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The Office of Foundation Oversight is a joint Congressional and civilian initiative designed to strengthen nonprofit oversight through nonpartisan investigations into corruption, fraud, and conflicts of interest.  Since its inception in 2017, the Office has investigated 18 nonprofits nationwide.

  • Five are permanently closed.

  • Five lost their 501(c)(3) status and were imposed with hefty fines.

  • Four CEOs were involuntarily terminated along with Six CFOs who also had their CPA licenses revoked.

  • Three Board members were removed.

  • Over one million dollars was returned.

  • Six individuals were referred for federal prosecution

  • Four nonprofits were cleared of all wrongdoing.

  • Several investigations are ongoing.

These cases were the result of tips from everyday citizens -- proving one person can make a difference. 

Over the last decade, nonprofit insiders have committed more violations than ever before, but most of them go unreported and therefore never prosecuted.

 

Through the exposure of the guilty and all those involved in concealing the crime, we intend to send a clear message that their abuse of trust will not be tolerated and there will be dire consequences for their betrayal. The Office is watching and accountability is back in play.                                                                                                           

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The Office of Foundation Oversight is more than a watchdog group. We are the eyes and ears of the American government, representing the interests of the American people.  Our independent investigations into corruption, misconduct, and conflicts of interest help achieve a more effective, accountable, and ethical nonprofit community.  We collaborated with IRS Special Investigations and the Office of the Inspector General to form a coalition united to bring justice to those who abuse that in which they have been entrusted. We will continue to fight for stronger sentencing for convictions involving the misappropriation of donations and program grants funds established to assist the disadvantaged.  We will push for stronger consequences for all persons involved in concealing these crimes and demand full disclosure to patrons interested in making charitable contributions, regardless of the level of generosity.  We will insist Nonprofits practice with full transparency regarding their financial management or be refused their nonprofit status and the ability to solicit donations and receive grants. 

FRAUD IN NONPROFITS

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Facts about Nonprofit Fraud

It is important to understand the types of fraud your nonprofit organization is most likely to experience in order to create effective anti-fraud policies. The Report to the Nations on Occupational Fraud and Abuse, the definitive study by the Association of Certified Fraud Examiners (ACFE), provides the following data:

The mission of nonprofit organizations is generally philanthropic, and employees, especially senior management, share this mission. Nonprofits are therefore more trusting of their employees and have less strict financial controls than for-profit organizations. As a result, nonprofit embezzlement cases and other forms of employee fraud are on the rise.

Several noteworthy trends in occupational fraud are highlighted in the ACFE study, as well as how companies can combat the problem internally.

Important trends emerged from the 2,400 or so fraud cases studied. According to the ACFE, all fraud schemes can be categorized according to these patterns and classified into three categories: misappropriation of assets, corruption, and financial statement fraud.

 

At 34.5 percent of the total, cash misappropriations were the largest, probably because cash is easy to misplace. Cash misappropriations include skimming, larceny, cash on hand, and register disbursements.

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  • An example of Misappropriation of assets is when a nonprofit's credit card is used to purchase personal items.

  • Corruption broadly includes bribery, accepting inappropriate gifts, defrauding others, diverting funds, and laundering funds.

  • In financial statement fraud, the company intentionally misrepresents its financial condition by falsifying its balance sheets, income statements, and cash flow statements to fool investors or Boards. 

A staggering amount of money is lost to fraud each year. It was reported that the median loss from cash fraud was over $168,000 per year. 

Embezzlement and check tampering follow cash fraud with median losses of $158,000 each. Modern scanning technology makes it easier than ever to forge check stock, signatures, and endorsements. To counter this, Lock up your check stock and restrict access to it just like you would cash.

The misappropriation of funds tops the list of nonprofit fraud cases, so organizations should take precautions to protect their assets. Over $400,000 is lost each year due to cash and check tampering.

How to Prevent Nonprofit Fraud

To help combat fraud, we recommend following these basic steps:

  1. Keep it locked up! This includes cash and checks. When counting money, make sure more than one person is present.

  2. Implement a strict "separation of duties" policy. Different staff should handle cash functions such as deposits, check writing, and bank reconciliations.

  3. It is impetrative to keep bank reconciliations up-to-date. It may be necessary to hire temporary help to bring your bank reconciliations up to date if you're behind.

  4. Checks should not be pre-signed. Safeguards need to be in place if autopen signatures are used.

  5. You shouldn't be too trusting! Sometimes it is the people you expect the least that do the most damage.

Last but not least, monitor the cash balances in your fund accounting software, send alerts to more than one supervisor, and keep track of your audit trails. Put policies in place and ensure they are enforced. Nonprofit fraud is easier to prevent than to detect, but if you need to file a report, contact your local law enforcement agency. If that does not yield the results you expect, contact The Office of Foundation Oversight for more useful information.

