It’s not clear what to make of an attorney general who opens an investigation and then accepts lame excuses for maintaining secrecy from its target, in this case, the American Red Cross. We’re flagging this example because it exemplifies an effort by organizations to use “trade secrets” as a pretext for hiding more and more of their dealings with governments. This is absurd, since the premise of Federal and state Freedom of Information Act laws is that government records should be open to the public, and that includes records of entities doing business with government agencies. In other words, if you want to have government bodies as your customers, one of the costs of doing business is having your formal interactions with them subject to public review.
The Red Cross has come under repeated criticism for poor performance at its core mission, disaster relief. The charity has an unusual quasi-public role by virtue of obtaining a Congressional charter in 1905 develop a system of emergency relief and disaster prevention. Thus, the Red Cross, as a charity, has long been a monopoly provider of national first/early responder services. No other charity has a similar stature or scope. While the Red Cross also receives a limited amount of funding from FEMA, the far more important aspect of its relationship with government is the considerable prestige and competitive advantage it has gained through its charter, which it had obtained through able performance under its founder Clara Barton in providing assistance in major calamities in the 19th century, such as the Great Fire of 1881 and the Jonestown Flood of 1889. The Red Cross also has a formal role in conjunction with FEMA in providing “mass care, emergency assistance, temporary housing” and other services.
Proof of the Red Cross’ de facto monopoly position comes through the fact that there is no organization to take over its role as its performance has faltered. The Red Cross was criticized for slow responses and waste of funds in 9/11 and Katrina. Congress forced governance changes on the Red Cross in 2007, but that was insufficient to lead to better results in Hurricane Sandy. As New York City readers may know, Occupy Sandy ran rings around the Red Cross in the hardest-hit areas here, particularly Staten Island.
That of course raised the obvious question: the Red Cross had solicited aggressively for funds during and shortly after the hurricane. Where did the $300+ million go? Why weren’t the relief services delivered well?
As ProPublca, which has been following this story diligently, complained that Red Cross spending was a “black box” and dug to find out what happened. From an April story:
When it comes to its Sandy spending, the Red Cross gives a dollar-figure breakdown in only the broadest of categories: Food and Shelter, Individual Casework, Housing and Community Assistance, and Relief Items are the four biggest.
The Red Cross also gives raw numbers of services provided in a different set of categories: emergency vehicles activated; relief items distributed; overnight stays in shelters provided; health and mental health contacts provided; meals and snacks served; and workers and volunteers mobilized.
Because the spending isn’t categorized in the same way as the numbers of services provided, one can’t calculate, for example, how much it cost for the Red Cross to provide 74,000 overnight shelter stays or what exactly it purchased for the $85 million it spent on individual casework.
Citing its finance tracking system, the Red Cross said it could not match up the categories for us.
This looks a lot like deliberate obfuscation, to make it impossible to calculate the cost of delivering particular services.
The latest sorry chapter is the New York State attorney general helping the Red Cross shroud its activities. Admittedly, Schneiderman has taken up an investigation of the Red Cross. However, when ProPublica tried to obtain a copy of the information that the charity sent to the Attorney General, the Red Cross’ law firm, Gibson Dunn, insisted that much of the material provided was a trade secret and thus not subject to disclosure under New York’s version of FOIA, the Freedom of Information Law, or FOIL.
Schneiderman’s response, which ProPublica published, shows how absurd and overreaching some of Gibson Dunn’s arguments were. For instance, the charity wanted the second line of a two line title redacted. The first line was “American Red Cross.” What could the second line possibly be that Gibson Dunn would contend that it deserved super secret status? The name of a legal entity?
But the troubling part is that Schneiderman, who has proven repeatedly to be an overly cautious prosecutor, took any of the Red Cross’ claims seriously. “Trade secret” status is based on the ability for competitor to do economic damage with the information. The only information in general that a charity possesses of this nature is related to donor giving: who the big donors are, what their giving patterns have been, and what sort of success they’ve had with various types of fundraising campaigns. Particularly for an organization as large and presumably as sophisticated as the Red Cross, that sort of know-how might be valuable, if it really were unique, as opposed to well-known and widely used solicitation and donor-grooming methods.
But with the Red Cross, you have to look at its monopoly provider status. Who can compete with them? The idea that some other organization is hot on its heels and eager to copy its methods is barmy. The closest direct competitor is Médecins Sans Frontières, which is not a player in US disasters, and local charities, which lack the clout and reach. So any claims regarding possible competitive harm should be regarded with extreme skepticism.
Yet Schneiderman took way too much of the Red Cross’ demand for special treatment at face value, and agreed to shield material related to “business strategies, internal operational procedures and decisions, and the internal deliberations and decision-making processes that affect fundraising and the allocation of donations.” I guarantee that like the private equity descriptions of their business strategies in limited partnership agreements that were released to the public, that there’s no special sauce in that, nor in anything else save possibly fundraising. The experts ProPublica quoted in its article also though the Red Cross claims were indefensible.
The good news is that fighting disclosure seems to have backfired on the Red Cross. As Barry Ritholtz at Bloomberg wrote:
I find it hard to believe that how a charity spends its money could possibly be a trade secret…
After Sandy, my wife suggested that instead of donating to the Red Cross as we usually do, we should consider local charities that could deploy money faster. We went with several local church groups that promised hot food and shelter for those whose homes were destroyed; for the rest of God’s creatures, it was the Little Shelter Animal Rescue & Adoption Center in Huntington, New York.
It is very disappointing to learn of this lack of transparency coming from the American Red Cross. I have no idea why it isn’t being more forthcoming about how it spent the $312 million in donations received after the storm. I’m left wondering if it failed to deploy that cash fast enough. Or perhaps more money was spent on administrative services and overhead than it claimed…
When giving to a charitable cause, donors want to know that their money is going to help victims of that tragedy. Historically, the Red Cross has said that 91 cents of every donated dollar reaches victims. That’s a good percentage, and it is no small part of why so many people feel comfortable donating to the Red Cross.
This isn’t the first time the Red Cross has balked at requests for greater transparency. There seemed to be a similar stonewalling after the Haiti earthquake, according to charity rater Givewell.org.
Nobody is obligated to give money to a charity — we just do because we want to help people in need. The very least we expect from these charities is transparency in how our donations are spent. Shame on the Red Cross for failing to provide that transparency. And shame on Gibson Dunn for putting forth such an intellectually disingenuous and dishonest defense.
As poor as the Red Cross’ conduct is, it should also be shame on Schneiderman for enabling this unjustifiable position. His knuckling under to the Red Cross extends the bad precedent of having private equity contracts with government investors exempted from public scrutiny. Contract bids and terms are also competitively valuable, yet heretofore, no one would have thought it acceptable to keep them from the media and interested citizens. But public officials like Schneiderman are all too willing to accede to private sector secrecy demands, no matter how ludicrous, which will make it easier for these organizations to hide incompetence and looting.