INTERNATIONAL JOURNAL OF CIVIL SOCIETY LAW
VOLUME III ISSUE 3
JULY 2005
IJCSL EDITORIAL BOARD
Prof. Karla W. Simon
Catholic University of America
EDITOR-IN-CHIEF
Paul Bater
International Bureau of Fiscal
Documentation
Dr. Leon E. Irish
Visiting Prof. of Law,
Catholic University
SENIOR EDITOR
SENIOR EDITOR
Nasira B. Razvi
NEWSLETTER EDITOR
Alaina Van Horn
D.L.R.F. di Piazza
ASSOCIATE EDITTOR
CONTRIBUTINIG EDITOR
C. J. Albertie
Maureen McCarthy
Sarah Bagely
ASSOCIATE EDITOR
Managing Editor
ASSOCIATE EDITOR
Donna M. Snyder
Stephen Young
EDITORIAL ASSISTANT
REFERENCE LIBRARIAN
CONTRIBUTING EDITORS
& CONTRIBUTORS
Prof. Myles McGregor-Lowndes
Prof. Susan Woodward
Dieter Hernegger
Daniela Pais Costa
AUSTRIA
BRAZIL
Terrance Carter
Prof. Debra Morris
Prof. Ge Yunsong
CANADA
CAYMAN ISLANDS
CHINA
AUSTRALIA
Dr. Petr Pajas
Michael Ernst-Pörksen
Paul Opoku-Mensah
CZECH REPUBLIC
GERMANY
GHANA
Noshir Dadrawala
Renata Arianingytas
Zahra Maranlou
INDIA
INDONESIA
IRAN
Dr. Hadara Bar-Mor
Dr. Alceste Santauri
Tatsuo Ohta
ISRAEL
ITALY
JAPAN
Dr. Abdullah El-Khatib
Elkanah Odembo
Qadeer Baig
JORDAN
KENYA
PAKISTAN
Bayarsetseg J.
MONGOLIA
Dr. Christine Barker
Ros Harwood
Beatriz Parodi Luna
Karen Nelson
PERU
SOUTH AFRICA
Karin Kunstler Goldman
Dr. Antonio Itriago
Paul Bater
UNITED STATES
VENEZUELA
WESTERN EUROPE
2
UNITED KINGDOM
LETTER FROM THE EDITOR
29 July 2005
Dear Friends,
Writing once again from South Africa (though we leave on Sunday), I am pleased to call your
attention to another issue of IJCSL, which is being published on both the Catholic University of
America (CUA) website and the new ICCSL site at www.iccsl.org. I hope you will explore the
new site – it is quite rich, in terms of project descriptions, papers, and documentation. Please
email us with any questions or suggestions.
This issue of IJCSL is quite a full one, with various articles and country notes. We have two
”Perspectives” pieces, dealing with such issues as a “rights-based approach to development,” by
Leon Irish, Recurrent Visiting Professor of Law at Central European University, and Making the
Best Use Of the Auditing Process, by Ruth McCambridge, Editor of the Nonprofit Quarterly.
Our articles come from a variety of sources. The article by Julie Manning Magid and Jamie Darin
Prenkert, Assistant Professors of Law, Indiana University Kelley School of Business discusses
The Religious and Associational Freedoms of Business Owners, and is reprinted here with the
kind permission of the University of Pennsylvania Journal of Labor and Employment Law.
Alaina Van Horn, who is a rising third year student at CUA, provides interesting observations
about the role and development of civil society in Germany today.
Tamuka Muzondo, a candidate for a PhD in law at the University of KwaZulu Natal and a
Research Associate of the African Centre for Civil Society Law (ACCSL – founded this month
by ICCSL in Cape Town), has written an interesting paper on the involvement of civil society
with institutions related to the African Union. We also feature a Special Section of articles, in
which we publish papers presented by Profs Tymen van de Ploeg, P. Ishwara Bhat, and Karla W.
Simon at the Bei Da Forum on NPO Law, held in Beijing in March 2005.
Our country reports feature The AccountAid Team, writing about the proposed revision of the
FCRA in India; Frits Hondius, writing about the Warsaw Summit of the Council of Europe;
Nasira Razvi, writing in detail about the legal framework for civil society in Pakistan; and A
Point-Counterpoint debate about legal reforms in South Africa.
Please read all of these in good health and write to us with any questions or concerns.
Peace,
Karla
3
TABLE OF CONTENTS
IJCSL EDITORIAL BOARD
LETTER FROM THE EDITOR
TABLE OF CONTENTS
IJCSL EDITORIAL POLICY
PERSPECTIVES
The Right to Development Versus a Rights-Based
Approach to Development
Making the Best Use of the Auditing Process
ARTICLES
The Religious and Associational Freedoms of
Business Owners
Civil Society Participation in the
African Union and NEPAD
Causes of the Bipartite Structure of the Third Sector
in Germany: Public perception and
the principle of subsidiarity
2
3
4
5
6
Leon Irish
9
Ruth McCambridge
15
Julie Manning Magid & Jamie Darin
Prenkert
42
T.H. Muzondo
53
Alaina Van Horn
61
Karla Simon
62
Tymen J. van der Ploeg
73
P. Ishwara Bhat
97
Karla Simon
98
Frits Hondius
102
AccountAid Team
113
Nasira Razvi
114
115
116
IJCSL Staff
Yvonne Morgan
Karla Simon
129
Organized by Eduardo Szazi
SPECIAL SECTION: PAPERS PRESENTED AT
THE BEI DA NPO LAW CENTER FORUM:
MARCH 2005
Introduction
The Legal Framework for Non Profit Organizations
in The Netherlands and Other Western European
Countries
Basic Features of the Legal Framework of the Non
Profit Sector in India
COUNTRY REPORTS
EUROPE REGIONAL
Reform Of China’s Laws For NPOs: A Discussion Of
Issues Related To Shiye Danwei Reform
Civil Society in the Perspective of the Warsaw
Summit of May 2005
SOUTH ASIA
Foreign Contribution (Management & Control) Bill,
2005
Country Note: Pakistan
SUB-SAHARAN AFRICA
Introduction
How is Good Governance Achieved?
South Africa Update
BOOK ANNOUNCEMENT
Third Sector Polemical Issues 2
4
IJCSL EDITORIAL POLICY
July 2005
Dear Reader
CONTENT—IJCSL PUBLISHES ARTICLES ON A VARIETY OF TOPICS, seeking to
provide a venue for an international readership to learn about and express opinions on
developments in law affecting civil society. These topics and the array of opinions on them are
complex and sometimes controversial. The opinions expressed do not necessarily reflect the
views of IJCSL or its editorial staff.
STYLE—IJCSL PUBLISHES ARTICLES BY CONTRIBUTORS FROM AROUND THE
WORLD. Therefore, IJCSL uses a flexible editorial policy regarding questions of style. Articles
submitted by persons for whom the English language is native are edited based on the author's
original syntax and spelling.
Articles submitted by persons for whom the English language is not native are edited according to
American English style. Occasionally, IJCSL publishes articles in languages other than English.
In those instances, articles are published as submitted and IJCSL provides an English-language
summary.
QUESTIONS & COMMENTS—IJCSL WELCOMES READERS’ QUESTIONS &
COMMENTS on items published in its pages. If you have a question or comment, please contact
Karla W. Simon, Editor-in-Chief
Maureen McCarthy, Managing Editor
simon@cua.edu
40mccarm@cua.edu
IJCSL RETAINS FINAL EDITORIAL CONTROL of all aspects of publication and will
share copyright with authors.
We look forward to hearing from you.
Thank you.
PLEASE CITE AS
3 INT. CIV. SOC. LAW at http://www.law.cua.edu/Students/Orgs/IJCSL
5
PERSPECTIVES
THE RIGHT TO DEVELOPMENT VERSUS A
RIGHTS-BASED APPROACH TO DEVELOPMENT
BY LEON E. IRISH*
More than 30 years ago, in 1986, the UN General Assembly adopted a Resolution recognizing the
“right to development.”1 This right has been controversial from the beginning. Many have argued
that, if there is such a right, it adds nothing to the collection of civil and political (“first
generation”) rights and the economic, social, and cultural (“second generation”) rights that are
enshrined, respectively, in the International Covenant of Civil and Political Rights (ICCPR)2 and
the International Covenant of Economic, Social, and Cultural Rights (ICESCR).3 Others have
insisted that “development” cannot be a right because its content is vacuous and uncertain, there
are no identifiable duty-holders, and it is not “justiciable” – i.e., it is not enforceable in court.
Critics of the right to development (RTD) point out that it was promulgated only as a
Resolution of the General Assembly of the UN and does not have the binding, legal force of a
multilateral treaty. Under the ICCPR states party have clear legal obligations to protect, respect,
and fulfill civil and political rights. Under the ICESCR, by contrast, each state party is legally
obligated merely to take “steps . . . to the maximum of its available resources, with a view to
achieving progressively the full realization of the rights.”4
Defenders of the RTD agree that it involves all of the rights guaranteed under the ICCPR and
the ICESCR, but contend that, by bringing them all under one tent, the RTD associates
development with the principles of equity and justice, including the need to establish equity
between the countries of the North and the South. Defenders further argue that the inability to
identify a specific duty-holder makes the RTD an “imperfect” obligation, and perhaps not a
legally enforceable one, but that it is an obligation nonetheless, a moral, not a legal, one.5 It may
be a “third generation” right, but it is a right nonetheless.6
This debate has raged for decades, usually with representatives of developing countries on
one side and those of developed countries on the other. By now the RTD has become an almost
ubiquitous term in the rhetoric of development and human rights, but it has most often been a
slogan used to make politicians, diplomats, and bureaucrats feel and sound good, without
involving anything of substance.
*
President, International Center for Civil Society Law. Dr. Irish teaches the basic course on International
Human Rights at Central European University.
1
http://www.unhchr.ch/html/menu3/b/74.htm.
2
http://www.unhchr.ch/html/menu3/b/a_ccpr.htm.
3
http://www.unhchr.ch/html/menu3/b/a_cescr.htm.
4
The arguments for and against the right to development are ably surveyed in Stephen Marks, Obstacles to
the Right to Development, http://www.hsph.harvard.edu/fxbcenter/FXBC_WP17--Marks.pdf (2003).
5
E.g., Arjun Sengupta, The Right to Development as a Human Right,
http://www.hsph.harvard.edu/fxbcenter/FXBC_WP7--Sengupta.pdf (2000). Arjun Sengupta is the
Independent Expert on the Right to Development for the UN Human Rights Commission.
6
There is also a legal debate as to whether groups and communities, rather than individuals, can be said to
have human rights, including the RTD.
6
The defenders of RTD have a difficult task. Even in the Declaration on the Right to
Development, it was recognized that, whereas developing states have an obligation to adopt
national laws and policies that assure development and a fair distribution of income, developed
states have only the “the duty to take steps . . . to formulate international development policies
with a view to facilitating the full realization of the right to development.”87 In other words, donor
nations should facilitate the realization of the RTD, but they have no legal obligations to do so,
nor do recipient states or peoples have a right to demand aid from one or more donors. Even the
Vienna Declaration of 1993, that emerged from the World Conference on Human Rights,
recognized that “the processes of promoting and protecting human rights should be conducted in
conformity with . . . international law,” under which it is very clear that one state cannot demand
that another provide something if there is no legal obligation to do so. International development
aid, in other words, lies within the policy discretion of each donor nation.
The RTD remains part of the rhetoric of human rights, and the UN Commission on Human
Rights continues to have annual meetings on the RTD, but it was essentially abandoned as a
serious contender for donor attention in 2003. In that year, at a United Nations Inter-Agency
Meeting, a consensus was achieved on the key components of a “human rights-based approach to
development.” The essential components of a rights-based approach to development (RBAD) are:
•
•
•
The requirement for development assistance to contribute to the realization of human
rights as laid down in international law and international instruments;
The use of human rights standards and principles at all levels of programming; and
The provision of assistance to both those claiming rights (rights-holders) and those
with rights obligations (duty-bearers).8
An RBAD does not depend upon the RTD. It recognizes developing nations as the principal
duty-holders to implement the First and Second generation rights. It seeks to assist them to fulfill
their obligations as duty-holders and to help the individual rights-holders to receive them.
An RBAD can significantly affect the strategies and programs of a donor nation. Under an
RBAD people are recognized as key actors in their own development, rather than passive
recipients of donated commodities and services; they are partners in the planning and
implementation of assistance programs. RBAD brings front and center key principles of
international human rights, including universality and inalienability; indivisibility;
interdependence and inter-relatedness; equality and non-discrimination; participation and
inclusion; and accountability and the rule of law.
Under a RBAD donors maintain full discretion over their development assistance programs
(including whether to have one at all). Thus, adoption of an RBAD does not require a donor state
to acknowledge that it has international law obligations to provide development assistance. But a
RBAD can have a profound effect on the way in which an assistance program of a donor is
designed, implemented, and carried out. For example, DFID, which has adopted a RBAD, now
puts great emphasis on assisting in the enactment of legislation and the development of effective
remedies in recipient countries to enforce first and second generation rights.9
7
Declaration on the Right to Development.htm. See Articles
2(3) & 4(1).
8
See generally DFID Human Rights Review,
http://www.odi.org.uk/PPPG/publications/papers_reports/dfid/issues/rights01/DFIDRightsReview07.04.pdf
(2004) at p. 16.
9
See id, and especially Annex 6.
7
In Malawi, for example, DFID has established three key components to its development
programs:
•
•
•
Improving the responsiveness and accountability of the state to citizens
(elections, parliament and other accountability institutions);
Improving the capacity of the poor to define, understand and demand their rights
(in a number of sectors such as health, education or livelihoods); and
Support to CSOs to provide a link between community-based, demand-side
interventions and supply side institutional support.10
The way in which an ARBD can shape development strategies is illustrated by DFID’s
activities in Bolivia, where it has contributed (with other donors) to supporting the Public
Defender, a mediatory space between government and civil society. DFID supported the
consultation process for elaborating the PRSP [Poverty Reduction Strategy Paper] in which the
issues of poverty, inequality and social exclusion were highlighted. The goal of DFID’s future
strategy is that state and society should work together to achieve sustainable poverty reduction,
with the specific aim of bringing a strong rights-based focus to development and promoting the
inclusion of the excluded throughout the program.11
People will no doubt continue to disagree about whether or not there is a right to
development. By shifting serious discussion to a rights-based approach to development, however,
donors are able to focus their aid programs and procedures on ways to implement important first
and second generation human rights while avoiding the increasingly arid debate over the “right to
development.”
10
11
Id at p. 33.
Id. at p. 31.
8
MAKING THE BEST USE OF THE AUDITING PROCESS
BY RUTH MCCAMBRIDGE*
Relationships with auditors have been a central issue in corporate scandals such as Enron and
WorldCom. It was addressed by the Sarbanes-Oxley reform for public companies and has rightly
been a nonprofit sector concern.
The Senate Finance Committee proposals have focused on whether audits should be
mandated for nonprofits (and if so, at what threshold level) whether rotation of auditors should be
required, and what other accountability and reporting measures should be established. Before
either embracing or rejecting these proposals, it is critical to understand what an audit does and
does not provide. This article addresses what boards (and management) should expect from the
audit process, as well as ways to evaluate whether the best services are being provided.
AUDITS AND ACCOUNTABILITY
How are financial statement audits related to accountability? What does an audit really tell the
reader of financial statements? Simply stated, an audit tells the reader whether the financial
information that management has reported to the auditors properly portrays the financial health of
the organization as of a given date (typically it’s year-end, although audits should also report
substantial subsequent events). So, assuming an “unqualified” audit opinion, the reader can take
some comfort that financial information presented by management can be relied upon.
The audit opinion itself does not address the systems or procedures at an organization that
helped to create these figures, nor does it provide any form of assurance on these systems or
procedures. No one outside the organization and its board should rely on an organization’s
financial statement audit opinion to gauge the efficiency and effectiveness of an organization’s
internal reporting mechanisms.
During the audit, the auditor may discover weaknesses or areas of potential problems in an
organization’s internal controls, but this is not specifically communicated in the audit opinion on
the financial statements. In fact, this information—which should be communicated by the auditor
to the board as a by-product of the audit process, in the form of a “management letter”—is
generally private information for the board of the organization and not for public consumption
TALKING TO THE EXPERTS
Nonprofit Quarterly editors recently had the opportunity to interview Julie Floch, CPA, Director
of Not-for-Profit Services at Eisner LLP, and Bill Josephson, former Assistant Attorney General
in charge of the Charities Bureau of New York Attorney General Eliot Spitzer’s Law Department,
about their views on organizational governance concerns and the audit process. Anyone who
*
Printed with kind permission of and authored by the editors of Non Profit Quarterly. For more
information about this article and Non Profit Quarterly, please visit nonprofitquarterly.org. Regulation and
Accountability: The New Wave, Regulatory Landscape 2005, Volume 12, Special Issue.
9
knows these two knows that they often agree to disagree, but there were many points on which
they concurred, mainly on the importance of the nonprofit sector and the absolute requirement for
stronger assumption of responsibility and accountability by nonprofits, their boards, and the
auditors who serve them.
First, to set the stage: Bill Josephson is an imposing figure. He seems to enjoy scaring the
bejeezus out of people (albeit for their own good) by asking them questions that test their
understanding of their own fiduciary responsibilities. Julie Floch is a diminutive figure, but not
exactly a retiring personality. In our session with them they went toe-to-toe primarily about the
fascinating topic (in their opinion) of the appropriateness of the audit process, the stance of
boards and management with regard to this process, and other governance concerns.
Both believe, as stated previously, that there are critical governance and reporting issues that
are not reflected in an audit report, including potential or real problems in the checks and
balances of the financial systems. And sometimes, those problems conceal improper practices,
fraud, or even insolvency. Thus the outside reader of the financial statements, while perhaps able
to rely on the year-end financial information shown, is unable to gauge what is “really going on”
at the organization from the financial statements alone.
As Floch observes:
An unqualified opinion by an auditor does not indicate the quality of
management’s reporting processes underlying the financial information shown.
For example, an auditor can begin the audit fieldwork and recommend many
substantial adjustments to the financial statements in order for them to be fairly
stated in conformity with generally accepted accounting principles. If
management agrees, it adjusts the financial statements. The adjusted financial
statements are then released into the marketplace with an unqualified auditor’s
opinion—because the information presented is now fairly stated in conformity
with generally accepted accounting principles. By contrast, another organization
presents its financial statements to the auditors, and the auditors test the
information presented, and find that they have no adjustments to recommend
because they believe the information as presented is fairly stated in conformity
with generally accepted accounting principles as is. This audit also goes out into
the marketplace with an unqualified opinion. And yet, we would all agree that in
the first case the organization is probably operating with poor and inaccurate
information, perhaps leading it to make dangerous fiscal decisions, while the
second organization’s financial systems are more reliable.
The public looking at these two sets of financial information has no way of knowing
what the audit fieldwork processes were behind either opinion. There is no tool that
communicates to the public (although as mentioned before, there should be a
management letter presented internally) that on this internal control level the organization
is not functioning as it should. The audit report merely signifies that the auditor believes
that the financial information in the financial statements at that point in time is fairly
stated, regardless of the processes used to get to those figures.
Josephson is critical of this and believes “too many auditors do not properly assess the
organization’s ability to continue to operate.” He believes that auditors’ concerns about the
organization’s ability to continue as a “going concern,” if it exists, should be communicated in
the audit opinion well before insolvency is imminent.
10
RECOMMENDED RESOURCES FROM JOSEPHSON AND FLOCH
Audit Committees: information sheets on audit committees produced by the National Council of
Nonprofit Associations to provide guidance on the role of the audit committee:
www.ncna.org/index.cfm?fuseaction=Page.viewPage&pageId=429
Josephson and Floch also recommend two resources, which they were active in producing,
available from the New York Attorney General’s Web site:
Financial Controls: Internal Control and Financial Accountability reflects some of the spirit
of the discussion reflected in the article: www.oag.state.ny.us/charities/internal_controls.pdf
Board Responsibilities: Right From The Start is a guide for board members:
www.oag.state.ny.us/charities/not_for_profit_booklet.pdf
WHERE THE EXPERTS AGREE
Josephson and Floch agreed that the audit’s usefulness to management and the board is severely
curtailed if it is not accompanied by a detailed management letter and a meeting with the
appropriate board oversight committee (preferably the audit committee, but if not, then the board
of directors itself) to discuss the audit process and audit findings (including the processes that
were needed to adjust the financial statements). While the auditor can communicate these
management letter findings either orally or in writing, both stressed that the board should insist
that the communication be in writing. Josephson said that he has seen many instances where there
were no management letters provided to organizations where the internal controls were clearly
lacking, and he believes that to be the result of poor training and expertise of some auditors who
work in the nonprofit field and others who may not accord to their nonprofit work the same
standards and practices they accord to their for-profit work. He believes these auditors should be
held accountable for the resulting failures of these organizations.
Even if an organization would prefer not to receive a written management letter, Floch
believes it is in the auditors’ best interests to provide one. She told us that one management
executive said to her after she had delivered to his organization a lengthy management letter,
detailing problems with the internal control structure and reporting processes, “You know what I
do with your management letter? I take it politely, put it on the floor, jump all over it, and throw
it out.” As one of the comments in the management letter addressed the lack of attention paid to
the organization by the board, Floch says she resigned this particular engagement the day after the
incident occurred, realizing there was no hope of improvement there.
Both Josephson and Floch agree, therefore, that boards should not be satisfied with an
unqualified audit opinion, without a full and complete understanding of the management letter
comments as well. The organization may still have quite serious and unaddressed problems that
could eventually position them on the front page of the Chronicle of Philanthropy, even if the
financial information is fairly stated at a point in time.
Josephson said that the New York Attorney General’s Charities Bureau had prepared changes
to its regulations under which auditors for filers would separately alert the Bureau to the issuance
of qualified opinions and also provide the Bureau on a confidential basis with copies of
11
management letters. He also talked about the importance of having a nonprofit site (similar to the
Securities and Exchange Commissions for publicly held companies) for reportable events. Thus
contributors, grantors, and regulators would have early warning of substantial issues.
Long story short: boards or their audit committees must involve themselves in the audit
process and take responsibility for managing it. To do otherwise would be foolhardy.
ON AUDITOR ROTATION
Neither Josephson nor Floch came down on the side of regulated rotation of audit firms
Josephson, because he considers the feasibility of regular rotation of audit firms to be dependent
on the size and importance of the organization, geographic location, numbers of available
qualified auditors, and the extent to which the organization raises money from the public. Floch
agreed with this, and in addition had concerns about the impact on the pricing structure that
rotation could cause, as new engagements are initially more costly. Auditors’ fees usually allow
for an investment in the first year’s engagement, but might be structured differently if the period
of engagement were finite.
The core issue addressed by the rotation of audit firms is whether a long-term relationship
with the firm leads to a lack of independence. In the public sector, the SEC requires a rotation of
audit partners (not audit firms) every five years, in the belief that this promotes a clearer line
between auditor and client. The SEC also has strict rules limiting other work that auditors can do
for their audit clients, to keep the audit relationship from having potential conflicts of interest.
This has started to be the norm in other “non-public” engagements as well, as both the American
Institute of Certified Public Accountants and the GAO have issued guidance restricting the other
types of work that auditors can do for their audit clients. There are those in the marketplace who
believe that rotation of auditors can lead to a “fresh look,” though neither Josephson nor Floch
believes that this fresh look should necessarily be legislated.
Josephson has an example of what he considers to be a clear conflict of interest in an
auditor/client relationship, which he believes might not be all that uncommon in organizations
that operate too informally. “This foundation had a lawyer-chairman-director who made a
personal investment in an entity that was going south. In order to shore up his personal
investment, he had the foundation make an investment in this entity as well—clearly improper
behavior on his part, but his accountant, who knew the trouble with his personal investment, was
also the auditor for the foundation. Was it the duty of the auditor to report to the board the
inappropriateness of that transaction? Absolutely. Independence is very important in these
matters.”
He also spoke of instances when even “big four” firm auditors who had audit relationships
with two interrelated organizations seemed to have no understanding that they owed an equal
(even special) fiduciary duty to each, even if one had a degree of (or even total) control over the
other.
Both Floch and Josephson were adamant about understanding the competence of the audit
firm the audit team (including the partner), and the value of the services provided —both
economically and in terms of whether the audit firm is a “fit” for the organization. They believe
that this relationship should also be examined on a periodic basis to make sure that the board (not
management) is still satisfied with the services provided.
12
Both called attention to the availability of professional peer reviews and, with respect to
auditors who also audit public companies, information from the new Public Companies
Accounting Oversight Board.
ON AUDIT COMMITTEES
The board (or its audit committee) should have full responsibility for management of the audit
process, including hiring the auditor; approving the fee structure and services to be performed;
approving the audit approach; discussing the audit fieldwork results with the auditors; and
reviewing all auditor-proposed adjustments resulting from the audit process, among other
functions. The audit committee should approve the financial statements and review the
management letter. Josephson believes strongly that organizations should establish fully
functioning separate audit committees to manage this process. He believes that the audit
committee should be separate from the finance committee, as “the danger is that if you are really
functioning properly in your finance committee role and overseeing the company’s financial
reporting over the course of the year, you’ve lost some of your objectivity.” For some
organizations, particularly those with small boards, an audit committee might not be practical
because of the possible overlap between those on the finance committee and an audit
committee—in such cases the entire board should act as the audit committee.
RECOMMENDATIONS TO BOARDS
Understand that the board of the organization (not management) is the audit client, and that it
needs to take responsibility for ensuring that the audit process is adequate and appropriate.
Check the references of your auditors. Read the peer review reports of the auditors. Evaluate
their knowledge and expertise in the nonprofit field. Choose one who agrees to issue a
management letter that addresses both the appropriateness of the organization’s current practices
and recommends corrections and improvements in the financial systems. Make sure the auditor
has the expertise to assist with the preparation of the tax filings (if required), and is prepared to
address them in a timely manner as well. Make sure that the fee is fair and consistent with the
marketplace.
Insist upon a written management letter to the board and immediately create a plan to
implement its recommendations. Remember that a significant amount of time may have elapsed
from the end of the fiscal year to receipt of the management letter, so it is important to address its
concerns expeditiously.
Auditing standards require that management makes some dozen or more written
representations to the auditors—more in unusual situations. If your auditor is not doing this,
consider retaining another auditor.
Don’t use your auditor or auditing firm for other organizational or personal functions; make
sure you are comfortable that independence is present, and that conflicts of interest do not exist.
If an audit is not required, or undertaken, make sure that the board (or its committee)
understands the processes for developing financial information that is reliable. Understand the
internal controls that are in place at the organization, and make sure that regular updates about
13
these controls are provided to the board by the CEO and CFO. Implement a conflict of interest
policy for both management and the board, so that outside relationships do not influence the
decision-making processes for the organization. Remember that under Sarbanes-Oxley, all
organizations must have written whistleblower and record retention policies.
Monitor carefully the progress of the various proposals made in Congress and by the various
state charities regulators, for example that the board chairs, CEOs, and CFOs certify the adequacy
of internal controls and the accuracy and completeness of IRS and state filings.
And finally, understand what assurances the audit process can and cannot provide. If you
have the right auditor and the right board (okay, we know this is a tall order), the results from the
audit process should go far beyond merely the audit opinion on the financial statements.∗∗
Copyright 2005. All rights reserved by Third Sector New England, Boston, MA. The Nonprofit
Quarterly features innovative thinking and management practices in the nonprofit sector. For
reprint permission or subscription information please e-mail subscriptions@tsne.org.
∗∗
14
ARTICLES
THE RELIGIOUS AND ASSOCIATIONAL FREEDOMS OF BUSINESS OWNERS
BY JULIE MANNING MAGID AND JAMIE DARIN PRENKERT*
May private employers who are not exempted from Title VII1 as religious employers but who
nonetheless wish to pursue a niche market of catering to and advocating a narrow theological
orientation employ only those with a shared religious practice or belief? Recent United States
Supreme Court decisions have strengthened free exercise2 hybrid rights3 and, in particular,
freedom of association,4 which necessarily contracts the reach of antidiscrimination legislation.5
The theoretical parameters of these decisions grant currently non-exempt religious employers,
albeit perhaps unintentionally, the constitutionally protected right to promote religion and exert
their associational freedoms through their employment decisions, in particular the decision to hire
only those individuals who share and who are willing to promote the employer’s religious beliefs
and values.6
That the employer devoted to employing co-religionists has emerged as the chief beneficiary
of Smith’s7 lowering the scrutiny of government intrusion in free exercise claims may be ironic,
but it is a result following the emergence of expressive association as a trump to
antidiscrimination legislation in Dale.8 Thus, the end of the Sherbert9 era did not necessarily
bring about a wholesale defeat for the free exercise of religion but instead is marked by an
expanding definition of religion and a resurgent commitment to less encumbered associational
*
Assistant Professors of Law, Indiana University Kelley School of Business. We are grateful to Douglas
Laycock and Eugene Volokh for their comments as we were developing this Article. Our thanks to the
participants in the Eighth Annual Huber Hurst Research Seminar co-sponsored by the University of Florida
and the Wharton School of Business for their diligence and insights.
IJCSL publication permission kindly granted from University of Pennsylvania Journal of Labor and
Employment Law editors. Copyright (c) 2005 The Trustee of the University of Pennsylvania.
Cite as 7 U. Pa. J. Lab. & Emp. L. 191
1
42 U.S.C. § 2000e (2000).
2
U.S. CONST. amend. I.
3
Employment Div., Dep’t of Human Res. of Or. v. Smith, 494 U.S. 872, 881 (1990) (linking free exercise
rights with other constitutional protections that, conjoined, receive heightened scrutiny); see William L.
Esser IV, Note, Religious Hybrids in the Lower Courts: Free Exercise Plus or Constitutional Smoke
Screen?, 74 NOTRE DAME L. REV. 211 (1998) (discussing hybrid rights).
4
U.S. CONST. amend. I.
5
References to antidiscrimination legislation in employment are meant to reference Title VII and state
statutes, many of which simply mirror the provisions of Title VII. This general reference also incorporates
federal civil rights statutes prohibiting discrimination on other grounds and their state counterparts. See,
e.g., Americans with Disabilities Act of 1990, 42 U.S.C. §§ 12101–12213 (2000) (prohibiting
discrimination on the basis of disability, record of disability, or perceived disability); Age Discrimination in
Employment Act, 29 U.S.C. §§ 621–634 (2000) (prohibiting discrimination on the basis of age involving
employees over forty years of age); Equal Pay Act, 29 U.S.C. § 206(d) (2000) (prohibiting wage
discrimination based on gender). Courts routinely interpret these statutes and their respective enforcement
schemes consistently with Title VII.
6
See infra Part III.C.
7
Smith, 494 U.S. at 883
8
Boy Scouts of Am. v. Dale, 530 U.S. 640 (2000).
9
Sherbert v. Verner, 374 U.S. 398 (1963).
15
freedoms, which have created a super-hybrid protecting the employment decisions of those
business owners with a devotion that is considered religious.
This super-hybrid right has important implications for the private employer who chooses coreligionist employees over otherwise qualified individuals to promote a religious message. While
clearly not overwhelming in their representation in American business, such companies can and
do enter the marketplace. In EEOC v. Preferred Management Corp.10 the owners of a home
health care agency were born again Christians who adhered to “The Great Commission,” a
religious directive to go into the world and share their faith.11 “The world” includes their
workplace.12 Can these business owners hire only co-religionists who share their faith and who
will promote their religious beliefs to their clients while at the same time functioning as home
health care providers?13 A second related, yet distinct, example of an employer whose behavior
implicates the constitutional issues addressed in this Article is the business owner whose religious
worship requires substantial time diverted from the typical workday. For this reason, the business
is designed to accommodate the employment needs of co-religionists. Any positions filled by a
non-adherent to this belief system results in one less employment opportunity for a co-religionist,
who must then choose between worshiping according to the religion’s beliefs and earning a
livelihood. Therefore, the owner reserves all positions for co-religionists.
These scenarios are raised by the nexus of three strains of constitutional jurisprudence: free
exercise, the Establishment Clause, and freedom of association. We do not advocate for an
expanded understanding of these constitutional protections. Instead, we present the recent
Supreme Court rulings that have broadly interpreted an organization’s expressive association
rights. This Court’s broader application of freedom of association has significant impact when
considered with a free exercise of religion claim. This Article urges a consideration of the impact
of the super-hybrid right on civil rights legislation before constitutional jurisprudence forces an
unexamined conclusion.
At the very core of this issue is the question of constitutional tension between freedom and
equality.14 In particular, religious diversity is a constitutional strength and conundrum because
tolerance for religious beliefs does not promote necessarily tolerant beliefs. Dale portends an
important shift in the constitutional balance toward promoting associational freedom over
equality.
This Article argues that deference toward both religious and associational freedoms need not
eclipse equality protections. In light of the free exercise hybrid right created – even if
inadvertently – by the Court’s recent decisions, the context of Title VII antidiscrimination
10
216 F. Supp. 2d 763 (S.D. Ind. 2002).
Id. at 772–73; see Matthew 28:19-20 (King James) (“Go ye therefore, and teach all nations, baptizing
them in the name of the Father, and of the Son, and of the Holy Ghost. Teaching them to observe all things
whatsoever I have commanded you. . . .”).
12
Preferred Mgmt. Corp., 216 F. Supp. 2d at 773.
13
The facts of Preferred Management do not raise this precise issue because the owners of the home health
care agency knowingly hired both adherents and non-adherents to their belief system and then subsequently
tried to convert the non-adherents. Id. (“Preferred employs an ‘evangelism and discipleship’ subcommittee
whose members have prayed for the salvation of employees.”).
14
See Alan Brownstein, Symposium, Protecting Religious Liberty: The False Messiahs of Free Speech
Doctrine and Formal Neutrality, 18 J.L. & POLITICS 119, 119 (2002) (“The core of our legal and political
culture has been pragmatism and experimentation, not a commitment to unchangeable absolutes and fixed
principles.”).
11
16
legislation must be considered.15 Expanding the category of exempt religious employers to
accommodate the employers who advocate and advance their religious beliefs through their
occupational pursuits and employment decisions strikes the appropriate balance between overand under-protectiveness.16 Through this recommendation, business owners whose main purpose
is a devotion that is religious will attain the right to employ co-religionists to carry out that
purpose. In contrast, a business may not base employment decisions on religious belief if its
owners are religious or have a religious niche but do not have a goal to advance or advocate a
particular religious belief system or practice through the business. In formulating this response to
the tension between broad associational freedoms and civil rights legislation, the Article
contextualizes the current standard for religious exemptions under Title VII as impacted by the
changed emphasis in religious and associational freedoms that now join to create a super-hybrid
right.
Necessarily, the courts must treat religion under Title VII differently from other protected
classes. Part I of this Article highlights the unique nature of religious freedom as evidenced by the
religious employer exemption from Title VII.17 Courts generally do not treat this exemption
broadly,18 but an interpretation that is too narrow implicates the Establishment Clause19 and its
parallel values of separation and neutrality.20 Concurrently, the Free Exercise Clause is emerging
as a challenge to federal and state antidiscrimination laws. Part II examines Smith as a shift away
from traditional categories of religion toward an emphasis on any additional rights implicated
with free exercise to form a hybrid right entitled to heightened scrutiny. Part III then recognizes
Dale as providing broad associational freedoms with no consideration of the limiting parameters
previously defining expressive association. Thus, the combination of religious exercise and
association freedom forms a superior hybrid right with a broad emphasis on freedom over
equality. Part IV offers a method by which this right may be contained within the established
religious employer exemption to permit co-existence between well-recognized freedoms and a
waning judicial interest in civil rights legislation.
I. THE RELIGIOUS EMPLOYER EXEMPTION OF TITLE VII
A. RELIGION FAILS TO CONFORM TO TITLE VII PARADIGM
Religion as a basis for protection from discrimination in employment has been different from
other protected categories of Title VII of the Civil Rights Act of 196421 from its inception. Title
15
See infra Part II.B.
See Roberts v. U.S. Jaycees, 468 U.S. 609, 632 (1984) (O’Connor, J., concurring) (voicing concerns the
Court’s test for associational freedoms is both “overprotective of activities undeserving of constitutional
shelter and underprotective of important First Amendment concerns.”).
17
42 U.S.C. § 2000e-1(a) (2000).
18
See infra note 40 and accompanying text.
19
U.S. CONST. amend. I.
20
See infra Part I.C. But see Brownstein, supra note 14, at 120–21 (positing that formal neutrality and “the
subsuming of religion under the rubric” of free speech are replacing the doctrine of separatism).
21
42 U.S.C. § 2000e-2(a) (2000) of Title VII provides:
(a) It shall be an unlawful employment practice for an employer –
(1) to fail or refuse to hire or to discharge any individual, or otherwise to discriminate against any
individual with respect to his compensation, terms, conditions, or privileges of employment, because of
such individual’s race, color, religion, sex, or national origin; or
(2) to limit, segregate, or classify his employees or applicants for employment in any way which would
deprive or tend to deprive any individual of employment opportunities or otherwise adversely affect his
16
17
VII represents the traditional antidiscrimination model,22 what we refer to as the Title VII
paradigm. This paradigm wholly rejects discrimination on the enumerated bases permitting only
the very narrow bona fide occupational qualification (BFOQ) exception.23 The Title VII paradigm
proved problematic only for the protected category of religion.24 As a result of the unique
constitutional protection of religion, accommodation of employees’ religious practices is included
in legislation otherwise developed in an antidiscrimination paradigm.25 The Free Exercise Clause
and the Establishment Clause of the Constitution26 require a delicate balance of permitting
religious freedom, yet avoiding government endorsement. Part of this balancing includes the
exemption for religious organizations from Title VII’s prohibition of religious discrimination.27
Defining “religion” for purposes of Title VII calls into question these same constitutional
protections.28 The EEOC Guidelines29 utilize the term itself in a circular definition derived from
the Welsh30 and Seeger31 decisions. Thus, courts look to whether a belief is held as “religious”
without defining the differentiation between values or priorities from religion.32 Many
commentators and courts favor avoiding differentiation between religious and nonreligious belief
systems by focusing on the broader interpretation of feelings of the conscience established by the
Selective Service for conscientious objector purposes.33
status as an employee, because of such individual’s race, color, religion, sex, or national origin. Id.
22
For an excellent discussion of the paradigms of antidiscrimination and accommodation, see Christine
Jolls, Antidiscrimination and Accommodation, 115 HARV. L. REV. 642 (2001).
23
42 U.S.C. § 2000e-2(e)(1) (2000); see infra Part IV.B.
24
However, the protected category of sex later proved problematic as applied to pregnancy. See generally
Julie Manning Magid, Pregnant with Possibility: Reexamining the Pregnancy Discrimination Act, 38 AM.
BUS. L.J. 819 (2001).
25
Cf. Erickson v. Bd. of Governors of State Colls. and Univs. for Northeastern Ill. Univ., 207 F.3d 945, 949
(7th Cir. 2000) (“Title I of the ADA, by contrast, requires employers to consider and to accommodate
disabilities, and in the process extends beyond the anti-discrimination principle.”).
26
U.S. CONST. amend. I (“Congress shall make no law respecting an establishment of religion, or
prohibiting the free exercise thereof . . .”).
27
42 U.S.C. § 2000e-1(a) (2000); see infra Part I.B.
28
Obviously, this particular issue does not exist in a vacuum. Modern regulation of religious tax
exemptions begs many of the same questions. Religious institutions organized and operated exclusively for
a limited number of purposes are tax exempt (often referred to as “501(c)(3) organizations”). 26 U.S.C. §
501(c)(3) (2000). Nonetheless, the Internal Revenue Service considers “religion” broadly to avoid
Establishment Clause violations. See Gen. Couns. Mem. 36,993 (Feb. 3, 1977) (“An attempt to define
religion, even for purposes of statutory construction, violates the ‘establishment’ clause since it necessarily
delineates and, therefore, limits what can and cannot be a religion.”).
29
29 C.F.R. § 1605.1 (2000). The EEOC Guidelines are interpretive regulations. Although they do not have
the force of law, courts often rely upon them. The Supreme Court states, “while not controlling upon the
courts by reason of their authority, [the Guidelines] do constitute a body of experience and informed
judgment to which courts and litigants may properly resort for guidance.” General Elec. Co. v. Gilbert, 429
U.S. 125, 141–42 (1976) (quoting Skidmore v. Swift & Co., 323 U.S. 134, 140 (1944)) superseded by
Pregnancy Discrimination Act, 42 U.S.C. 2000e(k).
30
Welsh v. United States, 398 U.S. 333 (1970).
31
United States v. Seeger, 380 U.S. 163 (1965).
32
29 C.F.R. § 1605.1 (2000) (“[T]he Commission will define religious practices to include moral or ethical
beliefs as to what is right and wrong which are sincerely held with the strength of traditional religious
views.”); cf. Gen. Couns. Mem. 36,993 (Feb. 3, 1977) (“[T]he primary rule as to religiousity is whether the
organization’s adherents are sincere in their beliefs.”).
33
Welsh, 398 U.S. at 339–40 (“What is necessary under Seeger for a registrant’s conscientious objection to
all war to be ‘religious’ within the meaning of § 6(j) is that this opposition to war stem from the registrant’s
moral, ethical, or religious beliefs about what is right and wrong and that these beliefs be held with the
strength of traditional religious convictions.”); see Ira C. Lupu, To Control Faction and Protect Liberty: A
18
Thus, feelings motivated by inner conscience, even if they comply with no known religious
organization, may warrant protection under Title VII.34 Despite the courts’ use of morality and
ethics for definitional purposes, there is resistance to rely on the normative force of social entities
to define religion. A broad notion of commitment to justice that underlies other antidiscrimination
legislation cannot be employed in the religious context because religion is constitutionally
protected from being normalized by the majority.35 A belief in white supremacy and intolerance
toward minorities if sincerely held as religious is protected under the Constitution even if a
supervisor may not make promotion decisions based upon these beliefs under Title VII.36
Religious beliefs, then, are those defined by the individual claiming the religious belief.37
Although affiliation with or membership in an organization of a religious nature is not necessary
for the individual to hold a belief as religious, if such an organization is referenced by the
individual, the belief need not be one mandated by that organization.38 An individualized
understanding of the doctrines of an established religious organization is adequate to support the
belief as religious.39
B. THE PARAMETERS OF THE RELIGIOUS EMPLOYER EXEMPTION
Not only is religion unique in the Title VII framework from the standpoint of what characteristics
or behaviors warrant protection, but also because Congress recognized the potential for
constitutional concerns involved in forcing certain employers to ignore religion as a basis for
making employment decisions.40 Congress was concerned with the right of a religious
organization to identify in employees the characteristics necessary to carry out the organization’s
mission. They were spurred, not in small part, by concerns about how Title VII’s demands on
employer conduct squared with the religion clauses of the First Amendment.41 In particular,
recognizing the potential Free Exercise Clause implications of regulating religious employers,
Congress exempted such employers from the prohibition against religious discrimination.42 The
General Theory of the Religion Clauses, 7 J. CONTEMP. LEGAL ISSUES 357, 384 (1996); William P.
