Fraud Archives

How can you secure government grants and avoid prison in the midst of a corrupt state or other regulatory environment? New York nonprofits and many others are famously susceptible to fraud. The NY literature (NPQ:02/2014) is filled with names of politicians such as Shirley Huntley, Efrain Gonzalez, jr. Sheldon Silver, Hiram Monserrate, Pedro Espada, fr., and others who were convicted of misdeeds with nonprofits or controlled non profits while pursuing criminal activities. The Nonprofit that decides to base its financing around contracts needs to approach funding mechanisms with political capacity.

5 Thoughts on Corruption, Connections, and Compulsory Crime

Let us accept right from the start that connections matter. A Danish study of ‘clean nonprofits’ found that political connections led to more cash for agencies and better bottom lines on the income statement. (Amore and Bennedsen, 2013:1)
Corruption is the willing agreement of organizational leaders to participate in a corrupt plan that benefits two parties. For example, William Rapfogel in New York overpaid insurance premiums for Metropolitan Council on Jewish Poverty. An insurance executive kicked back the excess payment with cash provided to both parties. He stole $3 million with this strategy.
Tolerated semi public corruption breeds a corrupt culture which is hard to avoid. NYS Assembly Sheldon Silver intimidated some in the legislature and ruined the career of Michael Bragman and others who tried to make a change. Vito Lopez founded a senior center that was investigated for misdeeds while he continued to steer member items to the agency. It can be hard to exist in the same industry if a government official has a favorite project for funds.
Tolerated corruption leads to extortion (Compulsory Crime) where unwilling participants from non profits have to participate in the corrupt practice in order to stay in business. IBM, GE, and many others have been caught in bribery schemes because they wanted to be in business in a certain jurisdiction. Non profits can face the same pressure if a majority of their funding originates in government.
Corruption can be in the form of
1. A simple cash kickback from the contract money
2. a required donation to a non profit in which the politician has an interest or receives funds
3. a donation may be made to your nonprofit by someone else who needs access to the politician and a compliant non profit to wash the money.

How To Avoid – A Beginning List

It’s good to develop your political capacity before you sail into deep waters of public money. If simply caught by any of this, your two defenses are stupidity or secret need. Neither are sufficient to keep you from being fired or in jail.

Since this is an article still not fully written, I welcome any suggestions to add or improve it.

Petty Extortion –

People generally don’t want to go jail for stealing $10,000. They may make a hint about your $50,000 grant offer, but it’s not worth entanglement if you have a defense. You can try one of these push backs:
- Mention that you are getting a more severe A133 audit – in other words, just give us the cash, because the audit will catch any disappearing funds.
- Stop the conversation before any illegal proposal is out in the open and save face for both parties with a legal offer. Maybe Senator X can get legitimate free publicity from the grant. Its not illegal. It’s expected.
- Refuse the grant. This is not always possible since presumably you are meeting important needs with the money that you want to secure
- Involve more community partners. Centrality is a concept from academe where several departments cross list a course to protect it during a budget cut. The Academic Dean decides to cut Communications 157 and suddenly discovers that it’s cross listed with Psychology and Sociology departments and will still be offered 100 years from now.

In this example ……..

Community partners can be legitimate subcontractors for a small amount and you promise to be their subcontractor in a similar circumstance. For example, the grant is for a school and you involve a food bank to subcontract the snack and the YMCA for a 3 week soccer class. Now the senator has three agencies involved and the sunlight becomes a disinfectant.

Larger Corruption
- Hire a lobbyist. If you need a clinic and the only path is through corrupt electeds, you need a strategy. Making your own rolodex isn’t sufficient. A lobbyist who works at the level of the funding (city, state, county, federal, regional) can draw a safe map from you to funds.
- Develop a cause in your nonprofit. If you are a vocal Cause (Al Sharpton, Bernie Sanders. Martin Luther King, and Eva Moskowitz are examples) you develop public support that may open the door for you even if it does not bring structural justice and reform the funding process. People like to fund projects with publicity value.
- Examine your board of directors. Use LinkedIn, Facebook, and Google to understand any connections that they have that would be a conflict of interest. Make sure that no one is acting as a quiet agent in ways that are not transparent. Hire a private investigator if necessary. Then use the Board as a spokesperson. Even if you are not a firebrand, the entire board giving a press conference is unusual enough to get some publicity.

In Buffalo, my close friend and non profit leader was attracting money and doing things. During the build up, he got an unusual offer of money from the mayor. His comment was that he had to be wise because the funding would come with snares that would compromise his work.

If you are ready to grow, make sure you have the political capacity to do good and avoid jail

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Notes

Amore, Mario, and Morten Bennedsen. “The Value of Local Political Connections in a Low-corruption Environment.” Journal of Financial Economics (2013): 19-20. Web.

Cohen, Rick. “New York’s Nonprofit Culture—“Corrupt at the Core?”.” Nonprofit Quarterly (2014): n. pag. Web. <https://nonprofitquarterly.org/2014/02/07/new-york-s-nonprofit-culture-corrupt-at-the-core/?gclid=Cj0KEQjw_9-9BRCqpZeZhLeOg68BEiQAOviWAhGhn_Fto85pvtpHuErLkoGiu-SOyuefS303Cui6bCgaAuEZ8P8HAQ>.

Summary

Fraud is a persistent cancer in the non profit world. Local news in New York City reported another fraud of $1 million as the director redirected funds for his mortgage. Just as with other cancers, prevention is cheaper and easier than cure.

This cancer is much larger than officially reported.

