Common Nonprofit Scams and How to Avoid Them
Thursday, August 13, 2020
Nonprofit organizations can be especially prone to scams, both internally and externally. Because they tend to be filled with do-gooder types, they’re often taken advantage of by people who perceive them to be easy targets. They’re frequently also small, making them potentially easy targets for people who take advantage of the nonprofit mission to create good in the communities they provide service to.
Fraud risk in nonprofits
A typical organization loses around 5 percent of annual revenue in fraud. For nonprofits, these numbers tend to be lower because they aren’t bringing in as much money. Still, 5 percent of any income can be significant, especially for larger nonprofit organizations. Fraud can go beyond dollars too, hitting nonprofit donor trust, community reputation, and credibility for grant applications.
Common types of fraud or scams in nonprofits
Billing schemes are common in nonprofit fraud, often committed through billing schemes, which require an employee to submit an invoice they are not entitled to be paid for. They may also involve the creation of a fraudulent company or person or fraudulent markups that allow an employee to collect the extra cash. Scams may also be as simple as ordering personal goods with company cash--the sky's the limit. Nonprofit scams can look a lot of different ways, but typically include at least one of the following:
Ghost employees: A ghost employee is someone on the payroll who doesn’t actually work for your nonprofit. Instead, falsified records cause a paycheck to be issued for this “person”, and the checks are later cashed by your scammer.
Misappropriation of funds: This is simply another way of saying embezzlement of money or property, and occurs when a person knowingly takes money or resources and uses it for personal things in a myriad of ways.
Vendor kickbacks: Although there are a few variations on this, the most common form of vendor kickback scam occurs when a vendor submits an invoice that is either inflated or entirely fraudulent. Then, the other scammer (who works within the nonprofit) submits it for payment, splitting or otherwise dividing the overage.
Check fraud: This encompasses a huge variety of nonprofit scams, and refers to using checks to commit fraud. This can mean forgery, theft, paper hanging, check kiting, using chemicals to remove information from a check, or even counterfeiting.
Expense fraud Expense fraud can vary, but it is usually when an employee submits fake expenses, fraudulent personal expenses, multiple reimbursements, or overstated expenses.
Theft of cash or assets: Perhaps the easiest to understand, theft happens when an employee within your nonprofit simply removes cash or assets from the premises with nefarious intent.
Red flags for fraud or scams in your nonprofit
Learning to identify warning signs of fraud can help save your organization before you’re even hit. Scammers can be clever, but well run organizations often thwart fraudulent activity before it even takes place, or soon after.
- Unclear invoices
- Vendors you haven’t heard of or those with unclear information (like no physical address)
- Sudden increases in invoices from a specific vendor
- Multiple monthly invoices from one vendor
- Vendor invoices that list employee addresses as their own
- Large vendor amounts divided amongst multiple invoices
- Low visibility of employees dealing with payments and vendors
How to protect your nonprofit
The best way to protect your nonprofit from scams is to set in place clear policies that offer increased visibility within your organization. This can include working with an external nonprofit accountant, safeguarding your financials by having multiple people in different departments oversee them, or maintaining a high level of transparency with your board.
Get to know your employees and learn to recognize personal triggers that may make someone increasingly prone to run scams. Extreme personal financial difficulty caused by illness or divorce, legal problems, or a troubled employment history may all indicate that an employee may be more likely to steal. It certainly doesn’t always--but it is better to monitor the situation than to be surprised by it. Organizations that function well and rely on respect and trust are less at risk, so offer a work environment that prioritizes employee wellbeing and solutions for personal issues that may lead to unlawful behavior down the road.
You should also set up a corporate compliance plan, which helps hold nonprofits accountable and offers some extended visibility. Corporate compliance plans for nonprofits usually include a document retention policy, a policy for conflicts of interest, a whistleblower policy, and a detailed code of conduct policy for everyone within the organization. These documents help protect your organization against fraud and other forms of unethical behavior, as well as build your reputation by reassuring donors and board members that you are operating with vision and transparency. Be thorough in crafting, reviewing, and updating your policies, and communicate them with everyone within your nonprofit organization.
Finally, don’t assume that your organization is safe because you’re small, know your employees, or don’t deal with large amounts of cash. Nonprofit scams can and do happen to everyone. By implementing policies that safeguard your organization, you’re not being critical of your employees--you’re protecting them.