Marshall, What is the Matter with Equality?: An Assessment of the Equal Treatment of Religion and
Nonreligion in First Amendment Jurisprudence, 75 IND. L.J. 193, 203 (2000); Lisa Schultz Bressman,
Accommodation and Equal Liberty, 42 WM. & MARY L. REV. 1007, 1008–09 (2001). But see Michael
W. McConnell, Accommodation of Religion: An Update and Response to the Critics, 60 GEO. WASH. L.
REV. 685, 688–90 (1992).
34
29 C.F.R. § 1605.1 (2000).
35
Sujit Choudhry, Distribution vs. Recognition: The Case of Anti-Discrimination Laws, 9 GEO. MASON
L. REV. 145, 172 (2000).
36
Peterson v. Wilmur Communications, Inc., 205 F. Supp. 2d 1014, 1019 (E.D. Wis. 2002).
37
29 CFR § 1605.1 (2000).
38
Geller v. Sec’y of Def., 423 F. Supp. 16, 18 (D.D.C. 1976) (noting that religious practice not required by
religious organization may still constitute a religious belief).
39
Thomas v. Review Bd. of Ind. Employment Sec. Div., 450 U.S. 707, 714 (1988) (noting that personal
beliefs not mandated by a religious organization can constitute a religious belief).
40
A related issue is the parameters of religious harassment under Title VII. See Terry Morehead Dworkin
& Ellen R. Peirce, Is Religious Harassment More Equal?”, 26 SETON HALL L. REV. 44, 58 (1995)
(discussing the “reasonable person” standard in religious harassment cases).
41
U.S. CONST. amend. I.
42
42 U.S.C. § 2000e-1(a) (2000). (“[Title VII] shall not apply . . . to a religious corporation, association,
educational institution, or society with respect to the employment of individuals of a particular religion to
perform work connected with the carrying on by such corporation, association, educational institution, or
society of its activities”). Throughout this Article, this section of Title VII is referred to as “the religious
employer exemption.”
19
original version of Title VII provided exemption only in cases where the employee of a religious
employer was involved in the religious activities of the organization.43 A 1972 amendment to
Title VII expanded the exemption, however, to exempt all activities of the religious employer –
both religious and secular.44
Aside from the bare language of the religious employer exemption, Title VII does not
specifically define or explicate what types of employers qualify as religious corporations,
associations, educational institutions, or societies. While courts have recognized that the religious
employer exemption is not limited on its face to houses of worship or churches, religious orders
or denominations, and other institutions that are traditionally recognized as “religious,” courts
nevertheless have required an employer that qualifies for the exemption to have some sort of
relationship or connection with that type of institution or organization.45 Still, once that
relationship or affiliation has been shown, courts have found that a number of employers
engaging in activities as diverse as social services, health care, publishing, and general education
qualify for the exemption.46
Even when an employer qualifies for the religious employer exemption, it is not entirely
excused from complying with Title VII. Instead, the exemption allows qualified employers to
make decisions based on religion, by limiting consideration of and continued employment to
individuals and employees “of a particular religion.”47 Nothing in the exemption excuses an
employer from the Title VII prohibitions on race, sex, or national origin discrimination. Only
discrimination on the basis of religion is exempted.48 Nonetheless, an employee’s failure to fulfill
and to support the religious behavioral and moral mandates of the particular religion could
43
H.R. CONF. REP. NO. 92-899, at 16 (1972).
Id.
45
See, e.g., Hall v. Baptist Mem’l Health Care Corp., 215 F.3d 618, 624–25 (6th Cir. 2000); EEOC v.
Kamehameha/Bishop Estate, 990 F.2d 458, 461 n.7 (9th Cir. 1993) (finding “no case holding the
exemption [in Section 702(a)] to be applicable where the institution was not wholly or partially owned by a
church”); Wirth v. Coll. of the Ozarks, 26 F. Supp. 2d 1185, 1187 (W.D. Mo. 1998).
46
See, e.g., Hall, 215 F.3d at 620 (discussing college of health sciences and related healthcare entities);
Killinger v. Samford Univ., 113 F.3d 196, 197 (11th Cir. 1997) (church-related liberal arts college);
Anderson v. Loma Linda Cmty. Hosp., No. 91-56331, 1993 U.S. App. LEXIS 15249, at *1–*4 (9th Cir.
June 16, 1993) (hospital affiliated with the Seventh-Day Adventist church); EEOC v. Pacific Press Pub.
Assoc., 676 F.2d 1272, 1274 (9th Cir. 1982) (nonprofit publishing house); EEOC v. Mississippi Coll., 626
F.2d 477, 478 (5th Cir. 1980) (four-year liberal arts college owned and operated by Mississippi Baptist
Convention); EEOC v. Presbyterian Ministries, Inc., 788 F. Supp. 1154, 1155 (W.D. Wash. 1992)
(retirement home operated by arm of Presbyterian denomination); Feldstein v. Christian Science Monitor,
555 F. Supp. 974, 975 (D. Mass. 1983) (newspaper).
47
42 U.S.C. § 2000e-1(a).
48
See Mississippi Coll., 626 F.2d at 484; Smith v. Raleigh Dist. of the N.C. Conference of the United
Methodist Church, 63 F. Supp. 2d 694, 701 (E.D.N.C. 1999) (“Although [the religious employer
exemption] permits religious institutions to discriminate based on religion or religious preferences, Title
VII does not permit religious organizations to discriminate on the basis of race, sex, or national origin.”);
Ganzy v. Allen Christian Sch., 995 F. Supp. 340, 348 (E.D.N.Y. 1997); see also Joanne C. Brant, Our
Shield Belongs to the Lord : Religious Employers and a Constitutional Right to Discriminate, 21
HASTINGS CONST. L.Q. 275, 290–91 (1994) (citing Psalms 89:18). But see Treaver Hodson, Comment,
The Religious Employer Exemption Under Title VII: Should a Church Define Its Own Activities? 1994
B.Y.U. L. REV. 571, 576 (arguing that courts should defer to religious organizations to define their own
religious beliefs and to create communities consistent with those beliefs, even if the beliefs result in a
disparate impact on members of other protected classes such as race, national origin, or sex).
44
20
constitute valid grounds for discharge.49 The circuits are split regarding how broadly to apply that
ideal when those mandates require or result in other forms of discrimination.50
Finally, the religious employer exemption reads only “this subchapter shall not apply . . . with
respect to the employment of individuals of a particular religion.”51 The section mentions nothing
about compensation, terms, conditions, or privileges. Because the section does not track the
language of Title VII’s antidiscrimination mandate52 it is reasonable to assume that not all
employment decisions are exempted under the religious employer exemption. The most
restrictive approach is to suggest that only the decision to hire or not to hire an individual would
be included in the exemptions.53 While courts may treat hiring and discharge decisions
differently,54 courts have applied the exemptions to decisions to discharge an employee as well as
the decision to hire.55 The EEOC admits that the religious employer exemption’s use of
“employment” encompasses both hiring and firing.56 On the other hand, there is significant
disagreement regarding the application of the religious employer exemption to terms, conditions,
or privileges of employment, like compensation, benefits, and insurance.57
With courts finding that many less traditionally “religious” pursuits qualify for the religious
employer exemption, there are many employees of those entities who will not be engaged in
strictly religious activities. That certainly has spawned serious debate regarding the
constitutionality of the 1972 amendment to the religious employer exemption, which broadened
the exemption to include all activities of the religious employer.58 Far from protecting freedom of
religion, critics contended, it improperly benefited religious employers, burdening nonreligious
employers in comparison.59
49
See Robert J. Araujo, The Harvest is Plentiful But the Workers are Few : Hiring Practices and
Religiously Affiliated Universities, 30 U. RICH. L. REV. 713, 732 (1996) (citing Little v. Wuerl, 929 F.2d
944 (3d Cir. 1991) and EEOC v. Presbyterian Ministries, 788 F. Supp. 1154 (W.D. Wash. 1992)).
50
See Vigars v. Valley Christian Ctr. of Dublin, 805 F. Supp. 802, 807 n.3 (N.D. Cal. 1992) (describing
this developing split in the circuits); see also Hodson, supra note 48 (advocating that beliefs which result in
disparate impacts on other protected classes are and should be covered by the religious employer
exemption).
51
42 U.S.C. § 2000e-1(a).
52
42 U.S.C. § 2000e-2(a)(1) (2000) (prohibiting an employer “to fail or refuse to hire or to discharge any
individual, or otherwise to discriminate against any individual with respect to his compensation, terms,
conditions, or privileges of employment, because of such individual’s race, color, religion, sex, or national
origin”).
53
See Brant, supra note 48, at 285, for an article espousing this restrictive “hiring-only” approach.
54
See Ralph D. Mawdsley, God and the State: Freedom of Religious Universities to Hire and Fire, 36
EDUC. L. REP. 1093, 1106 (explaining that courts will probe discharge decisions more thoroughly than
decisions not to hire).
55
See, e.g., Hall v. Baptist Mem’l Health Care Corp., 215 F.3d 618, 624 (6th Cir. 2000) (citing Killinger v.
Samford Univ., 113 F.3d 196 (11th Cir. 1997); Little v. Wuerl, 929 F.2d 944 (3d Cir. 1991)).
56
Religious Organization Exemption, EEOC Compliance Manual (CCH) ¶ 2183, at 2364.
57
See EEOC v. Fremont Christian Sch., 781 F.2d 1362, 1364 (9th Cir. 1986); see also Religious
Organization Exemption, EEOC Compliance Manual (CCH) ¶ 2183, at 2364 (espousing the position that
the religious employer exemption does not encompass decisions regarding terms, conditions, and privileges
of employment). While this controversy remains unresolved, its resolution is immaterial to this Article.
This Article deals with the associational expression involved with religious employers making decisions
about whom to hire and retain. Therefore, the hybrid right created in such situations would not be present in
discriminatory decisions regarding terms, conditions, and privileges of employment. See infra Part III.
58
See, e.g., Corp. of the Presiding Bishop of the Church of Jesus Christ of Latter-Day Saints v. Amos, 483
U.S. 327, 338 (1987) (rejecting plaintiff’s claim relying on this argument).
59
See id. at 333.
21
Settling some of this controversy, the Supreme Court determined in 1987 that the religious
employer exemption was a permissible accommodation of religion and religious employers. A
unanimous court declared in Corporation of the Presiding Bishop of the Church of Jesus Christ of
Latter-Day Saints v. Amos60 that the religious employer exemption does not violate the
Establishment Clause.61 Working through the three-part Lemon v. Kurtzman62 Establishment
Clause test, the majority found that the Deseret Gymnasium, a nonprofit and nonreligious arm of
the Mormon Church, could fire a janitor for failure to maintain a certificate of good standing with
the church.63 Several justices concurred with the judgment of the majority but qualified that
agreement.64 Nevertheless, the several concurring opinions share with the majority opinion the
common understanding that the religious employer exemption is for the most part safe from
constitutional challenge and abrogation.65
C. GOVERNMENT APPROACH TO RELIGION: SEPARATE OR NEUTRAL?
The role of the Establishment Clause in the issues of exemption is an important judicial strain to
intersect with the free exercise and freedom of association jurisprudence.66 Under this clause, the
courts attempt a balance between separating religion from government and maintaining
government neutrality with respect to religion as encapsulated by Justice Hugo Black in Everson
v. Board of Education of Ewing Township.67 In Lemon, the Court established a three-pronged test
to determine whether a government action maintains the required separation by examining the
purpose, effect and entanglements raised by the action.68 As conceived and practiced,69
60
Id. at 327.
Id.
62
403 U.S. 602 (1971).
63
Amos, 483 U.S. at 330–39.
64
Notable among the qualifications found in the concurrences is the contention that the case leaves open
the question of the constitutionality of the exemption as applied to for-profit activities of religious
organizations. Id. at 344, 346, and 348 (Brennan, Blackmun, and O’Connor, JJ. concurring in the
judgment). Still, the concurring opinions do not suggest that for-profit activities could never be exempted.
Instead, Justice Brennan writes that such activities may require a case-by-case analysis to determine their
role in the organization’s religious mission. Id. at 345 n.6. This approach is consistent with this Article’s
recommendation and conclusion. See infra Parts IV.B.,V.
65
This is clearly true with regard to all activities except perhaps for those secular, for-profit activities of an
otherwise qualified organization. For an argument that the religious employer exemption should apply to all
activities of nonprofit religious organizations and only the religious activities of for-profit religious
organizations, see Scott D. McClure, Note, Religious Preferences in Employment Decisions: How Far
May Religious Organization Go?, 1990 DUKE L.J. 587, 606. Again, this approach is consistent with the
recommendation of this Article. See infra Part IV.B.
66
Establishment Clause and free exercise discussions are inevitably intertwined. See Venters v. City of
Delphi, 123 F.3d 956, 969 (7th Cir. 1997) (“Although [the Free Exercise and Establishment Clauses]
constitute distinct protections, they also embody ‘correlative and coextensive ideas, representing only
different facets of the single great and fundamental freedom [of religion].” (citing Everson v. Bd. of Educ.
of Ewing Township, 330 U.S. 1, 40 (1947) (Rutledge, J., dissenting)).
67
330 U.S. 1, 15–16 (1947) (government may not “prefer one religion over another” but must erect a “wall
of separation” between Church and State).
68
403 U.S. 602, 612 (1971).
69
See, e.g., Santa Fe Indep. Sch. Dist. v. Doe, 530 U.S. 290 (2000) (holding prayer in public schools
impermissible despite students’ selection of speaker); Wolman v. Walter, 433 U.S. 229 (1977) (finding
violation of separation of religion and government in government aid to religious schools); Sch. Dist. of
Abington Townshipv. Schempp, 374 U.S. 203 (1963) (ruling state-sponsored school prayer
unconstitutional).
61
22
separationism scrutinizes any relationship between government and religion to avoid involvement
that in secular matters may be permissible.70 The image of an impenetrable wall of separation,
although dominating Establishment Clause jurisprudence for decades,71 is not as easily practiced
as it is endorsed.72 Thus, the neutrality approach to the Establishment Clause was further
developed.73
Rather than emphasizing an avoidance of religion in government action, neutrality advocates
an even-handed approach to religious and secular institutions.74 This change in emphasis75
permits religious organizations to play a role in public welfare, whether that be in receiving or
distributing such benefits, on par with secular organizations.76
Professor Gedicks considers both neutrality and separation approaches to the Establishment
Clause issue of granting exemptions from federal antidiscrimination laws in hiring to religious
social service providers.77 In his neutrality analysis he notes that nonreligious social service
providers are permitted to hire employees based on their adherence to the providers’ ideological
view of the world.78 Permitting religious providers to hire only those employees who share the
same religious beliefs that inform the providers’ approach to welfare services is necessary in the
neutrality context so that all social service providers have the same ideological freedom in
formulating and advocating their social service agenda.79 Such an exemption from federal
antidiscrimination laws is much narrower under Professor Gedicks’s separation analysis.80
70
See Frederick Mark Gedicks, A Two-Track Theory of the Establishment Clause, 43 B.C. L. REV. 1071,
1073 (2002) (“Separationist doctrine thus subjects relationships between religion and government to special
scrutiny, which may result in religion’s being subjected to legal and regulatory burdens not imposed on
secular activities, or relieved from burdens that are generally imposed on such activities.”).
71
See Ira C. Lupu, The Lingering Death of Separationism, 62 GEO.WASH. L. REV. 230, 233 (1993).
72
For a discussion relating Establishment Clause jurisprudence to faith-based initiatives endorsed by
President Bush and Congress, see Carl H. Esbeck, A Constitutional Case for Government Cooperation with
Faith-Based Social Service Providers, 46 EMORY L.J. 1 (1997); Douglas Laycock, The Underlying Unity
of Separation and Neutrality, 46 EMORY L.J. 43 (1997).
73
But see Locke v. Davey, 540 U.S. 712 (2004) (discussing the Supreme Court’s most recent review of the
parameters of Establishment Clause and free exercise in the context of permitting a state to deny
scholarship money to students pursuing a theology degree emphasizes the separationist doctrine).
74
See Esbeck, supra note 72, at 26 (explaining that under neutrality, the Establishment Clause aims for “the
minimization of the government’s influence over personal choices concerning religious beliefs and
practices.”).
75
Professor Laycock argues that, despite some inconsistent Court decisions, there has been no change and
separation remains the only necessary analysis of Establishment Clause. Laycock, supra note 72, at 47 (“In
the Court’s view, separation is and always has been a means of maximizing religious liberty, of minimizing
government interference with religion, and thus, of implementing neutrality among faiths and between faith
and disbelief.”).
76
Mitchell v. Helms, 530 U.S. 793 (2000) (finding that the government providing materials to qualifying
schools, including sectarian schools does not violate the Establishment Clause).
77
Gedicks, supra note 70, at 1105–06.
78
Id. at 1105–1106. For example, it violates no law for a secular provider to refuse to hire an applicant who
is categorically opposed to providing welfare services to the poor. A secular provider who believes that the
poor are exploited by capitalists in a worldwide class conflict may discriminate in favor of Marxists, just as
a secular provider who believes that the poor are responsible for their own situations may discriminate in
favor of economic conservatives who believe that wealth is accumulated only by hard work. Id.
79
Id. at 1106.
80
Id. (Separation analysis would permit an exemption from antidiscrimination laws only for those who
“exercise leadership or doctrinal authority in the sponsoring church.”). Professor Gedicks maintains the
separation analysis is the core of the Establishment Clause protection. Id. at 1098.
23
These analyses are useful in considering the free exercise and expressive association claims
of private employers who use their businesses as a means of expressing and propagating their
religious beliefs. Specifically, can this neutral approach inform a means for delimiting the
constitutional claims of private employers who pursue a religious interest while allowing those
employers to, in the words of Professor Laycock, “maximize their religious liberty and minimize
government interference?”81
D. CIVIL RIGHTS VS. CIVIL LIBERTIES
Eradicating discrimination in employment has enjoyed preeminence among competing
constitutional rights in the decades following Title VII passage.82 Thus free exercise and
associational freedom claims have been subverted to the compelling government interest in civil
rights. Cases such as Bob Jones University v. United States83 provided an opportunity for courts
to emphasize that antidiscrimination legislation can survive even strict scrutiny by the courts.84 In
that case, the Court determined that a racially discriminatory admissions policy based on a
sincerely held religious belief did not excuse a religious institution from complying with the
federal tax code’s antidiscrimination provisions.
Prior to Dale, the major expressive association decision of the Court granted such deference
to civil rights over associational freedoms. Justice Brennan, writing for the Court in Roberts v.
United States Jaycees,85 equated sex discrimination to discrimination on the basis of race and
noted the “stigmatizing injury” resulting from both forms of private discrimination.86 The fact
that the Jaycees’ right to expressive association was denied by forcing it to comply with a state
antidiscrimination law was dismissed as inconsequential in light of the state’s legitimate purpose
in combating discrimination.87
Indeed, decades of judicial approval, enforcement and enlargement of Title VII have focused
priority of equality over First Amendment freedoms.88 This tradition of equal rights reining in the
extremities of freedom no longer enjoys the robust support of the Supreme Court.89 The balance
81
Laycock, supra note 72, at 47.
See, e.g., Roberts v. U.S. Jaycees, 468 U.S. 609, 628 (1984) (“[A]cts of invidious discrimination . . .
cause unique evils that government has a compelling interest to prevent – wholly apart from the point of
view such conduct may transmit.”).
83
461 U.S. 574 (1983).
84
Id. at 603–04 (finding government interest in eradicating racial discrimination was sufficiently
compelling using strict scrutiny).
85
468 U.S. 609, 625 (1984).
86
Id. (“That stigmatizing injury, and the denial of equal opportunities that accompanies it, is surely felt as
strongly by persons suffering discrimination on the basis of their sex as by those treated differently because
of their race.”).
87
Id. at 626 (“Indeed, the Jaycees has failed to demonstrate that the Act imposes any serious burdens on the
male members’ freedom of expressive association.”).
88
Neal Troum, Expressive Association and the Right to Exclude: Reading Between the Lines in Boy Scouts
of America v. Dale, 35 CREIGHTON L. REV. 641, 670 (2002) (“The Supreme Court has in the past used
language suggesting that discrimination in general, and exclusion in particular, are not properly understood
as forms of protected expression.”) (citing Norwood v. Harrison, 413 U.S. 455 (1957); R.A.V. v. City of St.
Paul, 505 U.S. 377 (1992)).
89
. See David E. Bernstein, Trends in First Amendment Jurisprudence: Antidiscrimination Laws and the
First Amendment, 66 MO. L. REV. 83, 139 (2001) (“Dale suggests that the Roberts era is thankfully over,
and that the nine Justices of the Supreme Court, though retaining a level of disagreement on the scope of
82
24
away from expansion of antidiscrimination legislation was not abrupt. Indeed, Dale was presaged
by Hurley’s focus on government interference with free speech rights in a decision that gives
meager weight to the goal of eradicating discrimination.90 In what has been described as a
“compelling picture of the civil libertarian approach”91 Justice Souter’s majority opinion in
Hurley refuses to subvert the message of the organization to comply with government
objectives.92
It is not necessary to end the Title VII regime in order to provide religious and associational
freedoms to private businesses and organizations.93 Nonetheless, striking a balance between the
two is a difficult task that necessarily establishes some distinctions pertaining to the nature of
religion and the extent of equality in employment.94
II. FREE EXERCISE CLAUSE NARROWED TO REQUIRE RELIGION PLUS
A. THE SHERBERT ERA GIVES WAY TO SMITH HYBRID
That Congress may enact no law prohibiting the free exercise of religion is enshrined in the First
Amendment of the Constitution.95 Because government cannot restrict the beliefs of an
individual, the constitutional protection undoubtedly includes the right of individuals to act upon
their religious beliefs.96 It is only when religiously-motivated conduct infringes upon others’
rights that government may curtail that conduct.97
In 1963, the Court’s Sherbert decision defined the test for free exercise claims as whether a
law is justified by a “compelling state interest” and, to demonstrate this, the government’s
showing must amount to more than a “rational relationship to some colorable state interest.”98
the right of expressive association, unanimously believe that antidiscrimination laws must be subject to the
same constitutional scrutiny as other important laws with broad popular support.”); Richard A. Epstein, The
Constitutional Perils of Moderation: The Case of the Boy Scouts, 74 S. CAL. L. REV. 119, 142 (2000)
(Dale “calls for the constitutional invalidation of much of the Civil Rights Act, including Title VII insofar
as it relates to employment.”).
90
Hurley v. Irish-American Gay, Lesbian, & Bisexual Group of Boston, 515 U.S. 557 (1995).
91
See Troum, supra note 88, at 667 (noting Justice Souter’s opinion places “the line of permissible
government intervention at a relatively low threshold”).
92
Hurley, 515 U.S. at 559.
93
Rebecca L. Brown, Liberty, The New Equality, 77 N.Y.U. L. REV. 1491, 1557 (2002) (stating that “if
courts would begin to protect even those values we all hold in common, unapologetically and thoughtfully,
they would take a large step forward in the continuing evolution of ordered liberty”).
94
But see David E. Bernstein, Defending the First Amendment From Antidiscrimination, 82 N.C. L. REV.
223, 228 (2003) (describing antidiscrimination legislation as a threat to civil liberties).
95
LAURENCE H. TRIBE, AMERICAN CONSTITUTIONAL LAW § 12-1 at 785 (2d. ed. 1988)
(characterizing the First Amendment as “the Constitution’s most majestic guarantee”).
96
See JAMES MADISON, MEMORIAL AND REMONSTRANCE AGAINST RELIGIOUS
ASSESSMENTS (1785) reprinted in 5 THE FOUNDERS’ CONSTITUTION 82 (Philip B. Kurland &
Ralph Lerner, eds., 1987) (“The Religion then of every man must be left to the conviction and conscience
of every man; and it is the right of every man to exercise it as these may dictate.”); see also Martin Redish,
The Value of Free Speech, 130 U. PA. L. REV. 591, 593 (1982) (noting the importance of the First
Amendment as a tool for “individual self-realization.”).
97
. See Michael W. McConnell, Free Exercise Revisionism and the Smith Decision, 57 U. CHI. L. REV.
1109, 1128 (1990) (arguing we should be “free to practice our religions so long as we do not injure
others.”).
98
Sherbert v. Verner, 374 U.S. 398, 406 (1963).
25
The Court further explicated this “compelling interest” test in Yoder99 and, seemingly, relied on it
for nearly two more decades of decisions.100
The landmark case of Smith abandoned the “compelling interest” test and set forth a rational
basis review for neutral laws of general application that incidentally burden free exercise.101 The
Smith case arose from the attempt of two Native American employees to obtain unemployment
benefits. The employees were denied benefits because they were fired “for cause” by their
employer, a drug-rehabilitation facility, for violating a state controlled substances law when they
ingested peyote while participating in religious rites. Justice Scalia’s majority opinion found no
exemption was necessary on free exercise grounds for this neutral law of general applicability.102
The compelling interest test of Sherbert was not overruled, but limited to its facts.103 Yoder and
its progeny were distinguished from Smith by noting these decisions involved not free exercise
alone, but in conjunction with some other constitutionally protected right.104
In effect, Smith returned the Court’s free-exercise analysis to its pre-Sherbert
jurisprudence.105 An important heightened scrutiny exception to this erasing of the Sherbert era
was preserved for hybrid rights: those involving free exercise and another First Amendment right
– including free speech,106 parental rights107 and freedom of association.108
99
Wisconsin v. Yoder, 406 U.S. 205 (1972) (finding an exemption for Amish students from attending
school through the age of sixteen did not undermine state’s interest in education).
100
Jack S. Vaitayanonta, Note, In State Legislatures We Trust?: The Compelling Interest Presumption
and Religious Free Exercise Challenges to State Civil Rights Laws, 101 COLUM. L. REV. 886, 892 (2001)
(“Between 1963 and 1990, the Court reaffirmed the principle that a neutral and generally applicable
governmental regulation may nevertheless be unconstitutional if, in its application, it unduly and
incidentally burdens the free exercise of religion by an individual or a group.”).
101
Employment Div., Dep’t of Human Res. of Or. v. Smith, 494 U.S. 872, 879 (1990).
102
. Id. (“[T]he right of free exercise does not relieve an individual of the obligation to comply with a ‘valid
and neutral law of general applicability on the ground that the law proscribes (or prescribes) conduct that
his religion prescribes (or proscribes).’”) (citing U.S. v. Lee, 455 U.S. 252, 263 n.3 (1982)).
103
Id. at 883 (“We have never invalidated any governmental action on the basis of the Sherbert test except
the denial of unemployment compensation. Although we have sometimes purported to apply the Sherbert
test in contexts other than that, we have always found the test unsatisfied.”).
104
Id. at 881. The Court stated:The only decisions in which we have held that the First Amendment bars
application of a neutral, generallyapplicable law to religiously motivated action have involved not the Free
Exercise Clause alone, but theFree Exercise Clause in conjunction with other constitutional protections,
such as freedom of speech and of the press. . .Id. (citations omitted).
105
Critics of the Smith decision included renowned scholars. See Douglas Laycock, New Directions in
Religious Liberty: The Religious Freedom Restoration Act, 1993 BYU L. REV. 221, 221 (“In a nation that
sometimes claims to have been founded for religious liberty, Smith means that Americans will suffer for
conscience”); Ira C. Lupu, Reconstructing the Establishment Clause: The Case Against Discretionary
Accommodation of Religion, 140 U. PA. L. REV. 555, 609 (1991) (“Smith is . . . profoundly wrong on both
substantive and institutional grounds . . . .”); Michael W. McConnell, The Origins and Historical
Understanding of Free Exercise of Religion, 103 HARV. L. REV. 1409, 1455 (1990) (arguing the
Founders understood protection of religious liberty required specific measures); Michael W. McConnell,
Free Exercise Revisionism and the Smith Decision, 57 U. CHI. L. REV. 1109, 1111 (1990) (considering
Smith in view of the First Amendment).
106
Smith, 494 U.S. at 871.
107
See, e.g., Troxel v. Granville, 530 U.S. 57, 65 (2000) (“[T]he interest of parents in the care, custody, and
control of their children—is perhaps the oldest of the fundamental liberty interests recognized by this
Court.”).
108
Roberts v. U.S. Jaycees, 468 U.S. 609, 617–18 (1984).
26
The importance of these hybrid rights was reaffirmed in City of Boerne109 in which the Court
struck down Congress’s legislative attempt to return to the Sherbert standard by passing the
Religious Freedom Restoration Act.110 Although at least one circuit court has pronounced the
scheme of affording heightened scrutiny to free exercise claims only when the claim is conjoined
with some other constitutional right as “illogical,”111 there may, indeed, be some logic to the
scheme.
The Court emphasized the religious tolerance aspect of free exercise in its post-Smith
decision of City of Hialeah.112 By emphasizing religious tolerance,113 the Court has permitted a
broad definition of religion but has granted such religious exercise little deference in light of
government intrusion. That logic balances the relaxed, rational-basis review in defining “religion”
with the stricter review for hybrid rights, protecting more traditional aspects of religion in the
form of freedom of speech, association, and determining the religious upbringing of children with
the stricter review hybrid rights provide.114
B. FREE EXERCISE CHALLENGES TO ANTIDISCRIMINATION LEGISLATION
Prior to Smith, Bob Jones was among several cases in which the heightened scrutiny of the
compelling interest test was used to challenge antidiscrimination legislation.115 As noted earlier,
109
City of Boerne v. Flores, 521 U.S. 507 (1997).
Religious Freedom Restoration Act of 1993, 42 U.S.C. § 2000bb (2000); see Ira C. Lupu, Why Congress
Was Wrong and the Court Was Right Reflections on City of Boerne v. Flores, 39 WM. & MARY L. REV.
793, 808 (1998) (remarking that City of Bourne was about federal power rather than religious liberty). But
see Michael W. McConnell, Institutions and Interpretation: A Critique of City of Boerne v. Flores, 111
HARV. L. REV. 153, 183 (1997) (“[T]he Court’s conclusion that judicial interpretations of the provisions
of the Amendment are the exclusive touchstone for Congressional Enforcement power finds no support in
the history of the Fourteenth Amendment”); cf. Eugene Volokh, A Common-Law Model for Religious
Exemptions, 46 U.C.L.A. L. REV. 1465 (1999) (outlining an alternate approach to federal legislation with
states fashioning exemptions in a common-law approach).
111
Kissinger v. Bd. of Trs. of the Ohio State Univ., 5 F.3d 177, 180 (6th Cir. 1993) (stating that it is
illogical to find that “a state regulation would violate the Free Exercise Clause if it implicates other
constitutional rights but would not violate the Free Exercise Clause if it did not implicate other
constitutional rights”).
112
Church of the Lukumi Babalu Aye, Inc. v. City of Hialeah, 508 U.S. 520, 533 (1993) (“[A] law targeting
religious beliefs as such is never permissible . . . .”).
113
Id. at 547 (“The Free Exercise Clause commits government itself to religious tolerance . . . . “).
114
Employment Div., Dept. of Human Resources of Or. v. Smith, 494 U.S. 872, 881 (1990) (holding that
the only cases where the court has held the First Amendment to bar application of a neutral, generally
applicable law has been where the Free Exercise Clause is acting in conjunction with other amendments).
115
See, e.g., Bob Jones Univ. v. United States, 461 U.S. 574, 603–04 (1983); Dayton Christian Sch., Inc. v.
Ohio Civil Rights Comm’n, 766 F.2d 932, 961 (6th Cir. 1985) (holding that state civil rights commission’s
assertion of jurisdiction over a case involving a teacher who was discharged by a private school after she
became pregnant violated the Free Exercise and Establishment Clauses), rev d on jurisdictional grounds,
477 U.S. 619 (1986); EEOC v. Pac.
Press Publ’g Ass’n, 676 F.2d 1272, 1275 (9th Cir. 1982) (reviewing a case in which a religious publishing
house dismissed employees in retaliation for bringing discrimination charges and claimed that it did so
based on a religious
doctrine that prohibited church members from bringing lawsuits against the church); Voluntary Ass’n of
Religious Leaders, Churches, & Orgs. v. Waihee, 800 F. Supp. 882, 883 (D. Haw. 1992) (dismissing
challenge to state statute prohibiting sexual orientation discrimination in employment); Madsen v. Erwin,
481 N.E.2d 1160, 1161, 1166 (Mass. 1985) (finding that a state law prohibiting sexual orientation
discrimination in employment unnecessarily burdened a church-published newspaper’s free exercise right).
110
27
the courts gave great deference to the interest in civil rights and eradicating discrimination during
the Sherbert era. In particular, Title VII and state antidiscrimination legislation furthered a
government aim for equal employment opportunity.116 Therefore, although heightened scrutiny
was utilized, free exercise challenges generally could not overcome the compelling government
interest in equality in employment.117
Not surprisingly, the end of heightened scrutiny and return to a rational basis review of a free
exercise claim under Smith along with the continued government emphasis on civil rights,
particularly in employment opportunities, left little ground for religious freedom claims.118 Any
of the protected categories that equal employment legislation was designed to protect could prove
to be rationally related to the government interest of equal employment opportunity.119
Despite Smith’s weakening of the free exercise right, the religious employer exemption to
Title VII remained as a protective barrier between religious employers and discrimination
claims.120 In contrast, following Smith the parameters of the constitutionally-required ministerial
exception to Title VII received renewed attention. First formulated during the Sherbert era in
McClure v. Salvation Army,121 the exception permitted courts to avoid entanglements prohibited
by free exercise and establishment clauses by giving churches carte blanche in conducting their
employment relationship with their ministers.122 The McClure court determined Congress did not
intend include the church/minister relationship under Title VII.123 The decision, while claiming to
be limited to the facts of the case, raises doctrinal issues of “church”124 and its “ministers”125 that
continue to vex the ministerial exception.
116
Roberts v. U.S. Jaycees, 468 U.S. 609, 617–18 (1984).
State ex rel. McClure v. Sports & Health Club, Inc., 370 N.W.2d 844, 846–47 n.4 (Minn. 1985) (stating
that health club owners who insisted on only hiring employees whose religious beliefs were consistent with
their religious beliefs were required to comply with the state law prohibiting discrimination on the basis of
sex, religion, and marital status).
118
See Robinson v. Jacksonville Shipyards, Inc., 760 F. Supp. 1486, 1536 (M.D. Fla. 1991) (“freedom of
association and free exercise of religion have bowed to narrowly tailored remedies designed to advance the
compelling governmental interest in eradicating employment discrimination”).
119
Vaitayanonta, supra note 100, at 901 (“Presumably, any one of the various types of civil rights laws
designed to protect individuals on the basis of classifications such as race, gender, sexual orientation, age,
or marital status could pass this low level of scrutiny simply owing to the legislature’s judgment that such
discrimination was undesirable.”).
120
See supra Part I.B.
121
460 F.2d 553 (5th Cir. 1972).
122
See, e.g., Gellington v. Christian Methodist Episcopal Church, 203 F.3d 1299, 1304 (11th Cir. 2000)
(“[A]pplying Title VII to the employment relationship between a church and its clergy would involve
excessive government entanglement with religion as prohibited by the Establishment Clause of the First
Amendment”) (internal quotation marks and citation omitted); Scharon v. St. Luke’s Episcopal
Presbyterian Hosps., 929 F.2d 360, 363 (8th Cir. 1991) (holding that an inquiry into why a member of the
clergy was dismissed is barred by the Fourteenth Amendment).
123
McClure, 460 F.2d at 560–61 (“We therefore hold that Congress did not intend, through the nonspecific
wording of the applicable provisions of Title VII to regulate the employment relationship between church
and minister.”).
124
See, e.g., EEOC v. Southwestern Baptist Theological Seminary, 651 F.2d 277, 283 (5th Cir. 1981) (“The
local congregation that regularly meets in a house of worship is not the only entity covered by our use of
the word ‘church.’”).
125
As an initial matter, the use of the term “minister” might seem to suggest it is only applicable to certain
Protestant denominations and the other relatively few religious sects that use the term “minister” to
describe their clergy. That, however, is certainly not the case. See Smith v. Raleigh Dist. of the N.C.
Conference of the United Methodist Church, 63 F. Supp. 2d 694, 704 n.7 (E.D.N.C. 1999) (“The court does
117
28
While the Supreme Court has not addressed the ministerial exception, its Smith holding may
fundamentally undermine the exception using rational basis review, but offer the exception a new
basis of renewed support under the hybrid right analysis. In EEOC v. Catholic University of
America, the court determined the ministerial exception survived Smith because it represented a
“hybrid” of Free Exercise and Establishment Clause concerns.126 Certainly, any such decisions of
minister employment will involve both constitutional protections, but the hybrid rights to which
Justice Scalia referred in Smith required more than bringing together any two constitutional
claims.127 Rather, the hybrid rights arose when free exercise is entwined with another distinct
fundamental right.128
Hybrid rights of religious employers are raised in their employment decisions.129 However,
the strength of such a claim remained relatively weak vis-a-vis the deference to legislative
judgment that ending invidious discrimination in private employment on the basis of narrowly
tailored protected classes was necessary.130 Hybrid rights have not played a major role in free
exercise challenges since Smith.131 However, because Locke v. Davey132 has limited the holding in
Church of Lukumi Babalu Aye, Inc. v. Hialeah133 as applying to laws showing animus to a
particular religion,134 the focus undoubtedly now will be on hybrids in free exercise claims.
The Court has parsed the hybrid rights associated with child rearing and free speech in Yoder
and Sherbert through its Smith decision.135 In part, that explains the relative absence of hybrid
claims in the lower courts. In contrast, there has been no case explicitly addressing freedom of
association and free exercise; therefore, the hybrid of those two constitutional rights has not yet
received examination by any court. This is particularly significant in a post-Dale era.136 As the
not intend, by its adoption of the terminology “church-minister” exception, to suggest that this line of cases
applies only to Protestant institutions and their clergy. The same principles are equally applicable to other
religious entities and their clergy, including rabbis, priests, and imams”).
126
EEOC v. Catholic Univ. of Am., 83 F.3d 455, 467 (D.C. Cir. 1996).
127
Church of Lukumi Babalu Aye, Inc. v. Hialeah, 508 U.S. 520, 567 (1993) (Souter, J. concurring in part)
(“If a hybrid claim is simply one in which another constitutional right is implicated, then the hybrid
exception would probably be so vast as to swallow the Smith rule . . . . ”); see also Miller v. Reed, 176 F.3d
1202, 1208 (9th Cir. 1999) (“[A] plaintiff does not allege a hybrid-rights claim entitled to strict scrutiny
analysis merely by combining a free exercise claim with an utterly meritless claim of the violation of
another alleged fundamental right”); Catholic Charities v. Superior Court, 85 P.3d 67, 89 n.15 (Cal. 2004)
(rejecting a hybrid claim of free exercise and establishment clause).
128
Smith, 494 U.S. at 881–82.
129
Employment has associational aspects similar to membership in an organization. See Boy Scouts of Am.
v. Till, 136 F. Supp. 2d 1295, 1308 (S.D. Fla. 2001) (adopting a broad reading post-Dale concerning
whether the BSA has the right to exclude homosexuals from all membership or employment positions).
130
See Catholic Charities, 85 P.3d at 89 (expressing doubt about the validity of the hybrid-rights theory
and noting the Supreme Court has not invoked it since formulating it in Smith).
131
Id. at 88 (“We are aware of no decision in which a federal court has relied solely on the hybrid rights
theory to justify applying strict scrutiny to a free exercise claim.”) But see Esser, supra note 3, at 242
(positing it is the strength of the attached right that determines the court’s decision).
132
540 U.S. 712 (2004).
133
Lukumi Babalu Aye, 508 U.S. at 520.
134
Locke, 540 U.S. at 720 (“In Lukumi, the city of Hialeah made it a crime to engage in certain kinds of
animal slaughter. We found that the law sought to suppress ritualistic animal sacrifices of the Santeria
religion. In the present case, the State’s disfavor of religion (if it can be called that) is of a far milder
kind.”).
135
Smith, 494 U.S. at 881–82.
136
Roberts v. U.S. Jaycees, 468 U.S. 609, 617–18 (1984).
29
emphasis on civil rights and antidiscrimination legislation has given way to associational
freedoms in Dale, the hybrid right of religious and association freedoms now has superior
strength.137
III.
THE STRENGTH OF EXPRESSIVE ASSOCIATION
A. ASSOCIATIONAL FREEDOMS DEFINED
Freedom of association constitutes two analytically distinct forms of association. Freedom of
intimate association is protected by the substantive due process guarantee in the Fourteenth
Amendment.138 This freedom protects “choices to enter into and maintain certain intimate human
relationships” free from government intrusion.139 Freedom of expressive association is protected
under the Freedom of Speech Clause of the First Amendment.140
Although the First Amendment is praised as the centerpiece of the Constitution, the praise for
expressive association protection is not as universal.141 In the first decision explicitly recognizing
expressive association rights, NAACP v. Alabama ex rel. Patterson, Alabama required the
NAACP to produce a list of members.142 The NAACP refused to comply knowing its ability to
organize in a hostile southern state would be compromised by such a disclosure. The Court found
Alabama’s action would curtail the formulation of ideas embraced by free speech guarantees,
noting “[i]t is beyond debate that freedom to engage in association for the advancement of beliefs
and ideas is an inseparable aspect of [liberty] . . . .”143
Freedom of association became permanently intertwined with religious freedoms in Roberts.
