Fraud in Non-Profit Organisations

Published on 5th February 2020

One would not ordinarily think of an NGO as an easy place to commit fraud. After all, there are no profits, large dividends or growth rates that ‘invite’ greed. However, it is very common to see Nonprofits being used to launder money. Laundering like the term implies entails taking ‘dirty’ money, channeling it through a well-meaning NGO to make it ‘clean’.

An example of this can be a large sum of restricted funds being given to a charity to spend on procuring goods from a specific supplier (owned by the person who donated the funds) reducing the changes of fair procurement. Non-Profit institutions are targets for fraudsters as they believe that the need for fundraising can outweigh adherence to own controls and policy.

Finally, not all organizations have a fraud policy to begin with that employees can refer to and successfully implement.

Who Would Do This?

Believe it or not, the average fraudster is an average person just like you or me. Contrary to popular belief, the average fraudster is not always a monster sitting behind a desk in a faraway land, they can be a lot closer than you think. A lot of fraud in NGOs can also be termed as ‘Incidental Fraud’ by some well-meaning individuals. It is therefore important to be very clear about what is fraud and to train all
employees, especially fundraisers and finance The point is that anyone presented with the opportunity, the perceived 'need' for extra cash, can succumb to the temptation to steal. And too often, they do.

This happens with general non profits, churches, government funded institutions, hospitals and more. It is also with noting that the term fraud can be interpreted in different ways depending on the culture and context that one is operating in. As you will see below, an employee may genuinely think that is okay to underbid in order to win a tender because the market is unfairly priced.

In their minds, they are doing the organization a favour and trying to save money. Like the saying goes, “where there are no laws, there is no crime”.

How to Prevent Fraud

The simple answer to prevention of fraud at a non-profit is the same one as the prevention of fraud at a for profit business- internal controls. Internal controls is an accounting term that refers to the process and steps by which organizations receive, deposit and pays out of funds.

Note that it is not enough to have a process, but these controls need to be followed in the order that it is written. Pay special attention to segregation of duties and it is advisable to have an internal audit at least once a year to ensure that internal controls are robust and are being implemented across the organization.

For example, most organizations have a requirement of 2 signatures for outbound cheques. Too often, the second signatory has a stamp or electronic signature that is used ahead of time for convenience sake leading to an increased chance of fraud. We strongly encourage the use of wet signatures and adequate planning to ensure that payments are not made haphazardly and the relevant signatories informed on
time as well to reduce the likelihood of fraud.

It is no good having internal controls, segregation of duties and everything else in theory without adequate training. It is imperative that all employees are well versed as part of their induction and ongoing refresher training that they understand the controls in place. For example, payments should never be made to a supplier no matter how urgent they may be without ensuring that a counter terrorism check is conducted or bank details verified in writing. Programme managers should not be able to override this process even if it meals a delay in project implementation.

Fraud can also be prevented if there is an Organizational culture of openness and honesty. Some organizations call this whistleblowing. We advise that a separate email for whistleblowing is set up so that suspected cases of fraud can be reported and investigated on time. Employees should also feel safe enough to report this regardless of who the perpetrator is without undue fear to themselves or their

Need Help?

This is not an exhaustive list to the prevention of fraud, but it has been found time and time again that if a person who has an inclination to commit fraud feels that they are likely to be caught, they are far less likely to commit the actual fraud. Vigilance is key to the prevention of fraud, strong internal controls will also go a long way toward prevention.

At FINDEV, we offer internal audit services that can provide the assurance of strong internal controls, or the development of essential controls where they are lacking. These will reduce the likelihood of being easily defrauded and put your organization in a good chance of excelling donor due diligence assessments as you seek funds to deliver good quality programs.

Our aim is to empower your core project team with the right tools and skills to confidently manage projects whilst ensuring utmost compliance with donor rules and regulations.

We’ve done this with non profits spread over 3 continents in the past 5 years. and we have glowing testimonials for it, but we want to do more …

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