Organizations may make use of a third-party vendor to process mail, including product orders, premium fulfillment, and gift income. Services that can be provided include picking up mail from post office boxes, opening mail, processing orders, issuing receipts, data entry for accounting purposes, bank deposits, reports of all types for management analysis, etc. The process of collecting mail, banking gifts, issuing receipts, etc., is often referred to as “caging.” ECFA member organizations have asked questions concerning the practice of outsourcing “caging” services and whether it is appropriate for ECFA members. This advisory opinion has been developed in response to these questions.

These services can be very helpful to charitable organizations and are often used by charities that have very large volumes of mail to process and believe that contracting with specialty organizations for these services is a more efficient use of their resources. Very small organizations can also make good use of businesses providing caging services. Small organizations may not be able to provide adequate security controls in mail opening and gift processing areas; i.e., more than one person being present at all times. In these cases, all income is deposited directly into the account of the charity and the vendor bills the charity for its services.

When used in this manner, there is absolutely no problem with such outsourcing and, in fact, it may be a wise use of a charity’s resources. The charity should satisfy itself that the vendor operates with essential controls in place. One method of determining this is to request and receive a report by an independent accountant on internal controls of the service organization—a Statement on Accounting Standards (SAS) report, if such is available.

However, in some instances, fundraising consultants offer caging services for their clients and this is where serious concerns begin to emerge. Fundraisers may offer caging services as a means of insuring payment for their services, or as a way to overcome a charity’s concern about upfront costs of a fundraising effort. This can be presented as a guaranteed no loss effort where the fundraiser agrees to limit its expense to no more than what actually is received. In those cases, funds are placed directly in the account of the fundraiser (or in a joint account with the charity) and only the net income in excess of the fundraiser’s costs are forwarded on to the charity. Also, in some agreements between fundraisers and charities, the charity’s donor list becomes available to the fundraiser to rent or sell to provide additional income to the fundraiser. These situations offer many opportunities for abuse and can cause problems in several areas.

Problem Areas

Outsourcing of gift processing may also raise concerns in the following areas:

• Accounting and reporting. When only net income is received by the charity the temptation exists to book the net income without any accounting for the expenses of the fundraising campaign. This would result in an understatement of fundraising expenses and therefore would not provide an accurate picture of the organization’s operations. This would clearly not be in accordance with generally accepted accounting standards and therefore would be a violation of ECFA’s Standard 3.

• Donor communication. When donors respond to a particular fundraising effort, they would naturally expect that their gifts are going to the charity itself to be used for the purpose described in the fundraising communication. When the fundraiser banks the gifts and only a portion (or possibly none) of the gift is passed along to the charity, donors are misled and ECFA’s Standard 7.2 may have been violated.

Legal Aspects

Some states have laws stating that all income from fundraising appeals must be deposited in accounts held solely in the name of the charity. In those states, the arrangements mentioned above would be illegal and the charity would be liable for whatever penalties those states have established.

Summary

Outsourcing of gift processing services can be a proper and appropriate approach for a charity to obtain higher levels of efficiency, security, and control. However, it is never appropriate for a fundraiser to provide the caging service. The fundraiser must never control the income, bank accounts, or have ownership of donor lists of a charitable organization.