Justice Brennan noted that associational rights include the need to gather and form alliances to
engage in other protected First Amendment activity – including the exercise of religion.144 In
Roberts, the Jaycees were unsuccessful in excluding women from membership in the organization
in violation of a state public accommodations law. Although the organization engaged in
expressive association it was unable to show admitting women would inhibit the activities
engaged in or opinions expressed.145
In contrast, the activities and opinion of the organizers of a St. Patrick’s Day parade were
inhibited if a group of homosexual people, vocally expressing pride in their sexuality, participated
in the parade.146 This message of sexual pride was wholly different from the message that the
organizers supported and the parade organizers were permitted to exclude it discriminatorily in
137
See Smith, 494 U.S. at 882 (suggesting free exercise claims might survive if linked with freedom of
association claims).
138
Roberts, 468 U.S. at 617–18.
139
Id. at 617.
140
Id. at 618.
141
Dale Carpenter, Expressive Association and Anti-Discrimination Law After Dale: A Tripartite
Approach, 85 MINN. L. REV. 1515, 1516 & n.5 (2001) (“Of the liberties guaranteed by the First
Amendment, the freedom of association may be the most distrusted.” Carpenter notes “‘free exercise’ of
religion is a close second.”).
142
357 U.S. 449, 453 (1958).
143
Id. at 460.
144
Roberts, 468 U.S. at 618.
145
Id. at 627.
146
Hurley v. Irish-Am. Gay, Lesbian, & Bisexual Group, 515 U.S. 557, 559 (1995).
30
order to shape their message.147 Thus, in Hurley the expressive association rights of the parade
organizers trumped the state public accommodations law.148
B. DALE STRENGTHENS EXPRESSIVE ASSOCIATION
Dale is most notable for its seeming disinterest in tailoring the holding to the unique situation
presented in the case.149 It is a broad statement of an organization’s associational freedoms to
defeat antidiscrimination legislation and it strengthens expressive association among fundamental
rights.
The Court upheld the Boy Scouts of America’s (BSA) right to exclude from its membership
an openly homosexual man on the basis of his sexual orientation.150 A state public
accommodation law prevented such exclusion. However, the Court found public accommodation
ubiquity violated First Amendment rights and set to reconfigure the model to push associational
freedoms back into the spotlight antidiscrimination legislation previously enjoyed.151
In formulating associational rights, the Court granted the organization control over its
message, even absent specific evidence that this message had importance within the organization
or was maintained strictly.152 Thus, BSA claimed its objection to homosexuality was evidenced
by goals to be “morally straight” and “clean.”153 Further, the Court granted to the organization the
right to exclude individuals based on the organization’s analysis of whom or what type of
expression would impair their message.154 Such deference to exclusion of members of a protected
class based on expressive association directly conflicted with Court precedent elevating
antidiscrimination goals over an association’s exclusionary tendencies.155 Previously, in Norwood
v. Harrison, the Court held that freedom of expression resulting in private discrimination was not
afforded constitutional protection.156 Now, the BSA is allowed such deference.
In Roberts, Justice O’Connor’s concurring opinion attempted to tailor the majority opinion to
avoid those organizations who wanted to discriminate through an associational freedom claim. To
do so she noted a distinction between commercial associations and expressive associations, the
latter enjoying full constitutional protection.157 Justice O’Connor required an association to
147
Id. at 576 (“[W]hen dissemination of a view contrary to one’s own is forced upon a speaker intimately
connected with the communication advanced, the speaker’s right to autonomy over the message is
compromised.”).
148
Id.
149
Boy Scouts of Am. v. Dale, 530 U.S. 640 (2000); see Troum, supra note 88, at 680.
150
Id. at 642.
151
Id. at 657 (“As the definition of ‘public accommodation’ has expanded . . . the potential for conflict
between state public accommodations laws and the First Amendment rights of organizations has
increased.”).
152
Carpenter, supra note 141, at 1538.
153
Dale, 530 U.S. at 650.
154
Id. at 653 (“As we give deference to an association’s assertions regarding the nature of its expression,
we must also give deference to an association’s view of what would impair its expression.”); see also
Carpenter, supra note 141, at 1540 (calling impairment analysis in Dale a “sheep in wolf’s clothing.”).
155
See Stephen P. Hayford, Case Note, Boy Scouts of Am. v. Dale, 120 S.Ct. 2446 (2000), 11 SETON
HALL CONST. L.J. 825, 854 (2001) (“While this holding is a victory for organizations’ freedom of
expressive association, it provides very little protection for individuals in minority groups seeking access to
public accommodations, and represents a defeat for states that seek to end discrimination.”).
156
413 U.S. 455, 469 (1973).
157
Roberts v. United States Jaycees, 468 U.S. 609, 632 (1984) (O’Connor, J., concurring).
31
“choose its market.”158 If the choice is one that is commercial “in any substantial degree” the
association may not choose its members and is correspondingly limited in the message it can
disseminate.159
Dale does not embrace the limitations developed in Justice O’Connor’s Roberts concurrence.
Rather, the majority opinion seems to embrace the notion that associational freedoms necessarily
result in diminished equality. Nonetheless, the message as formulated by the organization is
protected.160
The dissent in Dale recognizes the impact of the majority opinion on civil rights
jurisprudence. In particular, the grant of power to organizations in formulating and executing a
message in the most exclusionary manner it deems necessary without requiring a balance is a
significant departure for the Court.161 The dissent would require a showing of a “clear and
unequivocal” message to offset antidiscrimination protections.162
C. EXPRESSIVE ASSOCIATION AS A HYBRID
Commentators and courts debate the importance of Dale to antidiscrimination law. In particular,
some commentators believe equal employment opportunity legislation is sacrosanct.163 They
claim that, while antidiscrimination legislation likely will not proliferate in public
accommodation legislation post-Dale, the overall impact of the decision is minor and justified in
terms of the organization or the protected class at issue.164
Such analysis fails to recognize two related issues. Firstly, to rely on Court precedent to
narrow the implication of Dale disregards the change in jurisprudential priorities from civil rights
and equality protection to the reinforcement of fundamental rights.165 Certainly the scales may
have been balanced toward usurping individual rights in favor of equality in the past but,
regardless where one finds the balance is achieved, antidiscrimination legislation and court
precedent must be viewed in light of this shift in priorities.
Secondly, Title VII and state employment antidiscrimination legislation is not universally
affected by the broad pronouncements in Dale, but a subset of employment antidiscrimination
legislation is necessarily impacted – the religious employer. The religious employer invokes not
158
Id. at 636.
Id.
160
Dale, 530 U.S. at 653.
161
Id. at 676 (Stevens, J., dissenting).
162
Id.
163
Carpenter, supra note 141, at 1517–18 (arguing Dale will not have revolutionary consequences in areas
where equality guarantees are “most critically needed” – particularly employment).
164
Id. at 1517. Some are more fearful of Dale’s consequences. See, e.g., Nan D. Hunter, Accommodating
the Public Sphere: Beyond the Market Model, 85 MINN. L. REV. 1591, 1591 (2001) (“[Dale] may portend
a substantial rewriting of previous expressive association law . . . . At a minimum, it weakens the claim to
open participation in our civic culture by lesbians and gay men.”). Dale is also criticized for both
contradicting and ignoring altogether the Court’s holding in Runyon v. McCray. Id. at 1603.
165
See Laura B. Mutterperl, Note, Employment at (God s) Will: The Constitutionality of
Antidiscrimination Exemptions in Charitable Choice Legislation, 37 HARV. C.R.-C.L. L. REV. 389, 416
(2002) (“Because some religious organizations may feel that hiring exclusively coreligionists is necessary
to maintain their religious identity, the right of association suggests at least a limited entitlement to
discriminate.”).
159
32
just the strengthened associational freedoms but also advances a free exercise claim, thus
producing a hybrid right pursuant to Smith.166
Although Smith grants hybrids heightened scrutiny, one noted commentator has found that
that it is the strength of the fundamental right intertwined with free exercise that determines the
court decision.167 Accepting this conclusion, free exercise combines with a powerful expressive
associational claim to create a claim that a religious employer can employ co-religionists as an
exercise of expressive association despite antidiscrimination legislation in employment.
IV. STRIKING A BALANCE FOR RELIGIOUS BUSINESS OWNERS
A. A CLASH OF RIGHTS
The Court’s focus on associational freedoms in Dale and its accommodations of various
“sincerely held” beliefs as free exercise establishes the potential rights of business owners to
require employees to be co-religionists and to discriminate against those applicants that profess
non-adherent religious beliefs.168 As rights asserted in the First Amendment to the Constitution
each alone, and all the more so as a hybrid, are touted as preeminent. Other rights are implicated
in the employment of co-religionists, however.
Throughout this Article the importance of civil rights legislation largely is characterized as
equality legislation with a normative force defining a commitment to justice. The Court
consistently recognized sufficient government interest in establishing equality in employment as
well as public accommodation as a means of advancing a societal value of justice both in terms of
fairness to the individual and maintaining a meritocratic community norm.169
In addition to this equal justice paradigm,170 however, is the essential constitutional right of
equal protection underlying the formation of Title VII and other antidiscrimination legislation.
The Fourteenth Amendment offers secure grounding for the ban on private discrimination
motivated by race or sex.171 But this grounding is far from absolute and courts consistently weigh
even equal protection against competing rights. Therefore, the extent of this ban is necessarily
limited to these enumerated categories,172 while other legislatively protected categories, such as
national origin, are less constitutionally secure but rather rest wholly on the commitment to equal
justice.
166
But see Catholic Charities of Sacramento, Inc. v. Superior Court, 85 P.3d 67, 74 n.3 (Cal. 2004)
(suggesting skepticism of hybrid right in a case concerning employment benefits).
167
Esser, supra note 3, at 242.
168
Business owners may bring religion in the workplace in a manner that does not evoke the same
constitutional concerns. See, e.g., Timothy L. Fort, Religion in the Workplace: Mediating Religion s
Good, Bad and Ugly Naturally, 12 NOTRE DAME J.L. ETHICS & PUB. POL’Y 121, 126 (1998)
(maintaining religious beliefs have a legitimate role in business ethics).
169
See, e.g., Roberts v. U.S. Jaycees, 468 U.S. 609, 631 (1984).
170
See supra notes 18–19 and accompanying text.
171
U.S. CONST. amend. XIV.
172
Even defining the appropriate groups in terms of race and sex may challenge the courts. See, e.g.,
General Elec. Co. v. Gilbert, 429 U.S. 125, 143 (1976) (rejecting sex discrimination claim for an otherwise
comprehensive short-term disability policy that excluded pregnancy-related disabilities from coverage
under an employer’s benefit plan by explaining the exclusion was not based on sex but between those
people who are pregnant and those who are not, the latter category including both men and women)
superceded by Pregnancy Discrimination Act, 42 U.S.C. 2000e(k).
33
Ultimately, there exists no inalienable right to employment. Free exercise and freedom of
association claims of an employer who chooses to offer employment opportunities to individuals
whose religious practice make them otherwise largely unemployable or to a home health care
provider who seeks to carry a religious message as well as a service to its clients may rest their
claims on constitutional principles which Dale raises to a higher constitutional priority than Title
VII employment directives.173 Title VII itself limits its protections to those employers with fifteen
or more employees.174 Even under state antidiscrimination legislation, the smallest employers are
free to discriminate. No constitutional right is absolute and the clash of the rights between
employees and employers is emblematic of an inherent compromise, the balancing point being
critically debated.175 The issues here involve two different legal relationships involving religion:
Title VII endeavors to free individuals from a religiously-hostile work environment and from
hiring exclusions based on religion while individuals, including private employers, are free from
government interference in the free exercise of religion in operating their business.176 A useful
analogy explored by the courts is the regulation of speech in the context of workplace
harassment.177 Courts addressing this matter rationalize finding discriminatory speech as a “time,
place, and manner regulation of speech” permitted under free speech jurisprudence.178 Although
the time, place, manner limitations may control harassing speech in the workplace somewhat
tidily, the same formula is unworkable for free expression179 because Title VII itself specifically
permits religion in the workplace through its religious accommodation requirements.180 Thus, if
free exercise requires employers to permit religious considerations, can Title VII disallow private
employers from free exercise and expressive association in its hiring? We think not given the
renewed strength of this hybrid right.
B. MAINTAIN EXEMPTION UNDER TITLE VII
The system of exemptions employed to carve out constitutional parameters often are placed
squarely in the center of the debate about appropriate equilibrium. The literature concerning
exemptions is plentiful and distinguished.181 With respect to employer exemptions, much of the
literature eschews such compromises.182 However, constitutional jurisprudence has developed a
173
See infra Part I.B. concerning the religious employer exemption in light of First Amendment concerns.
42 U.S.C. § 2000e(b) (2000).
175
We use the term “balance” not in the sense of finding equilibrium between these competing and
contradictory rights but in the sense of constitutional co-existence, much like the “time, place and manner”
restrictions limiting the absolute right of free speech. See Gedicks, supra note 70 (discussing free speech
parallels to the Establishment Clause).
176
EEOC v. Preferred Mgmt. Corp., 216 F. Supp. 2d 763, 805 (S.D. Ind. 2002).
177
DeAngelis v. El Paso Mun. Police Officers Ass’n., 51 F.3d 591, 596 (5th Cir. 1995) (“Where pure
expression is involved, Title VII steers into the territory of the First Amendment. It is no use to deny or
minimize this problem . . ..”).
178
Baty v. Willamette Indus., Inc., 172 F.3d 1232, 1246 (10th Cir. 1999); Robinson v. Jacksonville
Shipyards, Inc., 760 F. Supp. 1486 (M.D. Fla. 1991).
179
See Gedicks, supra note 70 (Using the two-track theory of free speech jurisprudence to formulate a twotrack theory for the Establishment Clause).
180
42 U.S.C. § 2000e(j) (2000).
181
See Ira C. Lupu, The Case Against Legislative Codification of Religious Liberty, 21 CARDOZO L.
REV. 565 (1999); Eugene Volokh, Intermediate Questions of Religious Exemptions - A Research Agenda
with Test Suites, 21 CARDOZO L. REV. 595 (1999).
182
See Philip A. Hamburger, A Constitutional Right of Religious Exemption: An Historical Perspective, 60
GEO WASH L. REV 915, 948 (1992) (“[A] constitutional right of religious exemption was not even an
issue in serious contention among the vast majority of Americans.”).
174
34
strengthened freedom of association both alone and as a hybrid with free exercise.183 The unique
impact of this development on employment discrimination legislation requires consideration.
Therefore, in the narrow context of the religious and association freedoms of business owners to
employ coreligionists and the equal employment opportunity agenda encapsulated in Title VII,
we advocate for invigorating the religious employer exemption under Title VII as defining
regulation of competing priorities.
Having chosen an existing Title VII exception by which to accommodate and contain the
religious associational rights of employers in relation to antidiscrimination legislation, one may
wonder why we opted for the religious employer exemption rather than the exception that seems
more applicable at first blush, the bona fide occupational qualification exception (BFOQ).184 The
answer is quite simple: it does not fit the scope of the constitutional issues implicated in this
Article. This is evident by examining how the BFOQ would fail to address the example
employers we have previously presented as likely beneficiaries of the newly-invigorated religious
association hybrid.
The Supreme Court has emphasized that this BFOQ exception is applicable in only the most
narrow circumstances.185 The oft-quoted requirement for a BFOQ is that an employer must prove
the “essence of the business operation would be undermined” if someone with non-conforming
religious beliefs were hired for the position.186 For the home health care business typified in
Preferred Management, the employer could claim the essence of its business operations is to
share its religious beliefs with its clients. However, the courts have not interpreted “essence of
business operation” in terms of business goals but, rather, in terms of functionality.187
It is not necessary functionally for a home health care provider to have a religious
background to care for clients’ physical needs. Also, an employee may be willing to advance a
religious message with clients whether or not the employee’s religious beliefs conform to the
message. However, this is not the free exercise of religion the employers seek. Rather, the
business owners’ religious beliefs may require that the message is lived by its employees and
non-adherents could not proselytize to the clients of the business with any genuine conviction. A
BFOQ exception similarly would not address the free exercise claim of an employer who
discriminates in hiring in order to promote the daily time demands of religious adherents who
otherwise could not work regular hours and fully practice their religion.
183
See supra Part III.C.
42 U.S.C. § 2000e-2(e)(1). This section provides: (e) [I]t shall not be an unlawful practice for an
employer to hire and employ employees, . . . on the basis of his religion, sex, or national origin in those
certain instances where religion, sex, or national origin is a bona fide occupational qualification reasonably
necessary to the normal operation of that particular business enterprise. Id.
185
See Dothard v. Rawlinson, 433 U.S. 321, 334 (1977) (applying the narrow BFOQ exception to the
general prohibition against discrimination based on sex).
186
Id. at 333 (quoting Diaz v. Pan Am. World Airways, 442 F.2d 385, 388 (5th Cir. 1971)).
187
See Diaz, 442 F.2d at 388 (calling BFOQ a “business necessity test, not a business convenience test”);
see also Rasul v. District of Columbia, 680 F. Supp. 436 (D.D.C. 1988) (holding that denominational hiring
of prison chaplains does not meet BFOQ test); Abrams v. Baylor Coll. of Med., 581 F. Supp. 1570 (S.D.
Tex. 1984) (finding policy excluding Jews from Saudi Arabian hospital teams does not satisfy BFOQ);
Kern v. Dynalectron Corp., 577 F. Supp.
1196 (N.D. Tex. 1983) (holding that requirement of Muslim pilots to fly into Mecca, Saudi Arabia on threat
of beheading under local law is a BFOQ because business cannot operate if its pilots are beheaded); cf.
Pime v. Loyola Univ., 803 F.2d 351 (7th Cir. 1986) (stating that BFOQ exception applies to Jesuitaffiliated university seeking to maintain a Jesuit influence in its philosophy department).
184
35
To consider fully the free exercise and expressive association claim of private employers,
courts must address the factors that produce the hybrid right. Free exercise alone would not
impact the civil rights goals of Title VII.188 Only when free exercise has the additional element of
freedom of association, now more fully endorsed by the Court following Dale, is there an
inescapable impact on antidiscrimination legislation.189 Although private employers should assert
their hybrid rights recently developed by the Court, the underlying considerations offer delimiting
factors that promote the constitutional co-existence of rights.
Justice O’Connor’s well-reasoned concurrence in Roberts,190 wields less persuasive authority
after Dale failed to recognize its commercial associations and expressive associations dichotomy.
This is not the balance we strike. An association’s profit motive is just one of several factors to
consider in making the essential determination of whether
a business owner may express religious beliefs in hiring practices. In the employment
antidiscrimination context, Dale’s deference to the organization’s message, both in terms of
formulation and dissemination,191 also fails to enforce these important constitutional
requirements. Rather, an organization with the central mission of promoting and advocating a
religious belief must show objectively that its mission would be undermined by employing
individuals who do not share this belief system.
Title VII suggests one way an employer who wishes to advocate theological orientation
through business practices could hire discriminatorily without raising antidiscrimination
concerns: limit the number of employees the business owner can hire. Although many state and
local laws that likewise prohibit discrimination in the employment context reach much smaller
numbers of employees, a cap on employees has the appeal to resolve this issue. Indeed, in all
likelihood the employers who focus primarily on religious advocacy over profit motive of a
business will be small businesses. This is an obvious compromise position.
Permitting a “small business” exemption for the purpose of free exercise and freedom of
association, even if the number of employees permitted under the exemption is large enough to
accommodate every business owner who would want to take advantage of it, creates dangerous
precedent and ultimately does not respect the constitutional provisions as fundamental rights. It
would be under-inclusive.192 Yet, a size limitation also would be grossly over-inclusive, as hardly
every sufficiently small employer would use religious associational considerations as hiring
criteria. In the end, the simplicity of a “small business” exemption would be overshadowed by its
arbitrariness.
Each of these competing interests of civil rights and religious exercise play vital roles in our
society so that we would avoid a compromise position and advocate, instead, for a position that
recognizes the essential nature and goals of each and promotes each in a way that leads to coexistence rather than compromise.
188
See Employment Div., Dep’t of Human Res. v. Smith, 494 U.S. 872, 881 (1990) (holding that generally
the First Amendment does not bar “application of a neutral, generally applicable law to religiously
motivated action”).
189
See supra note 129.
190
Roberts v. U.S. Jaycees, 468 U.S. 609, 631 (1984) (O’Connor, J. concurring).
191
See supra notes 143–144 and accompanying text.
192
Despite the above generalization, religiously-motivated employers would not, by necessity, employ only
a small number of workers. Consider, for instance, our example of the business owner whose purpose is to
establish a place of employment that is tailor made for accommodating particularly onerous or nontraditional religious practices or worship. In a community with a large population of individuals who
adhere to that religion, the employer could grow quite large.
36
The religious employer exemption Congress incorporated in Title VII193 can achieve the
appropriate constitutional nexus. Its parameters facilitate religious and association freedoms of
business owners derived from the First Amendment while requiring equality in employment. The
factors considered in granting such an exemption should be: whether the main pursuit of the
employer is to express a devotion that is considered religious under current free exercise
jurisprudence; whether, objectively, the formulation and dissemination of the religious message is
undermined by the presence of nonconforming employees; whether the devotion represents a
complete and exclusive belief system; and whether profit motivation in the end outweighs
religious mission.
C. FACTORS FOR A PRIVATE EMPLOYER RELIGIOUS EXEMPTION ANALYZED
1. RELIGIOUS EXERCISE AS A PRIMARY PURSUIT
The central aim in granting a religious employer exemption is to permit those employers who
promote a religious message to engage in this constitutional right free of government interference
in hiring. However, the main goal of the business owner must be that of religious exercise, rather
than merely pursuing a niche market for profit. The focus here is not on alternatives to religious
expression but on whether the exercise of religious ideals necessarily implicates associational
freedoms.194 If private employers need not employ co-religionists as part of their religious beliefs
and practices, the hybrid right is not created and the lower level of scrutiny of Smith represents
the extent of the constitutional protections.
The recent Catholic Charities decision by the California Supreme Court offers an example of
a religious employer exemption under California’s Women’s Contraceptive Equity Act (WCEA)
that reaches many of the same employers advocated in our four factor analysis.195 WCEA’s
exemption requires religious employers to have the inculcation of religious values as the purpose
of the entity and the employer must primarily employ and serve persons who share the same
religious tenets.196 Catholic Charities did not qualify under this exemption because its primary
purpose was to offer social services rather than the “inculcation of religious values,” and many of
its employees were not Catholic.197 Likewise, Catholic Charities as an employer would not
qualify under our proposed exemption because it is not organized to advocate for religious tenets
and must not employ co-religionists to do so.
The difficulties associated with measuring the sincerity of any religious belief are present in
determining whether private employers have a purpose of religious exercise.198 Just as the
definition of religion is painted in broad strokes by government entities in order to avoid
Establishment Clause entanglements, so must the activities of religious groups be considered
193
See supra Part I.B.
For example, in Preferred Management, converting employees was part of the business owners’
religious and business purposes. EEOC v. Preferred Mgmt. Corp., 216 F. Supp. 2d 763, 819 (S.D. Ind.
2002). Therefore, the owners were willing to associate with non-adherents as part of their religious
expression.
195
Catholic Charities of Sacramento, Inc. v. Superior Court, 85 P.3d 67, 74 n.3 (Cal. 2004).
196
Id. at 74, n. 3.
197
Id. at 75.
198
See id. at 79 (“Congress and the state legislatures have drawn such distinctions for this purpose, and
laws embodying such distinctions have passed constitutional muster.”) (citing Corp. of Presiding Bishop v.
Amos, 483 U.S. 327, 334–40 (1978)).
194
37
broadly. Exercise of religion through enterprise, however, may be required by religious
organizations, as the religious employer exemption of WCEA suggests.199
2. OBJECTIVE EVIDENCE MUST EXIST SHOWING THAT EMPLOYEES PROMOTE
RELIGIOUS BELIEF
In addition, to consider the competing aims of civil liberties and civil rights, the religious tenet
requiring co-religionist hiring must be one objectively documented. The employer’s devotion and
analysis of whom or what type of association would impair the message similarly must be
determined objectively. This documentation requirement is addressed in Dale, but the majority
does not require overtly objective indicators of purpose and mission.200
Certainly, Establishment Clause concerns are raised by requiring proof of religious exercise
through private business.201 However, a variety of laws require the government to distinguish
between religious and secular activities, and it is upon objective indicators that this distinction
must be made.202
For a private employer pursuing religious exercise through a business purpose and as a
criterion for discriminatory hiring, the objective evidence must be obvious and available to
entities and individuals who may evaluate this information before choosing to engage in business
transactions.203 The opportunities to document the religious exercise purpose of a business are
numerous, ranging from business formation documents to employee handbooks. Interactions with
clients or customers would provide further objective evidence to support an exemption under
Title VII.
3. RELIGIOUS DEVOTION REPRESENTS A COMPLETE AND EXCLUSIVE BELIEF SYSTEM
An additional factor in qualifying for an exemption under Title VII is whether the message that
the employer seeks to promote represents a complete and exclusive belief system.204 For example,
the Boy Scouts of America, as an employer, would not be exempted from antidiscrimination
legislation under this formulation because, although the organization undoubtedly has a religious
message in its promotion of spirituality and a higher power, it promotes that message in
conjunction with various religious organizations that share this main tenet. As the religious
message is one promoting religion generally rather than a complete belief system to the exclusion
of embracing others, it does not rise to a constitutionally protected message over the civil rights
goal in employment.205
199
Id. at 75.
Boy Scouts of Am. v. Dale, 530 U.S. 640, 650 (2000) (demonstrating that through the Scout Oath, BSA
showed evidence of goals for its members to be “morally straight” and “clean”).
201
See Mitchell v. Helms, 530 U.S. 793, 828 (2000) (criticizing laws that invite government officials
“trolling through a person’s or institution’s religious beliefs”).
202
See supra note 28.
203
See Roberts v. U.S. Jaycees, 468 U.S. 609, 636 (1984) (O’Connor, J., concurring in part and concurring
in the judgment) (suggesting an association entering the “marketplace of commerce” loses some control
over its affairs it otherwise would retain if it remained in the “marketplace of ideas”).
204
Such a belief system need not be consistent with an established religion. See supra Part I.A.
205
Cf. EEOC v. Kamehameha Sch./Bishop Estate, 990 F.2d 458, 465 (9th Cir. 1993) (finding that school
does not qualify for curriculum-based religious educational institution exemption from Title VII, when
“religion [was] more a part of the general tradition of the Schools than a part of their mission, and serv[ed]
primarily as a means for advancing moral values in the context of a general education”).
200
38
If an entity embraces religion generally or a broad category of religions, the expressive
association concerns that elevate free exercise are far more tenuous. Dale supported an
organization’s ability to tailor its message and granted broad freedom of association.206 However,
this latitude did not eliminate the Court’s requirement in Roberts for a “proof of membershipmessage” connection.207 The connection between a private employer’s religious advocacy and
those employees who can promote that message are particularly strong when the message is more
narrowly tailored.208
Hiring focused on advocating a broad category of religion does not represent free exercise
and associational rights so much as exclusion of individuals of nonconforming beliefs or
practices.209 It is this exclusion of the potential employee’s religious beliefs that Title VII is
focused on eliminating. Religious beliefs must be appropriately tailored so as not to violate the
essential nature of civil rights goals.
4. PROFIT MOTIVE EXAMINED
Private employers with the goal of religious advocacy—including employing only individuals
who share their religious tenets—should not be banned from that pursuit based solely on a profit
element. Commercial enterprises are granted less protection under the First Amendment in many
respects.210 However, the definition of religion for constitutional purposes is sufficiently broad to
accommodate an infinite number of belief systems, some of which may be exercised through forprofit transactions.211 Profit element must be considered in making this determination but it is not,
by necessity, mutually exclusive with the other factors such that it should presumptively
disqualify the employer from exemption.
Justice O’Connor’s Roberts dissent offers a potential standard to determine associations
subject to rationally related state regulation by characterizing as commercial those associations
with activities “not predominantly of the type protected by the First Amendment.”212 Justice
O’Connor recognizes that no “simple precision” can characterize associations as commercial or
expressive.213 Nonetheless, her formulation of the standard is an attempt to give protection to
purely expressive association. The difficulty with this commercial/noncommercial standard is that
the formulation of the standard assumes that activities which are commercial cannot be activities
that are predominantly the type protected by the First Amendment. We believe our examples
prove otherwise.
206
Boy Scouts of Am. v. Dale, 530 U.S. 640, 653 (2000) (granting deference to an organization “regarding
the nature of its expression”).
207
Roberts, 468 U.S. at 627, 632.
208
See id. at 627–28 (“In claiming that women might have a different attitude about such issues as the
federal budget, school prayer, voting rights, and foreign relations . . . the Jaycees relies solely on
unsupported generalizations about the relative interests and perspectives of men and women.”).
209
See Alvin C. Lin, Note, Sexual Orientation Antidiscrimination Laws and the Religious Liberty
Protection Act: The Pitfalls of the Compelling State Interest Inquiry, 89 GEO. L.J. 719, 720 (2001)
(“[A]lthough the Free Exercise Clause was intended to protect free exercise of religion, it was not intended
to be used as a tool for individuals seeking to bypass generally applicable antidiscrimination laws.”).
210
See Roberts, 468 U.S. at 634 (noting that states may regulate commercial transactions and that the
“constitution does not guarantee a right to choose employees, customers, [or] suppliers. . . without restraint
from the state”).
211
See supra notes 25–28 and accompanying text.
212
Roberts, 468 U.S. at 635.
213
Id. at 635.
39
The business owners in Preferred Management undeniably had as their goal an effort to
advocate religious values documented in “The Great Commission” directive.214 Their business as
home health care providers offered them an opportunity to go into people’s homes and share their
faith with them. These owners believed their faith as Born-Again Christians required them to
express these tenets in every aspect of their lives, including the workplace.215 Obviously,
adequate home health care service is an important part of this business, but there seems no clear
line that either religious advocacy or health care were predominantly the activities of the
business. In fact, the business owners could point to “The Great Commission” and other
documents guiding how their business must be established to comply with their faith as the major
activity of the business.
The second example we have referred to throughout this Article is that of a business owner
whose business purpose is establishing an accommodating employment atmosphere for coreligionists when their shared religious beliefs require worshipping in a way that is considered an
“undue hardship” for other employers.216 The commercial nature of the business is to allow free
exercise of religion while employees earn a livelihood. Were it not for the religious requirement,
there would be no need for the business.
Therefore, the commercial aspects and for-profit status of private employers cannot easily be
separated to impose a bright line rule. Arguably, tax-paying entities should not be less qualified
for an exemption under Title VII than religious entities that otherwise are exempted from
regulatory or tax burdens.217 Nevertheless, evidence that the motivation for profit, financial or
market growth, or the like appears to drive the employer’s decisions is relevant to this inquiry. In
fact, it may very well belie the objective evidence of the religious mission or purpose required by
the second factor of our proposed exemption analysis. Yet, while business transactions and other
displays of profit motivation may be indicators that the first three factors of the test are not
sufficiently strong, profit motive cannot solely negate the existence of this super hybrid right.
These factors necessarily mean all but a very small number of religious business owners cannot
discriminate in employment decisions. For that small number of business owners who wish to
advocate a narrow theological orientation through their commercial pursuits, important
constitutional rights are maintained. The factors represent the essential elements of a free exercise
and associational hybrids, but one which permits the emerging civil liberties to exist alongside
well-established civil rights.
V. CONCLUSION
When combined with Dale as an emblem of the reemergence of civil liberties, Smith’s hybrid
rights could prove problematic for the civil rights advances made over the past four decades.
Therefore, we recognize the important values represented in this libertarian emphasis but
additionally recognize the need to limit its effect on important civil rights and equality values.
214
EEOC v. Preferred Mgmt. Corp., 216 F. Supp. 2d 763, 773 (S.D. Ind. 2002).
Id. at 773.
216
42 U.S.C. § 2000e(j) (2000); see also Trans World Airlines, Inc. v. Hardison, 432 U.S. 63, 84–85 (1977)
(establishing the standard that an employer was not responsible to accommodate an employee’s religious
practices if it resulted in more than “de minimis” cost).
217
See Corp. of Presiding Bishop of the Church of Jesus Christ of Latter-day Saints v. Amos, 483 U.S. 327,
334 (1987) (upholding Title VII exemption as “benevolent neutrality”); Walz v. Tax Comm’r, 397 U.S.
664, 680 (1970) (permitting property tax exemption for religious organizations that used the property for
religious purposes exclusively).
215
40
Thus, we have advocated a position that recognizes and respects the core of the Dale
associational expression as a super-hybrid constitutional free exercise right, while setting up a
factor balancing approach that limits its use only to those employers who are truly using the
employment process as a means of expressive association and religious exercise. By doing so, the
employer’s belief system will be laid bare for the market forces to judge whether or not such a
business can and should survive. If there is a niche market for such businesses, they will survive
and perhaps flourish. If not, they will not.
41
CIVIL SOCIETY PARTICIPATION IN THE AFRICAN UNION AND NEPAD*
BY T.H. MUZONDO**
1.0
INTRODUCTION
This paper looks at the role of civil society within the NEPAD vision and in the African Union.
The paper examines why and how civil society must participate in the AU and the NEPAD
vision. It also looks at the issues that bar effective participation and attempts to propose a way
forward.
It is necessary to first briefly define the subjects/principals in this paper before embarking on
an analysis of participation and engagement.
CIVIL SOCIETY
A question that is always asked is who civil society is. The concept of civil society is often
grossly misunderstood with just NGOs referred to as civil society. NGOs are a fairly modern
phenomenon. They were formed as a result of the extension of citizenship rights in Europe and
the Americas in the Eighteenth and Nineteenth Centuries as instruments to meet community
needs, defend interests or promote new policies.1 There is no generally accepted definition of an
NGO. Political scientists sometimes refer to NGOs as pressure or lobby groups. The terms civil
society and private voluntary organizations are also used interchangeably. There is however
agreement on the essential features of an NGO. As early as 1974, Gladstone2 defined the
voluntary sector as involving ‘a group of individuals who freely associate, without a commercial
motive, to further their own welfare or the welfare of others.’ Similarly, Hatch defined them as
(1) … organizations, not simply informal groups (2) not established by statute or under
statutory authority and not directly controlled by a statutory authority and (3) not
commercial in the sense of being profit making or being mainly dependent for their
resources on fees and charges paid by private individuals.3
Bamford also defines a voluntary association as ‘a legal relationship, which arises from an
agreement amongst three or more persons to achieve a common object, primarily other than the
making and division of profits’.4 Voluntary organizations have also been described as contracts
sui generis not falling within any of the well-defined classes of contract known to the law.5
*
Paper Presented by T.H. MUZONDO at IDASA Symposium on “Deepening Civil Society’s
Understanding In Africa Development” at Tshwane–Kutlwanong Democracy Centre; 20 July 2005.
**
TH Muzondo. (Doctoral candidate UKZN) I am grateful to Professor Karla Simon and L Verwey for
their comments.
1
J Paul ‘NGOs and Global Policy-Making’ Unpublished paper 2000.
2
T Hayes Management, control and accountability in non-profit/voluntary organisations (Dublin: Avebury,
1996) 12.
3
T Hyayes ibid at 12.
4
B Bamford Bamford on the law of partnership and voluntary association in South Africa 3ed (Cape Town:
Juta, 1982) 117.
5
B Bamford ibid at 117.
42
The term NGO gained popularity in 1945 because of the need for the United Nations to
differentiate in its Charter between participation rights for intergovernmental specialized agencies
and those for international private organizations. It is these private organizations that were then
referred to as NGOs.6 The term NGO embraces a broad diversity of institutions. Ball and Dunn
say that the term NGO describes organizations that have four key characteristics: they are
voluntary as opposed to statutory; are independent; are not formed for personal gain and they are
not self serving.7
Whilst it is difficult to accurately describe NGOs, there are certain requirements that must be
met for an organization to be termed as an NGO.8 The basic requirements are:
•
•
•
•
They must be founded by private individuals;
Be independent of states, although NGOs may receive funding from the government
They must be oriented toward the rule of law i.e. they must not engage in criminal
acts, in particular they must be non-violent;9
They must pursue public rather than private interests as an objective and possess a
minimal organizational structure.
We need to distinguish clearly between NGOs as civil society, and civil society as it is
broadly understood. The broader notion of civil society includes mutual benefit organizations
(MBOs), churches, trade unions, sports clubs, community based organizations (CBOs), faith
based organizations (FBOs) and so forth. These are primarily voluntary associations of citizens
established in pursuit of common interests. Thus civil society must be understood as much more
than just NGOs.
NEW PARTNERSHIP FOR AFRICA’S DEVELOPMENT
The New Partnership for Africa’s Development (NEPAD) is a VISION and STRATEGIC
FRAMEWORK FOR Africa’s RENEWAL.10 The goals of the vision are:
a) To eradicate poverty;
b) To place African countries, both individually and collectively, on a path of
sustainable growth and development;
c) To halt the marginalization of Africa in the globalization process and enhance its full
and beneficial integration into the global economy;
d) To accelerate the empowerment of women.
Some of the principles are: Good governance as a basic requirement for peace, security and
sustainable political and socio-economic development, African ownership and leadership, as well
as broad and deep participation by all sectors of society; Anchoring the development of Africa on
its resources and resourcefulness of its people; Partnership between and amongst African peoples;
6
P Willets ‘What is a Non-Governmental Organization’? Unpublished paper 2002.
C Ball & L Dunn, Non governmental organizations and guidelines for good policy and practice (The
commonwealth foundation London 1994) 17.
8
M C Nanavatty & P D Kulkarni NGOs in the changing scenario (New Delhi: Uppal Publishing House,
1998) say that the use of the phrase NGO is wrong in that it denotes a negative identity describing a group
of organizations by what they are not.
9
In Zimbabwe a lot of demonstrations organized by NGOs have ended up turning violent because of the
police attempts to stop the demonstrations.
10
See core NEPAD Documents available at http://www.nepad.org/2005/files/hsgic.php (accessed on 17
July 2005).
7
43
Ensuring that all Partnerships with NEPAD are linked to the Millenium Development Goals and
other agreed development goals and targets.
The main priorities for NEPAD are: establishing the Conditions for Sustainable Development
by ensuring:
•
•
•
•
Peace and security;
Democracy and good, political, economic and corporate governance;
Regional co-operation and integration;
Capacity building.
THE AFRICAN UNION
The African Union (abbreviated AU), founded in July 2002, is the successor organization to the
Organization of African Unity (OAU). It aims to help promote democracy, human rights and
development across Africa. The constitutive act was signed on the 11 of July 2000.11
2.0 WHY CIVIL SOCIETY PARTICIPATION IS IMPORTANT
The various components of civil society – from grassroots organizations to public policy think
tanks have vital contributions to make in the priority areas of the AU and NEPAD. They have
been doing so and should continue to do so without necessarily packaging the project as a
‘NEPAD project’. The participation of civil society is crucial to democracy as it ensures that the
laws and policies that affect citizens’ activities and cater for citizens’ needs. NEPAD seeks to
promote sustainable, people-centered development. A fundamental component of such a
development plan ought to include the role of civil society in formulating and implementing such
a plan because such participation is an indispensable requirement for securing positive
developmental outcomes. Civil society organizations have a closer proximity to the intended
beneficiaries of development policies than the state. They represent marginalized individuals and
groups who are not able to influence policy.
Civil society organizations have the obligation of communicating their constituencies'
concerns to policy makers and to ensure that people in power have accurate information in order
to make the best decisions. Civil society organizations often have specialized knowledge and
experience in fields that government does not necessarily have. Together, practical useful
solutions to problems can be developed.
In summary, civil society's role is to provide critical and constructive feedback to government
on problem areas and what works well, so that legislation could be changed and developed to
promote democratic governance. Where policies, laws and development projects are launched in
consultation with civil society, they are bound to be people-oriented and accepted by the
communities as their own, as they will have participated in the processes. In essence this is what
ownership and community driven development is all about. It represents a working democracy
were there is government of the people by the people and for the people. Because the people will
have participated, the policies will be legitimate and popular, meaning that they will be embraced
by the community. NGOs therefore play a very important role of being the link, between the
people and the legislators. They are hence commonly referred to as “the voice of the voiceless.”
11
See constitutive act available at http://www.africa-union.org/home/Welcome.htm.
44
The voiceless will remain voiceless as long as civil society is reluctant to engage the regional
bodies.
A problem that many people face in various African countries is that the legislature and other
state institutions are far removed and inaccessible to the ordinary person. If this is a common
problem, how much more inaccessible and far removed would the ordinary or even the
sophisticated person find the AU or the NEPAD vision? The institution which is the AU and its
organs is not designed to for individual exchanges. It therefore becomes the duty of civil society
to ensure that those individual voices are heard through its participation and engagement with the
regional bodies.
Clearly, the experience of the OAU has taught us that without civil society participation, the
chances of the body becoming an old boys club become increasingly high. Civil society
participation serves to remind the leaders that they are not there to protect each other but their
peoples. By constantly highlighting the abuse by member states, civil society will force the AU to
act against the offending party. (This in no way suggests that civil society has not done enough in
Zimbabwe)
Civil society also acts as a very necessary constraint on the power of government when it
calls for transparency and accountability. Civil society scrutiny forces decision-makers to place
the public good before their private good when faced with opportunities for self-enrichment.
Organizations such as Transparency International highlight government corruption, etc.
We now talk of community directed development (CDD) as the best method of achieving
large-scale development. It is civil society, with its links to the grassroots that must take the lead
in formulating and implementing these development programs. If CDD is to take occur and
succeed in Africa civil society must be involved to get the broad-based support that is needed for
success. The areas where civil society can make vital contributions include:
•
•
•
•
•
•
•
Holding government accountable;
Strengthening mechanisms for conflict prevention, management, and resolution;
Promoting and protecting democracy and human rights;
Extending education and healthcare;
Promoting the role of women in social and economic development;
Building state capacity to maintain law and order; and
Helping create infrastructure and agricultural programmes.