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DID YOU KNOW  theft of funds is not generally covered by insurance?  The employee dishonesty provisions of a standard insurance policy does not protect a charity  from loss when an employee conducts an unauthorized fund-raising campaign and uses the proceeds for himself, according to the First Circuit Court of Appeals. The Court affirmed a District Court decision denying coverage for the Special Olympics International and its Massachusetts affiliate.  In that case, an area manager hired a telemarketer to launch a fund raising campaign using the Special Olympics name and logo without the organization's knowledge. He deposited the raised funds in an unauthorized bank account opened in the organizations name from which he wrote checks to himself totaling over one million dollars. When this was ultimately discovered, as it usually is, Special Olympics sought to recover those funds under their employee fidelity policy. Not only did they not recover a single dollar, they lost even more by way of legal fees, payroll dollars, and undetermined donations withheld from benefactors whose confidence was now lost.

 

Insurance policies are intentionally ambiguous, so it is up to the insured to read and understand the fine print. A simple re-wording of a clause can change the entire meaning, so if it's not transparently clear, have them reword it.  Remember Insurance Companies are not in business to pay out claims.  An Executive over a federally funded and/or charitable trust has the fiduciary responsibility to read every page, every provision and every clause, no matter how time consuming and boring it may be, and not  sign anything that is not fully understood. Asking for additional clarification does not make one look foolish or ignorant, quite the opposite.

WHAT IS OVERSIGHT?

 

As a governance tool, oversight ensures that different organizations, groups, and governments operate legally and ethically, and adhere to whatever mission statement they claim as a tenet. Each organization's Board of Directors is responsible for direct non-profit oversight, but that is not enough. A nonprofit's board of directors is legally responsible for exercising the same care an ordinarily prudent person would in overseeing the organization. This includes the organization’s finances and legal compliance. Unfortunately, it's been proven that board members are often negligent in the crimes they're supposed to prevent. As a whole, or acting alone, they often break Federal and State law as well as their charter bylaws. This includes concealing a crime committed while on their watch.  Some Boards claim to have good intentions for concealing such misappropriations, but it is still a crime and one that continues when they seek financial contributions claiming to be moral, ethical, and financially sound.  For true non-profit oversight to be effective, it must be administered by a completely unbiased third party that has no connection to the organization. The main purpose of External Oversight is to watch over Internal Oversight. Government agencies all answer to Oversight in some manner; nonprofits and their Boards of Directors should do the same, especially when they are funded by public donations or government grants. 

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NONPROFIT OVERSIGHT:
Governing and monitoring the regulations of trust.

 

Despite the increase in fraudulent activity reported in nonprofit organizations, the majority of United States nonprofits still operate in an ethical and accountable manner. However, nonprofits are not immune to damage caused by unscrupulous and fraudulent solicitors, financial improprieties, and executives and/or board members who place personal gain above the organization’s mission. Because nonprofits are held to such high standards and depend on the public's trust, many safeguards have been initiated to defend against fraud and corruption:

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  • Boards – All nonprofits are governed by a board of directors or trustees consisting of a group of volunteers that is legally responsible for making sure the organization remains true to its mission, safeguards its assets, and operates in the public interest. But, as this office has seen firsthand, not all boards or directors are ethical.  Conflict of Interest cases are the highest reported complaints filed by insiders.  Some boards have even elected to "unofficially" remove that stipulation from its policy while continuing to claim compliance with government officials.  

  • Private Watchdog Groups – Private groups made up of everyday citizens, usually, those with a vested interest, monitor the behavior and performance of nonprofits in their local community. With the right attitude and fortitude, these Groups are extremely effective. 

  • State Charity Regulators – The Attorney General’s office maintains a list of registered charitable solicitors and investigates complaints of fraud and abuse. The AG is the first and best place to report any misappropriation or misconduct of a nonprofit. 

  • Internal Revenue Service – The Tax Exempt/Government Entities Division is charged with ensuring that nonprofits are complying with the requirements for eligibility for tax-exempt status. As a result of the thousands of audit investigations, a handful has their tax-exempt status revoked; others pay fines and taxes.

  • Donors & Members – Some of the most powerful safeguards of nonprofit integrity are individual donors and members. By withholding their financial support, donors can strongly encourage nonprofits to reappraise their operations.

  •  Media – Many nonprofit leaders may feel misunderstood or even maligned by negative media coverage, however, this media watchdog role has resulted in increased awareness and accountability throughout the sector. Often it is the fear of being caught and the public exposure that deters a would-be fraudster. Hiding the crime only leads to more crime. Showing those who have been caught and the humiliation and punishment associated is the best way to deter others from following that same path. Harsher penalties now mean fewer crimes in the future.

