Conflict of Interest in an Amuta – Types and Results

What kind of internal conflicts can trouble an Israeli non-profit association? Can an individual continue serving as a board member of a non-profit organization in Israel if their spouse owns a company that provides services to the organization? Previous articles on this website have explored general conflicts of interest in non-profit organizations. In this article, we will focus on specific examples of varying types of conflict of interest in an Amuta.

Member of the Board of an Association – A Volunteer-Based Role for Advancing the Association’s Objectives

An Amuta is a non-profit institution, also known as Mossad Lelo Kavanat Revach or Malachar in Hebrew. It is a separate legal entity that functions to advance public objectives and is managed by the board members of the association. The Association’s Law states that board members and audit committee members cannot be paid for their work. Section 27 of the laws declares that “Board members must work to help the association meet its goals, following its rules and the decisions made by the general assembly.” Acting for the benefit of the association means working impartially to advance the association’s interests, and not further interests of the association volunteer.

Types of conflict of interest in the association – a contradiction between the goals of the association and the goals of its directors

Is there an inherent conflict of interest when an association or its employees enter into a business contract with a company owned by the spouse of a board member? While there is a legitimate concern about potential conflicts of interest in such situations, the guidelines from the Registrar of Associations, as published by the Ministry of Justice, do not impose a blanket prohibition on such contracts involving close relatives of board members. However, it is important to exercise caution in cases where a conflict of interest may arise. Below, we will explore this issue in more detail:

“In a transaction involving the provision of services or goods with a family relative in a position of responsibility, either directly with the person or through a corporation, extra caution must be taken to ensure the association’s interests are protected. Therefore, to ensure the validity of the decision despite any potential conflict of interest, it is fitting to receive approval for this sort of transaction from the audit committee ahead of time, as long as the transaction has decent conditions that are in favor of the association.” 

Explanation of the Term “Provision of Services”:

Other than the prohibition against a board member being an employee of the association or them providing services as a contractor, there is also a prohibition on any other form of engagement between a board member and the association that can result in the board member getting paid by the association (such as renting property to the association or transferring funds to a board member – even indirectly – using another entity that the association contracts). These rules also apply if a board member holds a position or provides services to a company owned by the association. In other words, a board member cannot receive payments through a company, a branch or a daughter company that the association controls.

There is no doubt that contracting with a company owned by the spouse or a close relative of a board member raises a conflict of interest concern. In such cases, the association is responsible for demonstrating that the business engagement with that specific supplier, i.e., the company owned by the board member’s spouse, was made in the best interest of the association based on its objectives.

Approval of the Audit Committee is Mandatory When There is Concern of a Conflict of Interest

In situations where there is a concern about a conflict of interest, it is mandatory to obtain approval from the audit committee and follow the association’s procedures. For instance, an association involved in important activities must have clear written procedures governing those activities. This includes procedures for hiring employees, contracting with suppliers, managing employee attendance, and handling petty cash. These procedures help to ensure the association runs smoothly and consistently. The extent and detail of these procedures should be tailored to the scale of the association’s activities.

What To Do When There is a Fear of a Conflict of Interest? 

To avoid potential conflicts of interest, an association should generally ban any business relationships between board members and service providers. However, since the Registrar of Associations’ guidelines are not entirely clear on this matter, such relationships can proceed if they follow the association’s established procedures and are approved by the audit committee. This is only permissible if it can be demonstrated that the relationship benefits the association and supports its goals. Additionally, the association can seek direct guidance from the Registrar of Associations by submitting a specific query for clarification.

Contact Us if You Have Any Concerns About Any Type of Conflict of Interest in an Association

Our firm specializes in corporate and non-profit law. Should you have concerns that a business transaction by the association might raise suspicion of a conflict of interest, it is advisable to check the situation and finalize or approve the transaction before it is subject to an audit or denial of good governance approval. Contact our law firm in Tel Aviv or Jerusalem to schedule a meeting.

Translated by: Yamit Drotman and Yasmin Dabscheck

 :  :

03-3724722

055-9781688

office@lawoffice.org.il