10 corruption risks keeping charities/NGOs awake at night

Integritas360 - Sleepless over corruptionWorking for a charity or NGO? Getting enough sleep at night? If you’ve answered ‘yes’ to both these questions, then you should be asking yourself how much you really know about corruption risks within the non-profit sector.

The following article was subsequently published by Pro bono Australia.  Titled ’10 Corruption Risks Keeping NFPs awake at night’, it appeared in their Hot Topics section on 15 October 2015.

While Charities are the most trusted institutions in the world …

I’m always surprised when talking with people working in the charity/NGO sectors, at how little many of them know about the inherent corruption risks facing their industry.  While consistently ranked as the most trusted institutions’ globally (topping the Edelman Trust Barometer for the last seven years in a row), the sector faces a number of inherent vulnerabilities that significantly raises its overall corruption risk ranking.  Having a knowledge of these is essential if a charity/NGO is to put an appropriate risk mitigation strategy in place.

Inherent fraud and corruption-risks facing NGOs and charities

While not exhaustive, outlined below are what I believe are the top 10 interconnected corruption risks inherent to the NGO and charity sector:

(1)  A tendency to be ‘mission-driven’: While the last decade has seen a growing professionalisation of the sector, it continues to be characterised by a relatively high level of  ‘missionary’ zeal.  In such an environment, governance becomes secondary to the organisation’s mission, with adherence to the ’cause’ used to justify placing the action of the organisation – and its staff – above the law (a simple example of this is bribing a public official to release a container of humanitarian aid, the rationalisation being that helping those in need outweighs paying the bribe).  The extent of governance issues is highlighted by a recent compliance report by Australia’s charities and non-for-profits regulator, which stated that 72% of complaints substantiated by them, directly related to breaches of governance standards.

(2)  The presumption of  ‘moral authority’: A recent consultation paper by the NSW’s Independent Commission Against Corruption, states that “while the vast majority of NGOs and staff are dedicated to helping others, there are those that see government money as an opportunity for self-interested behaviour”.

While many of us believe that those working for NGOs and charities are naturally good, the most prevalent form of NGO and charity fraud is the embezzlement and miss-management of funds by employees and volunteers. As a charity’s employees are perceived to work for more than just financial gain, salaries in the sector are kept low, making both honest and dishonest employees more susceptible to the temptation of padding out a relatively small pay check (especially when oversight is less than rigorous).  This risk is heightened by the fact that in many parts of the developing world, jobs in the formal sector are few and far between, with many staff working in NGOs – not out of a deep-seated belief in a ‘cause’ – but out of simple economic necessity.

(3)  A high level of volunteerism:  A culture of mutual trust, and the presumption that people volunteer for an agreed common good, are (in part) what makes charities so effective.  Use of volunteers also ensures that costs are kept to a minimum.  Despite this, a qualitative empirical study by Nichole Georgeou (in his book ‘Neoliberalism, Development, and Aid Volunteering’) found that volunteers working in the development sector expressed a sense of entitlement to receiving privileges (even though agreeing they were undeserved); the same sense of entitlement used by fraudsters to justify or rationalise their behaviour.  This risk is exacerbated when operating in an environment where ‘volunteerism’ (a relatively Western concept) is new, as those involved may well have a preconceived expectation of being ‘rewarded’ for their efforts.

(4)  The propensity to be closed to external forces:  Unlike other sectors, NGOs and charities tend not to be imbedded into broader external processes, resulting in a narrow frame of reference and a natural predisposition to be inwardly focused and closed to change.  This insularity can easily make an organisation – and those in it – myopic to the broader environment (and the risks within it).

(5)  A low level of accountability:  NGO accountability is primarily enforced through self-regulatory mechanisms and internal rules and procedures.  Unlike other development players, most of who are subject to rigorous integrity regimes (e.g. internal and external oversight bodies), an NGO’s integrity predominantly relies on the effectiveness of its governance system, and the robustness of its internal control framework.  Add to this the tendency to focus only on donor (or ‘upward’) accountability, precludes charities from implementing more effective anti-corruption accountability mechanisms. For more on this see Trouble in Paradise: NGO Accountability & Corruption.

