Lawsuit Alleges That PayPal Diverted Donations To Different Charities

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Updated at 4 p.m. ET Thursday with Paypal's latest response

A class action lawsuit filed in Illinois on Tuesday alleges that PayPal misled tens of thousands of people about charitable donations made on the company's platform.

Specifically, it says the PayPal Giving Fund would tell users they were donating to a specific organization of their choice, but PayPal would actually redirect those funds to a different charity, without telling the donor or original charity.

Thousands of organizations missed out on donations because of the practice, the lawsuit claims.

PayPal's policies allow for donations to be redirected, but the company denies that it's done without notification — and also denies that it earns any interest in the process.

Not all donations made through PayPal are being disputed in the suit. The case only alleges mishandling of donations on the PayPal Giving Fund platform, not money donated to a charity that simply goes through a PayPal account. And donations to large charities are most likely not affected.

Here's the issue: PayPal offers to use its Giving Fund for donations to organizations that aren't yet signed up on the platform. But, as it acknowledges on its website, it will only distribute money to organizations that have a Giving Fund account, in addition to their standard PayPal account.

Many larger national and international charities have both accounts. But "hundreds of thousands of smaller charities" have not gone through the process, the lawsuit says.

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Nevertheless, those charities are listed on the Giving Fund site, without any indication that they aren't set up to receive funds.

PayPal says that when such a charity receives a donation, PayPal will contact the organization "at regular intervals ... in order to enroll them" — and that after six months, if they don't enroll, the funds may be "reassigned."

The lawsuit, however, says that PayPal and the Giving Fund "generally fail" to inform charities that there are funds waiting for them. Meanwhile, the donor receives a misleading confirmation that their donation went through, and PayPal accrues interest on the donation for six months before redirecting it to another group, the suit alleges.

The donor would continue to believe their donation went through without a hitch, and the would-be recipient of the funds would never know that the donation had been attempted.

The lawsuit was filed by Terry Kass and the nonprofit Friends for Health, on behalf of anyone else who was affected by the practice.

Kass attempted to donate money to Friends for Health and a number of other charities, the suit says, but only $100 of $3,250 actually went through to the organization of her choice. By chance, after talking to one intended recipient, a local legal aid clinic, she realized her donation was missing — and contacted PayPal repeatedly for an explanation.

She was told multiple times that her donations were delivered, the suit says. Then a PayPal employee explained the need for the organizations to register for accounts, and said that otherwise the company would "redistribute these funds to similar charities."

A PayPal spokesperson told NPR by email that the company is reviewing the lawsuit and is "fully prepared to defend ourselves vigorously."

The company says the Giving Fund "does not hold any donations in interest bearing accounts, and therefore earns no interest on charitable donations," and that when a donation is received for a charity that isn't enrolled in the Fund, the company contacts the nonprofit "to notify them of the gift and help them enroll."