead providing a four-paragraph defense of the charity. "We are proud of the fact that we always appropriate our donor's (sic) funds ethically and in the spirit of our mission to support the troops," he said, adding that Move America Forward was currently preparing 2,000 boxes of care packages for shipping.
It's not clear who currently oversees Move America Forward's day-to-day operations. The former executive director, Shawn Callahan, left in 2012 and does not seem to have been replaced. Callahan also didn't respond to questions, although last year, he defended the group to ProPublica in an email and said Move America Forward had been audited recently by the IRS. (The IRS does not comment on individual taxpayers.)
"I personally oversaw the audit where I worked with the IRS as they went over every penny spent with a fine-tooth comb," Callahan wrote in March 2013. "As expected, they reported that we were in full compliance and all our expenditures were appropriate."
Bill Durdin, the family readiness program coordinator for the 1st Marine Division, said Move America Forward recently sent care packages to at least five units in the division, but said a "thank you" letter from him the charity included in a March 2013 email praising donors for the Geronimo pledge drive had actually been written a year or two earlier. In an email to ProPublica, Durdin described the charity's use of his letter as "a serious case of 'Cut & Paste(ing)'!"
Move America Forward raises much of its money with its annual fundraiser, called Troopathon, held this year in the Ronald Reagan Presidential Library and broadcast live on the Internet.
Over the years, Troopathons have featured live and taped appearances by conservative stars from entertainment, media and politics, including actor Gary Sinise, rock idol Gene Simmons of KISS, Sarah Palin, Rick Perry, Rush Limbaugh and Sean Hannity. The charity counts all the money raised in the month of the broadcast as part of Troopathon.
"I'm hoping this will be the biggest and best event that we've had to let our troops know that we will not forget you," spokeswoman Debbie Lee said during an appearance over Memorial Day weekend on the Breitbart News Sunday radio show that kicked off this year's fundraiser. "We do recognize, even though, you know, there's been changes over there, that you're still there fighting.
"And we're here for you. We've got your back."
Move America Forward says on its tax returns that its mission is to "provide and promote support (for) our brave men and women in the armed forces."
It raised $7.8 million from 2008 to 2012, about 44 percent of it from the month of Troopathon.
Much of the rest came from responses to the emailed appeals it sends out every day or two, emotional notes packed with exclamation points and capital letters. The emails often seize on a tragedy like the Boston bombing and then ask for help sending boxes filled with items like Jelly Belly jelly beans, Swiss Miss hot chocolate and Hoo-Ahhs field towels.
Tracking the truth of this assertion is difficult, however. Neither the Defense Department nor the International Security Assistance Force in Afghanistan monitors who sends care packages to military personnel.
Each package for an individual service member is paid for with a $24.99 donation, the charity says, but it's unclear what the $24.99 pays for. The items in each care package are donated, a former consultant who spoke on condition of anonymity said, and volunteers put them together. "Our volunteers pack each box to the brim," the charity's outreach coordinator Scott Raab told a radio show over Memorial Day weekend.
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With gross NPA levels of Rs2.17 lakh crore in March 2014 and a restructured portfolio of Rs3.30 lakh crore, of which a lot will become NPAs, banks will continue to sell NPAs to the ARCs.
Internationally, the bankruptcy codes and effective legal mechanisms ensure speedy disposal of NPAs in the normal course. Hence, asset reconstruction companies (ARCs) are mainly set up as special purpose vehicles to resolve stressed assets during systemic crises.
The Indian ARC experiment is unique. ARCs are set up as perpetual entities to fix festering NPAs, which result from reckless lending and the inability of the judicial system to adjudicate the matter speedily. But ARCs are no longer serving their purpose.
According to the RBI, ARCs constitute a supportive system for stressed asset resolution, rather than the last resort to dispose of NPAs by banks. It may be recalled that an NPA suffers from a time mismatch between cash flow with debt servicing and/or inadequacy of cash flow for debt servicing.
If the most likely estimate of cash flow of a distressed account shows moderate shortfall in debt-servicing capability, such NPAs can be restructured with a modest sacrifice by the lenders and sponsors. High cash flow inadequacy and consequent unviability leads to a liquidation of the NPA. Definition of the time mismatch has evolved over years, and currently, Reserve Bank of India (RBI) prescribes the limit at 90 days, beyond which, a default renders the account an NPA.