(6)  Weak regulatory framework’s: NGOs and charities tend to fall through a regulatory crack, as most of them are neither corporate entity’s, nor do they form part of government.  This grey area is characterised by minimal regulations and a lack of robust external oversight.  Even in cases where an industry regulator may be present, resource constraints tend to make effective oversight challenging. This is evidenced by the rise of the BINGO (or briefcase NGOs) whose sole purpose is to tap into development funds for the benefit of its owners.

(7)  Exposure to highly corruption-prone countries:  The average charity’s footprint often includes exposure to programmes operating in some of the most corruption-prone areas on the globe. Notwithstanding this, specific controls needed to address the increased local corruption risks are often over-looked, with most head-office staff having little real exposure to (or understanding of) the realities on the ground.  In the case of one large well established INGO with operations in over 100 countries, despite 80% of its annual funds being channelled to highly corrupt jurisdictions (the bulk of which were classified as being – or at risk of becoming – a failed state), only minimal financial controls had been implemented.

(8)  The use of local delivery partners: Many small and medium sized charities sending funds overseas rely on local or in-country delivery partners.  While there are a number of obvious advantages to this, it brings with it an additional layer of risk.  In many cases formal due-diligence processes – common in the commercial world – are yet to be adopted as standard practice within the charity sector.  In addition, key oversight mechanisms used, tend to be restricted to the provision of ongoing programme reports, annual financial audits, and a programme visit.  While each is an essential control, they are unreliable indicators of the presence of fraud or corruption (including the presence of  ‘double dipping’, where a partner has sought or accepted funds for (part of) the same project from multiple donors).

(9)  An over-reliance on external audits: Despite the external audit process not being designed to detect fraud or corruption, NGOs and charities continue to rely on it as confirmation of a ‘clean bill of health’.  In a survey of Australasian charities, while 90% of respondents felt that fraud was a “problem” for their sector, 83% believed their own charity to have a low fraud risk.  The main reason for this?  The external audit process.  The ACFE’s annual global fraud survey however, have shown this trust to be misplaced, as external financial audits detect just 3% of frauds.  Over twice that number (6.7%) are uncovered by accident, making it a more effective fraud detection mechanism.  That being said, audits still act as a valuable deterrence to some potential fraudsters.

(10)  The difficulty of beneficiary verification: One of the largest on-going challenges faced by NGOs in the developing world is beneficiary verification, an issue made more problematic when operating in countries (for example Malawi), where birth certificates have not been mandatory. In one investigation I was involved in, 56% of the NGO’s registered programme beneficiaries were found to be non-existent.  Despite being  “ghost” beneficiaries they had received 48% of all programme aid distributed!  While various technologies have been used to make the process more transparent, no cost-effective solution has yet been identified.

What are the consequences of all of this?

The consequence of these vulnerabilities have been that the NGO and charity sector has been viewed as an easy target – not only by fraudsters – but by organised crime and terrorists groups, who have traditionally used them as conduits for money laundering and terrorism funding.

In the case of Australia, while the creation of the ACNC (the Australian Charities and Not-for-profits Commission) has ensured that questionable activities by charities and Not-for-Profits are less likely to go undetected, its overall effectiveness is hampered by limited resources and its mandate as a “light touch regulator”.

So what is the solution?

While a number of generic steps can be taken to reduce the risk of corruption taking place, the first, and most effective is for a charity or Not for Profit to fully understand its unique corruption-risk profile.

Based around analysing and assessing the risk of corruption across a number of interrelated perspectives, if done properly, it should help identify the crucial building blocks needed to mitigate the organisation’s key risks.   Until charities and NGOs start proactively dealing with this, many will continue to leave themselves exposed to unnecessarily high levels of preventable corruption.

 

Jeremy SandbrookAbout the author: Jeremy Sandbrook is the Chief Executive of Integritas360, a global social enterprise that helps charities and NGOs/NFPs  ‘corruption-proof’ themselves. An internationally recognised anti-corruption expert, he has spent the last decade working in the international development sector, predominantly in Africa, Europe and Australasia. Jeremy also lectures on the topic at the University of Sydney’s Centre for Continuing Education.