HELENA — A charity watchdog says the penalties leveled against "Three Cups of Tea" author Greg Mortenson for mismanaging and financially benefiting from his Central Asia Institute underscores the need for stronger regulation of charitable organizations.
Daniel Borochoff of the American Institute of Philanthropy said the problems found at the Bozeman, Mont.-based Central Asia Institute are more prevalent in the charity world than most people think and that the regulatory structure is broken.
"It's a Wild West atmosphere and it's not just Montana. Donors beware. Be really careful," Borochoff said.
The yearlong investigation by the Montana attorney general into the organization Mortenson co-founded in 1996 was prompted by allegations of financial misdeeds made in published reports by "60 Minutes" and author Jon Krakauer in 2011.
The probe resulted in a settlement that requires the author to repay $1 million and makes fundamental changes to the institute's structure.
The investigation, observers say, is an example of the kinds of successful investigations that states carry out all the time, but don't receive the same level of publicity. But, they agree, state regulators have limitations.
Among those are jurisdictional borders, shrinking budgets, small staffs, a lag in technology and often inadequate reporting requirements, said Cindy Lott, who directs the Charities Regulation and Oversight Project of the National State Attorneys General Program at Columbia Law School.
It's important to build the resources of the state regulators because individual donors don't have the legal standing to sue a charity, Lott said.
"They don't get to sue to find out what happens to their $25 or get it back," she said. "The A.G., that is who gets to stand in the shoes of the intended beneficiary to make sure the money goes where it is supposed to go."
The investigation into the Central Asia Institute concluded that CAI bought and promoted Mortenson's books and spent $2 million flying him on charter jets, without the organization receiving royalties or any other direct benefits.
Under Mortenson's leadership, unknown sums of money were wired overseas without receipts or supporting documentation and that he charged CAI credit cards for tens of thousands of dollars' worth of personal items, the report said.
In addition to the $1 million repayment, the settlement agreement changes the structure of the institute, such as expanding the board of directors and keeping Mortenson out of a position of financial oversight.
Attorney General Steve Bullock said he believes the investigation is the most extensive probe into a charity that his office has conducted.
Bullock said he is confident the settlement will take care of the biggest red flags identified at CAI, but he acknowledged there are limitations in dealing with an organization that conducts much of its work building schools and promoting education in Pakistan and Afghanistan.
Borochoff was less enthusiastic about the deal, saying it didn't go far enough in punishing Mortenson and could encourage bad behavior.
"I am concerned about the precedent that this sets, that other charity leaders will go out there and take resources from the charity that they work for and then get some sort of agreement to pay it back," Borochoff said.
Another likely result is that donors will be more cautious with their money, he said.
"It's good in the sense that it will lead to healthy skepticism, it's bad in that it will lead to some people being so distrustful and turned off that they won't want to support charities," he said.
Only a dozen states have bureaus dedicated to regulating charities, while the rest are dealing with staffing shortages typical of Montana: A prosecutor in the Office of Consumer Protection deals with a range of cases along with charities, and another person spends part of her time reading tax forms.
The lack of resources is likely to be a continuing problem for state regulators. But electronic filing, software development, information sharing and training can go a long way toward helping them better oversee charities, Lott said.
Montana is among a handful of states that have no significant reporting requirements and don't maintain a registry of charitable organizations for the public to decide what is and what isn't a legitimate charity.
That lack of reporting means there could be charities operating in Montana without the attorney general's knowledge, said John Doran, Bullock's spokesman.
Legislation that would have created a charity registry in Montana that donors could use failed in 2009 and 2007. Bullock said his office would still have to rely on whistleblowers, but a registry would help.
"I think having a charitable registry is good government," Bullock said. "It's something I think we should continue to look at as we go forward."