Every year for the past decade, the Not-for-profit (NFP) sector has been voted the most trusted in the world – but just how valid is that ranking when it comes to the ‘F’ word (fraud) and corruption? The sector itself remains highly vulnerable, as it is almost completely reliant on developing and maintaining a high level of public and donor trust. Despite this, there continues to be an explained complacency when it comes to the topic of fraud. While acknowledged by many NFPs as a problem for the sector, corruption is rarely viewed as an issue when it comes to assessing their own organisation. Unless NFPs recognise, and start to properly manage fraud and corruption risks, the reputations and public confidence – built up over many years – could be wiped out overnight. So where does this apparent reluctance to deal with the issue come from?
The Unravelling of an NFP fraud scheme
A recent fraud investigation I carried out for a large international NFP is a textbook example of how fraud can occur in the sector. Despite one of its humanitarian projects being externally audited four times (two external financial audits, a capacity audit and a specific project audit), vague mutterings continued to circulate about improprieties. None of the four audits had highlighted any irregularities. On the contrary, the capacity audit stated that the project had been “appropriately designed, well planned, and effectively managed,” while the project audit confirmed that all relief items had been physically delivered to all beneficiaries.
The six-month project had been designed and managed by a highly respected, trusted senior manager. Acknowledged as a leading expert in his field, he regularly presented on the topic at various regional and continental forums. It was the third such relief project he had initiated in the last four years.
While on the surface there were no anomalies, closer inspection of the beneficiary sign-off forms highlighted a number of irregularities. The same pen had been used to complete all 2,500 forms, while the beneficiary’s thumbprints (confirming physical receipt of the items) became successively lighter each month. This became the starting point for unravelling a long-standing, well-entrenched fraud scheme. Perpetrated by the senior manager himself, it was made up of a network of staff from all levels of the organisation, who together had conspired to bypass and undermine key internal controls (and various other operational processes and procedures put in place).
Its starting point had been the fraudulent overstatement of the real needs on the ground, enabling ghost beneficiaries to be included in the project. Various front companies were then established, with staff members involved colluding to ensure they were successfully awarded key supply and transportation contracts. A number of these companies then purchased relief items from other staff members, one of whom was the Chair of the NFP’s in-country board.
While a small portion of the items (sufficient to provide a semblance of legitimacy) were delivered and subsequently handed-out, proof of delivery documentation was falsified and stock records manipulated to give the impression that all items had been properly accounted for. Those beneficiaries who did exist had been coerced into signing distribution sheets for items never received, while the independent government representative (who had confirmed that the distributions had indeed taken place), admitted that he had only done so because he been promised a job in return. Information at all levels was manipulated, and reports sent to senior management and donors delayed and falsified.
So why are NFPs vulnerable to fraud and corruption?
The absence of a profit motive has resulted in many NFPs being extremely mission driven. This, coupled with an over-reliance on the use of volunteers, has resulted in an environment reliant on a high level of internal trust. This in turn is paralleled by an even higher level of external trust, where those working for NFPs are afforded an almost automatic presumption of honesty and moral authority (by the general public). As a result, governance can at times be viewed as being secondary to the organisation achieving its mission.
In addition, the NFP sector has traditionally been inwardly focused and closed to external forces that traditionally provide an appropriate level of checks and balances. Unlike other sectors, in many jurisdictions NFPs have tended to be subject to a lighter regulatory approach — leading to a lower level of oversight and scrutiny by authorities. When combined with low salaries, or no salaries in the case of volunteers, the sector has inadvertently created an environment that provides individuals with opportunity, motive and rationalisation: the three components of the traditional Fraud Triangle.
For those NFPs with an international presence, the risk factors are even greater. This is because the standard international NFP’s global footprint involves:
- Programs that operate in jurisdictions characterised by high levels of corruption and a low-level of governance and accountability.
- Comparative to other sectors, a relatively high level of ongoing resource flows (usually kept in hard currency, as it is a reliable store of value which can be traded globally); and a heavy reliance on cash-based distribution systems.
- Cultural issues that also increase fraud risk — an example being neo-patrimonialism, still prevalent in many parts of the world, where an organisation’s resources are distributed by the office-holder in return for personal support and loyalty.
Conclusion of the fraud case
While the fraud scheme outlined above finally made it before the courts, it took two years, and only got there after concerted efforts by a number of highly placed individuals with close connections to the accused, failed to have the investigation and subsequent court case discontinued. This included the NFPs own board, which twice attempted to halt proceedings. Notwithstanding the evidence uncovered, the manager at the centre of the scheme was held in such high esteem that even a guilty verdict was insufficient for many within the organisation to believe he was actually guilty — proof that NFPs still have a long way to go regarding the ‘F’ word.