Silent Partners: Are you working with a local NGO that doesn’t exist?

In this guest post, experienced global development finance professional Najwa Whistler describes her experience investigating ghost NGOs in a conflict zone. Names and details have been changed.

roadSome years ago, I found myself investigating events in a program in a war-torn country. The program had been set up to build the capacity of small local NGOs to implement community development projects. The concept was great, the donor funding had been secured, local partner NGOs had submitted proposals and agreements had been signed, transfers had been made and reports had been received. The only problem was that most of these NGOs didn’t exist.

In development sector investigations, one of the first actions upon arriving in-country is to meet with the local program director and understand how the concerns began. But within moments of sitting down with Nancy, I could already start to see how the fraud had arisen.

afghanistan-60668_1920Ex-pat Nancy used to be a teacher in Canada, and this was her first job in an international NGO. She was young, and idealistic, but it was clear that she did not have the relevant skills and experience. A conflict zone is a dangerous and stressful place, often with high staff-turnover, and the international NGO had compromised on her qualifications to find someone willing to endure the hardship.

As I talked through Nancy’s concerns that their local partners might not exist, two things became very clear. The first was that Nancy did not have field trip and progress reports and had not visited their offices.

“Why?” I asked.

“Oh, I can’t visit, it’s too dangerous,” she said.

The second was that, instead, Nancy had relied heavily on a single individual to manage this project.

“Can I see the checklist for the review of the partners’ proposals, and who was involved in the decision making?” I asked.

Nancy nodded. “Raj, the national program manager, reviewed the proposals and approved them – then he prepared the contracts.”

Raj had worked for the international NGO for many years.  In his late forties and a man of few words, he was a hard worker – the first in the office, the last to leave, and rarely took a day off. Nancy delegated most of her tasks to him.

volkswagen-569315_1920When my team drove out to the field to visit the partners and the communities, I went with Malik, a driver, who turned out to be Raj’s brother. The driver tipped off the ‘NGOs’ that we were coming for a visit.

Malik took us to a building consisting of five rooms and a hall way. On the door of each room was a crisp, freshly printed A4 paper with the name of each ’NGO’. In each room sat one man, the ‘managing director’ of each ‘NGO’. Solidarity, cooperation and co-ordination between NGOs at its best perhaps, and rarely seen to such an extent!

Malik was not the only person I met that day close to Raj. All five men came from the same village, and the same kinship group, as the brothers. This was surprising too – as the community development projects were in an area where the majority of locals were from a different kinship group – one with a long history of conflict with that of the brothers.

Over the day, I sat with each ‘managing director’ and asked about the progress of the work, the challenges, their records and their reports. Not one could locate any team members, volunteers or records with whom I could engage.

“I keep the documentation at my house because it is not safe to keep them in this building,” said one. Perhaps unsurprisingly, he would not allow us to follow him to his house or wait while he retrieved the documents as the house was ‘too far’.

Unfortunately, this picture is not unusual. But the red flags were visible in this case – and there are things we can do to better spot them and manage these risks.

office-594132_1920Firstly, ensure a realistic and validated assessment of potential partners takes place. More than one person or function needs to be involved in this assessment, and it should compare project proposals. Involve logistics and procurement teams to verify market rates.

Secondly, constantly review your project management approach during its lifecycle. Perform regular visits to the projects when the security situation allows. Ask the team members of the local partner organisation to meet you at your office from time to time.

Thirdly, even in environments where we trust our colleagues, ensure that you take a robust approach to verification. If security doesn’t allow you to physically visit the project, perhaps you can ask for GPS located photos of activities – and do not be afraid to ask for them again if the first ones look odd! Interview beneficiaries over the phone. Talk to donors and other international organisations working in the same area about their experiences.

passport photoNajwa Whistler is a finance director with 18 years of experience working for several international NGOs around the world. Growing up in a small village in Lebanon in poverty during the civil war built her resilience and determination to work in international development. She enjoys cooking and dancing. You can reach her via naj.whistler@gmail.com

Advertisements

International NGOs: What does Deloitte’s new bribery and corruption report mean for you?

This week, Deloitte published One Step Ahead, its 2017 bribery and corruption report. It provides insights from Deloitte’s survey of Australian and New Zealand risk leaders, asking about their perception and experiences of domestic and foreign bribery and corruption.

International NGOs operate in some of the most high-risk jurisdictions in the world, often in the bottom half of the Transparency International (TI) Corruption Perceptions Index. So what are the implications of the report’s insights for such organisations? This article suggests four key questions for your internationally-operating NGO.

Do you recognise the reputational risk – and how to manage it?

1reputationThere is a disconnect between the perception of reputational risk and the action taken to manage it.

