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A decade ago, an Argentinian man walked into Julian Smyth's office, set his briefcase on the desk and opened it up to reveal wads of cash, each pressed together with a World Bank sticker. The money - totalling tens of thousands of pounds - was, he said, his gift to the institution where Smyth then worked.

"There was no reason to suggest that it was illegal, although it was certainly odd," says Smyth, now director of development and alumni relations at Aberystwyth University. "But I did go and see the head of the institution and the bursar to decide whether we should take it."

The potential donor was known to the institution and the Argentine banking system was in turmoil at the time. Ultimately, the donor passed Smyth's standard investigation into whether there was any evidence of a link to criminal involvement or immoral activities, and the donation was accepted.

So what role do ethics play in fundraising for ÖйúAƬ? As institutions become more dependent on the sums being raised by their development offices, they are being forced to confront such dilemmas with increasing frequency.

Earlier this year, for example, a major donor to Miami University in Oxford, Ohio, was jailed for 50 years for orchestrating a $3.7 billion (?2.3 billion) Ponzi scheme whose victims included missionaries and pensioners. The donor, Tom Petters, had promised the institution $14 million, although it had received only $5.2 million.

When the deceit was revealed, the university said it would pay back $5 million, which was supposed to be put towards an ethics study centre. "The university has no interest in keeping money that Mr Petters obtained by fraud or deceit," David Hodge, president of Miami University, said.

Other decisions are more complex. Last year, for example, a high-level delegation from the University of Alberta visited a donor in his native Saudi Arabia. But when they arrived, they were told that the female members of the team could not take part in any discussions.

According to David Jeu, former director of global development at Alberta, the university knew this could invite a public relations disaster. The institution, he admitted to a conference in Glasgow earlier this year, could have been accused of sacrificing its values of gender-equality for financial gain. Nevertheless, the university agreed to exclude its female fundraisers and accepted the money.

"The situation and the values in that part of the world are what they are," Jeu said. "We bring with us our own Western culture, but we can't lay those values on cultures in other parts of the world in our fundraising."

Many, if not most, institutions have written guidelines to help them navigate such fundraising minefields. "We're entering a new world which makes it even more critical that we get our ethical decisions right," says Robin Cross, fundraising officer at Keele University.

The declaration drawn up by the Keele team states: "Fundraising professionals have a 'triple agent' responsibility to our donors, to the employer and to the cause. We must be guided by our mission, our sense of personal integrity, and our relationships with donors. At the heart of fundraising is the need to ensure the trust of the donor is not violated, which requires openness, transparency and respect."

Yet the policy itself acts to protect donors - emphasising the need to respect their right to anonymity, to provide information about how and why their money is used, and to deal with any complaints - and not the university, whose own responsibilities, and interests, remain unaddressed. Like many other institutions, Keele has no strict rules about who it should refuse money from.

"I suppose one has to deal with the situation as it arises," says Cross. "Before you come to a decision you have to talk through the situation with all the schools involved and make sure that you've got it right. We would review each approach and each donation on the basis of what could arise."

In this approach, universities differ from - or perhaps lag several years behind - much of the rest of the fundraising world, including the charity sector. The international development agency ActionAid, for example, has an international corporate fundraising policy that excludes certain industries with which it does not wish to be associated. These include arms and military services, tobacco, commercial agricultural input industries and pharmaceutical research and development.

Different ActionAid branches can add their own restrictions that take into account local cultural values; for example, some in the Muslim world refuse to take donations from the alcohol industry.

A final assessment of donor risk is done on an individual basis, with each potential donor given a green, amber or red rating.

"We aim to ensure that any donations we receive do not work against the important work ActionAid is doing to help lift people out of poverty," a spokeswoman says.

Back in the university sector, the Council for Advancement and Support of Education (Case) has started to provide training for fundraising staff run by ethics philosophers.

"It is very helpful in getting people to see beyond what they think is fairly black and white," says Joanna Motion, vice-president of international operations at Case. "People are getting much more thoughtful about those processes. (They) may be thinking particularly about the sources of gifts but there's very much more to it. There are issues around special treatment and impaired judgement and all sorts of other things."

Trainees are taken through a series of real-life dilemmas faced by members of Case. Examples presented include whether a university should accept a donation worth ?30,000 from an alumnus who has made his fortune in erotica (the university in question took the money); the ethics of legacy fundraising when a lonely pensioner comes to rely on a professional fundraiser as a friend; and whether a donor should ever expect an honorary degree in return for a financial commitment. "They realise that it's not that simple," says Motion. "Some of it is simply prudential - will it damage your reputation to be involved with this? Can you live with it if you're on the front page of News of the World? But some of it is much more to do with the values of the institution and where you sit."

Trying to agree on what a university stands for, however, can cause enormous difficulties. The Case statement of ethics dictates that in their work, development staff should "exemplify the best qualities of their institutions". Those at the University of Alberta who accepted the Saudi gift may describe their institutional qualities rather differently than a professor of women's studies at the same institution.

According to Motion, context is crucial. "It's much easier if it's illegal; if it's illegal you don't do it. Then you have to come back to the values of the institution and what its aspirations are and where it is trying to get to.

"The role of the development professional is to be a kind of matchmaker, to be the broker and interpreter between the institution and the supporters, the donors. Part of that means representing to the rest of the world the fact that your academic community is one that values freedom of speech."

The Case statement of ethics also says that fundraisers should not grant or accept favours for themselves or their institution, and indeed, most British universities reject any notion of privileged access. Yet some private institutions, here and overseas, still consider professional appointments on the back of a donation by a family member. And the awarding of honorary degrees to major donors is certainly common. The question is whether this constitutes a form of special treatment.

At Loughborough University, director of development and alumni relations Ron Gray has also developed gift acceptance guidelines, but he accepts that they have limited reach.

"The way it works is, I refer questions regarding potential gifts to the gift acceptance group on campus," he says. "When it comes to ethics, it's not always black and white. There are certainly grey areas but the guidelines seem to be black and white."

In one notable case, he was forced to refuse a donor a place on the recruitment panel for the academic chair he had funded.

"I understand that some universities will allow that. But it speaks to the issue of whether or not we have the freedom to use the money as we see fit, and is it really charitable income if they do? Are they qualified to make the best decision?" Ultimately, he says, experience is the only guide for managing donor requests and income sources.

"I often tell my major gift officers that they have got to get 100 'visits' under their belt."

Are universities going too far, though, in their ethical deliberation? Smyth at Aberystwyth fears development teams are tying themselves in knots over irrelevant questions.

"The fundraiser's job is to maximise income. You can't get into a mindset of finding reasons not to accept the money," he says. "There is a difference between ethics and some of the examples that are practical issues."

He is dismissive of the debate over the University of Alberta's decision to exclude women from the fundraising process in Saudi Arabia. "I think that's just a practical issue of how is one going to secure the gift from that particular client. There is no moral reason why one should not accept the gift."

Smyth says he would certainly accept a donation from an alumnus who had made money from the legal sex industry, yet he is quick to add caveats.

"If it were (for) the social policy or law department and it's from a lap-dancing club, that may be a bit different," he says. "It depends what it's being used for. My first instinct is to say yes (to the donor) and then I will check to make sure it's not breaking any rules."

He did, however, decide not to ask a very wealthy potential donor for money after he realised that he was suffering from the early stages of dementia.

"That to me was a simple moral choice. I don't need a philosopher for that; it was obvious. It would have been wrong."