U.S. nonprofits seeking to fund charitable projects in India must employ certain practices to avoid losing their tax-exempt status or running afoul of India’s foreign funding regulations and jeopardizing its overseas activities. By implementing some simple measures in their grant-making procedures, nonprofit organizations can mitigate these risks and ensure that their critical work continues without interruption.

Compliance with U.S. Law

A 501(c)(3) organization is permitted to conduct all or part of its charitable activities in a foreign country, including the giving of grants to foreign organizations, as long as such activities would be considered charitable within the meaning of § 501(c)(3) if carried on within the United States. However, since most foreign organizations have not been recognized under § 501(c)(3), a U.S. nonprofit is required to exercise supervision and discretion over the use of funds by the foreign organization and maintain sufficient records that grants have been used for exempt purposes. In addition, the nonprofit should implement the safeguards recommended in the U.S. Department of the Treasury’s “Anti-Terrorist Financing Guidelines: Voluntary Best Practices for U.S.-Based Charities,” including verifying that a foreign recipient organization does not appear on the Office of Foreign Assets Control Specially Designated Nationals List (“OFAC SDN”).

1. Supervision and discretion over funds. A nonprofit making a grant to a foreign organization should have practices in place to indicate that it has approved the foreign grant or project as being in furtherance of the nonprofit’s charitable purpose and not merely earmarked contributions for foreign transmission. The most effective ways to do this are (a) documenting that the Board of Directors has reviewed and approved the foreign grant pursuant to a formal grant policy and (b) executing a written grant agreement with the foreign recipient outlining the permitted use of grant funds and allowing the termination of funding if there is evidence of improper use. It is important to demonstrate that the nonprofit is not acting as a mere conduit of funds to the foreign organization but rather exercising full control over the use of funds for its stated exempt purposes.
2. Sufficient records of grant activities. The nonprofit should maintain proper records regarding the disbursement of funds to the foreign recipient and obtain full and complete reports regarding the use of grant funds, as evidence that all contributions are being used for the nonprofit’s charitable purpose.
3. OFAC SDN list check. To prevent the diversion of charitable funds to terrorist organizations, the U.S. Department of the Treasury developed voluntary best practices for U.S.-based charitable organizations that engage in grant-making and/or operations in foreign countries. In addition to taking precautionary measures with regard to the disbursement of funds and programmatic verification, the nonprofit should double check all contributions to foreign nationals against the OFAC SDN, which is updated regularly by OFAC and contains the names of companies and individuals sanctioned by the U.S. government, including designated terrorists and other covered persons. It is a violation of U.S. law to make a payment or undertake any other prohibited transaction with any person or entity on the SDN list.

Compliance with India Law

The receipt of foreign funds by Indian charitable or non-profit entities is governed by the Foreign Contribution (Regulation) Act, 2010 (“FCRA”). The FCRA states that no Indian person (individual or organization) having a definite cultural, economic, educational, religious or social programcan receive a foreign contribution without prior permission or a certificate of registration from the Indian central government (known as the “FCRA registration” or “FCRA certificate”). The increased scrutiny exercised in recent years by the Ministry of Home Affairs (“MHA”) over bank accounts receiving foreign funds necessitates the exercise of caution by both U.S. nonprofits and their Indian grantees to ensure strict compliance with the FCRA.

1. Due diligence to be undertaken by U.S. nonprofit. As part of its pre-grant inquiry, a nonprofit must ensure that a potential India grantee has a valid, unexpired FCRA registration. In addition, the nonprofit should review the potential grantee’s financial statements, including its FCRA annual returns and FCRA registration certificate, in addition to undertaking any other due diligence to comply with its obligations under U.S. law.
2. FCRA amendments imposing further restrictions. The FCRA was amended in 2020 to provide for increased regulation over the receipt and utilization of foreign contributions. Some notable changes include the following:
   • All FCRA-registered organizations must maintain a primary FCRA bank account exclusively with the government-owned State Bank of India at its Main Branch in New Delhi.
   • All banks must report any contribution received in an FCRA account to the central government within 48 hours of receipt, ensuring a high level of government scrutiny over foreign funds received.
   • An FCRA-registered organization is prohibited from transferring foreign funds to another FCRA-registered organization.
   • An annual report must be filed outlining the utilization of foreign funds by project, with an affirmation that funds do not affect religious or social harmony and the address and website of all foreign donors and projects; and
   • Every recipient organization can use a maximum of 20% of total foreign funds received for administrative purposes in a financial year.

Failure to comply with the FCRA carries monetary fines and/or a criminal penalty of up to five years in prison for the managing personnel of defaulting organizations.

For more information about compliance requirements under the FCRA please contact Jeff Pankratz of the DSA Group at jpankratz@devsourcing.com

Disclaimer: This material is provided for informational purposes and does not constitute legal advice. Access or use of this information is not intended to create, and does not constitute, a lawyer-client relationship. No portion should be acted upon without first seeking legal counsel about your specific legal situation.

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¹Rev. Rul. 71-460, 1971-2 C.B. 231; 1983 EO CPE Text.
²Rev. Rul. 68-489, 1968-2 C.B. 210; Rev. Rul. 63-252.