Deloitte’s report notes rising public scrutiny and political concern in Australia, with a number of recent initiatives including a review of Australia’s legislative and policy framework on corruption, the consideration of Deferred Prosecution Agreements, proposed changes to whistleblower protection and beneficial ownership legislation, and a proposed new corporate offence of failing to prevent foreign bribery. These measures arise as Australia slips down TI’s index, and survey respondents overwhelmingly saw reputational impact as the most serious consequence of incidents.

And yet despite this dizzying acceleration, Deloitte’s survey actually implies a slowdown in the progress of organisations. Detection rates and the perception of the risk were broadly consistent with 2015, and almost half of respondents did not even intend to upgrade their anti-corruption frameworks in the next five years.

International NGOs will recognise the reputational dimension, often perceived to impact upon fundraising. But they may also recognise the slowdown. There’s a paradox here and it begs the question – are you best managing the risk? Considering reputational risk after an incident has occurred is too late – it needs to be a driver for investing in meaningful prevention and detection systems.

What does ‘risk assessment’ mean to you?

Clusterflunk stock photo.One of the report’s most surprising findings was the under-use of risk assessment. This might not surprise NGOs, however; my counter-fraud colleagues and I have found the quality and extent of risk assessment in the sector to be patchy at best.

The problem is often in how it is seen. Is it a dry, bureaucratic, tick-box activity carried out for donor proposals and then forgotten about – or a powerful and creative tool for building resilience, evidencing stewardship, and quality-assuring your NGO’s anti-corruption approach?

The narrative we create around risk assessment, and the space we make for it, is critical. For example, I have delivered fraud and corruption training all over the world and people love risk assessment exercises – being invited to think about how they might defraud their organisation, and what could stop them! We can harness that intelligence. For example, consider proper risk workshops, horizon-scanning, ‘red-cell’ thinking, and reflect on how risk management is framed to your staff.

How effectively are you managing conflicts of interest?

3conflictsThe biggest proportion of incidents reported were conflicts of interest, with personal favours not far behind. This may resonate with NGO managers; anecdotally, conflicts of interest in procurement and recruitment can be a real issue.

There is often scope for improvement in how conflicts of interest are identified and managed. Because the process is often reliant on self-declaration by those who are not necessarily incentivised to declare, compliance is not automatic. Good conflicts of interest frameworks need to be simple, well-communicated, focused on heightening transparency, and subject to ongoing reinforcement.

What do you say, and what do you incentivise?

4incentivesRespondents most frequently declared organisational culture and tone-at-the-top as the greatest preventative factors. I have written about the link between culture and corruption for NGOs before (here and here), but in my experience most NGO managers believe they do set the right tone and have the right culture. The problem here is that by culture and tone, we don’t just mean what you say and how you say it, we also mean what you incentivise and are perceived to permit. In my book, I describe how tone at the top is about not just words, but actions. For example:

  • Did you take the right action over that manager who might have given a contract to his sister’s company?
  • Did you ask the right questions about that mysteriously rapid movement of humanitarian equipment into that high-risk jurisdiction when other agencies were held up at customs?
  • Do you include anti-corruption objectives into personnel appraisals and job descriptions?
  • Are the objectives and timelines for projects and programmes set at such an ambitious level that you inadvertently incentivise corruption?

Your staff, volunteers, institutional donors, private supporters are watching. Crucially, so are your beneficiaries.

 

FFCHGDSTo read more about how to deter, prevent, detect and respond to fraud and corruption in humanitarian and global development work, make sure you pick up a copy of my book, Fighting Fraud and Corruption in the Humanitarian and Global Development Sector (Routledge, 2016). It’s out now and packed with relevant material!

When NGOs break the law: Consequences for fraud risk

The 1986 movie Top Gun, starring Tom Cruise, opens with a fantastic scene of aerial derring-do.

In this fictional scenario, American planes are engaged by a rival power’s ‘Mig’ aircraft, one of whom activates its missile lock on an American aircraft. The pilot calls out to Tom Cruise’s character to ‘get the [guy] off’ him. As I understand it, what Maverick apparently should have done was to fly behind the Mig and engage his own missile lock, deterring the Mig from firing at his comrade. Maverick doesn’t do that. He’s got his own plan.

4It’s a great scene, and we celebrate Maverick’s daring heroics. But let’s be clear, this wasn’t what he was supposed to do. It was dangerous. We only celebrate because Maverick pulled it off. If something had gone wrong, Top Gun wouldn’t be a heartwarming movie about a young pilot’s quest for meaning, love and success. It would be a dark political thriller about a world on the brink of nuclear war following a mid-air collision caused by a reckless American pilot.

From time to time in my work with NGOs, I’ve caught glimpses of internal cultures where compliance is not as valued as one might expect. When the organisation’s overall aims are moral, getting away with non-compliance might even attract honour. But just as would be the case with Maverick’s airborne antics, there are consequences if risk catches up with reality.

