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Why Fraudsters Target Charities and NPOs

Fraud is a prevalent risk in any entity. However, when it comes to charitable and not-for-profit organizations, the risk of fraud appears to be more significant.

One of the recent cases that has put charities back in the spotlight is the staggering theft/fraud allegations that surfaced at The Salvation Army, which first came to light in August 2012, as a result of a whistleblower coming forward with concerns. Early reports estimate the alleged fraud to be $2 million, involving approximately 100,000 toys as well as food and donations, allegedly removed from The Salvation Army’s Toronto warehouse.

According to reports by the media, following an internal audit conducted by The Salvation Army, the then current Executive Director in Toronto, Mr. David Rennie, was initially suspended, and then shortly thereafter, terminated. It is believed that the alleged fraud had taken place over a period of two years.

In the days that followed, the alleged theft/fraud scheme in Toronto started to unfold quickly.

On November 21, 2012, the CBC reported that a police investigation was already underway. A few days later, the media reported that police raided two warehouses located in Brampton and Toronto, where “skids” of toys and other alleged merchandise belonging to The Salvation Army, were located.

To put the quantum of toys located in perspective, the media also reported that “…three tractor-trailers…” were required to move the goods from the warehouse to a secure location under police control.

Edward Nagel, forensic accountant and Principal of nagel + associates, provided his comments about The Salvation Army Toronto alleged fraud case on CBC’s Metro Morning show. Click here to replay the interview.

The media also reported that within a few days of uncovering the skids of toys, Mr. Rennie surrendered to the police, was arrested and charged with theft, possession of property obtained by crime and breach of trust.

As if the allegations that surfaced in Toronto did not create enough challenges for the organization, within the same week, the media reported fraud allegations that surfaced at The Salvation Army’s Ottawa Centre, involving approximately $250,000 of allegedly missing funds. Such allegations resulted in the termination of the Ottawa Executive Director, Mr. Perry Rowe.

While these two cases remain under investigation, they both raise the obvious question:

Why are charitable organizations the target of fraudsters?

As Edward Nagel indicated in his interview with CBC, there appear to be several reasons that might help explain this.

Firstly, organizations implement internal controls in order to guide employees to carry out the mandate of the entity. Certain internal controls are specifically designed to prevent/detect fraud. When fraud occurs, either the organization’s internal controls failed to prevent/detect the fraud, or as is more often the case, the controls may have been overridden.

The Globe and Mail recently reported that a Toronto lawyer, Michael Ingram, is facing fraud and theft charges and has been stripped of his licence after the Law Society of Upper Canada concluded he misappropriated more than $3-million of his clients’ money, most of it belonging to a charitable foundation with long-standing links to the Toronto Rotary Club. The Globe and Mail also reported that Mr. Ingram, a former partner with the downtown law firm Coutts Crane Ingram (“CCI”), had been the charity’s lawyer and had headed its board of directors. According to the statement of defence filed by the law firm, “CCI had reasonable safeguards in place to protect the funds in its trust account, which Ingram unilaterally and surreptitiously circumvented”.

One of the basic internal controls in any organization is segregation of duties. For example, the person collecting cash (or revenue) should neither be the same person who records the receipt of cash (or revenue) in the organization’s accounting records nor the same person depositing such funds in the bank account. Otherwise, that individual could misappropriate the cash and conceal it without detection.

Most charities and not-for-profit organizations are often managed by a lean number of paid staff and volunteers, in order to maximize distribution of resources to the intended recipients of the organization.

As such, the level of sophistication of internal controls within charities and not-for-profit organizations, is arguably less robust than a for-profit organization. Fraudsters will inherently take advantage of this knowledge.

More importantly, employees and volunteers of charities are not necessarily trained in fraud prevention. Therefore, even if so-called “red flags” or indicators of fraud were to surface, it is unlikely that they would be detected, possibly for an extended period of time. Keep in mind that when fraudsters engage in illicit activity, they do not intend on getting caught. In organizations where there is limited consistency of people working and/or volunteering on a day-to-day basis, this increases the likelihood that a fraud can go undetected.

It is also important to note that contrary to popular belief, trust is not an internal control. That’s not to say that you cannot trust those who work in your organization. Rather, checks-and-balances need to be put in place in order to provide some level of assurance that trust is not abused.

Fraud prevention in charities and not-for-profit organizations

Prevention–rather than detection–is the best deterrent against fraud.

Fraud awareness and prevention must resonate throughout every part of charitable and not-for-profit organizations, beginning with the board and trickling down to every employee and volunteer. The “tone from the top” of the organization is that there is zero tolerance for fraud and that specific consequences and actions will be taken, should fraud allegations surface.

Recent fraud surveys suggest that tips are the leading method of uncovering fraud. Yet, the most common reason cited for employees not coming forward with fraud allegations, is fear. As noted above, it was ultimately a whistleblower who brought to surface the fraud allegations at The Salvation Army in Toronto. As such, employees (and volunteers for that matter) need to be provided with a safe mechanism, such as an independent ethics or whistleblower hotline to report their concerns, fraud or otherwise. One firm that provides such services is The Listening Post. nagel + associates is the go-to forensic accounting partner for The Listening Post.

Furthermore, all employees and volunteers should be adequately trained in fraud awareness and prevention. To the extent that a fraud is occurring, such training increases the likelihood of detecting fraud (while deterring would-be fraudsters from engaging in illicit activity in the first place).

Recognizing the vulnerability of charities and not-for-profits to fraudsters, coupled with our belief that fraud awareness training is key to mitigating this known risk, nagel + associates has developed a one-day fraud awareness course specifically designed for boards and management in the charitable/not-for-profit sector entitled, “Fraud Awareness in the Charitable and Not-for-Profit Sectors”. Click here for more details about this course.

In closing, the alleged fraud cases that recently surfaced at The Salvation Army serve to highlight the fact that if fraudsters are prepared to target organizations whose primary mandate is to help the less fortunate, no organization should consider itself immune to fraud risk.


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