Civil society provides the alternative voice to what states inform the AU about. On too many
occasions civil society warnings have served to alert the African continent to massive human
rights violations that were taking place in their respective countries, despite spirited denial of
abuse by the governments. Civil society is also able to investigate abuses and disseminate
information quickly and effectively to those who can make decisions. The examples of Zimbabwe
and Sudan show the importance of civil society in forcing bodies such as the AU to act.
3.0 HOW CIVIL SOCIETY CAN PARTICIPATE EFFECTIVELY IN THE AU AND
NEPAD
Practice makes perfect. Many civil society groups complain about lack of space to participate
within the NEPAD vision and the AU. However, when interrogated further, it becomes apparent
that those very organisations have little or no interaction with governmental and legislative
45
structures in their countries. There is a belief that is held by large number of civil society
organisations that interaction with the state will leave then tainted. The truth of the matter,
however, is that civil society needs to interact with the state because that is where policies and
laws are made. Civic society needs to realise that the AU is only as democratic or as open to civil
society as the countries that form it. It is safe to say that the acceptance/ tolerance of civil society
within the AU can be determined by looking at the tolerance of member countries. It has been
argued that the only difference between the Mugabe regime and other African states regarding
civil society is that Mugabe tells civil society that they are a nuisance whilst other states simply
treat civil society as a nuisance. How else could one explain away the lack of consultation with
civil society that characterised the drawing up of NEPAD?
Civil society needs to approach the AU or NEPAD to influence the formation of policy and
rules through the dissemination of documents that have well documented arguments and are
backed by quality research. Civil society must accept the responsibilities of the principles it
espouses. It is not enough for NGOs to criticize aspects of others' decisions--the key challenge is
to develop alternatives that work.
Civil society needs to form networks and make submissions in conjunction with other
organizations, such as churches and trade unions. By so doing they put all their resources and
energy together and speak with one voice. Further, co-coordinating around submissions is
mutually beneficial because in addition to building coalitions, civil society receives support in
areas where they are not as strong as other organizations. NEPAD and the AU should thus be
used by civic society organizations to build regional solidarity and thus become a strong voice in
any part of the continent. Further, the importance of coalitions and networks assumes a greater
importance when one considers the numerical limitations imposed on civil society under
ECOSOC.
In interacting with the legislature and other government policy making and implementing
departments, civil society needs to bear the following in mind:
•
•
•
Civil society should not seek to direct government, but to ensure that its efforts
where possible complements those of government and are for the good of the
voiceless.(this does not mean that civil society should not reject some initiatives;
however, in rejecting the initiatives, it is important that civil society, particularly
NGOs, have consulted with the grassroots instead of speaking for the elites and
intellectuals and making decisions without consultation)
If sustainable development is to be achieved, civil society should be part of a clear
political strategy which helps ordinary people to voice their concerns and be part of
the policy making process;
The aim should be to create synergy with those policy making institutions to achieve
development. Civil society could assist in building national ownership strategies as
well as prepare local communities to understand government policies. They could
give a voice to the concerns of the marginalized. Thus there is need for a two way
dialogue between government and civil society to ensure that efforts complement
one another. Partnership between government and civil society is not an option, but a
necessity to achieve ownership.
46
4.0
SPACE FOR CIVIL SOCIETY PARTICIPATION IN NEPAD AND THE
AFRICAN PARLIAMENT
In order to discover if there is room for civil society participation within the AU and, through it,
within NEPAD, it is instructive to examine the founding documents. The founding documents for
the AU and the NEPAD vision reflect the understanding that public participation is essential for
success. However, as is usually the case what is written is different from reality.
On 16 April 1999 the Organization of African Unity, now the African Union (AU) called on
Member States to take appropriate steps to implement the UN Declaration on Human Rights
Defenders in Africa in the Grand Bay (Mauritius) Declaration.12 African leaders also adopted the
Kigali Declaration recognizing the important role that the human rights defenders play in the
promotion and protection of human rights in Africa.13 And what has been done, for example, visà-vis the human rights defenders in various troubled states – the governments have sought only to
silence them, and they have done so with impunity.
The Constitutive Act of the African Union (AU) provides for an Economic, Social and
Cultural Council (ECOSOCC) as “an advisory organ composed of different social and
professional groups of the Member States of the Union”. This institution is meant to give effect to
the principle of “participation of the African peoples in the activities of the Union” and
recognition of “the need to build a partnership between governments and all segments of civil
society”.
The Pan-African Parliament and the Court of Justice are the other structures/organs of the AU
where civil society participation can take place. Despite the stated claim of civil society
participation, the rules of the parliament do not provide for civil society participation. The
problem is that civil society participation is not yet regarded as a way of doing things by most
African governments. They regard civil society as the opposition and seek ways to limit it.
The other area of participation is within the context of the African court and the African
commission. The African Commission recognizes the role of NGOs in human rights and seeks to
foster a close relationship with them. The commission indicated that:
We are rare, the only commission of this kind in Africa, which has this, close relationship
with NGOs. So we would like this relationship to exist and to be consolidated and
strengthened to promote and to protect human rights in Africa.14
The commission has demonstrated its intention to cultivate its relationship with NGOs by
granting NGOs observer status to enable them to undertake particular activities. The commission
also indicated that it may have to consider granting observer status to NGOs that are not
recognized in their own countries simply because they are doing important human rights work
that causes them to be marginalized or ignored in their home country.15 The commission has also
called upon governments to protect NGOs in their home states.16
12
The First OAU Ministerial Conference on Human Rights in Africa, meeting from 12-16 April, 1999 in
Grand Bay, Mauritius.
13
MIN/CONF/HRA/Decl.1 (I) adopted by the 1st African Union (AU) Ministerial Conference on Human
Rights in Africa meeting on 8 May 2003 in Kigali, Rwanda.
14
Quoted in R Murray The African commission on human and people s rights and international law
(oxford: hart publishing) 2000 at 88.
15
R Murray ibid at 90.
16
R Murray ibid at 92.
47
NGOs also have the right to submit cases to the commission and can also appear as amicus
curie. R Murray argues that NGOs also contribute to the development of law through litigation.17
In terms of the Protocol to the African Charter on Human and People's Rights on the
Establishment of an African Court on Human and People's Rights,18 NGOs can bring cases to the
court provided their home country has signed the optional protocol. However, even if the home
country does not sign the protocol, the commission is still able to refer the matter to the court.19
This clause is problematic as it can be used by countries with bad human rights records to prevent
NGOs from taking the maters to the human rights court.
By far the most important organ for civil society participation in the AU is ECOSOC. It is
provided for by article 22 of the AU and is composed of different social and professional groups
of the Member States of the Union to act as an advisory body (Emphasis added) This body
includes NGOs, FBOs, CBOs, and other civil society groups.
It differs from the UN ECOSOC model in that in the AU model, ECOSOC is primarily a
vehicle for civil society engagement with the AU. In the UN format, the voting members are
government representatives. However, through the Council Committee on NGOs, UN ECOSOC
consults with over 2,100 registered NGOs. These organisations are allowed to send observers to
the high-level session and submit written statements to ECOSOC.
The power of ECOSOCC lies in the fact that, as a structure of the AU, it has the ‘right to be
heard’ and its submissions taken into account. There are some limitations however to who
qualifies to be a member of ECOSOC and the total numbers are to be limited. My understanding
is that only those NGOS who have a 50 % local content can qualify to sit on ECOSOC. The state
also has a say in which NGOs become members. This means that NGOs become another
government mouth because of the lack of independence that this process of selection necessitates.
As for civil society participation in NEPAD, the main criticism that resulted in some sectors
of civic society rejecting the vision is the perceived lack of consultation with civil society in
drawing it up. Clearly, despite the arguments that it is difficult to consult each and every
individual civic society organization in Africa, more could and should have been done. That
however is water under the bridge. The vision of NEPAD is upon us and the interrogation that
needs to be made is what space is there for civil society engagement.
The starting point is that the African Union (whose vision is NEPAD) accepts and expects
civil society participation. The constitutive document of the AU indicates that one of the
principles that it will function on is the participation of the African peoples in the activities of the
African Union. (emphasis added).
This means that public participation within any organ or vision of the AU is not a privilege to
be granted or withheld. It is not exercised at the pleasure of the organs. Rather any body or vision
that falls under the auspices of the AU is required to provide room for civil society participation.
17
R Murray ibid at 95.
June 9, 1998, OAU Doc. OAU/LEG/EXP/AFCHPR/PROT (III).
19
D Padilla ‘An African human rights court: reflections from the perspective of the inter America system’
in African human rights law journal.
18
48
Within NEPAD the African peer review mechanisms (APRM) seeks to engage key
stakeholders to facilitate exchange of information and build a national dialogue platform on good
governance and all socio-economic development programmes. For it to succeed, the APRM
process relies on the need to promote full participation of relevant stakeholders in the
development as well as in the implementation of programmes of action.
The APRM provides a platform for African governments and civil society to discuss and
build consensus on the state of governance at the national level. It is a framework for systematic
review of state performance by other states in order to help the reviewed state adopt optimal
practices. To date, the process of implementing the APRM has been primarily spearheaded by a
government-designated focal point and this has tended to exclude civil society. The Panel of
Eminent Persons for Ghana expressed its concern about the participation of the civil society in the
APRM process. The NEPAD guidelines clearly set out the responsibility of the government under
review to conduct the self assessment in conjunction with all stakeholders including civic society.
Maybe that is where the problem is, because some states may not be willing to make the
process as open as it should be. This issue assumes greater importance when one considers that
the USA government is tying aid to good governance and is using the APRM as the only measure
of the good governance. This has the effect of putting pressure on the state to produce a favorable
country report so as to qualify for aid. As a result, civil society is either excluded or used to
rubber stamp the process.
The other manner in which the APRM has become meaningless is because it has been
reduced to be a very technical assessment dealing with policies rather than the issues that affect
the people.
Civil society should also be vigilant about opportunities to participate in the APRM process
as it unfolds. Clearly, civil society organizations will at times not be asked for their input in
assessments such as the NEPAD envisages or to shape the agenda or policy initiative. However,
civil society, independent thinkers, and interest groups will have to force open that space and
insist on participating.
The basic concept of assessments is not new. It is instructive to see what reliance UN
committees place on civil society participation in assessments. Commenting on the role of NGOs
on state parties’ reports to the various organs of the UN, Cecil Bernard and Peter Wille observe
that international and local NGOs have established themselves as a major force in the protection
and promotion of human rights. Their contributions in this regard include activist, watchdog
functions, non-partisan research, documentation work and civil litigation. They say that
governments should explore ways of involving NGOs and popular and representative groups in
the reporting process because:
the early involvement of groups outside the government in the reporting process offers an
opportunity for critical discussion between the government and its citizens, thereby
enabling the political leadership to identify more easily situations that constitute
violations of human rights, or that represent a factor of difficulty in implementing rights
contained in a treaty.20
20
C Bernard and P Wille ‘The preparation and drafting of a national report’ in Manual on human rights
reporting under six major international human rights instruments; 2nd edition (1997) at 33.
49
Commenting further on the issue of NGO participation in the preparation of state parties’
reports, Larie S. Wiseberg argues that, governments should seek NGO contributions in the
preparation of reports because there are usually areas where NGOs have information that is not
available to governmental bodies. Such groups may be gathering information about human rights
abuses, or about problems or achievements in their own areas of concern. Alternatively, the
NGOs may bring to the fore issues that the government may be keen to suppress. Due to these
factors, she argues that a report that has an NGO input will be viewed as a more accurate
reflection than that submitted by the state only.21 This is a clear indication that the international
bodies under which periodic reports are made value the contributions of the NGOs in the reports.
Clearly civil society has a very important role to play as an independent referee. The state can not
be both player and referee.
5.0
BARRIERS TO CIVIL SOCIETY PARTICIPATION IN AFRICAN UNION
BODIES
An examination of the barriers to participation by civil society in the NEPAD vision and the AU
has established that:
For civil society the greatest barrier has been that civil society initially rejected NEPAD on
the ground that NEPAD has neo-liberal assumptions. One can’t help but remember the civil
society indaba in South Africa in 2002 when the indaba voted to:
•
•
•
Reject NEPAD as development path for the continent and its people.
Join with other progressive forces to raise awareness about NEPAD and the dangers
it posses for Africa and her people.
Join with other progressive forces on the continent to campaign against the adoption
of NEPAD as a development path for Africa
The second barrier is that a lot of civic society organizations lack the resources needed to
participate effectively in AU bodies. This means that only the big, well-organized civil society
groups end up participating.
There is also a genuine concern among civil society organizations that they may sell out if
they participate in NEPAD. This is particularly true when civil society feels that it is being used
to legitimize processes and policies that it has not participated in formulating nor does not agree
with.
The barriers that are attributable to NEPAD are: the initial lack of adequate consultation, and
a continued lack of willingness to listen to civil society. There is a “take it or leave it attitude,”
that the Vision cannot be altered or changed to include other partners. Further, by failing to have
a NEPAD civil society group along the lines of the NEPAD business group, this sends out the
message that NEPAD is for business and open to business but not to civil society.
Another factor is that there do not seem to be effective communication channels between
NEPAD and civil society. It is not enough for NEPAD to say that civil society is disorganized
and therefore difficult to engage. At the very least there must be attempts by NEPAD to make
21
L S Wiseberg ‘Human rights information and documentation’ in Manual on human rights reporting
under six major international human rights instruments; 2nd edition (1997) at 50.
50
public notices of events /or issues so that those civil society groups who have an interest can
attend and respond.
Regarding participation in the Pan African parliament, two barriers quickly come to mind. As
governments are increasingly respond to the globalisation with strategies such as NEPAD and
institutions such as the Pan African parliament, it becomes more difficult for civil society to
respond to the transnational state. Particularly when one considers the difficulties of engaging
effectively with national level institutions
6.0
THE WAY FORWARD
Civil society needs to begin by viewing NEPAD as an opportunity that could be seized to
advance Africa's development priorities. This is particularly true because civil society agrees with
the NEPAD commitments to eradicate poverty, advance democracy, human rights, improve
health services and so forth.
There is also a need to strengthen the capacity of civil society institutions to improve
participation and to enable them to contribute to and monitor the implementation process of
NEPAD. It is essential that structures for CSO involvement are explicit and accessible.
A consistent way of obtaining and sharing information on NEPAD must be found. Such
information is not readily available from the NEPAD Secretariat. It is necessary to establish a
sub-group, similar to the NEPAD business group, to ensure a permanent voice for civil society at
the NEPAD Secretariat. In addition NEPAD desks are required in various countries that are
accessible to civil society. The need to keep open lines of communication cannot be
overemphasized.
The exchange of ideas must be mutual. In other words, consultation must be exactly that not
for one party to come up with a plan and expect the other to rubberstamp it. Criticism must be
accepted so that strategies can be put in place to remedy the shortcomings.
Civil society should also lobby on the criteria for accreditation to participate in AU structures.
The criteria should be technical ones that prevent states from exercising political control over
who obtains accreditation.
As the interaction begins to take place, civil society needs to remain vigilant, and
independent, so that it does not get co-opted and also retain its position to criticize and speak for
its constituents without fear. This means that civil society must retain its contacts with the
grassroots level lest it loses its mandate.
Finally there will be a need for an analysis and survey of the reasons for the failure of old
development initiatives as a basis for the amendment of NEPAD and its further development.
7.0
CONCLUSION
NEPAD will only be successful if it is participative and extends to the grassroots level. A
coalition between government and civil society is thus necessary. It remains to be said that both
51
civil society and governments have a mandate. Governments should thus not contest the
legitimacy of civil society because it questions the actions of the government.
52
CAUSES OF THE BIPARTITE STRUCTURE OF THE THIRD
SECTOR IN GERMANY: PUBLIC PERCEPTION AND
THE PRINCIPLE OF SUBSIDIARITY
BY ALAINA VAN HORN*
I. INTRODUCTION
A developed civil society can be a natural partner to a successful market economy, but the
existence of the latter does not always suggest the former. This is most evident in the post
unification society of Germany; home to the strongest economy in Europe, and a comparatively
weak health and social services sector.1 Following the cold-war, privatization and other market
reforms offered civil society the chance to step into the void resulting from governmental
retraction. Also during this period, the technological revolution allowed for widespread
dissemination of information, empowering citizens to form their own independent associations,
like those already existing in Western Europe and the United States.2 In Germany, however, at the
same time the government was retracting its reach, it was also burying its hooks deep within the
ground on which budding health and social service organizations grew. On one hand, small and
membership nonprofit organizations filled this void, receiving minimal funding, without which
they would still have operated successfully in the marketplace. Conversely, health and social
service organizations were growing increasingly dependent on the state.
The idea that the government should fund these organizations has become so entrenched in the
German welfare state that without philanthropic giving, voluntarily granted services in the sector
could not autonomously sustain their existence. Similarly, in the absence of governmental
support, most nonprofits in the health and social services sector could not survive in the
competitive market, lacking alternative sources of funding. The lack of competition that these
organizations face due to guaranteed state support has stunted innovation, reduced efficiency, and
prevented pressures to structurally evolve with the times from penetrating their interior. The
unique situation that these organizations face is due primarily to the principle of subsidiarity,
which remains in the hearts and minds of German citizens, the public perception of what these
organizations are, and conceptions of how they should operate. In order to alleviate the plight that
these organizations face and to ensure that their services are of comparable quality to those
offered in the private sector, the first step is to recognize that public perception of these
organizations needs to change.
*
Alaina Van Horn is an associate editor for the International Journal of Civil Society Law and attends the
Catholic University, Columbus School of Law. She is also studying for a Masters in Philosophy at Catholic
University. Comments or questions may be directed to lainavh@yahoo.com.
1
The “third sector” refers to all organizations that are not-for-profit and non-governmental, and the
activities of volunteering and giving which allow them to continue in operation. These organizations form a
major component of industries such as education, local health services, housing, sport, recreation and
culture.
2
Carothers, Thomas. Think Again: Civil Society” Foreign Policy Magazine Winter 1999-2000 edition.
Thomas Carothers is vice president for global policy at the Carnegie Endowment for International Peace
and author of Aiding Democracy Abroad: The Learning Curve (Washington: Carnegie Endowment, 1999).
53
II. SOURCES OF REVENUE FOR THE THIRD SECTOR
A. STATE SUBSIDIZATION
The non-profit sector in Germany is far more heavily subsidized by the state than in any other
country. In 1999, a study by Bertelsmann & Maecenata3 yielded the following figures:
Funding of the Third Sector
International Average
Public funding
42%
Sales of services
47%
Philanthropic giving
11%
Germany
64%
32%
3%
German nonprofit organizations receive almost two-thirds, 64% to be exact, of their income from
public sector payments.4 Employment in the nonprofit sector is also considerably lower in
Germany compared to Western Europe and other developed countries. Most of Western Europe
reports approximately 7% of their population are employed in the nonprofit sector, while in
Germany, employment in nonprofit organization amounts to only 4.9%.5 Germany’s nonprofit
sector is merely one half the size of those in the Netherlands, Belgium and Ireland, and is
significantly smaller than that of the UK.6
B. PHILANTHROPY
The word philanthropy- “the giving of gifts of time or valuables . . . for public purposes”7 is
rarely used in Germany because social welfare is basically considered a government
responsibility.”8 This ideology is reflected in practice, by comparing the level of philanthropic
giving in Germany to the rest of the modern industrialized world. In the following figures,
philanthropy is defined as the giving of cash or in-kind gifts by individuals, corporations, and
foundations, not including donations to religious congregations. In 1996, 19% of U.S. citizens
gave monetary support to nonprofit organizations, as compared to only 4% in Germany.9 In 1995,
total philanthropic giving amounted to only 3% of revenue for the civil society sector in
Germany, compared to the vast 65% of revenue derived from the government, and 32% derived
3
Bertelsmann Stiftung and Maecenata Institut für Dritter-Sektor-Forschung (eds), Expertenkommission zur
Reform des Stiftungs- und Gemeinnützigmeitsrechts. Anhörung im Ausschuß für Kultur und Median des
Deutschen Bundestages am 15 Dez, 1999 Stellungsnahme der Sachverständigen zur öffentlichen Anhörung,
Reichtaggebäude 15.12.99. pg. 2.
4
See Eckhard Priller, Annette Zimmer et al., citing John Hopkins Comparative Nonprofit Sector
Project/Germany, 1995.
5
Priller, Eckhard and Annette Zimmer et al, 8.
6
See Priller and Zimmer et al, 8; citing the UK sector at 6.7%.
7
Haibach, citing Lester M. Salomon (1992), America’s Nonprofit Sector. A Primer, New York: Foundation
Center.
8
Haibach, citing Ken Bauer (1992), Relationship Fundraising: A Donor-Based Approach to the Business
of Raising Money, London: White Lion Press.
9
See Salamon, Lester M. and Helmut K. Anheier (1996), The Emerging Sector: An Overview, Baltimore:
John Hopkins University.
54
from fees.10 In 2000 the percentage of private philanthropy was even lower, at 2.10% of GDP:
1.97% derived through volunteer efforts, and a mere 0.13% derived through private giving.11 Out
of thirty-four countries, Germany ranked in the bottom five countries for the percentage of GDP
devoted to private philanthropic giving, along with Italy, the Phillipines, Romania and Mexico.12
Despite the lack of philanthropic giving, the John Hopkins Comparative Nonprofit Sector
Project reported that the German civil-society sector attracts a considerable amount of volunteer
effort.13 In 1995 more than one-fifth of the German population reported that they contributed their
time to nonprofit organizations.14 However, even when “quasi-voluntary” income from the church
tax is taken in account, the share of philanthropic giving still does not reach the levels of other
countries in the region.15 In 2003, the John Hopkins study revealed that only 10% of the adult
population had volunteered, less than the 15% developing country average, 22% of the United
States, 30% of the UK and 14% of France.16
The figures above reveal the unique position the third sector holds in the German state. In
order to understand the varying levels of state subsidization between Germany and nations of
similar economic strength, it is first necessary to understand the philosophy underlying the
German social state; the principle of subsidiarity.
III.
THE GERMAN SOCIAL STATE
A. CONSTITUTIONAL UNDERPINNINGS
According to The Basic Law of the Federal Republic, (Grundgesetz (GG)), Article 20, ¶ 1,
Germany is a social state. This means that it is the responsibility of the state to provide humane
social conditions, and the duty of the legislature to put this principle into practice. German
citizens have no direct claims in this process, with the one exception of right to a minimum level
of subsistence. This right is reflected in Section I, Article 1, which states that:
(1) The dignity of man shall be inviolable. To respect and protect it shall be the duty of
all state authority.17
According to this basic right, the achievement of social justice by the state is a precondition
for human dignity. The state has the duty to respect individual liberty, the free development of
10
See The John Hopkins Comparative Nonprofit Sector Project, “The Civil Society Sector at a Glance:
Germany, 1995,” www.jhu.edu/cnp, adapted from Lester M. Salamon, S. Wojciech Sokolowski, and
Associates, Global Civil Society: Dimensions of the Nonprofit Sector, Volume Two (Bloomfield, CT:
Kumarian Press, 2004). © 2004 The Johns Hopkins University. Baltimore, Maryland.
11
See The John Hopkins Comparative Nonprofit Sector Project Table 5 “Private Philanthropy
(Volunteering and Giving) as a Percent of GDP, by Country ca. 1995 2000) at www.jhu.edu/cnp.
12
Ibid.
13
Priller, Eckhard, Annette Zimmer, Helmut K. Anheier, Stefan Toepler, and Lester M. Salamon,
“Germany: Unification and Change,” The Third Sector in Germany. Annette Zimmer (Ed.), Münsteraner
Diskussionspapiere zum Nonprofit-Sektor-Sonderband 3 Münster 2000.
14
Priller, Eckhard, Annette Zimmer et al., 6.
15
Priller, Eckhard, Annette Zimmer at al, 15.
16
The John Hopkins Comparative Nonprofit Sector Project, Table 2: “Volunteering, 36 Countries” at
www.jhu.edu/cnp. © 2004 The Johns Hopkins University. Baltimore, Maryland.
17
Conradt, David P., The German Polity 6th Edition. Longman Publishers USA, 1996. Based on an
English translation provided by the Press and Information Office of the federal government of Germany.
55
personality, and freedom of faith and creed. Only then can the dignity of the human being be
protected.
This principle is vastly different from the philosophy behind the United States Constitution,
in which the Bill of Rights, the equivalent of the Basic Law (Grundgesetz (GG)), is restricted to
traditional civil and political rights and is expressed in ‘negative’ terms without qualification. For
example, according to the Fourteenth Amendment all citizens are granted the freedom from
discrimination on the basis or race, religion or national origin.18 This right ensures that the state
will not arbitrarily pass laws or grant protection to citizens in an arbitrary or discriminatory
manner. However, the state does not promise to affirmatively do something, but only to not do
something; i.e., pass discriminatory laws on the basis of race, religion or national origin. In stark
contrast to the Grundgesetz, the United States government is not responsible for providing its
citizens with anything positive or tangible; all grants of civil rights are in the form of immunity
from governmental intrusion.
B. THE PRINCIPLE OF SUBSIDIARITY
The main philosophical principle underlying the German social state is the principle of
“subsidiarity.” The principle reflects a historic Catholic social doctrine that defined the
responsibilities of the church and the state. The principle was fully developed after World War II,
when Germany created six nonprofit welfare conglomerates as part of their social assistance
legislations. At the time, these conglomerates were among the largest nonprofit organizations in
the world.
In relation to the German third sector, the principle of subsidiarity means that the State leaves
as many social welfare duties as possible to independent, self-governing agents.19 In light of this
principle a public-private partnership is formed, wherein the existence and autonomy of
nonprofits engaged in health and social services is guaranteed, but ultimate responsibly for
providing such services remains with the state.20
The partnership between the state and the nonprofit health and social services sector allows
these organizations to ignore market forces and be dependent upon the state. This is a mixed
blessing. In practice, the subsidarity principle has created a bipartite third sector: one part is
relatively well funded and state-supported, the other characterized by small and relatively
independent membership organizations.21
18
See, the Fourteenth Amendment, Section 1: All persons born or naturalized in the United States, and
subject to the jurisdiction thereof, are citizens of the United States and of the state wherein they reside. No
state shall make or enforce any law which shall abridge the privileges or immunities of citizens of the
United States; nor shall any state deprive any person of life, liberty, or property, without due process of
law; nor deny to any person within its jurisdiction the equal protection of the laws.
19
Anheier, Helmut K., “An Elaborate Network: Profiling the Third Sector in Germany”, in Government
and the Third Sector. Emerging Relationships in Welfare States, ed. Benjamin Gidron et al, San Francisco,
Jossey-Bass Publishers, 1992.
20
Zimmer, Annette and Thorsten Hallman (2002).
21
Zimmer, A., Priller, E., and Anheier, H. (1997): Der Nonprofit-Sektor in den neuen Bundesländern:
Kontinuität, Neuanfang oder Kopie. Zeitschrift für offentliche und gemeinwirtschaftliche Unternehmen,
20(1), 58-75.
56
C. THE BIPARTITE THIRD SECTOR
The small-sized and membership-based nonprofit organizations are mainly involved in culture,
sports, recreation, the environment and international concerns. These organizations are nearly
financially independent from the state, and if the state were to withdraw funding, they would still
be able to operate successfully in the market. The well-funded and state supported part of the
third sector is mainly composed of health and social service organization. These well-funded
organizations rely primarily on government subsidies for their continuing existence. Because of
this dependence, they can be described as “quasi-governmental and almost indistinguishable in
their operations from the encompassing German state bureaucracy.”22
Zimmer, Priller and Anaheier (1997) believe that the unification process in Germany has
exacerbated the difference between the financial structures of these two sectors. The gap becomes
particularly evident in examining the frail system of financing non-profit organizations as a
whole.23 The authors later remarked in another study that “. . . in fact, today there are hardly any
significant differences between the East and West German nonprofit sectors with respect to size
and societal importance.”24 However, the bipartite nature of the third sector exists across all of
unified Germany today.
IV.
PUBLIC PERCEPTION OF THE NONPROFIT SECTOR
Perhaps one of the major reasons philanthropic giving is so low in Germany, is the unenthusiastic
light in which many citizens view the nonprofit sector. Many view such organizations as
incompetent because they are unable to compete with the market and the state.25 In their study
“Trapped in an Identity Gap,” Zimmer and Hallmann observed two differing images of
nonprofits: those active in environmental and/or international issues are perceived as “new
heroes,” whereas those active in health and social services are perceived as amateurish,
inefficient, ineffective and subject to corruption and nepotism.26 In their study, they also found
that in the field most supported by public funds, namely, the health and social services
organizations, the strategy to gain or maintain political influences has not developed.27 In the
course of conducting a dynamic social and political study of the third sector in Germany, the
Center for Civil Society at Johns Hopkins University asked organizations from the health sector
what they would do if they were in financial need.28
22
Priller, Eckhard and Annette Zimmer et al., 21.
Ibid, 58.
24
Priller, Eckhard and Annette Zimmer et al. (2000), The Third Sector in Germany. Münsteraner
Diskussionspapiere zum Nonprofit-Sektor-Sonnderband 3. Arbeitsstelle Aktive Bürgerschaft, Institut für
Politikwissenschaft, Westfälische Wilhelms-Universität Münster, available at: aktivebuergerschaft.
de/vab/resourcen/.../wp-sband03.pdf.
25
Zimmer and Hallmann (2002).
26
See Zimmer and Hallmann (2002), citing Siebel, Wolfgang 1992: Der Funktionale Dilettantismus. Zur
politischen Soziologie von Steuerungs- und Kontrollversagen im ‘Dritten Sektor’ zwischen Markt und
Stadt, Baden-Banden; Bauer, Rudolph, 1997: Zivilgesellschaftliche Gestaltung in der Bundesrepublik:
Möglichkeiten oder Grenzen, in: Schmals, Klaus/Heinelt, Hubert (Hrsg.): Zivile Gesellschaft Entwicklung.
Defizite. Potentiale, Opladen, S. 133-153; FAZ 1999: Der Dritte Weg, Frankfurt; TAZ, 2000: HertieStiftungen vor der Pleite, 14. Januar.
27
Zimmer and Hallmann (2002), 18.
28
See discussion in Zimmer and Hallmann (2002).
23
57
The organizations most dependent on the state responded that they would contact the
appropriate political platform and inform umbrella organizations.29 In contrast, environmental and
international organizations responded with more nuanced strategies: the former said that they
would focus on acquiring new members, the latter, that they would emphasize donation
campaigns.30
The out-dated approach of the health and social services organizations reflects not only their
dependency on the state, but also their failure to achieve an independent identity. Zimmer and
Hallmann refer to their failure to adapt innovative development strategies as “strategy lethargy,”
and surmise that they have not yet adapted to the changing conditions of modern German
society.31 The health and social services organizations are still too tied to the state, while at the
same time, environmental and international organizations have “left the long shadow of the
state”32 behind. Environmental and international organizations have developed and matured in
their need to find other sources of financial support, while the health and social services sector
has increasingly relied on the principle of subsidiarity.
Further confounding the problem of securing other sources of financial backing, the public
perception of fundraising is fairly negative. Citizens still rely on the state to fund nonprofit health
and social services organizations. A large number of cultural and charitable not-for-profit
foundations in Germany are organized under the business form Stiftungen des privaten Rechts.33
These private organizations are counted as legal persons under the law, yet they only engage in
business activity under very rare circumstances.34 Because of this, fundraising is considered
begging, and is often associated with fraud.35 In contrast to the majority to nonprofits in modern
industrial societies, such as the United States and the UK, most German nonprofits do not even
have a staff devoted to fundraising. Some theorists surmise that this is due to German’s emphasis
on the quality of their product, and not on marketing or securing their financial existence.36
V. INCREASING THE STRENGTH OF THE THIRD SECTOR
A. ENHANCING COMPETITION
The effect of the integration of the principle of subsidiarity into German social welfare legislation
has been a stifling of competition in the health and social services sector. In the past, nonprofits
linked to the German Welfare Associations were protected from commercial competition by
law.37 According § 21 Bürgerliches Gesetzbuch, or “BGB,” nonprofits were originally restricted
29
Ibid.
Ibid.
31
Ibid.
32
Ibid.
33
Greiling, Dorothea, “The Legal Framework: Company and Labour Law,” The European Business
Environment: Germany. Eds. Nigel Reeves and Helen Kelley-Holmes, International Thompson Business
Press: London, 1997. pg. 75-123.
34
Ibid.
35
Haibach, Marita. “Contemporary Women’s Philanthropy in Germany,” ISTR Third International
Conference: The Contribution of the Third Section to Social, Economic and Political Change. Universite
de Geneve, Geneva, Switzerland July 8-11, 1998, ISTR Working Papers Series.
www.istr.org/conferences/geneva/confpapers.html.
36
Haibach (1998), 5.
37
Zimmer, Annette and Thorsten Hallmann, “Trapped in an Identity Gap? Self-Perception and Self-Esteem
of Nonprofit-Organizations in Changing Environments,” in Transforming Civil Society, Citizens and
30
58
to so-called “idealistic” and not meant for economic activities38 (Münkner 2000). In an effort to
stimulate growth, the government modified the narrow definition of “subsidiarity” to make it
apply to nonprofits working in health and social services industry. Government agencies in
Germany are presently working with these nonprofits by engaging in competitive tendering; the
signing of contracts issued under competitive circumstances. By signing contracts under
competitive circumstances, the government is able to list such payments as remunerations for
services, in other words, as the “purchase price” of the organizations service, rather than as
government subsidies.39 Under this quid pro quo arrangement, nonprofits have to compete with
for-profit providers for these contracts, thereby increasing the competitive environment in which
they operate, and hopefully, stimulating more efficient and productive operation.
B. POSSIBLE REFORMS IN THE FUTURE
Reformation of the German non-profit sector is currently under discussion in the Social
Democratic government.40 Under the current legal rules, it is difficult for nonprofits to “ . . .
follow the global trend of commercialization and monetarization.”41 If the present legal rules
regarding taxation, earned income and business activity rules are changed in favor of decreased
regulation, nonprofit organizations will be able to enter into competition with the market place.
The daunting unemployment rates in Germany have also alerted the government to the
importance of the service industry in supplying many citizens with jobs, and therefore, the need
to sustain it. From 1990 to 1995, the growth rate in nonprofit employment was measured by the
John Hopkins Comparative Nonprofit Sector Project at 41.5%.42 In 2003, the health and social
services field represented 21.8% and 27.2% respectively, in the percentage of the total civil
society workforce; collectively accounting for 49% of all employment in the sector.43 The total
number of workers in the civil society sector in Germany was only surpassed by four countries
out of thirty-six: India, Japan, the UK and the United States.44
In order to sustain third sector industry, the government’s first instinct will be to continue
granting large sums to the health and social services industry. However, this may prove to be
counterproductive to fostering a healthy service sector and, in practice, it is becoming impossible
to sustain under the European Union deregulation procedures. It is reported that “[I]n accordance
Governance: The Third Sector in an Era of Global (Dis)Order. International Society for Third Sector
Research (ISTR), 5th International Conference, University of Cape Town, South Africa: July 7-10, 2002.
Working Papers Vol. III (2002).
38
Birkhölzer, Karl. “Development and Perspectives of the Social Economy or Third Sector in Germany,”
Interdisciplinary Research Group Local Economy at www.crida-fr.org, citing Münkner H. u. a. (2000),
Unternehmen mit sozialer Zielsetzung, Neu-Ulm: AG SPAK.
39
See Zimmer and Hallmann (2002).
40
See Zimmer et al. (2000) at 22: “Currently being discussed are possible changes in the legal treatment of
foundation, the tax deductibility of corporate and individual giving, and the treatment of earned income and
business activities of nonprofits.”
41
Ibid, 22.
42
The John Hopkins Comparative Nonprofit Sector Project, “The Civil Society Sector at a Glance:
Germany, 1995,” www.jhu.edu/cnp, adapted from Lester M. Salamon, S. Wojciech Sokolowski, and
Associates, Global Civil Society: Dimensions of the Nonprofit Sector, Volume Two (Bloomfield, CT:
Kumarian Press, 2004) © 2004 The Johns Hopkins University. Baltimore, Maryland.
43
The John Hopkins Comparative Nonprofit Sector Project, Table 3: “Civil Society Sector FTE Workforce,
by Field, 36 Countries” at www.jhu.edu/cnp. © 2004 The Johns Hopkins University. Baltimore, Maryland.
44
Ibid: Germany 2418.9, India 6035.0 Japan: 2835.2, UK 2536.0, US 13549.1; all numbers expressed in
thousands.
59
with the European integration rules, recent German legislation has already begun to loosen the
rigidity of the subsidiarity principle in some areas.”45 This development is certainly a turn for the
better, weaning health and social service organizations from dependency on the state, but by
itself, it will not succeed in making these organizations competitive on the open market. The
organizations must find an alternative method of raising revenue and securing private funding, a
prospect which requires the current stereotype of health and social service nonprofit to be revised.
VI.
CONCLUSION
Many social scientists have come to realize that the existence of a well-developed third sector is a
necessary ingredient to a healthy, well-functioning civil society. Civil society usually emerges
once citizens have reached a comfortable standard of living, because once physical sustenance is
guaranteed, people have more time and money to support, or participate in associational life.
While Germany has reached this level, whether or not the third sector is Germany is an integral
part of civil society, rather than a mere shadow of the state, remains an open question.46 Any
resolution to this issue must begin with recognition of the bipartite nature of the third sector, and
the principle of subsidiarity that underlies it. The first step in addressing concerns over the
flagging strength of the health and social services sectors is dealing with the negative public
perception of these organizations, and doing something to change it.
45
Ibid, stating: “In the context of recently introduced long-term care insurance, for example, all service
providers regardless of their organizational form are treated on equal footing . . . [A]lready, a number of
EU programs providing infrastructure and financial support are leaving their marks on German nonprofit
organizations, especially in fields such as culture and education and job training.”
46
See Zimmer, Priller and Anheier citing H.K. Anheier and W. Seibel (1997), “The Nonprofit Sector and
the Transformation of Societies: A Comparative Analysis of East Germany, Poland and Hungary.” In
W.W. Powell and E. Clemens (eds), Public Goods and Private Action, Yale University Press, New Haven.
60
SPECIAL SECTION
PAPERS PRESENTED AT THE BEI DA NPO LAW CENTER FORUM,
MARCH 2005
INTRODUCTION
BY KARLA SIMON
This special section of articles features some of the papers presented at the Bei Da Forum on
NPO Law, held in March 2005. In his paper, Prof. Tymen van der Ploeg of the Virjie Universiteit
in Amsterdam, describes the legal framework for NPOs in The Netherlands. The third paper is
presented as a link1 to the paper published by Prof. Karla W. Simon, of the Catholic University of
America, in the Zeitschrift fuer Chinesisches Recht (although Prof. Simon is fluent in German,
the paper is in English). This paper reflects on issues related to the “privatization” into NPOs of
China’s shiye danwei.
1
This paper is available at http://www.iccsl.org/pubs/Aufsatz_Simon.pdf.
61
THE LEGAL FRAMEWORK FOR NON PROFIT-ORGANISATIONS IN THE
NETHERLANDS AND
OTHER WESTERN EUROPEAN COUNTRIES
BY TYMEN J. VAN DER PLOEG*
1. DEFINITION
This conference is about non profit-organisations and their legal framework. The organisers use
the word non profit-organisations, but it could, maybe, also have been non governmental
organisations, not for profit organisations, charitable organisations, public benefit organizations
or even maybe social organisations. When I talk about non profit-organisations I mean: non
governmental organisations with a purpose in the general interest, recognized as a legal category.1
Or formulated in another way: institutionalized (recognized as legal category), private, voluntary
and self-governing (non governmental), non profit distributing (for a general interest purpose).2 It
is important to define the sociological entity, whose regulation we are discussing, because the
different circumstances related to historical trends, ideological influences and legal traditions
make it not easy to compare legal regulations. It is rather complicated for a foreigner to get a grip
on the different types of organisations as legal persons that exist in China and to see if they are
comparable with western types of legal persons, as for instance the ‘voluntary’ issue seems not to
be distinctive.
2. PUBLIC POLICY AND THE FREEDOM OF ASSOCIATION
An important remark I found in a report on NPOs in Asia and the Pacific: The policy of the
government towards NPOs is presumably more important for the well-being of NPOs than an
adequate legal system.3 Making law on NPOs is not just a technical matter, although good legal
techniques are necessary. The idea of NPOs is connected with the freedom of association.
Freedom of association presupposes a certain autonomy for the participants of the NPOs towards
the State. How much room private organisations in a society enjoy is predominantly dependent on
the approach of the government to them.
Freedom of association has been a fundamental right in several European countries since at
least the 19th century. It is also part of the constitution (first amendment) of the United States. It
has received more global adherence in the 20th century, after the second World War. For instance
in art. 11 of the European Convention on Human Rights and fundamental freedoms4 this right is
recognized as an universal human right to the protection of which the countries that are party to
*
Vrije University Amsterdam
Comp. T.J. van der Ploeg, Supervisory powers relating to foundations, p. 256 in Voluntas 6/3 (1995).
2
See L.M. Salomon a.o., Global civil society, dimension of the non profit sector, The John Hopkins
Comparative Non Profit Sector, T.J. Center for Civil Society Studies 1999, p.3.
3
Mark Lyons, paper on third ISTR Asia and Pacific Regional conference 24-26 October 2003, cited in
ISTR Report, p. 4 (report is also in Chinese).
4
See also Universal Declaration of Human Rights , adopted 10 December 1948, UNGRA Res 217 A(III),
art. 20.
1
62
the treaty are bound. This treaty, like other treaties5 limits the possibilities for the national
legislator to make restrictions on this freedom. Restrictions are only allowed as far as “they are
necessary in a democratic society in the interest of national safety or public safety, public order or
the protection of public health, good morals or the protection of rights and freedoms of others.”
This makes it rather difficult for legislators, policymakers, governmental authorities and judges to
limit freedom of association. First of all, restrictions have to be discussed in democratic debate,
and a formal law in which the restriction is laid down is necessary. Secondly, the restriction has
to be legitimized as adequate and necessary for the purpose of the restriction. The authorities are
not legitimized by policy-reasons, they have to show that the restriction is necessary. The citizens
of the countries that are party to the European Treaty have a direct right to complain about
infringement of their rights by the party-states.6 There are not many cases about art. 11 of the
European Treaty regarding West European countries.7 The judgments concerned do not touch the
requirements for the establishment of associations8 or the supervision on them.