PASSPORT 5Some international NGOs are tempted to break the laws and regulations of their countries of operation, registration, or both. Here we don’t so much mean situations where legal authority is unclear, or regulations and obligations are ill-defined or differently interpreted, or laws which violate human rights. Here we’re focussing on a situation where an NGO wilfully or negligently breaks legitimate, clearly-defined and communicated local laws and regulations. Temptations might include, particularly:

  • Breaching immigration, tax or employment law;
  • Procuring on the black market;
  • Conducting projects outside the authorised parameters;
  • Breaching NGO regulations or directives (e.g. reporting).

INGOs do complex work in complex places. Common reasons why staff or managers may take this action (or indeed, inaction) might include:

  • A tension between the time it takes to negotiate labyrinthine or contradictory local bureaucracies versus their urgent humanitarian objectives or donor expectations;
  • A disconnect between headquarters expectations versus local realities;
  • Failing to invest in the preparation and planning necessary to properly identify relevant regulatory factors and formulate organisational responses to them;
  • Failing to maintain proper oversight to ensure that staff are delivering objectives lawfully – sometimes potentially deliberately (‘don’t ask, don’t tell’);
  • Internal cultures where ‘getting the job done’ is valued more highly than compliance.

This exposes an international NGO to a wide array of risks. Now, this is not a legal blog and I am not a lawyer, but I do note that some possible consequences of non-compliance might affect an NGO’s ability to reduce its risk of fraud and corruption. In this article we’ll suggest three such areas.

The impact upon responding to fraud incidents

file2831269190184When an incident of fraud takes places in a project where the NGO was working unlawfully,  managers may then be incentivised against taking civil or criminal justice action for fear of drawing attention to the project’s own misdemeanours. This may significantly hamper the prospect of redress (getting our money back), and impact upon the available sanctions for a perpetrator. This, in turn, could damage the NGO’s ability to deter fraud and corruption if a potential perpetrator knows that such an outcome is unlikely.

The impact upon counter-fraud culture

My book suggests four characteristics of such a culture, one of which is that ‘all commit to, and participate in, reducing fraud and corruption to an absolute minimum.’ It is not hard to see how the toleration of unlawful activity can contradict this. As a previous blog post has mentioned, how can we ask our employees to role-model accountability and transparency if the managers of our organisations are not doing it?

file4081251141923The risk goes even further, however. While international staff may be able to hop on the next plane home if things get too hot with local authorities, local staff can’t press that escape button. They may therefore bear the greatest risk of consequences like prosecution. This outrageous burden is hardly helpful to the positive workplace relationships necessary to help deter corruption and promote whistleblowing.

Similarly, we need to consider how expecting or allowing workers to break the law, or breaching their employment rights, might disenfranchise them. A breakdown in the relationship between employee and employer – particularly where an employee feels wronged – might, in some cases, contribute to the rationalisation of occupational fraud.

The impact upon preventing fraud and corruption

Operating unlawfully could contribute to a country’s wider crime problem and undermine the legitimate state. In this sense, we help to sustain the environments of complexity and injustice that make transparent and accountable work so difficult – not alleviate them. In turn, this helps to maintain the risk of fraud and corruption in our operations there.

DSC06922An area where this ‘do-no-harm’ themed risk is particularly evident is where NGOs procure from the black market, an option that can arise during scenarios such as the recent fuel crises in Yemen and Nepal. Doing so makes an NGO part of an opaque supply chain and financial flow – where did the product really come from, and where is your money really going? The transparency of your contacts is in no way incentivised, and they are unlikely to volunteer to whom or what they are linked (think Six Degrees of Separation).

Subsequently, an NGO could easily appear in a network that features terrorist groups or those subject to financial sanctions, or in which the financial flow benefits those involved (or ultimately supports investment) in other forms of state-destabilising serious organised crime. Being a black marketplace buyer can make an NGO part of a network in which its donors and supporters might be surprised to see it.

How can these organisations claim to help the nation’s development when, through corruption, they weaken the rule of law? How can we deal with this hypocrisy?

Ingrid Nanne, What happens when NGOs break the law?

Conclusion

Humanitarian and global development work is complex, and programmes are often under pressure from multiple sources. However, operating unlawfully carries a range of risks, and the crystallisation of some of those might damage a programme’s resilience to fraud and corruption.

Managers need to take these risks seriously. This means avoiding the blanket application of a ‘humanitarian need’ trump card to all their operations, and instead ensuring that a nuanced and considered approach to business planning and risk management identifies and caters for foreseeable tensions with legitimate local laws and regulations. The days of ‘don’t ask, don’t tell’ need to be a feature of history textbooks, not modern programme doctrine.