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OVERSIGHT

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In an extraordinary development, all fifty states, the District of Columbia, and the Federal Trade Commission filed a federal lawsuit in May 2015 against four charities and their operators, alleging that they had defrauded more than $187 million from donors. While the dollar amount was staggering, the most unusual aspect of the lawsuit was the incredible level of cooperation among state nonprofit regulators.  ...read more...

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THE 
REALITIES & RISKS OF NONPROFIT FRAUD

-- Bruce W. Tucker

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"With more than 1.7 million nonprofit organizations registered in the United States, it was a statistical certainty that fraud and misappropriation were going to infect the philanthropic community". - Bruce Tucker, Founder

The risk of fraud is a serious concern for all types of enterprises. Fraud, however, can be particularly damaging to nonprofit organizations, where a damaged reputation can be devastating. There has been an increase in financial fraud incidents every year, which is a growing concern for law enforcement agencies. Corruption tends to spread like a virus, infecting all areas of an organization once it begins. In dealing with the crime internally, the Board of Directors has suddenly morphed from guardians of trust to conspirators in a cover-up. Obstructing justice by lying, falsifying, and betraying the general public. As a result, they suddenly become accomplices. What started as an ethical and worthwhile charity soon morphed into a sham.  ...read more...

 

Ethics and Nonprofits:

Understanding the Psychology

and Morality

In dealing with the crime internally the fraud infects the whole organization starting with the board of directors. Their participation in a cover-up and lack of disclosure to authorities and the general public makes them accomplices after the fact. Suddenly, what was an ethical and worthwhile charity has morphed into a deceitful sham.  To solve the problem we must examine the factors that influence moral conduct, the ethical issues that arise specifically in charitable organizations, and the best ways to promote ethical behavior within organizations.    ...read more...

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REPORTING  SUSPECTED FRAUD

Experts estimate that nonprofits lose almost $77 billion a year to fraud. Nonprofit fraud harms not only those who give to charity but the nonprofit itself. In order to report nonprofit fraud, you should gather evidence of the fraud, such as financial records or confidential emails. Then you should contact the police and other organizations.

NUMBER ONE  

Identify the fraud. Any nonprofit that defrauds people has committed a crime. Although fraud can take many shapes, there are two fraudulent schemes nonprofits often commit:

  • Deceptive fundraising. The nonprofit might make misrepresentations about charitable giving, such as the fair market value of donated assets or whether the nonprofit complies with donor-imposed restrictions on a gift.

  • Fraudulent financial reporting. The nonprofit might misclassify donations in order to mislead donors or charity watchdogs; misclassify expenses for fundraising and administration; or issue fraudulent statements of compliance.

NUMBER TWO

 

Gather evidence of the fraud. The police would benefit from receiving as much evidence as possible that supports your accusation of fraud. Be sure to gather the evidence legally. For example, don’t break into someone’s computer or office. Also, don’t secretly tape a conversation since this is illegal in many states.  Instead, get copies of evidence available to you:

  • Financial records. If the nonprofit has committed financial fraud, then you will want copies of the records which show the fraud.

  • Advertisements. The nonprofit might misrepresent its activities or purpose to the public. You should get samples of any misleading flyer or advertisement.

  • Letters or other communications. If the nonprofit lies to a donor, then you should get a copy of the misleading communication, provided you can legally access the letter or email.

NUMBER THREE

Notify the police of the fraud. You should report the crime to the local police first so that they can determine if an investigation is warranted.  If it does, they may have a division specific to that type of crime, or may need to be transferred to  a higher authority, such as the FBI.  Visit the police station in person as a face to face interview will help take you seriously. If you can't go in person, then call. If the police want to see your evidence, then share copies of all documents with them. Tell them only about the facts you have, not your personal speculation and do not embellish it. Do not make comments relating to the suspect's character. It will do more harm than good.  Be positive in your statements and do no waiver.

  • Your state may also run a charities watchdog group that you should contact as well.  

DO NOT spread rumors or speak of it to anyone that doesn't need to know. It could derail the investigation. The criminal may be tipped-off and have time to destroy evidence and even pin the misdeeds on someone else. Maybe even you.  

REPORT SUSPECTED NONPROFIT FRAUD TO THE OFFICE OF FOUNDATION OVERSIGHT:

Thank you. We will respond within 24 hours.

The Office of Foundation Oversight  provides a confidential evaluation of your situation to determine the best course of action is right for you.  This may be done via phone call, email, or one-on-one consultation. The Office will never charge a fee for any work, advise, or other actions performed on a client's behalf. We do not accept charitable donations, nor do we receive federal grant funds. This office is the product of volunteers that believe truth and justice are not outdated concepts. 

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