It is good I think to explicitly mention what the freedom of association implies. It implies a)
the freedom to establish associations –or better voluntary organisations (NPOs)9- with a purpose
as wished by the establishers, as long as it is not contrary to public order; b) the freedom to join
or not join an association,10 c) the freedom of the organisation to refuse persons to become a
member and d) the freedom to resign as a member.
The situation in which next to the State NPOs play an important role in society and where the
citizens not only enjoy political rights but also the right to participate in private organisations –
also for purposes of general interest- in which they can manage things in their own way, is often
called civil society. In the European Union11 there is a clear call for the promotion of this civil
society. The roots for it are inter alia the freedom of association and the subsidiarity principle.
One can argue that there is also a relation between the idea of free market and the freedom of
association.12 The free market is based on the free will of the citizens to organize their own
economic activities. When people have the opportunity to establish economic activities of their
own choice and through this conclude contracts also based on their own choice, they enjoy
freedom in an important part of their life. It seems inconsistent when this freedom is only limited
to economic life. The same freedom motivates people to establish private non profitorganisations for purposes they think fit. In a way these nonprofit activities are made possible by
the economic activities, because these have produced funds and time. As long as these voluntary
5
See art. 8 International Treaty on economic, social and cultural rights of New York,19 December 1966,
Trb. 1969, 100 and art. 22 of the International Treaty on civil rights and political rights of New York, 19
December 1966, Trb. 1969, 99.
6
Art. 34 European Treaty on Human Rights.
7
See F.H. Jacobs and R. White, The European Convention on Human Rights, Oxford 2003, p,. 290.
8
There has been a complaint of a French organisation of atheists who was refused the recognition as
association of public utility, but this has for unknown reasons not led to a judgment.
9
This includes in Dutch law also foundations.
10
Cfm. Art. 20 s. 2 Universal Declaration of human rights of the United Nations 1948. The ECHR also
recognizes this ‘negative’ right of association; see ECHR 13 August 1981, Series A.44 (1982) (Young,
James, Webster vs. United Kingdom) and ECHR 30 June 1993, NJ 1994, 223, Series A, No. 264 (1993) 16
EHRR 462 (Sigurjónsson vs Iceland).
11
See the report of the European Commission: The strengthening of the role of association and foundations
in Europe, COM (97)0241-C4 0546/96 and the Note: The Commission and nongovernmental organisations:
building a strong partnership, COM (2000) 11 def. 128.1.00.
12
These thoughts do not by accident follow the short description of the liberal view.
63
organisations do not endanger the state or society, it seems from that perspective to be logical to
allow this freedom to the citizens.
3. LAWS REGARDING NPOS
In the Netherlands the most important law is the civil law, which regulates which forms NPOs
have –the association and the foundation-, which internal organisation they have, how they are
registered and how they can be dissolved and liquidated. NPOs in our law are characterized by
the restriction that they may not issue profit to their members, board members, establishers and
other interested persons. They are not restricted to non-commercial activities. The members of the
management boards –or in American terms the executive directors- may earn a salary within the
limits of reasonability for their work. Associations and foundations are not necessarily for public
benefit.
Apart from the civil code NPOs are in certain aspects regulated by other laws. For example,
there are specific rules in tax-law for NPOs with public benefit purpose. In administrative law
there are general rules on subsidies, which are in most cases applicable to NPOs. In many laws,
like the election law, the media-law, the social welfare law, the youth help law, the law on elderly
homes, the (primary) education law, the social housing law etc., in short on nearly all fields of
society where NPOs play an important role in society as the government allows them this
position, there are rules in which the conditions for the participation of NPOs in the concerned
fields are laid down.
All non-civil laws take the association and foundation as regulated in the civil code as the
fundament. They do not add rules for the establishment; they may add rules regarding the internal
organisation and requirements for the professional capacity of the workers etc. As the NPOs are
legal persons, also the rules in the Criminal Code on punishable legal persons and criminal
organisations are applicable to NPOs.
4. THE CATEGORIES OF NPOS
The legal types for NPOs are the association and the foundation. The association (vereniging) has
the following characteristics: the presence of members, that form a general meeting of members
with mandatory rights (f.i. to appoint the members of the management board, to amend the
statutes, to dissolve the association) and a management board. The organs have their own
sovereignty. The association may not do payments from profit to its members or the members of
its organs. An association is a principally democratic type of organisation.The rules in book 2 CC
are meant to safeguard this and to protect members. When organisers do not want such a type of
organisational structure, they can choose the foundation-form.
The foundation (stichting) has as characteristic that it may not have members –which is
interpreted as that it may not have an organ with participants which has more or less the same
competences as the general meeting of members of an association- and which may not do
payments to the establishers, the members of the management board or of other organs and also
not to others unless the payments are of ideal or social character (art. 2:285 ff. Dutch Civil Code).
It must have a management board; the way the board members are appointed and dismissed is not
regulated by law, but is free to the statutes.
64
There are according to Dutch law no other legal forms available for non profit-organisations
in general than the association and foundation. Religious organisations, which also should be non
profit, can choose the legal form of ’church denomination’ (kerkgenootschap), which has by law
legal personality (art. 2:2 CC), but for which legal type the law has no further regulations, due to
the freedom of religion.
In Western European continental law this distinction between association and foundation is
generally found.13 Mostly the origin of this distinction is that the association was considered to be
a group of people with a common purpose given legal personality (corporation), while a
foundation was seen as a separated property given legal personality for the specific –public
benefit- purpose. The practice in The Netherlands has been different for a long time already.
Foundations do not have necessarily a separated property and may also be functioning as the legal
vehicle of a group of people. For us the difference lies in the mandatory rights for members of an
association. In most countries the rights of the members are for the biggest part a matter for the
establishers/the designers of the statutes, not for the law. The internal organisation of a foundation
is up to the establishers; the law gives very little rules about it.
4.A.
HOW DOES THE LAW MAKE NPOS REALLY NONPROFIT?
According to Dutch law there are no restrictions to the purposes that associations and foundations
may pursue. In many other European countries these restrictions exist and they cause quite a few
cases on the question what is or what is not allowed to do when one operates in the legal form of
association or foundation. The criteria can be very subtle. To my idea the choice of the Dutch
legislator not to make the distinction between types of legal persons too strict is wise.
Associations and foundations may have as their ideal-type a noncommercial purpose, it is yet
allowed to have commercial activities in these forms. What is important is that an association or
foundation as a legal form for an enterprise has no favorable position in tax. When it operates in
competition with commercial companies, it has to pay the same taxes as these other legal bodies.
Only when they effectively are purposed on a public benefit destination do they receive certain
fiscal facilities.
There might be misuse of foundations because members of the management board opt for a
payment by the foundation on improper grounds. When the receiver is the only board member of
the foundation, the tax authorities tend to neglect the legal personality of the foundation and
impute the assets of the foundation to that person.
When an association or foundation would in practice do payments of the profit of the
organization to its members or members of the management board, it risks that it will be forced
by the court to convert itself into a company limited by shares or a cooperative or mutual society.
5. THE ESTABLISHMENT OF NPOS
According to book 2 CC, since 1976 the establishment of associations as legal persons was a
private matter. There is no governmental approval at the establishment or later.
13
In Eastern Europe, f.i. Czech republic is also created a specific public benefit corporation, necessary to
obtain tax and other facilities. In France there exist three different types of assocations; plain associations*,
associations with full legal capacity* and associations with recognized public benefit. Only the last has
certain benefits.
65
An association can be established by at least two establishers, of which at least one has to
become member of the association (art. 26 CC).The establishers may be natural or legal persons.
There are no special rules for federations. There must be a purpose –not of cooperative character
and not to distribute profit- and an internal regulation. It is not necessary that the association has
assets at the establishment.
According to book 2 title 2 CC there are two types of associations: formal and informal
associations. Formal associations have full legal capacity; informal associations have limited
legal capacity.
When the establishers of an association want to have full legal capacity they have to go to the
notary public, who will lay the establishment, including the statutes, down in a notarial deed. The
statutes of formal associations have to include: a) –the name of the association and the
municipality in the Netherlands of the seat; b)- the purpose of the association; c)- the duties that
the members have towards the association, or the way in which these duties can be imposed; d)the way of convening the general meeting; e)- the way of appointing and dismissing the members
of the management board; f)- the destination of the surplus of the association in case of
dissolution, or the way in which the destination will be fixed. The language of the notarial deed
(and the statutes) has to be Dutch.14 See art. 2:27 CC.
Associations who want to stay informal have according to book 2 limited legal capacity: they
can not buy or sell estate, they can not be heir and the members of the management board are
personally liable for the obligations of the association. But also informal associations have legal
personality. The rules on associations in book 2 CC are –with the mentioned exceptions- also
applicable to informal associations. To my idea this is principally contrary to the freedom of
association.
Also the foundation is completely a private matter in The Netherlands. The establishment can
be2 done by one or more –natural or legal- persons before a notary public. The notarial deed may
be a testament. There must be a purpose (not doing payments to members of the management
board etc.) and some internal regulation (without members).: art. 2: 285 CC.
The statutes of a foundation have to contain: a) the name of the foundation with the word
foundation (stichting) as part of the name, b)- the purpose of the foundation; c)- the way of
appointment and dismissal of members of the management board; d)- the municipality in The
Netherlands where the foundation has its seat; e)- the destination of the surplus after liquidation of
the foundation in case of dissolution, or the way in which the destination will be fixed. The
statutes have to be in Dutch, or in Fryslân in Frisian, like for associations. See art. 2:286 CC.
A situation like in the Netherlands where the establishment of NPOs is a totally private matter
is, especially concerning foundations, not usual in Europe. In other countries either the court or
the government is involved in the establishment of associations and foundations.15 Regarding
foundations it is generally the government that wants to have a say in the coming into being of
these legal persons for public benefit –an area which the government has general care for.
14
In Fryslan-province it may be also Frisian.
In the U.K. associations and foundations are not the used forms; more general is spoken of charities.
They need to be registered at the Charity Commission.
15
66
6. REGISTRATION
A public register can be helpful to participants and third parties, including governmental
authorities.16 In The Netherlands, both associations and foundations have to be registered in the
Commercial Register, held by the regional Chamber of Commerce. For their existence as legal
persons the notarial deed is enough,17 but as long as they are not registered, the members of the
management are liable per capita for the obligations of the legal person.
What has to be registered? The notarial deed in which the statutes are included has to be
registered and the members of the management board with the information about their
representation competence. It should be noticed that the members of the management board, if
competent, are always unconditional and unlimited competent to represent the legal person.18
Also other important facts are registered, like the dissolution of the legal person. Associations and
foundations with a commercial enterprise of some size have to apply the rules about the balance
sheet and the financial report for companies (art. 2:360 CC). Therefore they also have to register
the balance sheet at the Commercial Register (art. 2:394 CC). These rules do not apply to
foundations and associations with a small commercial enterprise or with a non commercial
enterprise, like hospitals, schools etc. In certain sectors, like housing corporations and hospitals,
special laws regulate these matters, including the requirement of the publication of the balance
sheet.
Neither annual reports nor minutes of the meetings of the management board or general
meeting are registered, nor is there any other necessity to make them public.
The legal persons that are registered have to pay annually a (small) fee to the Chamber of
Commerce. When an association or a foundation does not pay its fee and also apparently has not
stated the data of the members of its management board, the Chamber of Commerce has by law
the competence to dissolve the legal person. Case law has made clear that the Chamber of
Commerce has not the right to dissolve the legal person, when this legal person is apparently still
alive.
The Commercial Register is open to the public. What is registered in the Commercial
Register can be trusted by other persons, like creditors. It does not concern third parties if the
registered data are not correct. The third party may trust the register.
In most of the other West European countries associations and foundations are registered, be
it in separate registers, not at the Chamber of Commerce.
In Germany the district courts have registers of the associations that are established in their
district. In several states of Germany the supervising government keeps a public register of
foundations established in their state. The foundations have to send annually their balance sheet
to the supervisory governmental agency.
16
See about the value of registration and the ways of registration: Frits W. Hondius and Tymen J. van der
Ploeg, Foundations, Volume XIII, Chapter 9 of the International Encyclopedia of comparative law,
Nijhoff, The Hague, 2000, nrs. 100 ff.
17
The notarial deed is not necessary for the informal associations.
18
This rule stems from the first European Directive on company law, that the Dutch legislator has
expanded to all legal persons regulated in book 2 CC.
67
Registration for associations and foundations in Belgium also takes place at the district court,
since the new law of 2003. Associations and foundations have also to send their annual account to
registries of these courts. The association-register and the foundation-register at the court are
open to the public. Big associations and foundations have also to send their annual accounts to the
National Bank of Belgium.
In France, there does not exist public registration of associations or foundations.
In Switzerland associations are in general free to register in the Commercial Register, but for
commercial associations it is mandatory.19
Charities in England and Wales have to be registered at the Charity Commission. They have
annually to send their balance sheet to the Commission, who incidentally controls them. The
balance sheets of the registered charities are open to the public.
7. INTERNAL STRUCTURE
In art. 26 ff. book 2 CC is laid down a rather extensive set of rules regarding the organizational
side of the association. The law contains more mandatory rules than in other countries. There are
specific rules on the admission of members and more detailed and partly mandatory rules on the
termination of membership, on the appointment and dismissal of the board members, about the
general meeting of members and of delegates, about the competence to impose obligations on
members, also towards third parties, about the procedure in case of amendment of statutes and of
dissolution of the association, about the annual report and balance sheet and the control of it.
These rules are important to keep the characteristics of the legal person association clear.
Associations have obligatory a management board and a general meeting. The association is
free to organize other organs (bodies); the supervisory board is mentioned in the law, also the
meeting of delegates and branches are mentioned.
In general board members have equal positions, however the chairman has the power to
declare the result of the vote of a body (as well as the content of an oral proposal). There are no
rules about officers, as this does not fit in the Dutch (civil code) system of organisations-legal
persons. Directors are employees with a labor contract, being subordinate to the management
board. Directors may have more independent power according to the statutes or to the labor
contract.
Other specific names –and tasks- for board members are not a matter of the national law but
of the tradition in certain areas and of course of the statutes.
About voting there are only rules for the general meeting of the association. Members (10%)
have the right to request for a general meeting and in case the board does not react within 14
days, the members can convoke the meeting themselves. As a general rule there are no quorum
and no qualified majority requirements. The exception is the amendment of the statutes. The
convocation rules are here rather strict and the majority has to be two third, unless the statutes
regulate this differently. For the decision to convert an association in another type of legal person
the majority has to be nine tenth of the cast votes.
19
Art. 61 Swiss Civil Code.
68
On the basis of the freedom of association, members are free to resign, but the member
should take into account a term of notice. This term of notice has to be regulated in the statutes
and may not last longer than the end of the next year. The membership can be resigned
immediately if it would be unreasonable to demand for continuation of the membership.
The rules about the internal organisation of the foundation in the law are rather meager. Only
a management board is required. This board has the power to manage and represent the
foundation. It may have the power to dissolve the foundation unless this is regulated in the
statutes differently. The power to amend the statutes has an organ only on the basis of an explicit
authority given by the statutes. In many bigger foundations there is also a supervisory board, but
this is not regulated by law. As the law does not make limitations to the types and amount of
internal bodies of a foundation this is not a problem. Only the membership-prohibition has to be
taken into account.
It is very important to notice that the regulations of the associations and foundations are part
of book 2 on Legal persons of the Dutch Civil Code (Burgerlijk Wetboek). This book 2 has other
titles/chapters that are also applicable to associations and foundations. In part 1 are important: art.
2:7 Dutch CC that makes annihilation of legal act in the name of a legal person possible because
it is contrary to its purpose; art. 2:8 about the general rule of reasonability and fairness between
the legal person and those who take part in its organisation; art. 2:9 about the responsibility of
members of the management board for proper fulfillment of their duties.
The general regulation of the validity of the vote and of nullity and annihilation of decisions
(art. 2:13-16) is a very important complement on the legal rules. Interested persons may request
the court the annihilation of a decision of the management board or the general meeting because it
is contrary to reasonability and fairness towards him or her.
In art. 18 is a general regulation on conversion from one type of legal person into another.
This goes without dissolution; the legal person stays the same, be it from another category.
Also in other parts of book 2 CC one can find rules that are applicable to associations and
foundations. In Title/Chapter 7 there is a rather extensive regulation of merger and splitting. In
Title/Chapter 8 the inquiry procedure is regulated, which is also applicable since some years to
associations and foundations with an enterprise and a compulsory works council. Also rules can
be found in Title/Chapter 9 about the balance sheet and the annual report. The rather extensive
rules of this part are only applicable to associations and foundations with a commercial enterprise
and a minimum turnover.
8. SUPERVISION OF NPOS
8.1
GOVERNMENTAL AND SEMI-GOVERNMENTAL SUPERVISION
As generally governments are not substantially involved in the establishment of associations,
governments in Western Europe are normally not seriously supervising associations. This is
different for Austria and the countries which have been part of the Austrian-Hungarian empire.
The government restricts associations much more in their operations. Associations there have
more duties to inform the government. In Western Europe this is not seen as an adequate
implementation of the freedom of association.
69
In the area of foundations, the governments who are involved in the establishment generally
also supervise the activities of the foundations after establishment. The same is true –and in a
rather intensive way- for the role of the Charity Commission. Apparently the supervision on the
pursuit of public benefit purposes is seen as a task for the State as the sole or highest protector of
the public good (interest). In Germany the state government exercises this supervision (also) on
behalf of the establishers, to make sure that the property is used according to the will of the
founders.20
8.2
SUPERVISION BY GOVERNMENT OR BY COURT?
An important issue is whether supervision of associations and -especially- foundations should be
exercised by the government or by the court (on request of the public prosecutor and eventually
interested persons). To my idea court control has certainly advantages compared with
governmental control. By court control the acts of the private organisation and its participants are
directly evaluated. The court evaluates the lawfulness/legitimacy of the acts of the foundation and
its participants but not the usefulness. There have of course to be sufficient means for the public
prosecutor to do investigations at NPOs .
In case of government control the chance that the government uses policy-arguments rather
than legal arguments is big. There is the danger that the control is not only on lawfulness but also
on usefulness. This last type of control would be an illegitimate involvement in the private
organisation by government. But also when the government only takes measures in case the board
(etc.) acts contrary to the law or the statutes, this has a disadvantage compared to judicious
control. The organisation or –in some cases- interested persons may have the right to appeal
against the governmental decisions to the administrative court. By evaluating the governmental
control this court however only evaluates the actions of the governmental body marginally and
only in an indirect way the actions of the organisation.
8.3
PROSECUTION
The State may according to the formulation of the freedom of association in the Treaty of Rome
on human rights21 restrict the freedom for the protection of public safety, public health and public
morals and for the protection of the rights and freedoms of others. The government has in this
way to define and control the boarders of the freedom of association. It can do this in a preventive
and in a repressive way. In general the Western governments exercise repressive control
regarding associations. They do not require permission for associations to operate. They only take
measures when associations and other NPOs perform illegal activities. In formulating criminal
rules they take the restrictions of inter alia the freedom of association into account.
In the Dutch Criminal Law criminal sanctions against NPOs and their board members are
regulated in two ways.
1) When legal persons -through the members of their management board or by other
officers or employees- trespass the criminal law, the legal persons themselves can be
punished. The persons who gave in fact guidance to the criminal act can also be
punished, together with the legal person or separate. See art. 51 Criminal Code.22
20
See more extensive on this point C.R.M. Versteegh, De goed doelstichting, diss. VU, Lemma, 2003.
Treaty of Rome of 4 November 1950.
22
In art. 342, 343 and 347 Criminal law, the members of the management board and of the supervisory
board of a legal person are specifically punished in case they have participated in or approved of fraudulent
bankruptcy and fraud.
21
70
2) Participating in an organisation that has as its purpose to commit criminal offenses is
a criminal offense and is at maximum punished with 6 years imprisonment or a fine
of 45000 euro.
Founders, managers and board members of the organisation may get punishment of one third
more. See art. 140 section 1 and 3 Criminal code.
Dissolution of a criminal organisation is not regulated in the Criminal Code, but is a sanction
of civil law. When associations (and foundations) perform criminal activities they will be
declared forbidden and dissolved by the district court.23 In recent time there have been some
dissolutions of associations (political parties) by judges because the associations summoned to
discrimination of foreigners.24 In case only the purpose is criminal, the court allows the legal
person to change its purpose into a purpose which is not against public order (see art. 2:20 section
2 CC). Dissolution has as effect that the property of the organisation is liquidated. The name of
the dissolved organisation may not be used any more. It is of course not possible to prevent the
former members to establish another organisation, but then they have to be extra careful to stay
legal. In art. 140 section 2 Criminal Code is ruled that participation in the continuation of the
activities of a legal person that is declared forbidden and dissolved will be at maximum punished
with 1 year imprisonment or a fine of 4500 euro.
In general one can say that the public prosecutor does not actively act as watchdog on
activities of associations and foundations. He merely acts on signals from the public (media),
unless the organisation is openly active in the criminal sphere.
The European Court on Human Rights is rather strict on the dissolution of associations (in
practice often political parties). The member states have only a very limited margin of
appreciation.25 It must be clear that dissolution of the organisation is the only solution. It would
also be contrary to the freedom of associations when they have to ask permission for a meeting to
the authorities, or when they are obliged to open their meetings for the public or for the
authorities.26
9. PROBLEMS WITH THE CURRENT LEGISLATION AND HOW THEY ARE DEALT WITH
In general the legislation does not cause many problems.
One may question if the notaries public are always enough alert in controling the statutes of
the associations and foundations that are established before them on the compliance with the law.
There are (nearly) no cases where these legal persons are brought to court because their internal
organisation is contrary to the law.
The scope of the restriction on members in the foundation and on the issuing of payments is
not clear. In practice this is left to the prudence of the notary public. The law has to be amended
23
Art. 20 book 2 Dutch CC.
See HR 9 March 1976, NJ 1979, 363 (NVU), HR 30 September 1997, NJ 1998, 118 (Centrum Partij),
District court Amsterdam 18 November 1998, NJ 1999, 377 (NVU/Centrum Partij).
25
F.G. Jacob and R. White, European Convention on human rights, 3rd edition 2003, Oxford Press, p. 292
ff.
26
The authorities may have this right when there is an apparent threat of the public order.
24
71
regarding representation of the foundation by members of the management board in case of
conflicting interests. In practice different views are taken.
Regarding transparency and responsibility of NPOs the law could be strenghtened by
requiring the publication of an annual balance sheet and report of all associations and foundations
and a mandatory research by accountants for associations and foundations above a certain size.
It would be better when there would be a serious mandatory registration of NPOs with public
benefit purpose at the Tax authorities and that this registration would be required to receive tax
facilities.
The public prosecutor has nearly no personnel nor means to do serious research to the
activities of foundations. Because of the recent fear for terrorist organisations there are law
proposals to strengthen his position.
72
BASIC FEATURES OF THE LEGAL FRAMEWORK OF THE
NON PROFIT SECTOR IN INDIA*
BY PROF. P. ISHWARA BHAT**
INTRODUCTION
The role of the Non Profit Sector1 in India has been of increasing significance due to the wide
range of functions it performs benefiting the cause of human rights,2 welfare,3 social justice4 and
the environment.5 They are the major social, cultural and ideological actors of civil society.6 In the
*
Revised version of the paper presented in the International Forum on NPO laws organized by Research
Centre for NPO Law, Law School of Peking University at Beijing on 24th and 25th March 2005.
**
MA LL M Ph D, Professor of Law, Department of Studies in Law, University of Mysore, Karnataka,
India.
1
The term NPO is alternatively understood as Non Government Organisation, Third Sector, Voluntary
Organisations and Civil Society. National Commission to Review the Working of the Constitution, (2002)
points out their relevance for multiculturalism, by reporting, “It is the civil society that has to take the lead
in helping create a society based on principles of social justice, secularism and non-casteist approaches to
social action. It should be one of the serious endeavours of civil society to strengthen the mosaic of India’s
pluralism and not let it be broken up lest endless tensions and increasing violence come in the way of
peoples’ progress.” (6.5.3).
2
Judicial activism on human rights has been supported by various organizations spread over various parts
of India through filing of Public Interest Litigation (PIL) before Supreme Court and High Courts. See
Bandhua Mukti Morcha v. Union of India, AIR 1984 SC 583, 802; AIR 1997 SC 2218; Laboureres, Salal
Hydro Project v. State of Jammu and Kashmir, AIR 1984 SC 177; Peoples Union for Democratic rights v.
Union of India, AIR 1982 SC 1473; Consumer Education Research Centre v. Union of India, AIR 1995 SC
922; See generally, P.Ishwara Bhat, Fundamental Rights: A Study of their Interrelationship (Kolkata:
Eastern Law House, 2004) pp.251-5; Arun Shourie, Courts and Their Judgments, New Delhi: Rupa & Co.
2001; P.M.Baxi, Public Interest Litigations, New Delhi: Ashoka Law House, 2000; S.P.Sathe, Judicial
Activism in India, New Delhi: Oxford University Press, 2002; B.L.Wadehra, Public Interest Litigation,
New delhi: Universal Law Publishing Co. Pvt. Ltd. 2003. After the enactment of the Protection of Human
Right Act 1993 and establishment of National Human Rights Commission, the Voluntary Organizations
approach NHRC also for redressing of grievances. Under Section 12 (i) of the Act, the Commission shall
encourage the efforts of NGO’s and institutions working in the field of human rights.
3
Advocacy and social action for right to food and health of the deprived sections of citizens and for
rehabilitation of evictees, bonded labour and child labour are spearheaded by the NPOs. See People’s
Union for Civil Liberties v. Union of India, 2000 (5) SCALE 30; P.B.Khet Mazdoor Samiti v. State of West
Bengal AIR 1996 SC 2426; Consumers Education and Research Centre v. Union of India AIR 1995 SC
922; A.S.Mittal v. State of U.P (AIR 1989 SC 1570); Common Cause v. Union of India, AIR 1999 SC
3436.
4
Section 7 of Dowry Prohibition Act, 1961, section 3 of National Commission for Women Act, 1993 and
sections 15, 17 and 13 of Immoral Traffic (Prevention) Act, 1956 give scope for recognized women’s
organizations to participate in the enforcement of laws for the welfare of women. State’s negligence in
investigating or preventing crimes against women have been successfully litigated in All India democratic
Women s Association v. Union of India, AIR 1989 SC 1280; Joint Women s Programme v. State of
Rajasthan, AIR 1987 SC 2060.
5
The Water (Prevention and Control of Pollution) Act, 1974, (sec 34 and 14) the Air Act 1981 (Sec 5,16,
17) and the Schedule III of Environmental Impact Assessment Regulations framed under Environment
Protection Act, 1986 provide scope for participation of NGOs in effectuating the policies of environmental
law. Most of the PILs for environmental justice have been fought by NGOs. See Vellore Citizens Welfare
73
context of the inability of both state and market to fulfill their basic objectives to the extent
needed, the role and responsibility of this sector to fill the gap is enhanced.7 Matching with the
federal structure, pluralist system and varieties of Non Profit Organizations (NPOs) required for
distinct types of activities, there is an abundance of law governing this sector. Since they are
piece meal measures with both similar and dissimilar approaches, it is difficult to project them as
containing a comprehensive national policy. However, the long historical tradition of NPOs
commencing from Vedic and Buddhist times, their social objectives and organizational needs
have emphasized the importance of some essential characteristics in their legal framework like
democratic participation, accountability and arrangement for purpose compliance.8
An effort made in the Eighth Five Year Plan report to identify some ingredients which are
essential to successful functioning of NPOs will help us in analyzing and evaluating the legal
framework governing them.9 The ingredients are as follows:
1. They are owned and managed by the users/ stakeholders, producers, or
beneficiaries themselves.
2. They are accountable to the community.
3. They have capacity to become self reliant over a period of time.
4. They have the capacity to diagnose the needs of the areas, interact with the
governmental agencies in order to draw need-based local plans and to
implement those plans in close cooperation with the administration; and
5. They tend to bring about integration of various segments of the society for
the achievement of common goals of development.
Although the above characteristics are envisaged as benchmarks in the context of NPOs
assisting the task of the government sponsored Five Year Plan programmes, except the fourth
one, most of them are relevant in assessing their suitability for providing effective service to the
specific communities.10 The legal environment governing the NPOs has insisted on adequacy of
scope for people’s participation, democratic governance, functional supervision by the
bureaucratic agencies, measures for financial accountability through auditing systems, and
mechanisms for facilitating purpose compliance.
In the process of expounding these basic features in the Indian NPOs, the present paper tries
to focus on the following matters: the variety of NPO laws and their coordination; the reasons for
varieties and classification; the character of organizational law for each category; the legal
Forum v. Union of India AIR 1996 SC 2715; Indian Council for Enviro-Legal Action v. Union of India,
AIR 1996 SCW 1069; AIR 1996 SC1446; Rural Litigation and Entitlement Kendra v. State of Uttar
Pradesh, AIR 1985 SC 652, AIR 1988 SC 2187; Tarun Bharat sangh v. Union of India, AIR 1992 SC 514;
Shyam Divan and Armin Rosencranz, Environmental Law and Policy in India, 2nd Ed. (New Delhi:
Oxford University Press), 2002 p.4.
6
For details see P.Ishwara Bhat, Legal Environment Governing Third Sector in India: A Purpose Scrutiny
Perspective (Sydney: CACOM, University of Technology, 2003).
7
On market failure proposition, see Henry B.Hansmann, ‘The Role of Nonprofit Enterprise’ 89, Yale L.J.
(!980) 835 at 843; see Weisbord, B.A., The Voluntary Nonprofit Sector (1977) for the proposition of state
failure; also see Benjamin Gidron et al., The Israeli Third Sector (New York: Kluwer Academic.2004, p.7.
8
P.Ishwara Bhat, ‘Historical Evolution of the Indian Legal Philosophy on Collective Duties and Rights in
the Context of Social Organizations’ 3 Journal of Indian Legal Thought, 2005 (forthcoming); also see
supra n.6.
9
Government of India, Eighth Five Year Plan 1992-7 (New Delhi: Planning Commission) Vol.I, p.17.
10
A.Kumar, Social Change Through NGOs, (Lucknow: Institute for Sustainable Development, 2003)
pp.269-285.
74
measures to make them really non-profitable; and the current problems haunting them and their
possible solutions.
THE VARIETY OF NPO LAWS
Multiplicity of NPO laws in India is traceable to the fact that India is a federal union.11 The
Constitution provides for distribution of legislative powers relating to NPOs between two levels
of government in the following manner.12 First, the Central Government has exclusive power
under Entry 44, List I of the Seventh Schedule to the Constitution to enact laws for incorporation,
regulation and winding up of corporations whether trading or not, with objects not confined to
one state, but not including universities. For example, regarding multi-state cooperative societies
whose objects and functions spread over more than one state, a central law is enacted (Multi-state
Cooperative Societies Act, 2002). Further, incorporation of Not for Profit companies is possible
under section 25 of the Companies Act, 1956, which is enacted by the Central Government under
Entry 43 of List I primarily to deal with trading corporations.
Second, state governments have exclusive power under Entry 32, List II of Seventh Schedule
to enact laws for incorporation, regulation and winding up of corporations other than those
specified in List, and universities; unincorporated trading, literary, scientific, religious and other
societies and associations and co-operatives. In application to Union Territories, the
Parliament/Union Territory legislatures have power to enact laws on these subject matters. As a
result, different legislations are applicable to different states. Thus, while Societies Registration
Act, 1860 is in force in centrally administered territories, states have their own Societies
Registration Acts in effect. Some common policies relating to registration, annual general body
meeting, requirement of accounting and auditing are traceable in these legislations. However,
regarding the extent of governmental supervision and interference in policy and functional
matters, there is much variance from one to another. In the matter of cooperative societies,
although different legislations prevail in different states, owing to the acceptance of the model
cooperative societies bill circulated by the central government, by and large, they have common
policies. But these legislations envisage higher levels of governmental or bureaucratic
interventions, narrowing down the scope of people’s initiative and autonomy. For obviating these
defects, the Planning Commission circulated a model bill in 1994 amidst states and suggested
replacing the existing law to facilitate greater autonomy and accommodate people’s choice. Only
6 states13 responded, and that too, by making the new system only optional and alternative to the
existing system. As a result, two types of cooperative laws coexist in those states. The higher
circles of central government are contemplating a constitutional amendment to shift the
legislative power on the subject to List III of the Seventh Schedule so that Parliament can impose
a uniform law on cooperative societies throughout the nation.14
Third, both the central and state governments have concurrent powers under Entry 22 of List
III to enact laws on Trade Unions. This implies that subject to the requirement of conforming to
the policies and principles of Central law on the subject, states can have their own patterns of law
11
Instead of rigid or classical federalism, a federal union with strong central bias is contemplated in the
Indian constitutional scheme to accommodate cooperative federalism, learning from the experiences of
other federal systems. See M.P.Jain, Indian Constitutional Law, Fifth Edition Rept. ( Nagpur: Wadhwa,
2005) pp.477-8.
12
Article 246 of the Constitution.
13
Andhra Pradesh, Karnataka, Bihar, Madhya Pradesh, Jharkhand, Haryana.
14
Prime Minister Manmohan Singh’s speech at New Delhi on 16th November, 2004 reported in
http://www.prajavani.net dated November 17th, 2004.
75
or rules governing the field. If there is inconsistency between the two, central law is to prevail
over state law. In fact, the Trade Unions Act of 1926 passed by the Parliament governs the field.
The legislations enacted under the above heads constitute legal infrastructure to Not for Profit
Organizations. Regarding the management of fund/property arrangements for a variety of cultural
and philanthropic activities, regulative power is exercisable by the Union and state governments
under Concurrent List. Entry 10 of this List mentions Trusts and Trustees and Entry 28 Charities
and charitable institutions, charitable and religious endowments and religious institutions. Central
Government has enacted the Indian Trusts Act, 1882 to deal with private trusts. In a real sense,
they are not concerned with public assistance schemes. However, some private trusts registered
under the Indian trusts Act, but in fact having public assistance schemes become constructive
public trusts for the purpose of Civil Procedure Code. In case of abuses or malfunctioning of
express or constructive public trusts, remedies are available under Section 92 of Civil Procedure
Code. Quite importantly, the Central Government abstained from exercising legal control on
funding system and allowed the states to frame laws on the subject keeping in mind the need to
accommodate regional diversity, local demands and people’s aspirations. Hence, each state has its
own statute on the subject of charitable endowments15 and some states have enacted legislations
on public trusts16 applicable within their territories. However, for bringing uniform law on Wakf
throughout India, the Central Government has enacted Wakf Act in 1995.17 Central Government
has continued some piece meal legislations on religious trusts (Charitable Endowment Act, 1890
and Charitable and Religious Trusts Act, 1920) for institutions registered under these legislations
and to the communities other than Hindus and Muslims. Further, for enabling flow of foreign
funds to NPOs subject to its supervision, the Central Government has enacted Foreign
Contribution Regulation Act. It has also exempted from income tax, the income earned by or
donations made to charitable and religious institutions, subject to the requirement of recognition
of those institutions by the tax authorities.
COORDINATION OF NPO LAWS
Because of diversity prevalent in NPO laws due to federalism, multiplicity of religions and
plurality of purposes for which NPOs had to be constituted, effective coordination amidst all
these laws for projecting common policy is not possible. However, since each law operates in its
own sphere and in connection with its specific legislative audience, there is no problem of
overlapping. Further, all the NPO laws are required to conform to the Constitution, which
guarantees freedom of association, freedom of religion and other freedoms.18 Central government
supervises the NPOs for the purposes of allowing foreign funding19 or granting tax exemptions.20
Thus, it has the opportunity to ensure compliance with common standards and requirements. For
bringing common legal policy with regard to cooperative societies in states, the central
government has been partly successful by resorting to extra constitutional influence through the
15
Settlement or dedication of property or money by competent persons for specific religious or charitable
purposes.
16
State of Bombay, Gujarat, Rajasthan, and Madhya Pradesh.
17
Endowments amidst Muslims. These were regulated prior to 1995 under the Mussalman Wakf Validating
Act, 1913. Mussalman Wakf Act, 1923, Bengal Wakf Act, 1934, U.P. Muslim Wakf Act, 1936.
18
Art.19 (1) (c) and Art. 25-28 confer freedoms of association and religion respectively. Other freedoms
like freedom of speech and expression, assembly, movement and residence, business trade and occupation
are conferred under Art. 19 (1). There are also duties not to practice untouchability. (Art.17).
19
Foreign Contribution Regulation Act.
20
Income Tax Act, 1961 provides exemption to charitable and religious bodies from taxation of their
income and to donors from taxation of donation made to these bodies subject to statutory limits.
76
Planning Commission.21 Moreover, as NPOs are required to conform to the same ‘function
supporting legislations’22 in the field of education, health, consumer protection, environmental
protection, child care and gender justice and conform to the general legal system as a whole, their
diverse legal base has not been experienced to be problematic. Regarding NPOs whose activities
are spread over more than one state, either the central legislation is applicable as in the case of
multi-state cooperative societies or the law of the state in which it was originally registered
(principal place of business) is applicable as in the case of public trusts or endowments. More
importantly, in case of NPO laws coming under the Concurrent List (trusts, trade unions,
endowments, charities, charitable and religious institutions) there is a constitutional requirement
that before promulgation of such laws, they shall have been assented by the President of India.23
In practice, this is not an empty formality as it gives scope for scrutiny by the central government
and enables bringing of coordination.
CLASSIFICATION OF NPOS
From the perspective of legal infrastructure for NPOs it is possible to broadly classify them into
organizations and funding systems. While the former has corporate personality, scope for
democratic control through annual general body meeting and elected office bearers for limited
duration, the funding system does not possess these characteristics. The category of organizations
can be grouped societies, cooperative societies, trade unions, and non-profit companies. While
societies are constituted for literary, artistic, scientific, recreational, educational and cultural
purposes, cooperative societies are meant for mutual economic assistance for promoting common
interests without profit motive (for example, consumers’ cooperative, milk producers cooperative,
farmers’ cooperative etc). Trade unions are established for collective bargaining and possess
immunities from civil and criminal liabilities for acts of persuasion. Non-profit companies are
limited liability companies with flexible procedures but enjoy the advantages of corporate status.
Funding systems or charitable foundations include property arrangements in the form of trusts,
charitable institutions, endowments, religious institutions and wakfs. Although they do not have a
fully elected set of leaders, administrative nucleus for their functioning is central to their
functioning. Looking to the purposes and functions of these bodies and kinds of legal mechanism
required for their efficacy there are some differences amidst them, and hence justifies
classification and variety in laws. Despite the diversity, law insists on financial discipline and
promotion of purpose compliance in each of the NPOs.
IMPACT OF CONSTITUTIONAL LAW
Apart from federalism, constitutional guarantee of fundamental rights has cast influence upon
NPO laws in its own way. Article 19(1) (c) of the Constitution of India guarantees to all citizens
the right to form associations or unions. The right is not absolute. It is subject to reasonable
restrictions imposed under law in the interest of sovereignty and integrity of India or public order
or morality [Art. 19 (4)]. While non-citizens cannot claim this right under Art. 19, they have legal
right to form association and the law regulating such right shall conform to the requirements of
21
Padala Rama Reddi and Padala Srinivasa Reddy, The Andhra Pradesh Cooperative Law Manual, 12th
Ed. (Hyderabad: Asia Law House, 2001); P.N.Mohanan, Cooperative Societies Laws in Kerala, 10th
ed.2002.
22
Legislations, which do not directly deal with NPO s exclusively, but support their functions or involve
them in the effectuation of legislative policy with or without specific reference. Examples: Consumer
Protection Act, 1986 Environment Protection Act, 1986, Dowry Prohibition Act, 1961, Immoral Traffic
Prevention Act, 1957 Copyright Act, 1957 etc.
23
Art. 254 of the Constitution.
77
Articles 14 and 21.24 Right to form association includes right not to form or join association,25
right to continue the association and right to keep the identity and composition of the association
intact.26 As a result, governmental intervention to alter the composition of the association and its
managing body is unconstitutional. Regarding expulsion of members from any society, club or
association, although the latter enjoy certain amount of autonomy and their decisions are not
liable to liberal interference by the courts, strict compliance with procedure prescribed in the
byelaws of the society has been insisted by the Supreme Court in T.P.Daver case.27 Right to close
down an association is also a component of freedom of association, but it is subject to reasonable
regulation because of wider impact of closure upon the members, employees or upon the society
at large.28
Efficacy or success of association by use of the instruments like strike, lockout or bundh is
not within the contemplation of the constitutional jurisprudence.29 While laying down the above
proposition of law, the Indian Supreme Court went to the extent of stating that right to freedom of
forming association does not include right to achieve the purpose for which the association is
formed because freedom is an individual capacity rather than an entitlement to positive state
support. The only obligation on the part of State is to vacate unconstitutional impediments. Since
individual freedom had this inherent limitation, the group right could not project a better claim
owing to the judicially employed analogy that a stream never rises above the source. Applying the
same logic, in cases relating to taking over of the property or educational institution30 of any
registered society the Supreme Court has upheld the governmental intervention. Although it is
problematic to permit such a wide sweep of governmental intervention, in some instances it may
have the laudable effect of saving a well-initiated society of public importance, which also got
governmental grant, but performed badly because of maladministration. As can be gathered from
the recent Dharam Dutt31 case, the exercise of legislative control to declare particular registered
society as an institution of national importance and incorporate it as a new statutory council with
ownership of the property of erstwhile society for the purpose of rejuvenating it as an effective
body is constitutionally valid regulation. High Courts have also viewed in a similar vein that
amalgamations of non-viable cooperative societies with viable ones through governmental
intervention were valid.32 References in the Indian Constitution to religious denominations,
religious and linguistic minorities, cultural rights and educational institutions presuppose group
existence.33 The ambit of their collective rights gives an additional dimension to their freedom of
association. Inability of the state to take over educational institution of religious minority has
been pointed out by Karnataka High Court.34
24
Art. 14: “The state shall not deny to any person equality before the law or equal protection of the laws
within the territory of India.” Art. 21: “No person shall be deprived of right to life or personal liberty except
according to procedure established by law.”
