Fraud in the charitable sector

Fraud blog image

Published 24 October 2018

This week is international Charity Fraud Awareness Week. The true cost of fraud in New Zealand is unknown, but what is known is that the impact of fraud and economic crime is significant and can affect all types of organisations.

The not-for profit sector is not immune. Here at Charities Services we have uncovered examples of significant fraud during our investigations that resulted in the loss of hundreds of thousands of dollars to the charitable sector. Most of these investigations revealed charities with the best of intentions that just didn’t have sufficient protections in place to prevent fraud.

The charitable sector is a vital pillar in our society with assets totalling $58 billion and an annual income of $18 billion. So it’s not particularly surprising that there are some people out there looking to take advantage of the large amount of funds in the sector for their own personal gain.

Unsurprisingly, surveys have shown that most charities consider fraud is a problem for the sector, but the vast majority don’t believe it’s an issue for their charity.

We live in one of the least corrupt countries in the world, and every day thousands of people work for charities or volunteer their time to support their communities and make this country a better place. However, this does not mean anyone should be complacent about the real risk of fraud in their own charities. It is a small minority of charities that become victims of fraud; however, that minority can have a negative impact on the public’s trust and confidence in the charitable sector.

What is fraud?

In a nutshell, fraud is obtaining financial or personal gain by deliberate deception. Some examples in the charity context are:

  • Stealing donations
  • Unauthorised diverting of funds from a charity bank account to a personal bank account
  • Manipulating documents such as receipts, invoices, financial statements in order to obtain a personal benefit
  • Unauthorised use of charitable resources for personal benefit; e.g. fuel cards, supermarket vouchers, overseas travel
  • Misusing grants - such as underspending on the grant and then manipulating documentation to hide where the money has gone
  • Tax evasion
  • Diverting charity funds or resources to a personal business venture

Who commits fraud?

There have been a number of studies/surveys done to identify typical characteristics of a fraudster. While there are trends relating to gender, age, position and length of service, anyone can be capable of committing fraud.

Fraud in a charity can be internal (such as a staff member, officer or volunteer) or external (a contractor, supplier or donor). However, it is more likely to come from within your charity and often from people in positions of trust.

What are your responsibilities?

Every officer of a charity has a duty to act in the best interests of the organisation they serve. The board or committee have a collective responsibility to protect the assets of their charity.

It is understandable to think: “I trust everyone I work with and who our charity interacts with”, but one of the major reasons for people committing fraud is opportunity. What this means is that organisations that make it easy (or not terribly difficult) for someone to help themselves to the funds and resources of the organisation are at risk of being defrauded. It is vital that your charity has robust processes and safeguards in place to make it as difficult as possible for someone to defraud you.

These safeguards have some key benefits for your organisation:

  1. Protecting your charity’s money and resources
  2. Protecting your charity’s reputation in the eyes of the public, funders and supporters
  3. Deterring fraudsters from targeting your charity in the first place

What can you do to protect your charity?

There are many processes, policies and systems a charity can easily put in place to protect themselves. Here are 10 tips recommended by the Australian Charity and Not-For-Profit Commission (ACNC), our fellow regulator in Australia, which are just as applicable here in New Zealand):

1. Have clear, written financial procedures and delegations

Have clear financial controls for all staff and volunteers to follow. For example, always have two people involved in the handling of money and cheques, and approving invoices and bill payments. 

2. Implement robust HR procedures

Provide ongoing training and communication to staff and volunteers about fraud prevention and conduct appropriate checks when recruiting new staff.

3. Establish a code of conduct

Demonstrate and encourage ethical behaviour by recording it in a code of conduct. Display your code of conduct prominently and model it.

4. Define financial responsibilities

Make sure people in your charity understand their roles and responsibilities when it comes to finances and have the right skills and experience to carry out their roles effectively.

5. Develop a fraud prevention policy

Document a process on how to prevent, identify and respond to incidents of fraud and ensure staff members and volunteers are familiar with it (see a link to an example below).

6. Be secure when banking online

Choose secure internet banking passwords, change them regularly and limit who can have access to them.

7. Limit cash handling

Limit the amount of cash staff and volunteers handle. Large amounts of cash can encourage theft and fraud.

8. Regularly check your accounts and grant funding

Review and monitor your accounts and budget to identify variations. If you see a significant variation, ask for more information. Always keep records of your grant funding.

9. Ask questions

Members of your board should feel comfortable asking questions about the charity’s finances, and managers of charities should make sure staff are accountable.

10. Understand the importance of reporting fraud

Make sure your staff and volunteers understand the importance of reporting suspected fraud and that there is a clear process on how to make a report to your charity’s Senior Management, the Police and the Department of Internal Affairs. There is a lot of useful guidance available from other charity regulators and organisations around the world, and in a New Zealand context. Here are some that we would recommend looking at:

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