Banks are expected to sell the assets to ARCs at a stage when the assets have a good chance of revival and a fair amount of realisable value for rehabilitation and reconstruction. The reconstruction is generally not feasible within the 8-year limit imposed by RBI. Hence ARCs largely focus on liquidating the assets.
Set up by independent sponsors including some banks, ARCs have limited capital. Hence, ARCs’ major funding for NPA acquisition has been by issuing Security Receipts (SRs) to the seller banks for up to 95% of NPA acquisition cost with a minimum of 5% of the SRs being funded in cash by the ARCs under the popular 5:95 structure.
These SRs are serviced in terms of agreed cash flow waterfall, upon liquidation of the underlying assets by the ARC. Distribution from the cash flow first goes to meet expenses (including taxes), next for payment of management fee to the ARC, and thereafter for servicing of the SRs - redemption and payment of yield on SRs.
Servicing of senior SRs if any, has priority over servicing of junior/pari-passu SRs. The remaining surplus, i.e. upside, is shared between the ARC and the seller bank according to an agreed ratio. There is no penalty for shortfall in servicing SRs.
Acquisitions of NPAs by ARCs during 2003-07 also had senior SRs subscribed by ARCs. Senior SRs ensured that the ARCs could earn significant returns even if the recovery from NPAs was a small fraction of the acquisition cost of the NPA, with the losses being absorbed by banks. Hence, from FY-2008, banks shunned SR based deals in favour of 100% cash deals, resulting in limited acquisition by ARCs characterised by resource constraints. As a result, the fourteen ARCs in the country clocked modest returns in FY-2012 and FY-2013 (see the table below).
There has been a substantial increase in public sector unit (PSU) banks’ gross NPAs, reaching Rs2.17 lakh crore in FY-2014, from Rs74,600 crore in FY-2011. Under duress to minimise provisioning amidst low profits and high NPAs, these banks returned with a 5:95 structure in the later part of FY-2014. However, this time all the SRs were pari passu (where creditors are paid as a ratio of their claim in total debt and without preference).
Zero sum game
Banks’ sale of NPAs to ARCs has so far been mostly with a view to postpone the provisioning. The 5:95 structure meets this purpose as it enables ARCs to bid aggressively for the assets due to ARCs’ 5% investment risk that is fully mitigated by the management fee of 1.5% to 2% per annum, of the acquisition cost.
For example, an NPA portfolio acquired for Rs100 crore that gets resolved at the end of 5th year and incurs a resolution cost of 4%, equally spread over the 5-year resolution period, and the management fee of 1.5% per annum on outstanding SRs, results in pre-tax Internal Rate of Return (IRR) of 19.3% to the ARC with an estimated 100% recovery despite a 15.4% write off, of the SRs.
For a 100% cash deal, for the same return of 19.3%, the acquisition cost to the ARC works out to Rs40 crore (40% of the acquisition cost in 5:95 structure). Such a low all-cash bid often entails immediate provisioning in the bank’s books for the deficit between net outstanding debt and the asset sale price.
To obviate such provisioning, the banks prefer a 5:95 structure. To induce more aggressive bidding, banks sometimes allow a 2% management fee. An ARC’s earnings comprise of the management fee, redemption of SRs, the yield (coupon) if applicable, and the potential upside. Since the management fee has a priority over other cash flows, the ARC’s portfolio-life-time return is significantly affected by phasing of the recovery.
With high gross NPA levels of Rs2.17 lakh crore in March 2014 and a CDR portfolio of Rs3.30 lakh crore, of which a significant part is likely to slip into NPAs, banks will continue to sell large numbers of NPAs to the ARCs under the 5:95 structure over the next several years to minimise provisioning.
Banks’ other major consideration for sale to ARCs is extremely tardy legal administration and enforcement. The government has recognised the need to remedy this, and the legal enforcement will have to be revamped urgently lest the country’s banking faces crisis.
The current management fee driven model of ARCs also needs to evolve into an equitable risk-reward sharing model. Such models can be put in place only if the banks shed their tendency to avoid provisioning.
A new organisation, called the NAMC has recently been proposed. It is supposed to work on taking over big ticket NPAs from banks and revive them. The second part of this two-part look at NPAs and asset re-construction will take a closer look at how these ideas will pan out in the future.
(Rajendra M Ganatra is Managing Director & CEO of India SME Asset Reconstruction Co Ltd-ISARC. He had over 25 years of experience in project finance, asset reconstruction and financial restructuring. The views expressed in above article are personal)