25
Ramakrishniah v. District Board, AIR 1973 SC 87.
26
Damayanti v. Union of India, AIR 1971 SC 966.
27
T.P Daver v. Lodge Victoria, AIR 1963 SC 1144.
28
Tika Ramji v. State of U.P., AIR 1956 SC 676; Excel Wear co. v. Union of India, AIR 1979 SC 25.
29
Balakotiah v. Union of India, AIR 1958 SC 232; Raghubar v. Union of India, AIR 1962 SC 263; All
India Bank Employees Association v. National Industrial Tribunal, AIR 1962 SC 171.
30
L.N.Mishra Institute of Economic Development and Social Change v. State of Bihar, AIR 1988 SC 1136.
31
Dharam Dutt v.Union Of India, (2004) SCC 712.
32
Seethapathi Nageswara Rao v. Government of A.P., AIR 1978 AP 121; Harak Bhagat v. Assistant
Registrar, Cooperative Societies, AIR 1968 Pat 211.
33
Articles 26 (religious denominations), 29 (cultural and educational rights) and 30 (linguistic and religious
minority’s right to establish educational institutions of their choice) do influence the scope of associational
rights.
34
Quraish Education Society v. State of Karnataka AIR 1987 Karnataka 122.
78
KINDS OF ORGANIZATIONAL LAWS FOR NPOS
The following is a brief account of the organizational laws of NPOs in the form of registered
societies, cooperative societies, non-profit companies and trade unions.
REGISTERED SOCIETIES
Under the Societies Registration Act, 1860 any seven or more persons associated for any literary,
scientific or charitable purpose or for purposes of constituting charitable societies, military
orphan funds, societies for diffusion of knowledge and political education, libraries, public
museums and galleries may form societies by subscribing their names to a Memorandum of
Association and filing the same with the Registrar of Joint Stock Companies (Sec. 1). The
Memorandum shall disclose name and objects of the society and names and details of members of
the governing body of the association (Sec. 2). There shall also be annual submission of the
details about the names, addresses and occupations of the governors, council, directors,
committee, or other governing body entrusted with the management of the affairs of the society to
the Registrar within fourteen days from the annual general meeting of the society (Sec. 4). The
society’s property shall vest with the governing body (Sec. 5). The society has a perpetual
existence, and may sue or be sued in the name of the office bearer as prescribed under its rules
(Sec.6). This enables its effective participation in public life. Societies constituted for the
purposes of protection of human rights, environment and other public values are thus enabled to
move the courts of law or other grievance redressal system, and attain their basic objectives.35
Since societies can also be sued, legal remedy against arbitrary and unfair acts of the societies
protects both individual and collective rights (Sec. 8 to 11).
In order to ensure compliance with the purpose and bylaws or memorandum of association,
democratic process is provided by allowing the general body meeting of members to decide the
composition of the governing body and control their acts through deliberations in the meeting. It
has been viewed by the judiciary that the society’s purpose is its central aim, and contains the
fundamental principle for its working.36 Alteration, extension, or abridgement of the purpose of
the association or any decision on amalgamation can be effected when the proposition of such
measure made by the governing body is approved by a three-fifths vote of the members present in
the special meeting convened for this purpose with due notice (Sec. 12). For dissolution of the
society, similar approval is required (Sec. 13). All the documents filed by the society with the
Registrar are open to inspection by any person. This enables transparency and democratic control.
Members guilty of offences against the property of the society are punishable with imprisonment
or fine (Sec. 11).
While the Central Act makes a passing reference to the annual general body meeting of the
members of the societies, most of the state legislations have required conducting of annual
general body meeting of members with due notice as mandatory practice and the interval between
the two shall not exceed the period prescribed by the statute which ranges between 9 months to
35
See supra n.2,3 and 4.
The Allahabad High Court in Ram Charan v. Shridhar, AIR 1962 All 610 at 614 has also observed that
the word purpose is used therein has been used in a wide or comprehensive sense, that is, in the sense of the
main object or the central aim of the society as distinguished from its detailed activities which will be
naturally directed towards the attainment of that object.
36
79
one year.37 An annual report of the governing body and an audited account statement and balance
sheet are to be approved in the general body meeting. This ensures transparency in governance.
The power of electing the managing committee members and office-bearers of the society from
time to time is vested with the members. The tenure of office of the governing body’s members is
not laid down in the Central Act. But some states require conducting of election of members by
the general body in accordance with the rules and regulation of the Society whereas other statutes
require filing of returns about the general body members annually to the Registrar. It appears, the
dominant approach is to provide adequate leeway in the matter to the societies. But section 15 of
the Tamil Nadu Society Registration Act, 1975 provides that the term of office of the members of
the management committee shall not exceed three years, that their appointments shall be by
resolutions passed by members in the society’s meeting, and that they are eligible for
reappointment.38 Prevalence of democratic principle over individual domination is an appreciable
development making the registered society strong from within. The principle of free and fair
election is either expressly or impliedly insisted.
The general body of the society’s members has control over policy matters like change in the
objectives or purposes of the society, alteration of Memorandum of Association, change in the
name of the society, amalgamation and dissolution of the society. Special voting requirement like
two-third or three-fifth support of members present and voting are required for these purposes.
Thus, in evolving and controlling society’s policies and leadership, general body’s democratic
participation is legally contemplated to make substantial contribution towards the cause of
purpose compliance.
While the Central Act has abstained from providing for extensive governmental control,
except routine matters of filing annual statements, many of the state legislations have gone for
widespread governmental controls to deal with abuses, malfeasance and nonfeasance of societies.
The legal measures include: state’s power of enquiry, investigation and surcharge;39 cancellation
of registration and consequent dissolution of societies; supersession of the governing body;
appointment of administrator; dissolution of the society; and removal of defunct societies. The
policies of state legislations vary from one to another in adopting these measures.
COOPERATIVE SOCIETIES
In India, cooperative societies are regarded as ideal instruments to motivate the people to come
together and help themselves in the process of eliminating the unscrupulous middlemen making
huge profit at the expense of the society.
CENTRAL CO-OPERATIVE LAW
The Cooperative Societies Act, 1912, which is presently applicable only to centrally administered
territories, expanded the sphere of cooperation and provided for supervision by the appropriate
37
Karnataka Societies Registration Act, 1960, sec.11 (2) within nine months from the expiry of the
previous year’s meeting; M.P.S.R.Act, 1993, sec 27- once in a year; Meghalaya S.R.Act, 1983, Travancore
Cochin Act, 1955, sec.7 and West Bengal S.R.Act, 1961, sec.16 – at least once in a year and the interval
shall not exceed 15 months; Rajasthan Act, 1958, sec.4 and Tamil Nadu Act,1995 sec.26- once in a
financial year.
38
In Periyar Self-Respect Propaganda Institution v. State of Tamil Nadu, AIR 1998 Mad 27 this provision
was upheld following All India Bank Employees Association v. National Industrial Tribunal Bank AIR
1962 SC 171.
39
Taking over the charge; Sections 25, 27 and 27A of Karnataka Societies Registration Act, 1960.
80
government. Promotion of thrift and self-help among agriculturists, artisans and persons of
limited means has been the avowed purpose of the Act. A society, which has as its object the
promotion of the economic interests of its members in accordance with the co-operative
principles may be registered with limited or unlimited liability by filing an application
accompanied by a copy of its bylaws and signed by at least 10 adult members of the same
locality, class, caste, tribe or occupation (Sec. 4 to 9).
The Multi-State Cooperative Societies Act, 2002 aims to facilitate the voluntary formation
and democratic functioning of co-operative societies as people’s institutions based on self help
and mutual aid, attracting membership from various states. This enables people to promote their
economic social interest better and enjoy greater functional autonomy. The Act provides for
formation of federal cooperatives, whose membership is available only to cooperative societies
and multi state cooperative societies. They shall discharge functions democratically, and may
ensure compliance with co-operative principles, make model bylaws for its member co-operative,
undertake research, promote harmonious relations amidst members co-operatives, provide
management development, evolve a code of conduct, provide legal aid and assist in organizing
self-help (Sec. 24).
Any application for the registration of a multi-state cooperative society, of which all the
members are individuals, should be signed by at least fifty persons from each of the states
concerned. In the case of a society of which the members are cooperative societies, it should be
signed by duly authorized representations of at least five such societies registered in different
states (Sec. 6). Their main objects shall to serve the interests of members in more than one state
and their bylaws shall provide for social and economic betterment of their members through selfhelp and mutual aid in accordance with co-operative principles (Sec. 7). Otherwise, they are
ineligible for registration. A multi-state co-operative society is a body corporate with limited
liability (Sec. 9). Members may include adult individuals, Central and State Governments, the
National Cooperative Development Corporation, corporations controlled by the Government,
government companies and classes of persons and associations recognized by the Central
Registrar (Sec. 25).
The ultimate authority of the society vests in the general body of its members subject to the
provisions of the Act, the rules (delegated legislations) and byelaws (Sec. 38{2}). The annual
general meeting of the general body shall consider audited statements of accounts, annual reports
and audit compliance reports. It shall dispose net profits, review deficit, approve annual budget,
amend the bylaws, if any; formulate a code of conduct for members of the board and officers, and
elect members of the Board (Sec. 39). The Board of Directors, constituted on the basis of election
from the general body of members for fixed tenure, performs the functions of management (Sec.
41). The members of the Board shall not have disqualifications such as insolvency, criminal
conduct, interest in the profit of the society, expulsion and dereliction in attending the meetings or
repayment of loans (Sec. 39) (Sec. 43). Ministers are prohibited from holding membership of the
Board. (Sec. 46). The term of office for members of the Board is five years. But they may be
removed by a resolution passed by the general Body with two-thirds of the members present and
voting. (S.47) However, the present law does not provide for supersession of the Board of
Directors by the Registrar. Thus, the trend towards strengthening democratic functioning of the
society is clear.
STATE COOPERATIVE SOCIETIES LAWS: HIGH REGULATION TYPE
State legislations intend to provide for the orderly development of the cooperative sector by
81
organizing the cooperative societies as self-governing democratic institutions and to achieve the
objects of equity, social justice and economic development envisaged in the Constitution.40 In the
very context of registration itself, the society’s purpose is subject to scrutiny. Section 4 of the
Karnataka Cooperative Societies Act, 1959 states that a society which has its object the
promotion of economic interests or the general welfare of its members or of the public in
accordance with the cooperative principles, or a cooperative society established with the objective
of facilitating the operation of such a society may be registered under the Act. Before according
registration, the Registrar of Cooperative Societies shall satisfy not only compliance with the
above requirement, but also conformity to the society’s objects and bylaws to the principles of
social justice and to the provisions of the Act and rules and about compliance with the
requirement of sound business. {sec. 7}
Adult and competent applicants not less than ten in number and belonging to different
families can constitute a cooperative society (Sec. 6). For cooperative societies intending to raise
funds, lend money or produce or sell goods, the residential and property requirements are
stipulated in (Sec. 6 [2]{d}). Members of a cooperative society may include individuals,
cooperative societies, state or central government, firm or company or society, market committee
or local authority (Sec. 16). Apart from death, resignation, insolvency, conviction and transfer of
share, expulsion in accordance with byelaw is also a mode of cessation of membership (Sec.
18A). Upon registration, a cooperative society becomes a corporate entity with limited or
unlimited liability (Sec. 9).
Like local self-government and educational institutions, the role of democratic management
of cooperative societies has been contemplated as a means of building a strong India on a sound
foundation of peoples’ participation. The National Cooperative Policy Resolution initiated by the
Government of India in 1977 regarded cooperative movement as a ‘shield for the weak,’ to
involve millions of small and marginal farmers, agricultural labourers, rural artisans and ordinary
consumers in cooperative programmes. It envisaged building the cooperative system as an
autonomous and self-reliant system free from undue outside interference, corruption and
excessive control.41
The final authority of cooperative society shall vest in the general body of members, subject
to application of the law [Sec. 26]. In case of partnership of or collaboration with cooperative
societies, special resolutions by each of such societies are required for carrying out the business
(Sec. 26A & 26B). There is a mandatory requirement under the law to convene annual general
meetings of cooperative society members (Sec. 27 [1]). Failure to hold such meeting, if not
supported by reasonable excuse, incurs disqualification to the office bearer for becoming or
continuing as member of the managing committee, and brings penal liability to the employee
responsible for the failure (Sec. 27 [2]). The annual general meeting considers the annual report
presented by the committee, the audit report and response, inquiry report, if any; decides about
disposal of net profit; reviews deficit, approves the proposed ensuing activities and budget;
creates reserve and other funds; decides about links with other cooperative societies; amends
bylaws; peruses list of employees; forms the code of conduct for office bearers and employees
40
See Preamble and Articles 38, 39, 14, 21 and 40 of the Constitution. The constitutional policy that “the
state shall endeavour to promote cottage industries on an individual or cooperative basis in rural areas”
(Art.43) provides explicit direction for cooperative movement. According to the Fifth Five Year Plan,
cooperative society has the merit of combining freedom and opportunity for the small man with the benefit
of large-scale management and organization.
41
Padala Rama Reddi and Padala Srinivasa Reddy, The Andhra Pradesh Cooperative Law Manual, 12th
Ed. (Hyderabad: Asia Law House, 2001), pp. 102-103.
82
and determines admission and termination of members (Sec. 27[1]). A special general meeting
shall be held when the Registrar so requires or when fifty members or one fifth of the total
members (whichever is less) makes such requisition (Sec. 28). The members of the managing
committee of the cooperative society shall be elected from time to time (once in three years after
the first committee’s term of 5 years) by the members of the cooperative society (Sec. 28A).
Changing the name of the society, altering the extent of members’ liability and amending the
bylaws are the functions to be performed by the general meeting of members (Sec. 10 &12). The
resolutions relating to amalgamation and division of societies, and transfer of assets and liabilities
may be passed by two-thirds of members present and voting at a general meeting of the society
(Sec.14). On the whole, law insists that policies relating to and leadership of cooperative society
shall be the outcome of a popular decision-making process. In order to ensure free, fair and
prompt election of members of the Committee, elaborate provisions are made in Statutes or
Rules.
The Committee constituted through such electoral process holds the reins of power,
discharges such duties and performs each function as may be conferred under the statute. To
ensure adequacy in territorial representation, and representation of Scheduled Castes and
Scheduled Tribes and women, necessary provisions have been made (Sec. 28A). In case of state
assisted cooperative societies, state government may nominate not more than three members out
of whom one shall belong to the Scheduled Caste or Scheduled Tribe, and one shall be woman
(Sec. 29). A person becomes ineligible for election, appointment or continuance as member if he
commits default as borrower, or if he is directly or indirectly interested in any contract with the
society or is employed as legal practitioner for the society or as an employee or is guilty of
corrupt practice or of any offence punishable with imprisonment with two years (Sec. 29C). The
Committee elects the President, Vice-President and other office bearers of the co-operative
society (Sec. 29F). The Chief Executive of the Co-operative society shall be appointed and be
removable by the cooperative (Sec. 29G). The Andhra Pradesh legislation provides for removal
of President and Vice- President of the cooperative society by passing of no confidence motion
by the Committee (Sec 32A). In case of State assisted co-operative, the Registrar has the power of
appointment or removal of the Chief Executive.
Encouraging and promoting of co-operative movement including co-operative farming are
declared as State’s duty (Sec. 40). The State Government may directly subscribe share capital or
provide money to apex society to purchase shares in co-operative societies with limited liability
(Sec. 43). It may also give loans or make advances to co-operative societies, guarantee repayment
of debenture, share capital or any other principle and give any financial assistance including
subsidies to any co-operative society (Sec. 53). Extension of financial aid brings strings of control
to the government’s hands. If the State’s share is not less then 50% of the total share or aid is not
less than 500,000 rupees, the government has power of nominating one-third of the members of
the Committee (Sec. 53A). If the State’s aid extends rupees 200,000, it may exercise suitable
power of control in the public interest (Sec. 54).
A package of special privileges is given to cooperative societies for making them viable.
Cooperatives have the first charge on assets of borrowers for recovery of loan or outstanding
demand owing to them subject to prior claim of the government (Sec. 32). Land held as security
for loan, shall not be alienated without the permission of the society (Sec. 33). Shares in
cooperatives are not liable to attachment The State Government may by notification exempt any
class of co-operative societies from tax payable under Karnataka Agriculture Income Tax Act,
1957 and Karnataka Sales Tax Act 1957, from stamp duties payable under Karnataka Stamp Act,
1957; and from fees payable under Karnataka Court Fees and Suits Valuation Act, 1958 and
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Indian Registration Act, 1908 (Sec. 37). They are also exempt from the requirement of
registration of instrument relating to shares and debentures (Sec. 38).
The government’s role has extended beyond mere facilitating. The Registrar may, of his own
notion, or when requested by the apex society or by the majority of the committee or by not less
than one-third of the total members of the society, shall, by order in writing, hold or authorize an
enquiry into the constitution, working and financial condition of a co-operative society (Sec. 64).
He may inspect or authorize inspection of books of the society, either by his own notion or on the
application of creditor of the co-operative society (Sec. 65). In case defects are disclosed in the
audit, enquiry or inspection, he may by order direct the co-operative society or the office bearer to
take the prescribed action. If the committee or office bearer or employee of the society commits
any financial irregularity like payment contrary to the law, deficiency in assets, breach of trust,
negligence, misappropriation or fraud, the registrar may order the person to repay or restore the
money or property (Sec. 66).
The high water mark of State interference can be found in provisions relating to supersession
of the Committee, appointment of special officer and power to issue mandatory directions.
Regular democratic framework is temporarily set aside as a remedial measure to restore orderly
and real democratic functioning of the society, when suppression or appointment of special
officer is done.
When the Registrar is of the opinion that the Committee of a co-operative society persistently
fails or is negligent in performing the duty imposed on it under the law or commits any act which
is prejudicial to the interest of the society or its members or is otherwise not functioning properly
or a co-operative society is not functioning in accordance with the law and government’s
direction, he may after giving the committee an opportunity to state its objection, by order
remove the said committee and appoint an administrator to manage the affairs of the society for a
period not exceeding six month (Sec. 30). The period may be extended but shall not exceed one
year in aggregate. Similar provisions exist in Kerala (Sec 32) and Andhra Pradesh (Sec 34)
statutes also. The Judiciary has limited the scope of suspension only to serious instances of
irregularities or persistent defaults and negligence and has not allowed it to operate on mistake of
very routine course.42 It has also insisted on reasonable exercise of these powers in order to allow
democratic functioning of the society43 and also on the need to comply with principles of natural
justices.44
The broad power of issuing directions also intervenes with the autonomy of the co-operative
society. Under section 30B, where the state government is satisfied that in public interest and for
the purpose of securing proper implementation of co-operative or other developmental
programmes of the State or for specifically safeguarding the interests of backward classes
(SC/ST, OBC) in jobs, it is necessary to issue directions to co-operative society/societies, it may
42
M Srinivasa Reddy v. The Registrar of Cooperative Societies of Karnataka, ILR 2000 (3) Kar 2841;
2000 (5) KLJ 365; Dulla Weavers Cooperative Society v.Director of Handlooms, 1972, APHCN 146,
Syede Qutubuddin Quadri v. State of AP (1971) 2 AN.W.R. 172; Krishnan v. Joint Registrar, 1997 (1)
KLT SN.32.
43
Jose Kuthyani v. Registrar, 1981 KLT SN 65, AIR 1982 Ker 12; State of Kerala v. Sudarshanan, ILR
1998 (1) Ker 146; TJ James v. Joint Registrar, 1997 (1) KLJ 607, L.Kutumba Rao v. Registrar of
Cooperative Societies, (1959) 1 An.We.400 K.T.Putte Gowda v. Deputy Registrar 1989(2) KLJ 17.2.
44
Ashwathappa v. Dy Registrar 1990 (2) KLJ 182; M.M.Abdul Rahiman v. Jt Registrar, 1993(2) KLJ 197;
Veerpal Singh v. Registrar of Cooperative Societies UP, AIR 1973 SC 1249.
84
do so. The co-operative societies so receiving directions are bound to comply with such
directions.
In the matter of winding up of the cooperative society also, the Registrar has considerable
powers. Voluntary winding up may be initiated by three fourths of the members of the
cooperative society by filing application to the Registrar. Inquiry initiated by the Registrar and his
finding may lead to winding up. Suo motu decision to wind up the cooperative may be taken
when the number of members falls below the minimum required for registration, or when it has
not commenced working or when it has not complied with the conditions of registration (Sec 72).
STATE COOPERATIVE LAW-MUTUAL HELP TYPE
With an avowed objective of removing all kinds of restrictions and governmental interferences
that have come to clog the free functioning of the cooperatives, and to recognize and encourage
voluntary formation of member controlled and member sensitive co-operatives based on self help,
mutual aid and self reliance, some states (like Karnataka, Andhra Pradesh) passed new laws
providing for alternative model of cooperative societies. It was thought that at a time when
deregulation and liberalization enabled or compelled other forms of business to break new
ground, some degree of freedom of conduct on the part of co-operatives was expected to enhance
their competitive ability.
The General Body of the co-operative society is its final authority, vested with the power of
decision-making, appointment, scrutiny and overall supervision (Sec 23). The Board of Directors,
elected by the members in the General Body meeting for five years, is in charge of its continuous
supervision (Sec 24). Registrar or other public officers do not have power of interference in the
functioning of the society by way of holding of inquiry or supersession of the board or winding
up. Some state laws provide for federal co-operative to assist, guide, coordinate and train the cooperatives (Sec 53). Promotion of co-operative education, providing of information service and
propagation of cooperative principles are some of the tasks of this body. In case of
noncompliance with co-operative principle, or of obstruction to the normal functioning of the
society or illegality, the Federal Co-operative has the power of temporary supersession of the
cooperative for six months in order to put it into the right track (Sec 38). The Federal Cooperative has also the powers to initiate the proceedings of winding up of the co-operative if the
cooperative has not commenced the business within two years after registration, or has become
defunct or is no longer operating in accordance with the co-operative principles and the
provisions of the Act (Sec 48). Further, the Federal Co-operative may hold inquiry on matters
relating to the constitution, management, working and financial aspects of any co-operation in
case of complaint by a creditor or by minimum number of directors or members (Sec 35). If on
inquiry, the Federal Co-operative is satisfied about loss of assets, fraud, misappropriation or
breach of trust by the office bearers or directors it may direct the Board to convene the general
meeting (Sec. 37). Thus, certain amount of regimentation continues to operate upon the
cooperatives in Karnataka with the only difference that it is the Federal Co-operative rather than
the Registrar that wields the power control. However, the AP Act neither provides for Federal
Cooperative, nor has any scheme of extensive regimentation.
NON PROFIT COMPANIES
Conferring of corporate personality to associations that promote cultural and charitable objects,
but exempting them from the operation of some cumbersome requirements which are essential
only for regulation of business bodies but are difficult for compliance by non-profit companies,
are the noteworthy features that are provided under the Companies Act, 1956. According to
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section 25(1), “Where it is proved to the satisfaction of the Central Government that an
association:
(a) Is about to be formed as a limited company for promoting commerce, art, science,
religion, charity or any other useful object,
(b) Intends to apply its profits, if any, or other income in promoting its objects, and to
prohibit the payment of any dividend to its members, the Central Government may,
by license, direct that the association may be registered as a company with limited
liability, without addition to its name of the word “Limited” or the words ‘Private
Limited’.”
Existing companies complying with the above requirements may also be given such license
by the Central Government (Sec 25{1}). The License system presupposes imposition of
conditions and compulsion to comply with them (sec {5}). It insists on duty not to alter the object
clauses of its memorandum. It provides for revocation of licenses after due hearing in case of
deviance from statutory requirement (Sec 25 {7} and {8}).
The advantages of the Section 25 Companies are: availability of all the advantages of
incorporation with limited liability even with non-commercial nameplate; scope for allowing
firms to be its members; immunity of officers from personal liability; confining the elective
leadership for the company’s functioning to members who make donations; exemption from
filing of an annual return about membership; flexibility about time, place and manner of holding
annual general body meeting etc.45
While the above facilities assist the Section 25 Companies, the overall operation of the
Companies Act about regularity of annual meetings, board meetings, directors’ responsibilities,
normative character of the Memorandum and Articles, promotion of the chosen objectives,
transparency and winding up ensures their functional efficacy. However, inordinate delay in the
winding up process is a problematic practice in this sphere too. The members have remedies
against arbitrary expulsions but not against temporary disciplinary action of suspension of
membership.46
TRADE UNIONS
Under the Trade Unions Act, 1926, Trade Union means any combination, whether temporary or
permanent, formed primarily for the purpose of regulating the relations between workmen and
employees or between workmen and workmen or between employers and employers, or for
imposing restrictive conditions on the conduct of any trade or business, and includes any
federation of two or more Trade Unions (Sec 2{g}). The rulebook of the trade union, a copy of
which is to be submitted for registration along with other details, shall disclose the objects for
which the trade union has been established and the purposes for which the general funds of the
trade union shall be applicable. The rules shall also determine membership criteria, subscription
requirements, method of election of office bearers and dissolution of the trade union (Sec 6). The
Registrar’s satisfaction about compliance with all the requirements of the Act leads to registration
(Sec 8) creating a corporate personality. In order to deal with the problem of multiplicity of trade
unions, it is provided by the Amendment Act 2001 that a registered trade union of workmen shall
at all times continue to have not less than ten percent or one hundred of the workmen, whichever
45
A. Ramaiah, Guide to the Companies Act, Part I 14th ed (Nagpur:Wadhwa & co 1999) p.283; Hyderabad
Race Club v. C.I.T Hyderabad, (1985) 153 ITR 521; 134 Cosmopolitan Club v. Deputy Commercial Tax
officer, AIR 1952 Mad.814
46
Leela Kumar v. Government of India, (1997) 27 Corp LA 145 Mad.
86
is less, employed in the industry with which it is connected (Sec 9A). Willful contravention of the
provisions of the Act, or fraud or mistake in obtaining registration, or stoppage of functioning
may cost its registration itself (Sec 10). This is a strong measure for purpose compliance.
Legitimate objects for which general funds may be spent are detailed in the legislation (sec
15). Prominent expenses include: payment of salary to office bearers, payment for administration
of the trade union, meeting the litigation cost, compensating the members for loss arising from
trade dispute, providing social security measures and conferring social, educational and religious
benefit to members. A separate fund for political purposes is constituted which can be spent for
electioneering for the Parliament, state Legislature or local bodies (Sec 16). But no member shall
be compelled to contribute to such fund. This avoids ideological domination upon individuals.
For effective functioning of the trade unions, the office bearers or members of Trade Unions are
given immunity from criminal and civil liabilities (Sec 17 and 18) for activities purporting to
further trade union objectives. However, the immunity is not absolute as it is not available in
cases of illegal acts of interference with mobility of employer’s men and material or of violence
or unlawful confinements.47
Subjection of the trade union activities to human rights of others is note worthy. That the
collective competence rights of trade unions shall not bulldoze collective benefit rights of
workers, of consumers or of society at large is well recognized in constitutional jurisprudence.
This has, in fact, limited the scope of right to strike. Starting with the proposition that there is no
fundamental right to strike, the judiciary has pronounced that involuntary bundhs, prolonged
agitations, and strikes in essential services violate fundamental rights of people.48
KINDS OF FOUNDATIONAL LAW (TRUST, ENDOWMENTS ANDWAKFS) FOR NPOS
For their very survival and flourishing, religions require organizations and specific property
settlements, as the latter facilitate worship of God, performance of rituals, dissemination of
religious thoughts or beliefs and training of the providers of religious service. Religion and
charity have greatly influenced public life in India by aiming at humanity’s elevation to higher
level of thought and life. Rulers and men of piety have endowed properties for the upkeep and
maintenance of religious institutions for the performance of religious functions to attain this
goal.49 Further, for various secular and social service purposes such as education, health,
protection of the destitute and physically or mentally challenged persons, endowing property or
creating trust has been increasingly resorted to.
But unlike other organizations such as societies, co-operatives, non-profit companies and
trade unions, they are not associations. They are essentially property arrangements/ settlements
dedicated for definite charitable and religious purposes allowed under the law and under the
categories of their respective concepts. Fiduciary relation arising from such dedication of
47
Simpson & Group Companies Workers and Staff Union v. AMCO Batteries,1999 LLR Kar 95; Jay
Engineering Work v. Its Staff, AIR 1968 Cal 407. Rohtas Industries Staff Union v. State of Bihar, AIR 1963
pat 170.
48
All India Bank Employers Association v. National Industrial Tribunal, AIR 1926 SC 171; Balakatiah v.
Union of India, AIR 1958 SC 232; Bharat Kumar v. State of Kerala, 1997 (2) KLT 287; CPI (M) v.
Bharath Kumar, AIR 1998 sc 184. T.K.Rangarajan v. Government of Tamilnadu, AIR 2003 SC 3032. The
National Commission on Labour (2002) has supported the decisional law by referring to the adverse public
reaction to the long drawn strikes as in Kerala in 2002.
49
B.K.Mukherjea, The Hindu Law of Religious and Charitable Trust (1983) pp.28-9.
87
property is imaginatively carved out by the legal system by insisting that possession of dominion
over property in the context is coupled with an obligation to use it for others’ benefit. Since
organizational structure is lacking in these arrangements, that vacuum is made good by detailed
legal schemes with different approaches toward recognition of their legal existence and method of
control over them. Broadly, there are four methods of bringing these bodies into the map of the
legal regime: (i) formal registration; (ii) invoking civil court’s interference; (iii) allowing the
government to notify list of charitable trusts and religious endowments and controlling them
through Endowment Commissioner or Managing Committees and; (iv) obligating the
administration to survey such bodies, to notify them and control them through bodies like Wakf
Board. Sometimes, legislations have made use of more than one model to deal with different
classes of charitable or/and religious bodies. The policies of decentralized administration,
community’s participation, financial discipline and respect for charitable and religious purposes
are the major themes that work in this sphere.
Registered Trusts
The central legislations like the Charitable and Religious Trusts Act, 1920, and the Charitable
Endowments Act, 1890, and state legislations like the Bombay Public Trusts Act, 1950, the
Madhya Pradesh Public Trusts Act, 1951 and the Rajasthan Public Trusts Act, 1959, deal with
public trusts. The common legislative policy underlying these statutes is to provide for better
administration of public/religious trusts and for the protection and preservation of properties
appertaining to such trusts. While central legislation has employed the model of a court
monitored scheme as will be discussed in the next section, the state legislations mentioned above
have schemes for registration and regulation of public trusts through state officials like Charity
Commissioners. The Bihar Hindu Religious Trusts Act, 1950 does not elaborately provide for
formal registration of trusts, but obligates the Boards to keep register of all public religious trusts.
It has welcome characteristics about composition of Board of Religious Trusts.
The Bombay, Madhya Pradesh and Rajasthan Acts require Charity Commissioner, Devasthan
(Hindu Temple) Commissioner and Registrar respectively to superintend over the trusts on behalf
of the government and to render quasi-judicial adjudication. In the context of registration of the
trust, which is a must for existing and new trusts, the applicant shall disclose particulars about the
origin, nature and objects of the trust, its place of business, names and addresses of the working
trustee, list of moveable and immoveable trust property, average annual income and mode of
succession. After satisfying the truthfulness of the particulars through official inquiry, the
Commissioner shall register the trust (Sec. 18 –21 of Bombay Act, Sec. 4-7 of M.P.Act, and Sec.
17-19 of Rajasthan Act). Public trusts can be created by will also (Sec. 29 Bombay Act). Lack of
ascertainability of purpose, absence of religious or charitable purpose or impossibility of
performance of the specific objective does not render the public trust void (Sec. 10 to 13, Bombay
Act). The trustees shall submit an annual budget, keep accounts, get the accounts audited and
invest the trust money in authorized manner (Sec. 31A to 35, Bombay Act). The Commissioner
has the power of inspection and supervision, can call for explanation about financial defaults,
direct special auditing of accounts and issue orders imposing liability upon the defaulting party
(Sec. 37 to 40, Bombay Act). He has the power of suspending or dismissing the trustee in case of
default in submission of accounts, willful disobedience to lawful orders, continuous negligence in
duty, commission of breach of trust or offence involving moral turpitude, misappropriation of
property and acceptance of position inconsistent with his position as trustee (Sec. 41-D and 47,
Bombay Act). He has the power of passing any order for staying and preventing waste, damage or
improper alienation of trust property (Sec.41-A, 41-E and 36, Bombay Act). Before filing any suit
or alienating any immoveable property, the trustee shall obtain the permission of the
Commissioner (Sec 51 and 36, Bombay Act). The Commissioner may hold inquiry about charity
88
related acts (Sec. 41-B, Bombay Act). He may frame, amalgamate or modify schemes and give
notice about cy pres application of property (50-A and 55, Bombay Act). The doctrine of cy pres
enables use of trust property for a purpose nearer to the original purpose when the latter fails
because of impossibility of performance. The trustee has the responsibility of knowing the
organization, the trust property and his duties, not to have personal interest, not to delegate his
duties, not to buy trust property, not to invest trust fund in impermissible investments and not to
receive remuneration (Sec. 36-A, Bombay Act). Persons collecting Dharmada (Contribution for
religious or charitable purpose) are made accountable to the Commissioner (Sec 54, Bombay
Act). Further, court’s intervention for removal of trustees for default, appointment of new trustee,
allocation of trust property for various purposes, settlement of schemes, cy pres application of
property has also been contemplated (Sec 50, Bombay Act). Regarding religious /charitable
institutions or endowments established in territories, which were later merged into Maharashtra,
the Act has provided for Committees of Management to run the model of endowment
administration.
Court Monitored Schemes
There are two central legislations providing for remedial mechanism through civil courts’
interference to set norms for the governance of religious and charitable trusts. The Charitable and
Religious Trusts Act, 1920, was enacted for bringing effective control over charitable and
religious trusts in the background of instances of trustee’s failure to account, defalcation of funds
and commission of frauds. Under section 3 of the Act, any person having an interest in any
express or constructive trust created or existing for a public purpose of a charitable or religious
nature may apply by petition to the court seeking directions to the trustee to furnish particulars as
to the nature and objects of the trust and of the value, income, condition, management and
application of the subject matter of the trust or directions for auditing. After complying with the
hearing procedure, the court shall pass appropriate orders. Failure to comply with the court order
gives rise to presumption about breach of trust in addition to other legal consequence and he may
be proceeded against for proper remedy under Civil Procedure Code. Trustees of the trusts
created for public purpose of a charitable or religious nature may seek directions from the court
about management or administration of the trust property. After hearing, the Court shall give
directions in accordance with which the responsibilities of the trustee shall be discharged. Many
of the Christian religious institutions and diocese societies invoke the application of the Act by
non-contentious suits.
An important mechanism for purpose compliance in the sphere of public charities and trusts
is invoking Civil Court’s jurisdiction under section 92 of the Civil Procedure Code, 1908.
According to section 92 (1) in the case of any alleged breach of any express or constructive trust
created for public purposes of a charitable or religious nature, or where the direction of the Court
is deemed necessary for its administration, the Advocate General or two persons interested in the
trust and having court’s prior permission may file a civil suit for the following remedies: removal
or appointment of any trustee; vesting of any property in a trustee or its recovery from an earlier
trustee; directing accounts and inquiries or quantifying the allocation of trust property for
particular object of the trust; authorizing the sale , mortgage or exchange of trust property; setting
a scheme or granting other suitable relief. The Court may apply cy pres doctrine in any one or
more of the following circumstances: where the original purposes of the trust have been fulfilled
or cannot be carried out at all or cannot be carried out according to the trust’s direction or spirit;
or where original purposes are not exhaustive; or where trust property can be more effectively
used in conjunction with property applicable for similar purpose; or where original purposes have
ceased to exist, or ceased to be charitable, or ceased to be effective method of using the property
or have been adequately provided for by other means (Section 92(3)). Search for the original
89
purposes, extrapolation of their nearer and reasonable alternatives and adjudication about their
extinction or unsuitability call for extensive purpose scrutiny and commitment for their
compliance.
Religious Endowments
Religious endowments arise from dedications of property for religious purpose whereas wakfs tie
up the property and devote the usufruct to human beings. Such property cannot be the subject of
gift, inheritance or sale. It is a perpetual dedication for realizations of religious purpose. Since
charity is part of religious act, it nourishes the spirit of love towards humanity. Both have
common features and similar working patterns. The law’s role in good governance of these
instruments or mechanisms has become vital because of the vacuum in their organizational
structure, their significant contribution to religious world, and the legal need to check abuses.
The Charitable Endowments Act, 1890, provides for vesting and administration of property
held in trust for charitable purposes. It creates the office of Treasurer of Charitable Endowments
for India for executing the legislative policy. Appropriate Government, central or state, is vested
with the power of superintendence. The Act defines ‘charitable purpose’ to include relief of the
poor, education, medical relief and the advancement of any other object of public utility, but does
not include a purpose which relates exclusively to religious teaching or worship. The appropriate
government may, on application made by person/s holding or administering trust property, if it
thinks fit, order that particular property held or applied in trust for a charitable purpose shall be
vested in the Treasurer of Charitable Endowments. With the concurrence of person making such
application, the appropriate government may settle and notify a scheme for administration of such
property. The scheme so evolved supersedes the earlier decree or direction. In order to make the
scheme to reflect and effectuate the original intention, it is provided under section 5(5), “ In the
settlement of such a scheme effect shall be given to the wishes of the author of the trust so far as
they can be ascertained, and, in the opinion of the appropriate Government, effect can reasonably
given to them.” The Religious Endowment Act 1863 constituted and empowered Committees for
the appointment of managers, trustees and superintendents. It also authorized the District Courts
to take cognizance of allegations of misfeasance against the managing authority.
All the states have gone for a high degree of bureaucratization in the regulation over
endowments. Since there is no constitutional hindrance on reasonable regulation of financial and
economic matters associated with religion and since religious body’s right to administration of its
affairs does not include right to maladminister, such regulations continue as valid part of the
system. However, wherever religious freedom is impinged in the course of regulations, judiciary
has been providing remedies.50
Broadly, there are two distinct modes of regulations: one is constituting a State-level
Dewaswam Boards/Regional Dewaswam Boards (Endowment Boards for Hindu temples) and the
other is constituting a hierarchy of civil servants, both the authorities having varying degree of
power of control over Trustees or Board of Trustees/Committee of Management. There is scope
for political interference in both the modes, but it is more in the second mode because of direct
and day-to-day interferences. The first mode is traceable in Kerala to some extent. Travancore
50
Pannalal Bansilal Patil v. State of Andhra Pradesh, AIR 1996 SC 1023; A.S.Narayana v. State of
Andhra Pradesh AIR 1996 SC 1765; N.Adityan v. The Travancore Devaswom Board, (2002) 8 SCC 106;
C.K.Rajan v. State of Kerala, AIR 1994 Ker 179; Shri Swamiji of Adamar Mutt v. The Commissioner,
H.R.E., AIR 1980 SC 1; Commissioner of HRE v. Sri Lakshmindra Thirtha Swamier 1954 SCR 1005; AIR
1954 SC 282; Sri Lakshmana Yatindrudu v. State of Andhra Pradesh, 1996 (8) SCC 705.
90
Devawom Board and Cochin Devaswom Board are the corporate bodies constituted under the
Act, vested with the responsibility of administering the Devaswoms, Hindu Religious
Endowments and all other properties and funds.
The second mode, which is followed in almost all other states, and even in parts of Kerala
other than Travancore-Cochin, relies on control by bureaucratic hierarchy. The Commissioner,
the Deputy Commissioner and Assistant Commissioner are conferred with area wise (state level
and district level or local) powers to regulate the functioning of regional institutions (Sec.3 to 6,
Karnataka, s.3 to 5 Andhra Pradesh, s.8 to 9 Tamil Nadu, s.4 to 7 Orissa Acts). Only senior civil
servants or judicial officers who profess Hindu religion are eligible for appointment as
Commissioners etc. (Sec. 7 Karnataka, s.7 Tamil Nadu, s. 4 Orissa Acts). Further, in visiting any
Hindu religious institutions, the officers are required to give reasonable notice of entry and
comply with the practices and usages of the institutions (Sec. 12, A.P.). This enables retention of
Hindu identity in the functioning and supervision of Hindu religious institutions.
The Commissioner, Deputy Commissioner and Assistant Commissioner shall be considered
as the chief controlling authority in respect of all matters connected with notified religious
institutions.(Sec.24, Karnataka, s.8 to 10, A.P.) They have powers to dissolve the Committee of
Management, to fill up the casual vacancies in the latter, to restore the immovable properties
alienated in an unauthorized manner, to file suits on behalf of the notified institution, and to
require the tenants of the institution to remit rent.( Sec 28, 30, 32, 33 &34, Karnataka) In case of
mismanagement they have power to take action after giving hearing opportunity for treating the
institutions, as Declared Institutions, as a consequence of which there will be dissolution of the
Committee of Management and vestment of their administration with government.(sec 42 to 44)
Wakfs
The law of wakfs is an important contribution of Islamic jurisprudence in response to the needs of
philanthropic society and moral considerations of charity.51 Presently there is a central law, i.e,
Wakf Act, 1995 applicable uniformly throughout India. Like trust or endowment, it is basically a
property settlement and has no institutional framework or organizational structure. For the
administration of wakf according to law, survey of all wakf arrangements is arranged and the list
is to be published. A tribunal is vested with the power of deciding disputes about identification.
The law provides for compulsory registration of all wakfs at the office of the Wakf Board, after
complying with all formalities regarding application, which shall disclose necessary details about
the wakf. Mutawalli is the person vested with the responsibility of fulfilling wakf obligation and
has control over property for this purpose. But he is amenable to the supervision of the Wakf
Board.
The Wakf Board for each State has both official and non-official members as its composition,
and partly democratic principle is employed in filling the positions. From the Electoral College
consisting of Muslim MP’s of the State, Muslim members of State legislature, Muslim members
of Bar Council of the State and mutawalli of the wakfs having annual income more than 100,000
rupees, one or two members shall be chosen. State Government shall nominate one or two
representatives from eminent Muslim organizations, one or two recognized scholars in Islamic
Theology. There shall be a Chairperson. The term of office is five years. Disqualified members
may be removed and vacancies may be filled up by the state. Powers and function of the board
includes powers i) to maintain records/information of wakf; ii) to ensure that the income or
51
See S.A.Khader, The Law of Wakfs (Calcutta: Eastern Law House), 1999, and Ahmedullah Khan,
Commentary on the Law of Wakf in India (Hyderabad: Asia Law House), 2003.
