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Due diligence for international giving: How it works, why it matters [Updated]

Due diligence is an essential part of cross-border philanthropy, but it can pose challenges for donors and charities alike. Understanding the process sets up both parties for a successful relationship.

Updated in October 2021. Original article by Jill Chang and Nicolas Villegas.

What is due diligence for international grants?

For US-based grantmakers, vetting prospective 501(c)3 grantees is a best practice. But for foundations that grant abroad, due diligence is an IRS requirement. Grantmakers must use one of the two processes when giving overseas:

  1. Expenditure Responsibility (ER): This is a process that requires the grantmaker to follow the use of the funds being granted to ensure that the project is charitable. The grantmaker needs to continuously monitor the funds from start to finish.
  2. Equivalency Determination (ED): This is a legal determination made by an attorney that the grant recipient overseas is the legal equivalent of a U.S.-based charity.

Give2Asia uses the ER for the international grants we steward. This requires us to do a pre-grant inquiry for every grant released.

Why is due diligence important?

Due diligence increases the likelihood that a philanthropic grant will achieve its objectives. It also mitigates the potential risks of international donor-advised giving. Specifically, due diligence is designed to make sure the grantee is highly qualified to administer charitable programs, financially sustainable, and legitimate.

As part of its due diligence process, Give2Asia performs background checks on the organization, board members, and senior staff using both local references and international databases. We do this to avoid potential conflict of interest (e.g. buying your company’s products with granted funds) and to shed light on sensitive topics such as political involvement or religious activities.

Why is due diligence challenging?

Corporations and foundations seeking to give money overseas face common challenges with the due diligence process:

  • Cultural Barriers: Due diligence requires intimate knowledge of local norms and risks. For companies giving in a variety of communities, they must also overcome the language and cultural barriers across their portfolio.
  • Local Regulations: To remain in good standing, grantmakers must stay apprised of local regulations. This can prove challenging to do from afar, as the information isn’t always available online and its ever changing.
  • Limited Resources: The Corporate Social Responsibility (CSR) function is often run by small teams covering multiple markets. This makes it difficult to dedicate the concentrated effort needed to perform robust due diligence.

How we perform international due diligence

Give2Asia performs due diligence for grantmaking on behalf of corporations, foundations, and individual donors. We evaluate the ability of the organization to conduct charitable activities.

Our due diligence begins when a donor selects a grantee and a grant has been confirmed. Our first-level review is performed by in-country advisors.

Give2Asia’s Country Advisors are locally hired, bilingual, have degrees and abundant experience in the social sector, and are well connected in their countries. The Country Advisors evaluate the application, perform a local media and reference check.

Give2Asia’s US team then conducts a second-level review. The team ensures the grantee passes IRS requirements, performs an intensive background check on all board and staff members, and reviews all documentation to mitigate risk.

Give2Asia reviews the validity of the due diligence status each time a grant is issued to the organization.

What information do grantees provide?

Effective due diligence depends on a strong relationship with the potential grantee to collect and evaluate the relevant information. Here is a sample of the grantee-provided documents we evaluate:

Before a grant begins:

  • Articles of incorporation, by-laws: to see whether they’re registered with local government and follow the most recent regulations.
  • List of Board members & key management staff: for example, we could flag the cases in which the Board members are dominated by family members and relatives, or the major donor is sitting on the Board. Cases like these are not unusual in the Asian nonprofit sector.
  • Annual reports, financial statements, and income sources: We look at reports and figures for the past 3 years as well as activities and plans to verify financial health.
  • Program proposal & budget evaluation: before giving a grant, we request detailed proposal and budget from the grantee. We require specific metrics, social impact, and long-term plans, etc. The proposal and budget templates can be customized by the donors.

After the grant funds are remitted:

  • Monitor and report on grants: We request a report for each financial year of the grant and a final report at the end of the grant period. Our Country Advisors also check in with grantees in the interim to check on the progress of the grants, as needed.
  • Customized compliance: The reporting may also be customizable to donor’s requirements, e.g. ensuring the grantee complies with specific donor issued metrics on the reach and success of the grant.

Due diligence is a daunting but invaluable step in identifying the effectiveness of a potential grantee. As an NGO with a 20-year history in international grantmaking, Give2Asia is well-prepared to help funders achieve their overseas philanthropic goals. If you’re interested in learning more about our grantmaking services, you can request a consultation with our team.

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