Money raised by an Islamic charity created to help Canada’s poor and needy instead went overseas, potentially into the hands of violent militants, a government audit has found.

The federal charity watchdog is now threatening to revoke the charity status of Mississauga’s ISNA (Islamic Society of North America) Development Foundation.

A Canada Revenue Agency audit revealed the foundation shipped more than $280,000 to a Pakistan-based agency, cash the government fears went to supporting the Hizbul Mujahideen — a militant group that seeks the secession of Kashmir from India.

The foundation “facilitated the transfer of resources that may have been used to support the efforts of a political organization . . . and its armed wing,” the CRA said in a letter to the charity outlining its findings, obtained by the Star.

“Canada’s commitment to combating terrorism extends to preventing organizations with ties to terrorism from benefiting from the tax advantages of charitable registration,” the CRA letter said.

The charity’s acting president dismissed the suggestion that the money it gave to the Pakistan-based Relief Organization for Kashmiri Muslims may have landed in the wrong hands because of poor oversight.

“The money did not go to any groups who were freedom fighters,” G. Nabi Chaudhary said. “We made sure that all of the money the charity sent to those organizations was spent on the needy, to help the misplaced. We had people on the ground who were working with the relief organizations.”

But the charity failed to show auditors any documents proving it had control over how the money was spent, as the tax agency requires.

Contradicting Chaudhary’s assurance the money was carefully spent, the charity’s board members told auditors the funds were sent abroad with “no strings.”

In fact, the sole scrap of evidence the charity said it had on how its money was spent overseas — photographs appearing to show relief work being done on behalf of the ISNA Development Foundation — was “altered,” auditors said.

A forensic examination determined the pictures of men performing relief work with a banner depicting ISNA Development Foundation in the background had been doctored after they were taken, specifically around the banner.

The charity’s directors told auditors their knowledge of the relief work done in Kashmir is based solely on these photographs.

“Once the money left Canada, (the foundation) had no control over the money, how it was spent or what it was to be spent on,” board members said, according to the CRA.

The CRA’s audit probed the charity’s operations for a three-year period, from 2007 through 2009. Since then, the foundation has sent more than $80,000 to Pakistan.

Several audits launched

The audit is just one of several launched by the federal tax agency into charities affiliated with the Islamic Society of North America Canada, one of the country’s largest Islamic organizations.

The taxman’s probes began after a 2011 Star investigation revealed ISNA Canada, a charity itself, mismanaged more than $600,000, using money donated to help the poor and needy instead on office costs.

At the centre of both controversies is Mohammad Ashraf, the long-time head of ISNA Canada and secretary of the ISNA Development Foundation. Current board members accuse him of running the charities like his own fiefdom, and say he kept other directors in the dark until he was forced to retire in 2011.

In March, ISNA sued Ashraf and two relatives, alleging he misappropriated $400,000 from the organization and used the money to buy his daughter a house. He has filed a defence denying any wrongdoing, claiming the suit is just the latest salvo in a “character assassination campaign” against him and his family.

During his 32-year tenure with ISNA Canada, Ashraf told the Star he never made decisions without approval from the charity’s president and board members.

“This, and other accusations by the (ISNA Development Foundation) board, seem to come out of petty internal politics which seems to be ongoing but is not worth discussion,” he said in a written statement.

The ISNA Development Foundation was registered as a charity in 2005 to provide support to the poor and needy (indigent immigrant families in particular), community centres and places of worship throughout Canada. Under Canadian law, charities must pursue activities in line with their federally registered objectives.

The charity operates out of the ISNA Canada headquarters in Mississauga, where a graceful minaret towers over the nearby Queen Elizabeth Way.

The audit found a number of problems:

Nearly $180,000 of charity money was spent on the salaries and benefits of two employees whose duties were actually for the “exclusive benefit” of for-profit corporations.

The ISNA Development Foundation inaccurately reported financial information in its annual return, a record used by the CRA to ensure a charity is complying with the law. “There is significant harm associated with a deceptive or misleading statement, regardless of whether the charity’s conduct is intentional or negligent,” the CRA said in its letter.

The charity repeatedly flouted rules requiring it to spend donated money on activities carried out by the organization itself or qualified recipients (such as other charities.) The foundation dished out more than $535,000 to unapproved groups. More than half of that cash went outside Canada, despite the charity’s mandate to support domestic causes.

The CRA’s letter does not necessarily mean the charity will be shuttered. The government gives a charity a chance to respond to the audit before deciding whether to revoke its charity status.

The ISNA Development Foundation has responded to the government’s letter but will not share its representations with the Star.

“We want to enter into an agreement with (the CRA),” Chaudhary said. “The person who is responsible for (the problems) is no longer with the organization. We are working towards making everything accountable and transparent. It happened in the past.”

‘Third-party receipting scheme’

Among their most serious findings, auditors said the foundation “appears to have engaged in a third-party receipting scheme” in which it gave charity tax receipts to people who donated to a separate, noncharitable organization where Ashraf is a director.