91
property of the wakf is applied to the objects and purposes for which such wakfs were intended or
created; iii) to give suitable directions to the wakfs; iv) to settle schemes of management v) to
scrutinize the budget, to recover or protect property, and to sanction transfer of property; vi) to
administer wakf property and to inspect, investigate or call for returns. Wakf Boards are
empowered to assume direct management of wakf if no suitable person is available for
appointment as mutawalli of the wakf. Supervision by the Wakf Board will continue until the
appointment of mutawalli.(sec 65) Removal of a mutawalli by the State Government is
permissible in extraordinary circumstances like conviction for criminal act, disability arising from
insanity, insolvency and pecuniary bias, negligence in duty, willful disobedience of lawful orders
issued by the Government or the Board, failure to maintain regular accounts, misappropriation of
funds or commission of fraud.(sec 64) Upon the management of a wakf by committee appointed
by the Board, the latter has power of supervision and supersession (sec 67).The responsibilities of
mutawalli are elaborately laid down (sec 68). The Wakf Board has the power to frame scheme for
proper administration of wakfs, as a result of which the existing mutawalli may be removed (sec
69). There are elaborate provisions about financial discipline. Concerning secular activities of the
wakf, the Central Government has power of issuing directions, which are to be enforced by the
States.(se 96 and 97) Regarding settlement of disputes relating to the wakfs, special tribunal is
contemplated under the Act.(sec 83).
Legal Measures To Make NPOs Truly Nonprofit
All registered societies are to submit periodically accounts of income and expenditure of the
assets and liabilities of the society to the Registrar. The audited balance sheet is open to scrutiny
and approval in the annual general meeting of the society. Unless vested on trustees, the property
shall be deemed to be vested on the governing body of such society (sec. 8, Society Registration
Act). While the Madhya Pradesh Society Registration Act, 1993, (sec. 21) provides that no
immovable property shall be acquired or transferred without the prior permission of the Registrar
in writing, the Uttar Pradesh Society Registration (Amendment) Act (sec. 5-A) require that for
transfer of immovable property of the society previous approval by the court is mandatory.
Meghalaya S.R.Act and the West Bengal Societies Registration Acts provide, “ Where a society
accepts a gift of any kind from any person for a specific purpose, it shall not use the gift or any
part thereof for any other purpose, without the written consent of the donor or if the donor is dead
without the written consent of the Registrar. The Registrar shall not give consent unless he is
satisfied that the purpose for which the gift was made is incapable of execution by the society.”
An important approach that makes the registered society, a non-commercial entity, is
reflected in the provision common in all statutes to the effect that upon dissolution the surplus
fund or property shall not be paid or distributed among the members of the society.52 While the
Central Act and statutes of Rajasthan, Travancore-Cochin, Tamil Nadu and Madhya Pradesh
provide for giving of such property to some other society so determined by three-fifth (two-thirds
in case of Rajasthan) of the members of the dissolved society or in case of default, by the Courts,
the statutes of Maharashtra, Bihar, Uttar Pradesh, Goa, and Karnataka provide for giving of such
property to the state government to be utilized for any of the purposes referred in the Acts.
As co-operative societies are important economic institutions involving in considerable
financial transaction, although with least profit motive, their financial discipline is insisted by
legal mechanism. No part of the funds other than the net profits shall be paid by way of bonus or
dividend to members (Sec.56). Out of the net profit a minimum of 25% shall be credited to
52
Section 14 Societies Registration Act, 1860; sec 23 Karnataka Societies Registration Act, 1960.
92
reserve funds, 2% to the co-operative education fund, 5% to the government’s co-operative
welfare fund and the balance will be used for distribution of bonus to members and employees
and for donations for charitable purposes (Sec. 57). The investment of the society’s fund shall be
in recognized securities (Sec. 58). Receiving deposits and loans shall be in accordance with
bylaws. Loans shall not be given to non-members (Sec. 61). Employees shall be entitled to
provident fund benefits (Sec. 56) (Sec. 62). The Director of Co-operative Audit shall audit or
cause to be audited by authorized person the accounts of every co-operative society at least once a
year. He shall examine accrued debts, verify each balance, evaluate assets and liabilities and
examine the working of the society and other particulars of the society. Since the audit report and
compliant statement are to be scrutinized by the general body at its annual meeting, adequate
control can be exercised by the general body (Sec. 63).
Regarding nonprofit companies, since the central government has to satisfy about the
company’s intention to apply its profits, if any, or other income in promoting its objects, and to
prohibit the payment of any dividend to its members, the legal mechanism to render it really nonprofitable is clear.
Trade Union law also does not permit profiteering. The legitimate objects for which general
funds may be spent are detailed in the legislation (sec 15). Prominent expenses include: payment
of salary to office bearers, payment for administration of the trade union, meeting the litigation
cost, compensating the members for loss arising from trade dispute, providing social security
measures and conferring social, educational and religious benefit to members. Separate fund for
political purpose is constituted which can be spent for electioneering for the Parliament, state
Legislature or local bodies (Sec 16). But no member shall be compelled to contribute to such
fund.
Public trusts and religious endowments are subjected to elaborate financial discipline to
eschew profiteering or distribution of dividend. Under the state religious endowment law, the
Committee of Management shall frame the budget, prescribe the fee for religious service,
determine the dittam (scale of expenses required for worship), discharge financial liabilities,
arrange for securing the health, safety convenience of pilgrims and construct or maintain the
buildings. The budget is subject to approval by the controlling authority like the Commissioner.
Keeping accounts, getting them audited and complying with audit report are also prescribed. The
Commissioner or Deputy Commissioner or Assistant Commissioner has supervisory powers in
this regard. The policy of command and control has not left adequate space for independent
decision making in these spheres. In Andhra Pradesh, trustees are authorized to utilize surplus
funds for propagation of religious tenets, establishing and maintaining of Vedic schools, training
schools for Archakas (temple worshipper), hospitals for the benefit of devotees and orphanages
for children and disabled persons (Sec. 72). Similar provisions are prevalent in Kerala, Orissa and
Tamil Nadu statutes.
Under the Foreign Contribution Regulation Act, to get permission from the central
government for receiving foreign grants, the NPOs have to establish that they have definite
cultural, economic, educational religious or social programme.53 Further, (i) the association shall
register itself with the Central Government in accordance with the Act; (ii) shall agree to receive
such foreign contribution only through a particular branch of a bank as specifed in the application
for registration, and (iii) shall give an intimation to the Central Government as to the amount of
each foreign contribution received, the source from which it was received, and the manner in
53
For a discussion on the subject see, Gautam Banerjee, Law Relating to Foreign Contribution in
India, New Delhi: Commercial Law Publishers Pvt. Ltd., 2002.
93
which such foreign contributions was utilized. (Sec. 6) The Central Government may also require
such association to obtain its prior permission before accepting any foreign contribution if it is
satisfied that the acceptance of foreign contribution by such association is likely to affect
prejudicially the sovereignty and integrity of India or the public interest or free and fair election
to any Legislature; or foreign relation with foreign countries; or harmony between religious,
racial, linguistic or regional groups, castes or communities (sec10) It can be seen that the Central
Government’s scrutiny and intervention operate at various levels. At the stage of registration of
association under the FCRA, the Government scrutinizes its Memorandum of Association, audit
report and balance sheet of the past three years, report on the activities of the association during
the past three years, list of members of the governing body and of office bearers and copies of
publication. Secondly, at the stage of conferring prior permission also, the Central Government
has opportunity and power to make purpose scrutiny. In case purposes are bad, it may not accord
prior permission.
For getting the tax exemption and other advantages under Income Tax, the trust or institution
shall get itself registered under the Income Tax Act, 1961 as working for charitable purpose.
Before conferring registration, the Commissioner shall call for such documents or information
from the trust or institution as he thinks necessary in order to satisfy himself about the
genuineness of activities of the trust or institution and may also make such inquiries as he may
deem necessary in this behalf; and shall so satisfy himself about the objects of the trust or
institution and genuineness of its activities. The trusts or institutions shall file annual returns,
conform to the conditions prescribed for spending and accumulation of income, and get its
account audited.
According to section 11 of the Income Tax Act, 1961, any income derived from property held
under trust wholly for charitable or religious purposes, to the extent to which such income is
applied to such purposes in India, shall be exempt from income tax. Section 10 (23c) exempts
from taxation the income derived by any person on behalf of (i) any hospital or other institution
for the reception and treatment of persons suffering from illness or mental defect or for the
reception and treatment of persons during convalescence or of persons requiring medical attention
or rehabilitation, existing solely for philanthropic purposes and not for purposes of profit and
which is wholly or substantially financed by the Government; or(ii) any university or other
educational institution existing solely for educational purposes and not for purposes of profit if
the aggregate annual receipts of such university or educational institution do not exceed the
amount of annual receipts as may be prescribed or if the prescribed authority approves; (iii) any
hospital or other institution for the reception and treatment of persons suffering from illness or
mental defect or for the reception and treatment of persons during convalescence or of persons
requiring medical attention or rehabilitation, existing solely for philanthropic purposes and not for
purposes of profit, if the aggregate annual receipts of such hospital or institution do not exceed
the amount of annual receipts as may be prescribed or if the prescribed authority approves.
PROBLEMS OF THE CURRENT LEGAL FRAMEWORK AND THE POSSIBLE SOLUTIONS
The facilitative and regulative policy of a legal regime governing NPOs in India undoubtedly
contributed to their flourishing role in human rights advocacy and implementation of welfare
schemes in recent times.54 However, excessive bureaucratic control, inadequate built-in
mechanisms for grievance redressal and purpose compliance, and lack of people’s participation in
54
See supra n. 1 -5.
94
decision-making process appear to be the major problems with the specific statutes governing
NPOs.
State legislations on registered societies contemplate various types of regimentations and
interferences to set right the maladministration. But in practice, the governmental role is confined
to registration and documentation of information. Only in exceptional circumstances is
governmental interference found. Central legislation on the subject has no such policy of
bureaucratic control. But where governmental involvement in the form of funding or leasing of
land is present, the society suffers abuse of power, deterioration in the functioning of the society
and malfunctioning due to dominance of vested interests. Instead of resolving the problem within
the framework of the statute and Civil Procedure Code there are instances of taking over of such
society through special statute.55 It is more appropriate to use existing legal machinery than to go
for legislative intervention. Compulsory annual general body meetings should be in effect and
limitation of terms of office for office bearers should be implemented so as to avoid dominance
by vested interests.
Cooperative societies were expected to be effective agencies for avoiding middlemen’s
exploitation. But because of a heightened governmental role through bureaucratic intervention in
the functioning of cooperative societies, cooperatives have become government directed
instruments, relegating to irrelevance the values of self-help and member centrality. Political
nominations to the Committee of Management have been problematic. Decisions about
supersession of the Committee, inquiry or appointment of Special Officers often amount to
partisan decisions. Irregularities in holding the annual general body meeting, in accounting and
auditing and lack of people’s enthusiasm in active participation have been found to be obstructive
to the success of cooperatives.56 The Central Government’s effort to bring an element of
democratic culture to the system by replacing the present with a new system has not yielded much
result, as this proposal has not been favourably responded by the states. Presently the central
government is contemplating to introduce through central legislation and constitutional
amendment, the requirements of compulsory annual general body meetings, periodical elections,
systematic keeping of accounts, and auditing by persons recognized by the government.57 Further,
instead of privatization, opening the doors of cooperativization with adequate democratic control
would have been more appropriate.
Lack of public trust in law in many states in spheres other than charity and religion has been
experienced to be problematic. The Bombay model has an impressive scheme for registration and
supervision by the Charity Commissioner and the approach balances between people’s
participation and governmental intervention. The remedy available in other states under the
general law like Civil Procedure Code is litigation-oriented and cumbersome. The essential policy
of various endowment laws consists in extensive control by a hierarchy of bureaucrats to avoid
financial abuses and mismanagements. Governmental nomination to Committee of Management
and its power of dissolution and supersession of Committee have been experienced to be
thwarting people’s initiative and partisan. Exclusion of some religious institutions from the
endowment law and allowing remedies only under general law limits the scope for supervision
for good governance.58
55
L.N.Mishra Institute of Economic Development and Social Change v. State of Bihar, AIR 1988 SC 1136;
Dharam Dutt v.Union Of India, (2004) SCC 712.
56
Yashavanta Dongre, ‘Cooperatives at Crossroads’, The Hindu, October, 12, 2004.
57
http://www.prajavani.net, November, 17, 2004.
58
Exclusion of Mutts ( Hindu monasteries) and denominational temples from the operation of the
95
Constitutional development regarding freedom of association has limited the scope of
citizen’s right to formation of association by excluding the group’s claim for efficacy or success
of the association. This has enabled greater intervention by the state in the affairs of the NPOs.
An integrated application of right to equality, right to freedom of speech and expression and
cultural right should avoid and remedy arbitrary intervention, and thereby support collective right.
Looking to freedom of association only as an individual freedom without more is problematic. In
light of mixed experience about unjustifiable and justifiable use of legislative power to take over
the property or functioning of the organization, at present, legislative self control or democratic
process should rescue it from abuse. Instead of rigidly standing about group disentitlement to
success of association, the interrelated dimension of freedom of association needs to be
appreciated.
CONCLUSIONS
India has developed a good body of legal materials to build up a fairly satisfactory legal
infrastructure for the governance of Non Profit Sector. True to its cultural ethos rooted in
centuries of historical development, the values of peoples’ participation and decentralization in
organizational structure and functioning have been evolved as the essential policies. While the
colonial legislations had the policy of minimum interference by just enabling formation of
corporate personality and providing legal remedies under the general law in case of abuse, the
post colonial laws aspired for efficacy and success in NPO sphere and for this purpose
contemplated comprehensive supervision. The supervisory role sometimes touched the levels of
regimentation. However, desirability of the approach is to be understood in the context of social
needs, extent of abuse or inaction and persuasion for implementing the objectives of welfare.
Multiplicity of NPO laws owing to federalism, multiculturalism and variety of functions of NPOs
is to be looked upon as a factor of strength that enables them to reach the specific communities
according to their aspirations rather than an obstructive element.
A survey of the NPO laws discloses that most of them establish a fairly workable
environment for vesting ownership of NPO upon the users/stakeholders, producers and
beneficiaries. People’s inclination to use self-help groups as instruments of their activities should
grow with more awareness and education on NPO matters. Statutory schemes for their financial
and functional accountability to the community are very much prevalent, although the extent of
their success depends upon the application of democratic control by the stakeholders. Presence of
a variety of NPOs and their active role in the matter of environment protection, health, education,
protection from destitution, rehabilitation of victims of natural calamities and redressing of
human rights violations by recourse to appropriate bodies show that they are able to diagnose the
needs of the people, interact with the government agencies and work in cooperation for success in
their chosen areas. Society’s integration of NPO law emerges as both instrument and product in
the course of the functioning of NPOs by taking the rule of law norm seriously.
Karnataka Hindu Religious Endowments and Charitable Institutions Act, 2000 has caused this type of
situation.
96
REFORM OF CHINA’S LAWS FOR NPOS: A DISCUSSION OF ISSUES
RELATED TO SHIYE DANWEI REFORM
BY KARLA SIMON
A third perspective on the Bei Da conference, authored by Karla Simon, IJCSL Editor-in-Chief,
is available at http://iccsl.org/pubs/Aufsatz_Simon.pdf . The article, entitled Reform of China’s
Laws for NPOs - A Discussion of Issues Related to Shiye Danwei Reform, was presented at The
Forum on the Legal Framework of NPOs in China, sponsored by the Center for NPO Law of
Peking University School of Law Center in March 2005.
97
COUNTRY REPORTS
EUROPE REGIONAL
CIVIL SOCIETY IN THE PERSPECTIVE OF
THE WARSAW SUMMIT OF MAY 2005
BY FRITS HONDIUS*
In Warsaw, on 16 and 17 May 2005, the Polish presidency of the Council of Europe hosted this
organization’s third summit of heads of state and government. The previous summits had taken
place in 1993 and 1997 when the accession to the Council of former communist countries was
still in progress. A similar incorporation process is now under way in the European Union, but it
is doubtful it that will ever result in a membership equaling that of the Council, for example with
regard to the Russian Federation, Switzerland or Norway.
The Council unites 46 States, the near totality of Europe with the exception of Belarus,
Europe’s sole surviving dictatorship. The summit, ably chaired by Poland’s president
Kwasniewski, finished with the adoption of a solemn “Warsaw Declaration” and an Action Plan.
The core themes of the Council, which speaker after speaker re-emphasized, are human
rights, democracy and the rule of law. The Declaration stresses the wish of its signatories for
creating in Europe sustainable communities “where people want to live and work, now and in the
future”, a definition reminding us of that posed by Ernest Renan for nationhood 120 years ago.
The Warsaw Declaration states that “this can only be achieved through the active involvement of
citizens and civil society.” This is an interesting reference in a basic Council of Europe document
to the notion of civil society, which is more than “the participatory involvement of citizens in the
res publica” evoked in the preamble to a recent statement on fundamental principles on the status
of NGOs in Europe.
SOLDIARNOSC
The notion of “civil society” was revived by Polish philosophers 25 years ago in the turbulent
days of the creation of “Solidarnosc.” While that event was hailed by the heads of state and
government as a crucial historical moment, along with the fall of the Berlin wall in 1989, we
regret that no speaker at the Summit has paid tribute to the Polish revival of “civil society” as a
concept. A remarkable early reference appears in Article 43.2.1 of Ireland’s 1937 Constitution in
which De Valera invoked civil society as a safe harbor against the double dangers of fascism and
communism which were then ravaging Spain, his father’s country of origin. In the 1990s several
new East European constitutions included a reference to “civil society” (Macedonia 1991, Czech
Republic and Lithuania 1992) or equivalents thereof -“civil harmony,” “civil peace” (e.g; Russian
Federation 1993, Ukraïne 1996).
Civil society is more than the participation of people in the res publica. It is the affirmation of
the “we are the people” principle, so courageously demonstrated by citizens during the declining
*
Roving correspondent in Europe for the “International Journal of Civil Society Law,” Strasbourg, May
2005
98
days of the GDR (“wir sind das Volk ). It was an essential factor in the peaceful revolutions in
Portugal 1975, Belgrade 2000, Georgia 2004 and Ukraine 2005, but also in the French and Dutch
referenda on a European constitution on 29 May and 1 June 2005.
NGOS, INGOS
In the Council of Europe the notion of “civil society” has long been eclipsed by that of “NGOs”
or “INGOs,” which are a particular form of civil society representation. It is a step forward that
within the Council’s secretariat there is now a Division of Civil Society and NGOs of which an
NGO Unit is a sub-section. In 1991, when I first referred to “civil society” in a Council of
Europe official document, I received a note from a translator saying that this term did not appear
in any of his dictionaries. I then undertook research on it and published my findings in two
studies, i e “The notion of civil society in Greater Europe”, Transnational Associations, Volume
3/95, 130-135 and “Civil Society, the Human Dimension of Europe”, Festschrift Cremona
(Malta, 1999) 92-98. My favorite definition is Larry Diamond’s in The Journal of Democracy
(June 1994): “…the realm of organized social life that is voluntary, self-generating, (largely) selfsupporting, autonomous from the state and bound by a legal order or set of shared rules.”
Until recently, “civil society” seemed to be reserved to countries outside the circle of Western
democracies, but recent developments in the latter – in particular the popular revolt against the
proposed European Union constitution - have shown that it applies there as much. One of the
undeniable advantages of “civil society” is its positive connotation, unlike the negative concepts
of “non-governmental” or “non-profit”.
With regard to NGOs, the Council of Europe has a long standing commitment, expressed in
three pillars.
The first pillar is Article 11 of the European Convention on Human Rights which guarantees
the freedom of association and peaceful assembly. Protection by the Court of Human Rights
against violations of this freedom can be invoked by natural persons, groups of persons and by
NGOs. The words “groups of persons” are important because they recognize that in civil society,
entities other than NGOs can claim protection.
The second pillar is an elaborate system of recognized status within the Council of NGOs, a
status hitherto defined as “consultative” after the fashion of Article 71 of the UN Charter, and
since 2003 (Committee of Ministers Resolution (2003) 8) as “participatory.” In the preamble to
this Resolution, reference is made to “an active civil society” of which NGOs are an important
component. At the Warsaw Summit, a spokesperson for the recognized NGOs, Mrs Annelis
Oeschger, was allowed to briefly address the heads of state and government. She presented NGOs
as a “counterweight” to governments, not a way to endear herself to the Summit participants!
In spite of the privileged position of recognized NGOs, the Council of Europe allows its
committees of experts to invite to their work those important NGOs which have not bothered to
apply for participatory status. We may cite as examples the International Olympic Committee, the
Union of International Associations, the International Copyright Association or the Salvation
Army.
The third pillar is the set of international standards elaborated by the Council for NGOs,
notably the 1986 Convention on the recognition of the legal personality of international NGOs. In
spite of the pretended respect of States for NGOs the rate of ratification - 10 countries on a total
of 46 -is disappointing.
99
WHAT HAS THE SUMMIT DONE FOR CIVIL SOCIETY OR FOR NGOS?
We have carefully listened to the numerous statements by representatives of member States and
observer delegations (Canada, Japan, Mexico, Holy See; European Union, United Nations and
OSCE). Very few speakers have touched on NGOs. One speaker, President Vaclav Klaus of the
Czech Republic, even surprised his audience by launching a diatribe against NGOs. He referred
to “attempts of manifold forces, structures and groupings (not of the state itself) which – without
a democratic mandate - try to directly decide, (or at least basically influence) various crucial and
sensitive issues.” He said he had in mind various manifestations of NGOism, of artificial
multiculturalism, of radical human rightism, of aggressive environmentalism.
On the positive side, one NGO, “Reporters without borders,” received a well-deserved tribute
from Romania. Prince Albert of Monaco spoke words of praise for cultural patronage (mécénat),
and the observer from the Holy See commended the pursuit of the common good in general and
the charitable action of Catholic organizations in particular.
Many heads of state and government spoke in praise of civil society forces, especially youth,
and emphasized that globalization not only deals with freedom of capital but also of human
values.
THE WARSAW DECLARATION AND THE ACTION PLAN
With regard to “civil society” many speakers, as well as the Warsaw Declaration and the Plan of
Action reserved it an important place. Various definitions were heard, such as “participatory
democracy,” “civil conscience,” “active citizenship,” “partnership.” Paragraph 3 of the
Declaration deals with democracy and good governance at all levels and poses the need for “the
active involvement of citizens and civil society.” It announces an intensification of the work to
this effect within the Council of Europe and the creation of a Forum for the Future of Democracy.
This is a very significant development because in the past “democracy” was only treated as an
initial test criterion when a country applied for admission to the Council and as a matter to be
decided from time to time by the Court of Human Rights when a state justified restrictions on
human rights as “necessary in a democratic society.” The proposal to create a Forum was rooted
in a paradox. More Europeans live in a democracy than ever before. Yet, there is a degree of
mistrust or absence of interest in democratic institutions. The Forum, which is envisaged as an
event, not an institution, should provide a periodical platform for ideas, sharing of best practices
and suggestions for action.
The Declaration calls on all Europeans to turn Europe into “a creative community; open to
knowledge and to diverse cultures; a civic and cohesive community.” The Action Plan adopted by
the heads of State and Government instructs the Council to “enhance the participation of NGOs in
Council of Europe activities as an essential element of civil society’s contribution to the
transparency and accountability of democratic government.”
100
CONCLUSION
The Warsaw Summit was important in three respects. First, it signaled an end to the division in
the Council’s approach between established Western democracies and newly emerging Eastern
and Southern democracies. Poland’s president emphasized that this was the summit of European
unity. Secondly, the Summit acquired a new significance in the aftermath of the failure of the
European Union to reach a consensus on a constitutional treaty and on its extension to a greater
number of European member states. Thirdly, the emphasis on the three major themes: democracy,
human rights and rule of law, offers a wonderful opportunity for civil society to manifest itself
within the Council.
101
SOUTH ASIA
FOREIGN CONTRIBUTION (MANAGEMENT & CONTROL) BILL, 2005
BY ACCOUNTAID™ TEAM
There was time when pipers were common in the ancient world. They would play the tune that
you requested. This gave rise to a saying: ‘He who pays the piper calls the tune’. Does this apply
to the modern world also? We can’t say, but the Indian Government certainly believes it does.
That’s why India has a law called Foreign Contribution (Regulation) Act, 1976. This law, now
about 30 years old, is going through a mid-age crisis. So the Government is planning to replace it
with a new one.
The old FCRA focused mainly on preventing flow of foreign funds to electoral political in
India. In this, the law had a lot in common with similar laws in at least twenty-three other
countries, including USA and UK.1 But where the law made a departure2 was in monitoring flow
of funds to NGOs, in the belief that political funds could be routed through them.
To some extent, this perspective is more common in developing countries, who are, in a
manner of speaking, at the receiving end of foreign aid. Still the Act causes a lot of resentment
among the NGOs, who find it somewhat stifling and a nuisance. A large group of NGOs has,
therefore, been campaigning for repeal of the Act.
And the Government of India has agreed! It is likely to repeal the FCRA in the near future.
Only catch is that it will be replaced with a new, tougher law!! Some believe that this is reflective
of a new international trend in response to the FATF3 report of 2001.
A draft of the proposed new law has been released recently. It is titled Foreign Contribution
(Management & Control) Bill, 2005. It has been referred to a Group of Ministers. Public
comments are also being invited.4 Later it will be tabled in the Parliament. The bill is eventually
expected to replace the FCRA, 1976. This process may take one or two years. The Bill seeks to
manage and control the flow of foreign funds to NPOs and political parties in India. What are the
changes that the new bill proposes?
OBJECT OF THE ACT
By far this is the most important change. All other changes flow from this. The present FCRA
was primarily aimed at ensuring that foreign funds do not affect Indian elections.5
1
See AccountAid Capsules 70 and 71 at www.AccountAid.net.
Amendment to FCRA, 1976 made in 1985.
3
Financial Action Task Force. See ‘Report on Money Laundering Typologies’, issued 1-February-2001.
Available at http://www1.oecd.org/fatf/pdf/TY2001_en.pdf, and ‘Combating the Abuse of Non-Profit
Organisations – International Best Practices’ issued 11-October-2002. Available at
http://www1.oecd.org/fatf/pdf/SR8-NPO_en.pdf.
4
Full text available at www.AccountAid.net and at http://mha.nic.in/fcmc-bill-05.pdf.
5
Preamble to the FCRA 1976: ‘An act to regulate the acceptance and utilisation of foreign contribution or
foreign hospitality by certain persons or associations, with a view to ensuring that parliamentary
institutions, political associations and academic and other voluntary organisations as well as individuals
2
102
The new FCMC shifts the focus of the Act from politics to anti-national activities.6
ANTI-NATIONAL ACTIVITIES
What are anti-national activities? We all know this, but probably cannot agree on a legal
definition. The Bill also is silent on this. However, these appear to be the ones listed in section 10
of the present Act, which have been reproduced in section 12(3)(d)7 of FCMC.
A significant omission is terrorist activities. This phrase often crops up in informal
discussions related to foreign funds. However, the word ‘terrorism’ does not occur anywhere in
the new Bill.
NPOS IN THE CENTRE STAGE
FCRA was originally targeted at political parties. NPOs were included in the original Act as a
safety measure. Later, in 1984, the emphasis on NPOs increased. They were now asked to register
under FCRA. Since then, some 30,000 NPOs have registered to receive foreign contribution.
FCRA department now spends bulk of its time on giving FCRA registration to NPOs and on
monitoring them. This is reflected in the new Bill. The Bill addresses some of the key concerns
voiced by NPOs. It also makes several other changes which would affect NPOs.
CHANGES AFFECTING NPOS
As FCRA was never designed for NPOs, its implementation created certain problems.
Fortunately, in most of these cases, the FCRA department acted with restraint and maturity. The
new Bill proposes to wrinkle these out:
1. INTEREST ON FOREIGN CONTRIBUTION
This used to cause a lot of confusion, till the FCRA Department revised form FC-3 in July 2001.
This helped clear the confusion. However, some doubts persisted. These doubts will be set at rest
with the new explanation.8 This explanation says that any bank interest earned on foreign
contribution will also be treated as foreign contribution.
2. INCOME FROM FOREIGN CONTRIBUTION
This may give rise to another doubt. What happens if we invest FCRA funds in a Government
security or mutual fund? To cover this, the bill proposes that ‘any income derived from foreign
contribution’ will also be treated as foreign contribution.
working in the important areas of national life may function in a manner consistent with the values of
sovereign democratic republic, and for matters connected therewith or incidental thereto.’
6
Preamble to the FCMC Bill 2005: ‘A Bill to consolidate the law relating to the acceptance and utilisation
of foreign contribution or foreign hospitality by certain individuals or associations or companies and to
prohibit acceptance and utilisation of foreign contribution or foreign hospitality for anti-national activities,
and for matters connected therewith or incidental thereto.’
7
Section 12(3)(d).
8
Explanation 2, section 2(1)(f).
103
But what does this new phrase mean? Does it refer to income directly derived from foreign
contribution? Or would it also cover income received indirectly from a project set up with foreign
contribution? For example, if you buy ten cows with foreign contribution, then would the income
from milk be foreign contribution? Hopefully, the FCRA Department will leave this entertaining
question to the judgement of accountants and auditors!
3. FEES ETC.
If you interpret the present FCRA strictly, then fees paid by a foreign student to the school would
be covered by FCRA.9 The new Bill takes care of this problem by inserting an explanation10 to
section 2(1)(f).
This means that if you provide some services to a foreign source, and receive fees against
that, the fees will not be treated as foreign contribution. The explanation covers things like
conference fees, subscription to journals, tuition fees, and even consultancy services. This will
probably come as a relief11 to many NPOs engaged in publication, research or training activities,
as also to schools and colleges. One question that remains unanswered is the question of sale of
materials. If you sell a book or a handicraft item to a foreigner, then is the sale price foreign
contribution? Hopefully the Ministry will take a closer look at this, if for no other reason, then at
least to encourage our traditional handicrafts!
4. MULTIPLE BANK ACCOUNTS
Under the present FCRA, an NPO is required to receive and hold FCRA funds in one, specified
bank account. If you move these funds to another bank account, you may receive a show-cause
notice. This has created unlimited practical hardships for multi-location NPOs. Often cash has to
be carried by hand to other locations, because of this restriction.
The proposed bill takes care of this problem. NPOs will be allowed to receive funds only in
one designated bank account. However, afterwards they can move the funds to other bank
accounts according to their operational needs. Only they need to make sure that these bank
accounts are used exclusively for FCRA funds.12
5. GROUNDS FOR REJECTION
One of the problems under present FCRA is that you never know why you have been refused
registration.13 There have been some cases where the applicants have gone to court over this.
In the new Bill, grounds for rejection have been specifically listed:14
9
See AccountAble 55, page 1. www.AccountAid.net.
Explanation 3, section 2(1)(f).
11
However, the phrase ‘received…from a foreign source in India’ may create some confusion. Does this
mean that the foreign source should be located physically in India? If so, then it may still leave open the
question of subscription charges from foreign-based subscribers or workshop fees from a non-resident
foreign participant.
12
Section 17(2).
13
In a welcome change, the FCRA Department has recently disclosed that an application for registration
may be refused for any of at least twenty-three reasons (A Handbook on FCRA, June 2005).
14
Section 12(3), FCMC Bill.
10
104
(i)
(ii)
(iii)
(iv)
(v)
(vi)
(vii)
(viii)
(ix)
(x)
(xi)
(xii)
(xiii)
(xiv)
a fictitious or benami15 applicant;
has not undertaken meaningful activity in its chosen field; or
has not prepared a meaningful project for the benefit of the people;
has indulged in activities aimed at religious conversion through inducement or
force;
has created communal tension or disharmony;
has been found guilty of diversion or mis-utilisation of its funds; or
is engaged or likely to engage to propagate sedition or advocate violent methods
to achieve its ends;
is likely to use the foreign contribution for personal use or divert it for
undesirable purposes;
has contravened any of the provisions of this Act;
his FCRA certificate has been suspended or cancelled earlier;
has been prohibited earlier from accepting foreign contribution;
If the applicant is an individual, then he has either been convicted or any
prosecution is pending against him;
If the applicant is an organisation, then any of its directors or office bearers has
either been convicted or any prosecution is pending against him;
the acceptance of foreign contribution by the applicant is likely to affect
prejudicially –
•
•
•
•
•
the sovereignty and integrity of India; or
the public interest; or
freedom or fairness of election to any Legislature; or
friendly relation with any foreign State; or
harmony between religious, racial, social, linguistic, regional groups, castes
or communities.
Apart from the above, the application will also be rejected if it is not in the prescribed form,
or is incomplete.16 And, finally, a very welcome change is that the reasons for rejection will be
shared with the applicant in writing.17
6. DECENTRALISATION OF FCRA
Another problem with the present FCRA has been its centralised administration at Delhi. This
causes difficulties for people located in far-off places.
The FCMC Bill introduces the concept of ‘Registering Authority’ as distinct from the Central
Government. It appears that the Government will decentralise registration and administration of
FCRA once FCMC becomes an Act. This will probably be done by setting up regional FCRA
offices.
7. PAYMENT OF FEES
A curious innovation in the FCMC Bill is the introduction of fees. The Bill proposes separate fees
for:
•
•
FCMC registration;18
Appeal against refusal of FCMC registration;19
15
Where the real identity of the person is kept hidden.
Section 12(2) of FCMC Bill.
17
Section 12(4) of FCMC Bill.
18
Section 12(1).
16
105
•
•
•
Renewal of FCMC certificate;20
Appeal against cancellation of FCMC certificate;21 and for
Applying for revision of an order.22
Where does the idea for fees come from? Possibly, this is based on the fact that the Act is
moving from ‘regulation’ to ‘management and control’. Therefore, the people are expected to pay
for the services provided under the Act!
8. THIRTY PERCENT FOR ADMINISTRATION
This is another unique feature of the Bill. The Government will have the power to prescribe the
percentage23 that an NPO may spend on administration.24 How will you calculate administrative
expenses? Well, the Government will make rules for this.25 Why does the Government want to
get involved in something as complicated26 as this? Possibly, this has to do with the new
orientation of the Bill. This is also reflected in the new title: ‘…Management and Control…’
9. FCRA RENEWAL
Under the new Bill, FCMC registration will be given for five years at a time. The FCMC
registration will have to renewed every five years. The renewal process can be started any time
after three years are over.27 This is designed to ensure that an NPO can secure its renewal well in
time. However, the need for asking NPOs to renew their FCMC registration is not clear.
10. FCRA CANCELLATION
The present Act has no formal provision for cancellation of FCRA registration. However, an
organisation can be put on the list for prior-permission or prohibited from accepting foreign
contribution.28 Of course, in practice, this has the same effect as cancellation of FCRA
registration. The FCMC Bill introduces a proper provision for cancellation of FCMC registration.
It also lays down clear grounds for this.29 Once the FCMC registration is cancelled, it will not be
renewed for at least three years. What happens to the amount with the NGO at the time of
cancellation? This money will come into the custody of the Government. The Government will
then manage this money.30
19
Section 12(5).
Section 16(2).
21
Section 14(4).
22
Section 32(5).
23
Government can prescribe a limit not exceeding 30%.
24
Section 8.
25
Section 8 (2).
26
There have been some concerns in the FCRA Department about the high administrative expenses being
reported in the new FC-3. However, no one really knows how much an NPO spends on administration.
Partly this is because expenses are tracked using standard accounting heads, and not on the basis of
functional purpose (administration, program, fund-raising, etc.) of an expense. A restrictive rule like this
may probably lead to more innovative accounting, and a headache for auditors.
27
Section 16.
28
Section 10 of FCRA, 1976.
29
Section 14.
30
Section 15.
20
106
11. SUSPENSION OF FCRA CERTIFICATE
The process of cancellation may take some time. In the meanwhile, the Bill provides for
suspension of FCMC registration. This suspension can be for a maximum period of 90 days.
During the suspension, the organisation can not accept any foreign contribution. What happens to
the amount already received? This can be utilised only with prior-approval of FCRA
Department.31
12. PRIOR PERMISSION
The facility of prior-permission has been retained in the existing form.32 Presently, there is a
maximum time limit of 90/120 days for processing. However, the new Bill does not mention any
time limit for processing the application.
13. INDIVIDUALS WITH A PROGRAM
Under the present FCRA, only organisations are required to get FCRA registration. This happens
if they have a definite cultural, economic, educational, religious or social program.33
Under the new FCMC, the requirement covers all persons having such a program.34 Who is a
person? According to the Bill,35 ‘“person” includes(i)
(ii)
(iii)
(iv)
An individual;
A Hindu undivided family;
An association;
A company;’
While the last two were already covered in the present definition of an ‘association’, the Bill
has added an individual and an HUF36 to the list.
14. CHANGES IN GOVERNING BODY
In 1996, the FCRA Department had modified form FC-8. Accordingly, FCRA registration is
frozen if the changes in Governing Body reached 50% of the members. The registration remains
frozen till the FCRA Department is satisfied about the new members. This change has caused a
lot of confusion among the NGOs, and some people have started avoiding elections.
The new FCMC does not make any mention of this provision. Presumably, this restriction
will be lifted once the new FCMC Bill is passed.
31
Section 13.
Section 11(2).
33
Organisations having other kinds of programs (e.g. health program, sports program, etc.) are not covered
under FCRA. However, none of their objectives should be related to cultural, economic, educational,
religious or social activites.
34
Section 11 (1).
35
Section 2(1)(k) of FCMC Bill.
36
Hindu Undivided Family, a traditional joint family, which is recognized legally as a business unit
assessable to tax.
32
107
15. FELLOWSHIPS
Under the present FCRA, people receiving scholarship or stipend of more than Rs.36,000 per
year are required to report it to the Government37. In the new FCMC Bill, there is no such
requirement.
16. ENHANCED ROLE OF BANKS
The FCMC Bill proposes a formal role for banks in controlling flow of foreign contribution.
Firstly, you can now receive and keep FCRA funds only in scheduled banks.38 Secondly, you can
open multiple accounts in scheduled banks for utilising the foreign contribution.39 Thirdly, the
banks now will have to file regular reports with FCMC Department. These reports will show
details of funds received in the designated primary account. These will also show how much
funds have been transferred to secondary bank accounts. Finally, the reports will show details of
funds withdrawn from these accounts. Fourthly, there is a specific provision prohibiting banks
from allowing credit or withdrawal of foreign contribution to an account,40 unless the concerned
person has FCMC registration or prior permission.
17. UTILISATION RECORD
Presently, every organisation registered under FCRA has to keep separate account books. In case,
the contribution is in kind, then they have to maintain a register in form FC-6 also. The FCMC
Bill talks41 about a record showing how the foreign contribution has been utilised. This appears to
include foreign contribution in kind as well as in currency. The nature of this requirement will
probably become clearer when related rules are framed.
18. AUCTION OF ASSETS
Another new provision42 concerns disposal of FCRA assets. The Government will now have to
power to direct that any particular assets, created from foreign contribution, should be disposed
off. The procedure for this will also be prescribed by the Government.
19. THE OFFENCE OF FALSIFICATION
The FCMC Bill also introduces a new Section 33.43 Suppose a person has made a false statement,
or has falsified any document, record, or account books, etc. Then the person can be punished
with imprisonment extending up to five years. Suppose the person did not falsify the records, but
was aware of it? In some cases, the person may still be held liable. This would happen if the
person was duty-bound to check the records properly or make sure that the documents were
properly made out. While the Bill does not say this clearly, this provision may cover persons such
as accountants, chief functionaries and even auditors!
37
Section 7, Rule 5 of FCRA, 1976.
These banks are directly regulated by the Reserve Bank of India.
39
Discussed separately under ‘4.MULTIPLE BANK ACCOUNTS’ on page 102.
40
In case the person is required to get registration or permission under section 12.
41
Section 19.
42
Section 22.
43
Section 33.
38
108
20. PROHIBITORY POWERS
Under the present FCRA, the Government can direct that a particular person or association will
need prior-permission to accept any foreign contribution. Once the FCMC Bill is passed, this
power will be expanded substantially. The Government will be able to put the following on the
prior-permission list:
•
•
•
•
An entire class of persons or associations registered under section 12;
Any geographical area;
Any specific purpose;
Any specific source.
How will this work in practice? The Government could say, for example, that no foreign
contribution can be accepted by any religious organisation. Or it could say that no foreign
contribution can be accepted for a particular state. Similarly, it could say that no foreign
contribution can be accepted from XYZ agency.
From an enforcement point of view, this provision is designed to help the Government
micromanage the foreign contribution in a more efficient manner. A further extension of this
power is contained in section 45. This allows the Government to issue directions regarding how
foreign contribution will be received and the purpose for which it shall be utilised.
21. SUNSET CLAUSES
What will happen to the present FCRA? It will be withdrawn once the new Bill is passed. NGOs
registered under the existing FCRA will be given some time for the changeover. There are two
important provisions regarding this.
GRACE PERIOD FOR REGISTRATION UNDER THE NEW ACT
NPOs which are already registered under the present Act, will not get automatic registration
under the new Act. They will need to apply under section 12 and obtain a new certificate. This
must be done within two years from the date the new Act is implemented. This means that the
present FCRA registration will be valid for another two years after the new Act is passed. An
interesting practical question arises. Once the Act is implemented, all NGOs already registered
will apply again for FCRA registration. This may mean that some 15-20,000 organisations will
apply for re-registration in about 3-6 months’ time. How will the FCRA Department deal with
this rush?
APPLICABILITY OF OTHER PROVISIONS
What will happen to such NPOs during the grace period? They can continue to receive FCRA
funds. However, any foreign contribution received during this period will be treated as received
under FCMC Act.44 What does this mean in practice? Simply that such NPOs will have to file
returns in the new formats. Also their transactions will be governed by new provisions.
