The “American Cancer Society of Michigan,” state authorities say, was a fake charity. And not even a good fake.
It was not in Michigan, for one thing. When the group applied to the Internal Revenue Service to become a tax-exempt nonprofit in 2020, it listed its address as a rented mailbox on Staten Island. It was not the American Cancer Society, either: In fact, the real American Cancer Society had already warned the I.R.S. that the leader of the sound-alike group, Ian Hosang, was running a fraud.
Mr. Hosang, 63, is now accused by prosecutors in New York of operating a long-running charity fraud that has astounded nonprofit regulators and watchdogs — and raised concerns about the I.R.S.’s ability to serve as gatekeeper for the American charity system.
Not because the alleged scheme was so good.
Because it was terrible. And it worked.
Mr. Hosang — a convicted stock-market fraudster once accused of dangling a man out of a building — got the I.R.S. to approve 76 nonprofits, often despite glaring red flags of potential fraud. His operations stole the names of better-known charities. They claimed to be located where they obviously were not.
But the I.R.S. kept saying yes. And in doing so, the agency has attracted scrutiny of its new fast-track system for approving charities — an innovation implemented to deal with backlogs and budget cuts that now denies only one application in 2,400, according to agency statistics.
“Nobody’s watching the store,” said Nina E. Olson, who was the I.R.S.’s in-house national taxpayer advocate from 2001 to 2019 and warned repeatedly about the decreased level of vetting. “They’re the gatekeeper to this whole universe of charitable subsidies. And if the I.R.S. is not doing its job as a gatekeeper, then you’ve got real problems.”
The agency declined to answer questions about Mr. Hosang’s case, citing taxpayer privacy laws. It also declined to make officials available for in-person interviews, but it released a written statement saying that the fast-track approval system “continues to reduce taxpayer burden and increase cost effectiveness of I.R.S. operations.”
Mr. Hosang, was indicted in Brooklyn in May, on charges of grand larceny, identity theft and conducting a scheme to defraud. He has pleaded not guilty. The Brooklyn district attorney said he stole about $152,000 in donations that flowed through 23 of his nonprofits. Mr. Hosang did not need to do much to promote the groups; the money came in through online giving platforms that let users choose among I.R.S.-approved charities.
Mr. Hosang, prosecutors said, spent the money on mortgage payments, credit card bills and at liquor stores.
“I did very wrong. I know that,” Mr. Hosang said in an emotional interview with The New York Times at his home in Staten Island. His voice breaking, Mr. Hosang said he had changed his life after a near-death spike in blood sugar in 2020, which he took as a sign from God. He said he wanted to make restitution for what he had done.
But, Mr. Hosang pointed out, every one of his charities had been approved.
“If you file something with an agency,” he said, “and they approve it, do you think it’s illegal?”
Mr. Hosang was born in Trinidad, grew up in Brooklyn, and graduated from New York University in 1984 with a degree in finance. He wound up on the ugly side of Wall Street — accused of running “pump and dump” operations that conned customers into paying high prices for low-quality stocks.
Prosecutors later said Mr. Hosang and his associates recruited salesmen on the subway, rewarded them with marijuana and worked with an associate of the Gambino crime family. Once, when a rival visited to complain, investigators said, Mr. Hosang and the mob associate “dangled him out the window of the ninth-floor office.”
In 1997, he was barred from the industry by a self-regulatory body then called the National Association of Securities Dealers.
In 1999, he pleaded guilty to federal charges of fraud and money laundering. Mr. Hosang’s attorney, Yusuf El Ashmawy, said Mr. Hosang cooperated with authorities and helped convict 150 people. He spent about two years in federal prison, according to federal records.
After his release, Mr. Hosang focused on a new business. In 2014, federal records show, he asked the I.R.S. to approve tax exemption for a new nonprofit: “The American Cancer Society for Children, Inc.” It wasn’t connected to the American Cancer Society.
“I got sidetracked. My son passed away,” Mr. Hosang said in the interview at his home, explaining how he had turned to setting up charities. “It was not a stable mind at the time.”
He began running the operation at a time when the agency was already ill prepared to detect signs of fraud in new applicants.
The first problem, according to former I.R.S. officials: Tax law does not prohibit nonprofits from impersonating better-known nonprofits by using sound-alike names. The second: There are no systematic checks for a history of fraud.
“You could be Jesse James or John Dillinger,” said Marcus S. Owens, who headed the agency’s tax-exempt section until 2000 and now represents charities at the law firm Loeb & Loeb. “There’s nothing that says you can’t apply for tax-exempt status from a jail cell, having been convicted of charity fraud.”
Still, former officials said, the I.R.S. bureaucracy once offered a powerful weapon against potential fraudsters.
Examiners who suspected fraud could slow down applications by asking for financial records, plans for the future or information about their officers. The requests were often a bluff of sorts, intended to deter applicants from proceeding, even though the agency had little power to block them if they pressed ahead.