Auditors say the Kashmir Relief Fund of Canada raised money, purportedly to aid the Kashmir region. It then transferred the funds, along with its donor list, to the ISNA Development Foundation, which issued receipts to the donors.

Money raised through the scheme then flowed overseas.

“The integrity of the system is seriously breached when a registered charity colludes with an unregistered organization for the purpose of providing tax relief for donations,” the CRA said in its letter.

Ashraf said the charity under his watch never participated in a receipt scheme. One case arose where receipts were improperly issued but the practice “ceased as soon as the error was pointed out,” he said.

The charity’s board told auditors that all directions on where to send money came from Ashraf or Mushtaq Jeelani, another director of the Kashmir Relief Fund of Canada. Ashraf said this is untrue.

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Jeelani said the relief fund was merely a fundraising arm for the charity and all of the donors’ cheques were written to the ISNA Development Foundation.

“We didn’t have any direct role in terms of issuing tax receipts, no influence at all,” Jeelani said.

Despite being repeatedly named in CRA’s findings, Jeelani said he was never interviewed by auditors. Had they spoken to him, he said he could have eased concerns of where the money went in Kashmir.

“They could have seen where the money went and they would not have been speculating it may have gone into the wrong hands,” he said.

But the organization it went to, the Pakistan-based Relief Organization for Kashmiri Muslims, has “strong ties” to Jama’at-e-Islami, a political party with divisions in Kashmir that seek secession from India, the CRA said in its letter.

The Pakistani organization’s website said it is dedicated to helping the orphans “of Kashmiri Martyrs” by providing “financial support for the reconstruction of demolished and torched houses and mosques at the hands of Indian occupation forces.”

The CRA said directors behind the Pakistani group “have been identified as active participants both in defining Jama’at-e-Islami’s role in the armed militancy in Kashmir” and in establishing the militant force Hizbul Mujahideen, which the European Union has designated as a terrorist group.

“It appears that the funds transferred to (the Pakistan organization) could be used in support of . . . advancing the political cause of Kashmir’s self-determination, including through support of a militant movement,” the CRA said.

Those involved in sending charity dollars overseas remain adamant the cash was used for strictly humanitarian purposes.

“There is no evidence to support (the auditor’s concerns that money went into the wrong hands) as it never happened,” Ashraf said. “Every single penny (the ISNA Development Foundation) transferred to Kashmir relief was used to feed, clothe and shelter the Kashmiri refugees.”

All spending well documented

Ashraf and Jeelani, director of the Kashmir relief fund, said all the spending was well documented, and invoices and photographs showing the work done with charity money was given to the CRA during a previous audit.

That audit, done in 2008, found the charity had improper donation receipting practices, inadequate bookkeeping and filed inaccurate annual returns. The federal government issued ISNA Development Foundation an education letter explaining the rules of being a charity.

However, the discovery of the photographs being altered “calls into question the genuineness of (the charity’s) representations as to its direction and control of the funds transmitted to (Pakistan) during the period of the previous audit,” the CRA said.

The tax agency refused to confirm whether it received financial records showing how the charity spent the money for its earlier audit.

Further clouding how charity money was spent overseas is the fact that many of the ISNA Development Foundation’s business records are missing.

Board members told auditors Ashraf removed the records without permission when he retired, while the former leader steadfastly said this is untrue.

The few documents that do exist cannot be trusted, the charity’s directors told auditors, as Ashraf was allowed to operate a “one-man board” and “(agenda) minutes had been fabricated to reflect decisions that were never made.”

Ashraf denounced what he called a “false accusation by the board.

“I had been building and working for the organization for 32 years and most of these directors have worked closely with me during this time,” he said. “I have never falsified documents and until now, no one among these board members ever claimed that any minutes were fabricated.”

The increasingly toxic relationship between Ashraf and the charities he once ran has borne a lawsuit.

ISNA Canada alleges Ashraf controlled a web of bank accounts that he used to divert money from the organization’s profitable halal certification operations. The charity accuses Ashraf of using misappropriated money to buy his daughter a house in Oakville, Ont.

None of the allegations has been proven in court.

In his statement of defence, Ashraf said his job came with a company-matching savings plan, and that he withdrew just over $140,000 of that with a charity director’s permission to help buy his daughter’s house. He drew his salary from the organization’s halal certification business, he said.

The $400,000 moved from ISNA to another bank account was a repayment of money the charity borrowed from a community savings account to build its Mississauga headquarters, Ashraf said.

“This lawsuit is merely another attempt by ISNA to harass and embarrass the Ashraf family,” his statement of defence said.

In its letter, the tax agency made it clear that it wasn’t a good enough excuse for the charity’s directors to say they were kept in the dark by a controlling boss.

“Turning a ‘blind-eye’ or not exercising due diligence where a director is aware or ought to be aware of malfeasance on the part of another director . . . is not acceptable,” the tax agency said. “All directors have a duty to investigate any suspicious circumstances that suggest a charity’s property has not been properly used.”

Jesse McLean can be reached at (416) 869-4147 or jmclean@thestar.ca

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