22. PASSING ON THE FUNDS
44
What happens to the unspent foreign contribution already in FCRA bank account? Will this also be
governed by FCMC? The Bill is silent on this.
109
Under the present FCRA, NPOs are not allowed to pass on foreign contribution to other NPOs,
which do not have FCRA registration. However, this is not clearly specified in the Act, but is
stated in the Ministry’s letter of registration. The FCMC Bill will make this position stronger by
introducing a specific provision.45
23. APPEAL TO GOVERNMENT
A new provision46 in FCMC Bill relates to revision of orders. Under this provision, the
Government can revise an order which it had issued earlier.
This can be done by the Government on its own. For this, there is a time limit of one year.
The revision can also be done if an FCMC registered organisation applies for revision. In such a
case also there is a time limit of one year. This will be calculated from the date the order was
received by the organisation. In some cases, this time limit can be ignored by the Government.
As mentioned earlier, a fee will have to be paid to the Government for the appeal.
OTHER CHANGES
There are other changes in the Bill which do not concern NPOs directly. These are discussed in
the following paragraphs.
1. ASSOCIATION
The definition of ‘association’ is being revised to exclude Government NGOs and corporations.47
This would mean that an organisation like CAPART would not need FCMC registration to accept
funds from a foreign source.
But what happens if such a Government society decides to pass on such funds to a normal NGO?
Our reading is that FCMC would become applicable to such funds.48
2. GIFTS FOR PERSONAL USE
The FCMC Bill also proposes to raise the limit on this from the present Rs.1,000. A gift given to
someone for his or her personal use will not be considered foreign contribution. However, the
market value of the gift should not exceed Rs. 10,000.49
3. RECEIPTS FROM RELATIVES
Certain persons in sensitive public positions can not receive foreign contribution. This provision
has been carried over from the present FCRA, without any change.50 However, these persons can
receive gifts from their relatives. This is also a carryover from the present FCRA. However, under
the present FCRA, an intimation should be given to the Government when they receive such a
gift. Further, permission from the Government is required if the gift is more than Rs.8,000 per
year. Under the new FCMC Bill, both these requirements will be removed. No intimation will be
required. Also, no permission will be required, irrespective of the value of the gift.
45
Section 7.
Section 32.
47
Section 2.
48
Explanation 1 to section 2(1)(f).
49
Section 2(1)(f)(i).
50
Except for extending the restriction to persons in electronic media.
46
110
4. ELECTRONIC MEDIA
As mentioned in an earlier issue of AccountAble,51 FCRA does not cover electronic media. After
the electronic media was opened to private sector in 1990s, this could have become a loophole.
The FCMC Bill proposes to rectify this. Accordingly, organisations that are producing or
broadcasting news will be covered by the restriction. This news may be audio or it may be
audiovisual. Also covered are organisations producing or broadcasting any programs on current
affairs through an electronic mode. Further, any correspondent or editor of such organisation is
also prohibited from accepting foreign contribution.
What does this leave out? Well, organisations producing documentaries are not covered.
However, these documentaries should not be related to current affairs. What about broadcasting
of news through the Internet? Such news does not fall in the category of audio news or audiovisual news. It would also not be classified as a current affairs program. Surprisingly, owners of
such organisations are not covered by the language of the section.52 This is contrast with the
language used in the preceding segment related to newspapers.53
A practical problem may arise due to structure of the section. Suppose an NGO wishes to
produce a documentary on environmental issues. The documentary is being funded with foreign
contribution. Would this NGO be able to approach a commercial studio which produces various
kinds of programs, including audio-visual news? Would the payment of fees to the studio be
foreign contribution? This is not clear from the language of the Bill.
5. ORGANISATIONS OF A POLITICAL NATURE
The restrictions on organisations of a political nature have been amplified. Presently, these
organisations are allowed to receive foreign contribution, only after getting prior-permission in
each case. Once FCMC Bill becomes law, the option for prior-permission54 will not be available.
Thus, such organisations will not be able to access foreign contribution at all. What kind of
organisations are considered to be organisations of a political nature? These are mainly student
unions, trade unions, or organisations with links to a political party.
LOOKING INTO THE FUTURE
The new Bill’s potential for bureaucratic harassment is generating some concern in the NGO
sector. The Bill is likely to see a lively debate, and some lobbying too. One can also not be sure
that the Bill will actually become law – historically, this is the fourth attempt to strengthen FCRA
since 1988. The other three did not see the light of the day, as the Government changed before the
law could be pushed through!
Copyright information: © AccountAid India 2005 All rights reserved. No part of the publication
may be reproduced or transmitted in any form or by any means, without prior permission of
AccountAid India, in writing.
51
AccountAble 55: Puzzles of FCRA, page 2, www.AccountAid.net.
Section 3.
53
Section 3.
54
Presently granted against form FC-1.
52
111
However, AccountAid India encourages reproduction or re-distribution of this material in
workshops or through non-profit / academic institution newsletters for non-commercial use,
provided the source is acknowledged. Your use must not affect our rights to the material
adversely. Copyright material of AccountAid™ India. Used for noncommercial purposes under
general permission.
112
PAKISTAN
COUNTRY NOTE FOR PAKISTAN
BY NASIRA RAZVI
For the IJCSL country note on Pakistan, please see http://iccsl.org/pubs/pakistan_country.pdf or
go to www.iccsl.org documentation center under Pakistan Country Reports. 111
113
SUB-SAHARAN AFRICA
SOUTH AFRICA
INTRODUCTION
BY IJCSL STAFF
This issue of IJCSL features a “Point-Counterpoint” discussion of proposed changes in the legal
framework for NPOs/PBOs in South Africa. Under the leadership of the Charities Aid
Foundation Southern Africa (CAFSA) and the Nelson Mandela Foundation, workshops were held
in Johannesburg in June to discuss a proposal for a “single regulator” in South Africa. The slides
from those meetings, prepared by Yvonne Morgan of CAFSA, make the case for a single
regulator in the context of CAFSA’s Governance Initiative. The Counterpoint argument is made
by Karla Simon, Editor-in-Chief of IJCSL.
114
HOW IS GOOD GOVERNANCE ACHIEVED?
BY YVONNE MORGAN
Please see the iccsl.org publications document center to view a South African-based PowerPoint
presentation asking, “How is Good Governance Achieved?”
115
SOUTH AFRICA UPDATE
BY KARLA W. SIMON*
It is always interesting to be back in South Africa, as I now am every year, but it is particularly
interesting this year because of several developments with regard to the legal framework for civil
society organizations (CSOs) in the country. Various initiatives are underway, reports are coming
out, and new research has been launched. This short paper reflects on some of the developments.
Looking back to 1996. Having been involved with the development of the legal framework for
CSOs in South Africa since 1993, when DRC contacted me as a technical expert, it is quite
fascinating to see the way in which the current debate reflects much of what was discussed a
decade ago. Looking, for example, at the book CIRCLE OF POWER, which was published by the
Development Resources Centre in 1997, and which reports on the regional conference sponsored
by DRC, MWENGO, and ICNL (of which I am a co-founder) held in 1996, one sees that the idea
of an “independent regulatory body” to register all NPOs in South Africa was raised then. This
idea has come up again now, as will be discussed below.
What happened after 1996 was that:
•
•
•
The NPO Act was adopted in 1998;
The Fund Raising Act was repealed and no fundraising regulations have replaced it;
and
Amendments to the Income Tax Act were made in 2001 (with subsequent changes),
which improved the fiscal benefits for public benefit organizations (PBOs) and their
donors.
Under the current legal regime, NPOs may register as:
•
•
•
•
Section 21 Companies with the Department of Trade and Industry (DTI);
Trusts, under the Trust Property Control Act, with the Master of the High Court;
Not-for-profit cooperatives with the DTI;1 and
As NPOs under the NPO Act, with the NPO Directorate in the Department of Social
Development.
Unincorporated voluntary associations may obtain registration as NPOs, which means that
community-based organizations (CBOs) are generally not regulated, except by the NPO Act.
There is, however, centralization of registration and oversight in South Africa under all but one of
the pieces of legislation. Registration must be done in Pretoria.2 There are no provincial
*
Professor of Law, Catholic University of America (CUA; Editor-in-Chief, IJCSL. The author is grateful
to Yvonne Morgan of CAFSA, whose slides are published in the online edition, for her assistance in
providing information about various developments. She also wishes to thank Lee Irish and Richard
Rosenthal for their discussions and input; Lee Irish assisted in editing the paper. The author is also grateful
to Alaina Van Horn, a third year law student at CUA for assistance with footnotes.
1
Under the 15 April 2005 legislation. For more on this, see Tessa Brewis, DTI Takes Over The Regulation
of Co-operatives, in SIYAKA TODAY, June 2005, available at www.npc.org.za.
2
This is in contrast to federal systems such as those in the United States and Canada. In those countries
incorporation is accomplished at the state or provincial level. It is also important to note that ICCSL’s
project in Ghana is proposing a form of district-based organization for smaller entities. See www.iccsl.org
(Ghana Projects).
116
registration bodies or branches of the NPO Directorate; such branches could simplify registration
as well as reduce costs for smaller organizations. There are also no provincial bodies to oversee
NPOs – all oversight comes from Pretoria. With respect to charitable trusts, however, there are
High Court offices in each of the provinces. Commentators in South Africa suggest that this does
not serve well as a regulatory matter,3 but it is clear that the possibility of regulation by the Master
of the High Court exists. On the other hand, the High Court does not require annual financial
reports from charitable trusts.
If an NPO wishes to obtain PBO status, it must apply to the South African Revenue Service
(SARS) for exemption and tax deductible status (there is not an entirely congruent set of purposes
for PBO and tax deductible status). According to the legislation as written, a PBO must first be an
NPO, and only once it has been registered under the NPO legislation can it obtain PBO status,
which is crucial for fund raising purposes.
What is happening in 2005? At the present time discussions of alternatives to the existing
regulatory scheme have begun. For example, the Charities Aid Foundation Southern Africa
(CAFSA) and the GuideStar South Africa Exploratory Project of the Nelson Mandela Foundation
(NMF) hosted two workshops in June to discuss various initiatives,4 and it is said that the
Ministry of Finance is also considering reform proposals.
There are obvious problems with the law as it is written, which include:
•
•
•
•
Over-centralization;
No regulation of fund raising whatsoever;
Tax benefits too limited and system for obtaining them too complicated;
Too many steps for registration (some people complain about this, and it may well be
true, especially because the NPO Act requires a “third” step, which is not entirely
necessary for Section 21s and charitable trusts).
Nonetheless, it seems clear that it is the application of the legislation – not what it actually
provides, in most instances -- that has caused the greatest difficulties and the need for discussion
of alternatives to the current system.
The alternatives that are now being discussed include:
•
•
Review of the Companies Act (to ring-fence the registration and oversight of Section
21 Companies within the DTI and to provide for more effective governance of
Section 21 companies5);
The CAFSA Governance Initiative, which proposes
o A “Code of Good Governance”6 and
o An “independent regulatory authority” for all NPOs;7
3
Email from Yvonne Morgan, CAFSA, of 7 July 2005, on file with the author.
See the Yvonne Morgan, CAFSA, slides from the presentation, which are included in the online edition.
5
For example, there are no current requirements with regard to governing board membership, whereas the
proposal would require five member boards, with no than two members being related by blood or marriage
6
See presentation by Yvonne Morgan, CAFSA, at a meeting in Johannesburg on 23 June 2005, published
in the online edition. CAFSA was asked to undertake this project after a conference on “Governance and
Accountability for the Non-Profit Sector in Southern Africa” was held in May, 2004. A representative
Advisory Committee was formed to oversee the project. See email from Yvonne Morgan of 13 July 2005,
on file with the author.
4
117
•
•
•
The GuideStar project of NMF, which proposes to develop a new online resource for
publication of NPO reports and financial information;
Tax simplification and changes in the trading rules (announced by Finance Minister
Tervor Manuel in his 2005 Budget); and
More in-depth reform of the tax system, as discussed by the Nonprofit Consortium
(NPC).8
These discussions are taking place against the background of two pieces of useful research.
The first is the study prepared by Dave Husy of Umhlaba Consultants for the NPO Directorate,
which has yet to be published.9 The second is new comparative research that is being conducted
by Tamuka Muzondo, a Zimbabwean lawyer, in connection with his Ph D in law, which he is
doing at the University of KawZulu Natal. The concept paper for that project is available on the
ICCSL site.
This paper will address the issues being raised at this time in order:
•
•
•
•
•
General legal framework and the idea of an independent regulator;
Fund raising regulation;
Self-regulation (including some suggestions for SANGOCO and SAGA);
State support for the sector; and
Fiscal framework – large ideas as well as small ones.
General legal framework and the idea of an independent regulator. In most countries in the
world becoming a legal entity is accomplished through an incorporation or registration process. In
many large countries, the process is accomplished at the state or provincial level, on the theory
that such more localized authorities have better access to information about NPOs and their
operations and hence can better exercise oversight than can a national authority.10
The proposal for a single independent regulatory body for all NPOs in South Africa is
inconsistent with accepted legal regimes in all parts of the world. There is in fact no need to have
a single regulatory body, for several reasons:
1.
The reforms that will be developed for the Section 21 companies will improve what
is already thought to be a useful piece of legislation. In addition, according to recent
studies, the DTI already does a fairly good job with Section 21s. And the framework
for oversight seems to be in place. One issue that was raised in the drafting period for
7
See Yvonne Morgan, “The Potential for an Independent Regulatory Authority for NGOs in South Africa,”
The International Journal of Not-for-Profit Law Vol. 7, Issue 3, June 2005, available at
http://www.icnl.org/JOURNAL/vol7iss3/ar_morgan.htm.
8
See Kyle Reinecke, Tax Research Receives A Boost With International Centre for Non-Profit Law (ICNL)
Visit, in SIYAKA TODAY, June 2005, available at www.npc.org.za.
9
References to the Study’s findings come from an interview with David Husy on 22 June 2005. Critical
comments on the Study are available from the Legal Resources Centre (LRC) and CAFSA and are on file
with the author.
10
In the current debates in the United States, reforms of NPO regulation at the state level are proceeding
alongside reforms of the tax system, which is administered at the national level. For one example of recent
state legislation, see Thomas Silk & Rosemary Fei, EXPLANATION OF CALIFORNIA’S NONPROFIT
INTEGRITY ACT OF 2004 (SN 1262), in the January 2005 issue of IJCSL, available at www.iccsl.org.
The federal legislation is expected to be developed over the course of the next few months. See the Report
of the Panel on the Nonprofit Sector, available at
http://www.independentsector.org/media/20050622_Panel_Report.html.
118
2.
3.
the NPO Act is whether a simpler piece of legislation might be warranted, along the
lines of the Revised Model Nonprofit Corporation Act in the United States.11 Given
the inadvisability of trying to import something so foreign into the legal system of
South Africa,12 it is probably most useful to go with the proposed revisions to
Section 21, while at the same time studying various alternatives, such as the
Charitable Incorporated Company (CIC) being developed in the UK,13 and the new
federal NPO incorporation legislation in Canada.14
The trust registration and regulation process is not under discussion at the present
time.
The NPO registration process is the one that comes in for the most criticism. The
NPO. Directorate is criticized for:
• Its backlog of roughly 3000 applications;
• The average turn-around rate of 6-8 months (the NPO Act requires a 90 day
turnaround);
• The fact that it does not report to Parliament, as required by the NPO Act; and
• The fact that it cannot deliver support services because it is under-resourced.
This situation can be fixed, and David Husy’s study will suggest several alternatives to
remedy it.15 Some will require funds, some will require human resource capacity-building, and
some will require changes in the existing legislation, including, perhaps, moving the Directorate
from Social Development to the Deputy President’s Office.16 The system is not so badly
administered that it cannot be fixed, and the idea that something new will come along and remedy
all the current ills is not consistent with legal realities.17
It is also important to remember that the only organizations that really need the NPO
Directorate are the CBOs and voluntary unincorporated entities. Section 21s and not-for-profit
cooperatives are well-taken-care-of by DTI. Charitable trusts are taken care of by the Master of
the High Court, and it would be entirely possible to introduce legislation requiring that they file
annual financial reports. Certainly the Section 21 regime provides better oversight of the sector
than does the NPO Directorate. Some Section 21s have decided not to register as NPOs, in any
event, and some of them have actually achieved PBO status with SARS.18 It is clear that they
have decided not to do seek NPO status because they believe that they are well-enough regulated
without going through the NPO registration process.
11
Not-for-profit entities are organized under state law. Some states have adopted the Revised Model NonProfit Corporation Act (1986), which is based on the so-called “California Model” of electivity.
12
It should also be noted that the American Law Institute is in the process of developing a very
wideranging study of the current legal system for NPOs in the United States, and it would be helpful to
access those documents as well, when considering reform proposals for South Africa.
13
House of Commons Standing Committee Debates: Companies (Audit, Investigations and Community
Enterprise) Bill [Lords] Standing Committee A, September 16, 2004, text available at
http://www.parliament.the-stationery-office.co.uk/pa/cm200304/cmstand/a/st040916/am/40916s01.
htm#end.
14
See Robert Hayhoe, Country Reports: Canada, International Journal of Not-for-Profit Law Vol. 4, Issue
4, available at http://www.icnl.org/JOURNAL/vol4iss4/cr_na.htm.
15
Although David Husy told us various things, it would be unfair to attribute too much to an unpublished
study, which will certainly be subject to review and criticism when it comes out. Other suggestions for
reforms are appended to this paper.
16
This would be consistent with the situation in Tanzania, where the NPO regulation body is under the
Vice President.
17
It is interesting to note that Russell Ally, Director of the CS Mott Foundation in South Africa, seems to
share this view.
18
See notes of discussion with David Husy, on file with the author.
119
It is also useful to note that in all countries or states in which an independent regulatory body
exists, the commissions, etc., are all set up solely for the purpose of establishing and regulating
public benefit status, which is done AFTER the organization is registered or incorporated19 We at
ICCSL have proposed such a PBO commission structure in the book we wrote (together with Rob
Kushen) for the Open Society Institute (OSI), GUIDELINES FOR LAWS AFFECTING CIVIC
ORGANIZATIONS.20 We have also proposed such a structure for China.21
The model for any PBO commission is the Charity Commission of England and Wales,
which has existed for many years.22 New PBO Commissions or commission-type structures have
been established or are being established in:
•
•
•
•
•
•
India (Maharashtra and Gujurat states) (1966);23
Russia (Moscow and St. Petersburg) (1997);
New Zealand (2005);
Scotland (2005);
Northern Ireland (pending); and
Japan (pending).
Commissions have been rejected in Canada (proposed by the Broadbent Commission)24 and
Australia (the Industry Commission study),25 Hungary and Poland.26 We have made a proposal for
a PBO Commission in the United States (with potential solutions for a federal system) but that
proposal has not been actively considered.27
None of the existing or proposed commissions is entirely independent of government. The
Charity Commission has actually become more independent in the last year, due to the failures of
the prior system when the Commission was headed by a Chief Commissioner who was a civil
servant in the Home Office. The new structure includes a Chief Executive, who has been
appointed from outside and who has much administrative experience. For further information on
the changes in the Charity Commission, we recommend studying the various documents on the
Commission’s website.
In addition to government-related commissions, there are two existing models of outsourcing
to a completely independent body (an NPO) the responsibility for determining whether a PBO
may receive tax benefits. This has occurred in only two countries, The Philippines28 and
19
See text below.
See (hereinafter OSI GUIDELINES).
21
OSIGUIDELINES Section 3.2 B.
22
See http://www.charity-commission.gov.uk/.
23
In India “charity” is a state matter. See Sampradaan, Workshop on Effective Governance Through
Effective Boards, http://www.indianngos.com/sampradaan/news.htm. See also P. Ishwara Bhat’s paper,
published elsewhere in this issue of IJCSL.
24
The Panel on Accountability and Governance in the Voluntary Sector, "Building on Strength: Improving
Governance and Accountability in Canada's Voluntary Sector," February 8, 1999. Chaired by the former
head of the New Democratic Party in Canada, Ed Broadbent, it is most commonly referred to as the
Broadbent Report. So titled it can be found on the web at http://www.vsrtrsb.
net/pagvs/Building_on_Strength.htm.
25
See http://www.vsi-isbc.ca/eng/regulations/reports.cfm.
26
Notes on work done by Leon Irish and the author when they were with ICNL.
27
See A PBC for the US?, testimony presented by ICCSL to the Senate Finance Committee in August
2004, available at www.iccsl.org.
28
See Special Section on Self-regulation, October 2004 issue of IJCSL, available at www.iccsl.org.
20
120
Pakistan,29 but those are countries in which the state is relatively weak and the NPO sector is
comparatively strong (at least in The Philippines).30 This model is irrelevant to South Africa,
where the state is quite strong and the CSO sector is relatively weak and unable to self-regulate.
There will be more discussion of this in the section on self-regulation.
Fund raising regulation. It was shocking to be in discussions about the current legal framework
and to learn from Frances Lake of the Southern African Institute for Fund Raising, that the repeal
of the apartheid-era legislation has meant that there is no regulation of fund raising in South
Africa whatsoever.31 Even the United States, which has an interesting legal situation because of
the First Amendment,32 allows states to regulate fund raising for the purpose of consumer
protection. And in other countries, such as the UK and Canada, fund raising regulation is much
more extensive.33
On the other hand, since self-regulation is so much the watch-word in South Africa these
days, it must be noted that in the Netherlands, fund raising is entirely self-regulated by the
sector.34 As Wino Van Veen, a professor at the Vrieje Universitet in Amsterdam told the 1996
conference, this works well in the Netherlands, which is much smaller and, until fairly recently,
was a great deal more homogenous than South Africa.35 This is an alternative to be considered,
however, and it will be mentioned again in the self-regulation section.
Self-regulation (including some suggestions for SANGOCO and SAGA and NPC, NMF, and
CAFSA). One of the things that strikes outsiders like Leon Irish and myself looking into the
capacity of the CSO sector in South Africa today is seeing the extent to which the vibrancy of ten
years ago has diminished. It is tragic to see this. This is a sector that can be strong and
selfregulate, but it seems not to be able to do that effectively. SANGOCO, for example, has only
4,000 members, with the sector estimated to include 34,000 registered entities.36 As Tamuka
Muzondo37 has said in conversations, a membership of one-tenth of the registered entities is not
adequate to call the organization representative!
Does that mean that CAFSA’s call for a new Code of Good Governance is necessary?
Probably not. CAFSA is not a membership organization and represents only itself. What is
needed is a strong membership body to represent the NPOs in South Africa, and which will adopt
and enforce a Code of Conduct or Good Governance.38 In order to accomplish that, it would be
silly to throw out the baby with the bathwater. What would be highly desirable is:
29
Id.
Id.
31
Notes of meeting on 23 June 2005.
32
See U.S. Const. Amend. 1.
33
See Statutory Instrument 1994 No. 3024, The Charitable Institutions (Fund-Raising) Regulations 1994
for the UK, and, see ALBERTA REGULATION 108/2000 Charitable Fundraising Act, CHARITALBE
FUND RAISING REGULATION, available at http://www.qp.gov.ab.ca/documents/regs/2000_108.cfm.
34
National Institute of Fund Raising.
35
Wino Van Veen paper on file with the author.
36
We are discounting the 99,000 entities mentioned by the JHU study by Mark Swilling and Bev Russell,
THE SIZE AND SCOPE OF THE NON-PROFIT SECTOR IN SOUTH AFRICA, Johannesburg, 2002.
37
Tamuka Muzondo is an ACCSL Research Associate and a candidate for a PhD in law at the University
of KZN.
38
One of the things that I always found remarkable about SANGOCO in the early days was that the current
Code of Conduct was originally adopted in the Western Cape provincial body, and then by the national
30
121
•
•
•
•
A serious audit and evaluation of SANGOCO (HR and finance);39
A fully representative discussion about SANGOCO’s future;
Some recommendations for reform; and
Their implementation (with support from South African funders; see below).
Only with a strong representative organization, similar, for example to Independent Sector
(US), NCVO (England), SCVO (Scotland), etc. can the sector have the weight it needs to
effectively advocate for better pro-poor policies, in favor of ARVs, etc. It must also be able to
advocate effectively in favor of itself, for better tax benefits for example. The remarkable “Panel
on the Nonprofit Sector,” convened by Independent Sector and financed by some of the large
foundations in the US, shows how effective a sector-wide lobbying campaign can be.
Similar developments in Canada, England, Scotland, Northern Ireland, South Korea, and
several countries in Central and Eastern Europe have led to the development of “Compacts” and
other supportive mechanisms for NPO support and involvement with the state in constructive
ways.40
In Tanzania and Ghana, the sector and the state have worked on similar “NGO Policy”
papers, which are implemented through new legislative efforts.41 In Ethiopia, the adoption of a
Code of Conduct by the sector preceded and strengthened its efforts at negotiating new legislation
that will be more enabling (we hope!)42 And in Botswana, the BOCONGO Code of Conduct
appears to be effectively administered by the sector and allows the sector a fair measure of
independence.43
To further invigorate the sector, other sector support organizations must also be strengthened,
and new funding avenues must be opened in order to accomplish that result. For example, we are
also recommending a similar process for SAGA:
body and the other provincial bodies. Notes of conversations with Rams Ramashia and Kumi Naidoo on
file with the author.
39
Some funders would prefer to simply move on and see the development of a new sector apex body,
perhaps growing out of sub-sectoral apexes that are forming (e.g. in health advocacy, against crime, etc.) In
this regard, Shelagh Gastrow’s organization, Inyathelo, is assisting the development of sound governance,
etc.
40
See Compact between the government and the voluntary sector in Wales:www.officialdocuments.
co.uk/document/cm41/4107/4107.htm; The Scottish Compact:www.scotland.gov.uk/library/documentsw3/comp-00.htm; Compact between government and the voluntary and community sector in Northern
Ireland:www.nicva.org/compact.html; Compact on relations between government and the voluntary and
community sector in England:www.homeoffoce.gov.uk/acu/compact.pdf; Working together: a government
of Canada/voluntary sector joint initiative. Report of Joint Tables:www.web.net/vsr-trsb/publications/pcoe.pdf; Draft of the Estonian Civil Society Development: http://www.ngo.ee/; National Program for the
Cooperation between the Government of the Republic of Croatia and Croatian Civil Sector “Together for
Better”:http://www.uzuvrh.hr/eng/suradnjaENG.htm.
41
See Comprehensive Policy Framework for the Not-for-profit Sector in Ghana Draft Discussion
Document:http://www.icnl.org/library/africa/drafts/ghafinaldraftngos.htm; see Inter-Action: Africa Liaison
Program Initiative (ALPI) for information on Tanzania, available at
http://www.interaction.org/alpi/enews/enews_july04.html.
42
See International Center for Not-for-Profit Law, featured article by Eddie Adiin Yaansah, Code of
Conduct for NGOs in Ethiopia, available at www.icnl.org/journal/vol1iss3/self.html.
43
See Botswana Council of Nongovernmental Organisations (BOCONGO) Code of Conduct, available the
BOCONGO homepage: http://www.bocongo.bw/.
122
•
•
•
•
A serious audit and evaluation of SAGA (HR and finance);
A fully representative discussion about SAGA’s future;
Some recommendations for reform; and
Their implementation (with support from South African funders).
This last point is critical. Although the Ford, Mott, and Open Society foundations are critical
to the continuing support of sector initiatives, they are not the organizations that should be
providing long-term support for civil society infrastructural organizations such as SANGOCO,
SAGA, NPC, and CAFSA. Those organizations should be supported by local private foundations
and corporates.
It is important to put this issue squarely to the large South African funding bodies, such as
Ackerman, De Beers, Anglo, etc.44 The effort to enlighten these funding sources can and could be
led by the Ford and Mott foundations, because they are precisely two of the organizations that led
the effort to provide for infrastructural support organizations such as Independent Sector, the
Council on Foundations, and the Foundation Center.45 South African funders must be convinced
that these types of organizations are important not only for civil society but for the long-term
success of democracy in South Africa. And they must then take on the funding task themselves.46
With respect to another thread, which is the development by the Nelson Mandela Foundation
of an initiative similar to GuideStar in the United States. While we are well aware of the existing
structures (SANGONET and Prodder), we fully agree with the NMF approach – the database on
CSOs should be regarded as a public asset and should not be owned by anyone with other
objectives. That is the way GuideStar is structured, and that is why it is so effective.
It is even more crucial to have this sort of database in South Africa than in the United States.
The reality is that Form 990’s, the tax return that all NPOs (except for small ones and some
churches) file in the US are by law public documents. While other tax returns are not (and are
protected by privacy legislation), organizations that have tax exempt status must make their
returns publicly available (with certain sensitive data redacted). Those returns also disclose the
salaries of the five highest paid employees, the names of major donors, etc. For public oversight
of the sector to be effective, it is necessary to have this information made public (see below,
under tax changes).47
State support for the sector. In the previous section I referred to state-NPO interactive
mechanisms. In this section I will discuss state support. Many NPOs in South Africa are
implementers of state policies by carrying out projects that are funded by contracts or grants from
the government. Although this is as it should be (at least so long as it is supported by fair
44
Zohra Dawood, of OSF South Africa, reports that corporate funders are involved in supporting CSOs
through Business Against Crime, but this is only a small segment of CSOs. Notes of conversation on file
with the author.
45
A similar process has occurred in Europe, where Mott, in particular, has seeded the effort to make the
European Foundation Centre not only effective but also to become more fully supported by European
foundations. It will be interesting to learn lessons from Gerry Salole as he tries to further that effort, and
those lessons can be useful for SAGA.
46
It may be perceived as safer to avoid funding sector support organizations because to do so might be in
incur the wrath of the ANC. That alone should cause funders to think more carefully about what they are
doing!
47
It is useful to recall that Atlantic Philanthropies violated this important principle of disclosure for many
years!
123
procurement practices), this is one aspect of the current legal framework that has led to a certain
amount of chaos with respect to the NPO Directorate. According to David Husy, because
agencies need to push funds out the door and get projects underway, they are simply not requiring
that the organizations actually have registered NPO status before they receive the state funds.48
Surely this glitch in the system needs to be addressed.
Another issue to consider is whether the government should establish a mechanism that
would allow NPOs with innovative projects to suggest them to the state for funding, as an
alternative to mere outsourcing to NPOs government-created projects to NPOs. The example of
the state subsidy system in South Korea that is discussed in a Ministry of Government
Administration and Home Affairs (MOGAHA) document, published by IJCSL in its April 2005
issue, explains how this works. Such a mechanism might be very encouraging for South African
civil society.
Other similar mechanisms exist in Central and Eastern Europe. A paper analyzing these can
be found in the October 2004 issue of IJCSL.49
Fiscal framework – large ideas as well as small ones. In his 2005 budget speech, Finance
Minister Trevor Manuel suggested two small changes in the current tax rules for PBOs. One of
these would create a simplified process for registration for smaller organizations. The other would
revamp the trading rules by permitting partial exemptions. Adoption of these changes would be
good steps.
We also learned from Mark Kingon that the Tax Exemption Division of SARS will soon have
a new Director, who can help clear the backlog of some 4000 exemption applications.50 This is a
very important practical development.
In the meantime, however, there is a need to think more broadly about the tax issues, something
that NPC intends to do with the help of ICNL and ICCSL. Here are some suggestions:
1. Percentage designation laws. Although it is doubtful that the deduction limit
will be raised due to the general theory of South African democracy,51 it might be
useful to consider adopting a “percentage designation law” to permit more South
Africans to become involved with civil society. These laws permit citizens (and
in some cases corporate bodies) to designate that a small portion (1% or 2%) of
their taxes must be paid over to a named NPO.52 After having been adopted in
Italy and Spain in the 1980’s to replace direct church taxes, these laws have
become all the rage in Central and Eastern Europe; similar mechanisms have
been adopted in Chiba Prefecture in Japan and are being considered in Mongolia.
The enormous success of raising funds for the sector through this mechanism in
48
Notes of conversation on file with the author.
See C.J. Albertie, Public Benefit Organization Funds in the Czech Republic, Hungary, and Croatia,
available at www.iccsl.org.
50
Notes of conversation on file with the author.
51
The deduction limit for cash donations in the United States is 50% of adjusted gross income. The US
theory of democracy encourages pluralism and non-governmental solutions to problems, which contrasts
rather starkly with the South African approach of placing most social and economic responsibilities on a
democratically elected government. The latter approach is similar to the democratic theory of France.
52
Percentage designation laws are also relatively inexpensive from a revenue loss standpoint. A chart
comparing tax deductions, tax credits, and tax designation schemes is attached to this paper as Appendix A.
49
124
Hungary is quite interesting. Further information on how the mechanisms work
can be found at www.onepercent.hu.
2. Simplification of the trading rules. The trading rules adopted in the original
South African tax legislation are amazingly complex and probably accomplish
little more than the unrelated business income tax in the United States does. A
paper describing the way in which the rules work using a specific example was
included as an Appendix for the book CHINA’S TAX RULES FOR NOT-FOR-PROFIT
ORGANIZATIONS, prepared by Leon Irish, Jin Dong Sheng, and Karla Simon and
is available at the World Bank Office, Beijing website.53 That paper shows how
the French system – applying a commerciality test similar to the one in South
Africa – works, and provides a rather simpler way of dealing with the issues than
the current system in South Africa.
3. Ownership of trading subsidiaries. The ownership of 100% of the stock of a
trading subsidiary should be permitted, but the US rule and not the English rule
(which permits avoidance of all corporate tax on the profits of the subsidiary)
should apply to taxing the income from it. The subsidiary’s income should be
fully subject to tax, and any income it pays to the parent should be subject to the
same limitations on deductibility as donations by any other corporation.
4. Adoption of special accounting norms. Accounting norms for business do not
work well for the NPO sector because NPOs have distinctly different types of
income and do not distribute profits. Thus, special norms make sense. In
Switzerland the accounting profession went through an elaborate exercise to
adopt special accounting norms for the sector;54 the United States has adopted
special accounting rules for NPOs;55 in England and Wales the Charity
Commission did much the same thing as the accounting profession in
Switzerland;56 in India, the Institute for Chartered Accountants has published a
book setting out accounting standards for NPOs;57 and in China the Ministry of
Finance has done the same.58 While some of the rules, such as mandatory
consolidation (present in the Charity Commission and China Ministry of Finance
documents), are highly controversial, the general trend of developing good
accounting standards tailored to the specific characteristics of NPOs seems to be
gaining momentum.
5. Consideration of an alternative structure for tax exemption. In a paper I wrote
for a seminar in Austria in 2004, I mentioned a recent development in Tanzania,
where the tax legislation treats all NPOs as having taxable businesses and all
sources of income are subject to tax, with only the expenditures for actual public
53
Available at http://www.worldbank.org.cn/English/Publications/topic.asp?topic=2.
See Swiss GAAP ARR norms, containing accounting principles that differ from International Accounting
Standards (IAS).
55
Financial Accounting Standards (FAS) 116 and 117, adopted by the Financial Accounting Standards
Board, a non-governmental standard setter.
56
Charities Statement of Recommended Practice (SORP) 2005 available at www.cch.co.uk/product319.
57
Institute of Chartered Accountants of India (ICAI) has issued a technical guide, “Accounting and
Auditing in Not-for-Profit Organisations (NPO)” available at ICAI site:
www.icai.org/network/finan_msf.html.
58
See China’s NPO Accounting Rules, available on the ICCSL site, at www.iccsl.org.
54
125
benefit purposes being deductible for purposes of computing taxable income.59
This is similar to the tax rules in Japan, where all trade or business income is
subject to tax (albeit at concessional rates), with a deduction allowed for amounts
paid for public benefit purposes.60
6. VAT refunds. So much of the tax debate in South Africa has focused on the
income tax that commentators have not looked into a key issue – the value added
tax. The VAT is usually a far greater burden for NPOs, many of which zero out
their income every year, than is the income tax. It would make a great deal of
sense to permit an annual refund of a portion of the input VAT paid by certain
NPOs engaged in important public benefit activities.61 As we explain in our
book,62 other approaches to reducing the burden of VAT on the CSO sector tend
to be ineffective or to place the burden inappropriately.
CONCLUSION
South Africa has for a long time had good laws permitting the establishment of not-for-profit
organizations, and, since 1994, they have been administered in a fair and nondiscriminatory
manner. The new legislation adopted after the Transition – the NPO Act and the changes in the
tax laws – have been generally well-crafted,63 but they are not working as well as they should.
The largest problem with the NPO Act is that the NPO Directorate is woefully underresourced. It would also strengthen the Directorate if it were moved to a more powerful position
in government, perhaps by having it report to the Office of the Deputy President. The Ministry of
Social Welfare has a vast range of other duties, and not all NPOs conduct social welfare services.
As for the tax laws, they should be both liberalized and simplified. Consideration should be
given to the adoption of a percentage designation law and creating a system for VAT relief for
some public benefit organizations. In addition, serious consideration needs to be paid to adopting
fund raising legislation. Wholly unregulated public appeals are a fertile breeding ground for
fraud.
In sum, although South Africa can be justly proud of the enabling legal environment it has
developed for civil society, much more work needs to be done. South African funders need to
appreciate the importance of the CSO sector and provide it with the resources it needs to
strengthen itself and to advocate effectively for better policies for the country as well as for the
sector.
59
Paper on ICCSL site and also OEFG site.
See Robert Pekkanen and Karla Simon, “The Legal Framework for Voluntary and Nonprofit Activity” in
The Voluntary and Non-Profit Sector in Japan (Stephen Osborne, editor), Routledge Curzon.
61
Distinguishing between levels of public benefit activities with respect to tax benefits is accepted practice
not only in South Africa, but also in other countries.
62
OSI GUIDELINES Section 9.4.
63
Due in large part to very effective lobbying by such organizations as the Development Resources Centre,
under the leadership of Gavin Andersson and Zane Dangor, the Non-profit Partnership, under the
leadership of Eugene Saldanha and Karen Nelson, and the Legal Resources Centre, under the leadership of
Mary Honey and Ricardo Wyngaard. Richard Rosenthal was also a major individual contributor. It is also
important to note that Saguna Gordhan (Department of Social Welfare) and Mark Kingon (Department of
Treasury) were effective governmental partners.
60
126
APPENDIX A
DEDUCTIONS, CREDITS, AND RECLAIMS
Taxable Income
1000,000
5,000
95,000
Deductions
Tax Rate
Tax
40%
40,000
Gov’t Loses
Charity Receives
-0-
Charity
50,000
5,000
45,000
Charity
25,000
5,000
20,000
Charity
40%
38,000
20%
10,000
20%
9,000
10%
2,5000
10%
2,000
2,000 (5%)
5,000
-0-
1,000 (10%)
5,000
-0-
500 (20%)
5,000
Credit
•
•
•
•
TP contributes 5,000 to charity; assume a 50% credit.
5,000 x 50% = 2,500 tax reduction regardless of tax rate.
Charity receives 5,000, the same as in each deduction example above.
The 2,500 credit equals a 6.25% tax reduction for the taxpayer in the 40% bracket, a 25% tax
reduction for the taxpayer in the 20% bracket, and a 100% tax reduction for the taxpayer in
the 10% bracket.
Tax Reclaim Compared to Deduction
Assume: TP’s goal is for charity to receive 1,000. Tax rate = 28%.
1) Deduction:
• TP gives £ 1,000 c harity and deducts £ 1,000 from taxable income.
• TP pays £ 280 less in taxes (1,000 x 28%)
2) Reclaim:
• TP gives £ 780 charity.
• TP gets no tax reduction for this contribution.
• TP pays £ 220 in taxes on the £ 780 contribution to charity (780 x .28 = 220 (rounded).
• Charity “reclaims” from Inland Revenue the £ 220 tax TP paid on £ 780.
• Charity receives: £ 780 from TP + £ 220 from Inland Revenue = £ 1,000.
• Inland Revenue gives up £ 60 less (£ 220 instead of £ 280).
• TP pays lower taxes in the case of a deduction than in the case of a reclaim: the deduction
reduces taxes by £ 280 (£ 1,000 x .28 = £ 280)
• In the case of the reclaim, TP must pay full taxes on the contribution: £ 780 x .28 = £ 220
(rounded).
• In each case, TP is £ 1,000 out of pocket:
Deduction: £ 1,000 contribution but no tax on it.
Reclaim: £ 780 contribution + £ 220 in tax on that amount = £ 1,000
Benefits to government of reclaim system: (1) smaller revenue loss, (2) less fraud, and (3) the
“float” on taxes paid on contribution between the time received and the time the reclaim
amount is paid.
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Tax Designation
Income 100,000, tax rate 40% = 40,000 tax. 1% of 40,000 = 400. Gov’t loses only 400 as
compared to much higher amounts with deductions, credits, etc.
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BOOK REVIEWS
BOOK ANNOUNCEMENT
THIRD SECTOR POLEMICAL ISSUES 2
ORGANIZED BY EDUARDO SZAZI*
This book is the second in a series addressing themes faced by the Brazilian Third Sector, about
which there is a lack of understanding or consensus. It contains a number of analytical and
informative articles by legal specialists, who use the Brazilian legislation as a tool to unpack the
issues. The series is being organized by Eduardo Szazi, a specialist non-profit lawyer. The first
book was launched in 2004, and a total of 10 books, each containing 10 articles, are planned over
5 years.
Since not much research has been done in this field in Brazil and the legislation is very complex
and changes constantly, the series aims to: (i) generate debate; (ii) increase public awareness of
the matters; and (iii) create legal doctrine to influence court decisions.
The latest edition, launched in June, 2005, includes articles on “Reporting for NPOs,” “Heritage,”
“Directors' responsibilities,” “Microfinance,” “Donor's rights,” “Social cooperatives,” “Social
franchising,” and “Public policies.”
The book contains two articles by authors who are contributors to IJCSL: “Reporting for NPO's”
by Daniela Pais Costa and “Donor's Rights” by Laís Vanessa de Figueirêdo Lopes. Besides the
analyses of the Brazilian legislation, international experiences and best practices are also included
in these papers. By doing so, the intention is to bring new elements and approaches to a critical
national discussion.
*
SZAZI, Eduardo. Terceiro Setor Temas Polemicos 2. Organized by Eduardo Szazi. Sao Paulo:Editora
Peiropolis, 2005.
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