“Congress hasn’t given the I.R.S. authorization to issue rules to make sure charities are not run by crooks,” Mr. Owens said.
The agency, in its written statement, said that employees reviewing new applications “have been trained to identify fraud.”
Mr. Hosang still got through. Between 2014 and 2018, the agency approved 17 of his applications for groups with “American Cancer Society” in their names, according to I.R.S. records.
That caught the attention of the real American Cancer Society. The group began contacting state attorneys general, who often have the power to shut down fraudulent nonprofits in their jurisdictions. That worked in North Dakota, Washington and California, but the state-by-state approach was slow.
In 2018, the American Cancer Society decided it needed a national approach. It wrote to the I.R.S., laying out the pattern it had identified in Mr. Hosang’s groups.
“It feels a little like ‘Scooby Doo,’” said Meghan Biss, a former I.R.S. lawyer who represented the American Cancer Society. “It shouldn’t have been that hard to figure out who the bad guy was.”
“Using the exact same mailing address? ‘I am the American Cancer Society of, like, 19 different cities?’ she said, adding, “That didn’t raise flags to anyone?”
American Cancer Society officials said they never heard back from the I.R.S.
But then, in 2020, the agency approved four new groups connected to Mr. Hosang: The “American Cancer Society” of Michigan. And of Detroit. And of Green Bay. And of Cleveland. Same Staten Island mailbox.
“Sometimes you can get away with things,” Ms. Biss said. “Not because you were so smart but because the people who were supposed to be watching out were not.”
As it turned out, Mr. Hosang had switched to using a new I.R.S. process for smaller charities. The new program was established in 2014, in response to budget cuts and a scandal in which the agency was accused of targeting conservative groups for undue scrutiny.
The new “EZ” application stripped 11 pages of questions down to three, nine boxes to check and a small blank for groups to describe their mission. There was little room for I.R.S. officials to mire suspected scammers in bureaucracy. The denial rate for new charities — which had been as high as one in 53 applicants in the old system — fell to one in 2,400 in this one.
One 2019 study by the agency’s taxpayer advocate found that 46 percent of the applicants it approved were not actually qualified, usually because their charters did not conform to charity law. It also noted that the “mission statements” were often so vague as to be useless. In 2021, federal records show, the I.R.S. approved groups whose mission statements were, in their entirety, “CHARITABLE ACTIVITY,” “NON-PROFIT” and “Need to fill in” (possibly a forgotten note to self).
Mr. Hosang switched to the fast-track system in 2019, according to agency records. His mailbox in Staten Island was the same. The red flags were still red: Among the “directors” listed in these supposed charities, there was a long-dead classmate from N.Y.U., a long-estranged friend from Wall Street, and at least one person who appeared to be imaginary, living on a street in Brooklyn that does not exist.
But, despite the American Cancer Society’s warning, Mr. Hosang was even more successful than before: In two years of using the fast-track system, Mr. Hosang got the I.R.S. to approve 56 new charities.
Zachary Weinsteiger, at the nonprofit-rating group Charity Navigator, said his group’s analysts had noticed the pattern in the I.R.S.’s data — and said it became almost comic, like a single miscreant fooling the same border guards with bad disguises.
“One guy coming in, in a bunch of dollar-store costume pieces,” Mr. Weinsteiger said. “He keeps crossing the border, and everyone keeps thinking he’s a different person.”
But Mr. Weinsteiger said Mr. Hosang’s success highlighted an unsettling problem. The entire regulatory system for U.S. charities rests on the I.R.S.’s vetting process. Its approval signals to state governments and potential donors that a charity is legitimate. It signals to internet giving platforms that a charity is worth including.
“It would be very expensive to do background checks on all the charities the I.R.S. has already approved,” since there are 1.4 million of them, said Ted Hart, chief executive of Charities Aid Foundation America, one of several online giving platforms that allowed donors to give to Mr. Hosang’s groups after they were approved. Mr. Hosang stole more than $3,000 through their platform, according to the indictment in May.
“We need to be able to trust this list” of charities approved by the I.R.S., Mr. Hart said, or donors will be misled again.
When the fast-track process was created, the agency said it would free up personnel to examine existing nonprofits. Instead, as the service’s manpower has shrunk, those examinations have declined by 45 percent since 2013, according to I.R.S. figures.
State charity regulators have asked the Federal Trade Commission to ban charities from impersonating better-known groups. In Congress, Representatives Betty McCollum, Democrat of Minnesota, and Fred Upton, Republican of Michigan, have introduced a bill that scraps the “EZ” form and fast-track system entirely.
“This form is doing damage,” said Ben Kershaw of Independent Sector, a nonprofit association that supports the bill. “It needs to be stopped now.”
In New York, Mr. Hosang’s lawyer said he is in plea negotiations with prosecutors and “intends to make full restitution.”
“He’s in no shape to go to jail,” Mr. El Ashmawy said. “He’s hurt by this.”
Source: NYT > U.S. > Politics