Due Diligence for Non-Profits

The Importance of Due Diligence for Non-Profits

Many people are passionate about making a difference in the world. For some, it is a matter of starting a non-profit, working for one, or giving charitable donations to an organization or non-profits committed to  projects they believe in.

In the United States, alone, there are 1.54 million non-profits as of January 2021. The United Kingdom also has a long tradition of giving money to charities and helping those in need. It is ranked near the top of World Giving with over 160,000 registered charities. There are many varieties of charities and non-profits individuals and companies can support, but one must do so carefully because not all non-profits are created equal. There are times when non-profits fail to live up to their mission statement and stray into unethical or illegal activity. This activity includes (but is not limited to) mismanagement, fraud, embezzlement, or incidents where money donated isn’t being routed to those the donor thinks it will be. Additionally, non-profit executives may have a history of financial crimes, abuse or sexual harassment, amongst other harmful characteristics.

Due Diligence investigations are  one of the best ways to protect your non-profit against fraud and to ensure that you invest in someone who is committed to ensuring your donations are used to support the people and projects you believe in.

Though the expense of performing due diligence investigations in non-profits seems unfeasible, there are companies specializing in deep dive due diligence investigations that give back to the community by offering discounts to non-profits.

Some non-profit employees may think that they do not need to do anything more than a simple background check on non-profit executive staff. Wouldn’t people choosing to work there be doing it because they want to do good? Others who want to give company or personal money to a non-profit may feel bad about doing due diligence as well. Wouldn’t it look bad? Shouldn’t I just do the right thing? Don’t I want my employees, investors, or the public to know that I am supporting a great cause and if I investigate, doesn’t it make the company look bad?

The answer to each of these questions is that the primary purpose of  due diligence is to protect your non-profit, your reputation, your cause, and even your organization’s board of directors. It would look worse if it is revealed publicly that that the non-profit you ran or that you supported was far from doing good in the world.  Reputational damage for non-profit organizations may decrease donations for many years and even lose donors that are committing their hard earned money for good.

Example of Fraud in Non-Profits

When We Think of Non-Profits

We usually think of organizations like Goodwill, Meals-on-Wheels or Habitat for Humanity when non-profits come to mind. They maintain non-profit status for the good they do in local communities and around the globe, as well as for positive tax benefits. Sadly, some non-profits use their tax standing and appeal to people’s desire to do good to bring in enormous profits for their board members and executives. In some cases, few funds or even none at all have gone to help the people or cause they claim to support.

Some non-profits employ routine background checks to help weed out potentially unethical workers. While these checks are important, they are often inadequate, especially at executive levels. However, these routine background checks are often unable to locate all of the data needed to protect the organization’s board of directors from fiduciary exposure or lawsuits if adverse material is revealed post-hire.

On the other hand, executive due diligence provides an in-depth look into an employee’s criminal history, civil litigation issues, behavioral history (for example litigiousness), financial and legal issues, relationships with other companies and board advisory positions, reputation, misrepresented education and overstated work history, business ownership, and undisclosed or adverse issues.

A Few Examples of Non-Profit Fraud

United Way of Massachusetts Bay and Merrimack Valley

The non-profit, was indicted in a $6.2 million IT fraud in 2019. Imran Alrai, former Vice President of Information Technology at United Way of Massachusetts Bay and Merrimack Valley allegedly stole $6.2 million over a number of years through the creation of a shell company. He was also brought up on charges of wire fraud.

The Key Worldwide Foundation

At the center of the college admissions scandal, The Key Worldwide Foundation, claimed it made donations or had partnerships with a variety of other non-profits and charities, which many are denying. William “Rick” Singer, the founder of the foundation has been charged by the Department of Justice (DOJ) with money laundering conspiracy, racketeering conspiracy, and obstruction of justice.  Other defendants include university athletic coaches, collage exam administrators, CEOs, and actresses.

Examples of Non-profits Whose Funds May Not Help...Much

Kids Wish Foundation

The Kids Wish Foundation takes in millions to help kids who are terminally ill and their families. In past decades, nearly $110 million in donations were directed to corporate solicitors and a hefty $4.8 million has gone to pay the founder of the charity and his personal consulting firm.

National Veterans Service Fund

Those who have put their lives on the line and made so many sacrifices deserve better. The National Veterans Service Fund was found to do very little regardless of their name with 80% of donations going to solicitors.

What the Statistics Say

The Association of Certified Fraud Examiners (ACFE), in their 2020 Report to the Nations, found that in fraud cases reported to the Certified Fraud Examiners (CFE), 9% of the victims were non-profit organizations with a median loss of $75,000 per incident and a $639,000 average loss.

Non-profit employees were likely to commit fraud around 39% of the time in these instances, but the magnitude of the fraud was greatly amplified at the board and director level. Non-profit employees averaged $21,000 in theft from their non-profit, while board and director-level employees averaged $250,000.

Non-profits, whether educational, social services, social justice, health, or other charitable institutes, are vulnerable to misappropriation of funds and potential abuse with devastating effects. Skimming and larceny are also common types of fraud that non-profits are vulnerable to. Fraud can have significant negative impact on non-profits, some of which operate under extremely tight financial resources.

Some Common Types of Fraud Schemes in Non-Profits:

  • Embezzlement
  • Expense fraud
  • Misappropriation of funds
  • Check Fraud
  • Fictitious vendor schemes
  • Kickbacks from vendors
  • Ghost employees
  • Theft of assets or cash
  • Wire fraud

Preventative care and ongoing transparency remain a non-profit organization's best health practice. It is not only important to create a built-in, on-going FCPA program within any business, it is crucial to partner with an external, third-party global security and risk management firm who is highly-skilled at performing deep due diligence investigations at both individual and company levels. These executive due diligence checks need to be of the highest quality and designed to keep your donations safe from risk.

Safeguarding Your Non-Profit or Safeguarding You Donations to Non-Profits

In order to safeguard the non-profit or charitable donations to your favorite organization, make sure you do your due diligence. Inquire whether the non-profit vets the executives hired with due diligence checks rather than basic background checks. Is the non-profit legitimate? Are the board of directors and higher level executives who they say they are? Is the money going where they say it is going or reaching those you expect it to reach?  Due diligence investigations will prevent these issues and reveal a prior history of malfeasance or misconduct at other non-profit organizations.


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