Many nonprofit boards are reluctant to press charges. Board are filled with volunteers who are reluctant to give the examination time needed to find a result that they don’t want to discover.
Agencies don’t look good to the public when they report a fraud. It affects their brand and threatens future charitable and contract funding. It’s cheaper to ignore it.
Frauds are often perpetrated by employees who appear to be the most loyal and honest. While their overtime work conceals the fraud, they appear to the world as super diligent. It’s never popular to send Aunt Susie or Uncle Bill off in handcuffs.
Fraud is usually discovered by accident. Most of us are working in organizations where money is flowing in and out. Even auditors are unlikely to discover frauds below a certain percentage of the revenue of the corporation.

Cure – Expensive and rare

Intentional discovery is almost impossible. Forensic accounting is often more expensive than the potential fraud. It is the Board’s act of last resort.

Prevention – Cheap and Effective

It’s amazing that nonprofits don’t use much prevention. Thousands can be saved. Some of the ideas that follow require no money to implement.

There should be a Personnel Policy about fraud. Clearly warn people about things that the organization will not tolerate
In a staff team of 25 or more, create an anonymous survey once a year to ask about fraud. It communicates that you are serious. Include questions such as:
- Do you know of any staff member who has taken company property for personal use?
- Do you know of any illegal acts in the company?
- Have you seen a supervisor ignore complaints about illegal actions?
Require any person who pays bills, opens mail, or receives money (paid, volunteer, or part time) to take a 2 week vacation of consecutive days once a year. Watch for anomalies during that time.
Examine executive perks and how they appear to staff throughout the organization. A strong ethical public tone at the top strongly influences people throughout the organization. If you get a free car as director, the janitor may feel justified in pilfering toilet paper.
Create a simple treasurer’s report that warns of potential non profit fraud to watch. There are six ratios in the financials that predict possible non profit fraud. These include overstating expense, bringing future expense into the current year, and overstating depreciation. While these ratios don’t prove fraud, their presence in the Treasurer’s report means that the agency is serious about fraud detection.
Compensating Controls – Most organizations can afford compensating controls in lieu of extra staff for division of duties. Let us assume that one person handles petty cash. A simple log with date, purpose, receipt and amount of funds can be required and given to the Treasurer quarterly. It is considered a secondary control but much better than none.
Preventive Controls – these are primary controls which are more effective. Some are quite inexpensive. For example, buy rubber stamps for every person who opens mail or is involved with deposits. The rubber stamp is marked ‘For Deposit Only, My Happy NonProfit, Farmers Bank # 1235-56789’. Anyone stamps everything as soon as it is first seen. This simple control prevents double endorsement of checks to someone’s personal bank account.
Leadership – controls are of no use if leadership does not enforce them. I know that fraud correction can ruin friendships, invite retribution, or focus on a beloved staff member. Fraud prevention needs a leader who is more committed to the nonprofit mission than these other considerations. It’s not easy.
Board Leadership – As nonprofits grow, politicians and others may see the organization as a convenient place to enrich themselves. One non profit outsourced their accounting to a public company created by a former board member. They also invested surplus funds heavily in the new company. Management drained the outsourcing company of assets and closed – effectively taking the non profit’s treasury. Strong board policies to prevent board access to assets and existence of potential conflicts of interest must be written and maintained.

Conclusion:

I first became interested in nonprofit fraud when I heard stories and realized that it’s nearly universal. It’s often a staff member who appears loyal and hardworking, secretly paying personal bills. Most of this fraud is undetected.

Detective controls are expensive, preventive controls are effective and cheap. The faster you start, the more money you will have to help the homeless, feed the hungry, or cure disease. Start today.

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A crippling snowstorm has closed my nonprofit today. I can rest easy. It’s difficult to be a nonprofit fraud victim when you’re closed. But that strategy is impractical for the longer term 🙂

Nonprofits attract fraud like ants to honey. Why?

It happens because you have money. If your total revenue is $100, you are relatively safe from fraud. There is not much theft from lemonade stands. When you receive a grant for $10 million, people notice. Board recruiting suddenly becomes easy. You attract Freddie, whose sister Betty — owns a building perfect for renting as a school. You need a new building. Freddie uses the board position to push the lease to Betty at a high price. The nonprofit gets the school, Betty gets rich, Freddie gets a finder’s fee. It’s corrupt, and often impossible to prove.
Fraud happens because nonprofits don’t pay that well. The typical profile is a female who has worked in your nonprofit for 3 years, has considerable responsibility, and doesn’t make that much (Non Profit Quarterly 12/21/2007)
Fraud happens because nonprofits build a corporate atmosphere of trust. Can you imagine your local bank being as friendly as you are?
Finally, Fraud happens because nonprofits are famously weak on punishment. Sam, the front desk guy that everyone loves, stole $10,000 by tampering with checks received (NPQ, Ibid). It seems a shame to add a criminal charge to such a nice guy.

As much as we trust audits, they rarely reveal fraud. True forensic audits are very expensive. Even the government prosecution of Sheldon Silver (Majority Leader NYS Assembly 1/2016), almost did not succeed with the jury. The majority of fraud is discovered by accident.

So, how can you stand in the door and keep (some) corrupt money from flowing this week?

Realize that all of us will commit fraud under the right circumstances. If my child needs a medical treatment and I see a way to steal from you, I will do it and worry about the consequences later. You will too. And you have no idea what personal crises are going on in your company personnel.
Once you have announced to your managers that we will all steal under the right circumstances, implement protective policies to reduce and eliminate. As Ronald Reagan said so famously ‘Trust, but verify’
Set a high ethical tone. People watch you turning in lunch receipts that are not believable, attempting every known device to get more expense money. Sheldon Silver chose longer routes in business plane flights to get more points on his personal account. Certainly his office staff and direct reports knew that a flight to Albany does not go through Washington 🙂

You don’t have the time and money to catch fraud this week, but you probably can prevent it.

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Fraud Archives - TurnAround Executive Coaching

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