FFCHGDSFind out more about the risk that fraud and corruption pose to humanitarian and global development organisations, and how they can better deter, prevent, detect and respond to it, in my book! Click here to get your copy of Fighting Fraud and Corruption in the Humanitarian and Global Development Sector from the Routledge website or Amazon!

The ‘Panama Papers’: What lessons can NGOs learn?

2

This week, the world is reeling from two significant scandals in the space of five days, Mossack Fonseca in Panama and Unaoil in Monaco. They are both interesting cases, potentially offering fascinating insights into the shady world of illicit financial flows and their enablers. NGOs worldwide are lining up to challenge the global financial order afresh.

But as they do so, now might be a good time for them to reflect internally on the extent to which their own operations minimise the risk of involvement in the darker side of finance. One risk in particular is money-laundering – the process by which the proceeds of crime are given a veneer of legitimacy, obscuring their origin or ownership.

port-1030760_1920
Monaco

While there may be some examples of illegitimate NGOs being used as vehicles for money-laundering, there are also dangers that this risk can be over-emphasised and perhaps used unfairly to penalise local civil societies. A more common and credible risk, instead, might be that legitimate NGOs are abused by criminals during a money laundering phase known as ‘layering,’ in which multiple transactions are created, perhaps between entities, across borders and involving other fraudulent activities.

Indeed, depending on the jurisdiction, NGOs, nonprofits and charities may have explicit or implied legal obligations to minimise money-laundering risks. What all such organisations should do, however, is consider where there might be a risk of exposure and take steps to limit it.

This article suggests some common areas of particular risk. It does not, of course, advocate that NGOs avoid all these situations wholesale, nor that they are necessarily indicative of money-laundering. But, these could be situations of heightened risk and therefore our diligence in managing them should rise accordingly.

Funds from anonymous donors

mask-1249923_1920Anonymous donors are a normal feature of fundraising. We’ve all popped a few coins into a collection bucket. But where NGOs receive unusual or significant funds, with no information on their provenance, a red light should flicker into life. Anonymous giving could be the starting point for a number of laundering methodologies, perhaps even involving insiders. NGOs need to take reasonable steps to identify the sources of such contributions.

Donors with restrictive demands

Major institutional donors are likely to meet our due diligence requirements – so that’s not necessarily who we mean here. We mean the rich, local businessman who approaches our NGO to execute a project entirely of his choosing – especially where it sits outside or at the fringes of our stated mission, or where it comes with unusual requirements.

credit-card-851506_1920An example might arise from the UK. In 2013, the Charity Commission published a warning that followed a Serious Organised Crime Agency (SOCA) alert. Some British charities had been approached by an individual who wanted to give them a large donation – but the charity had to pay some of it to a foreign charity of the individual’s choosing. Alas, the person was laundering the proceeds of fraudulently-obtained credit cards, and there was no foreign charity. It was the criminal’s own bank account, and a number of charities fell for this scam.

Requests to move funds between organisations

OLYMPUS DIGITAL CAMERALet’s say you are running a social development enterprise. A company approaches you to purchase a quantity of your beautiful wooden products. You’re delighted – but then the company asks if a second company can settle the invoice on its behalf. They’ll settle up between themselves, later, it says. The red light should come on.

A second example might be what’s known as conduit funding, which is variously defined but broadly means that our NGO acts a funding intermediary without influence or control over what happens to the funds. The Canada Revenue Agency gives a good example of this here.

Requests from donors to return funds to them

RETURNED COINSLet’s say that our rich, local businessman approaches you with a proposition. He wishes to store some money in a savings account, but he doesn’t like banks. Maybe he says they’re greedy and corrupt, and he wants to help those who live out his own commitment to social justice. He suggests giving you his US$100,000 – which he will retrieve in six months, while you get to keep the interest. Red light.

Another example might be where a donor asks for a refund for some reason, perhaps stating that the donation was in error or quibbling over the extent to which the NGO delivered on its promises or stated purpose. Requests for refunds are not uncommon, and may present elevated money-laundering risk – particularly when amounts are substantial or unusual. A good defence is a clear and publicised policy on refunds.

Using Money Transfer Organisations (MTOs) in high-risk locations

IMG_2298A range of complex issues face NGOs that move funds into and around locations of elevated risk, such as conflict zones, fragile states and areas of significant terrorist activity. One of these is that we don’t know who else’s money an MTO is moving in or out of these places. If our NGO engages an unscrupulous, unregulated or badly-run MTO, there are real risks of breaching the principle of ‘do no harm’ and of reputational impact.

We need to do what we can to assure ourselves of the agent’s probity ahead of engagement. This is known as due diligence, and should include comprehensive checks on identity, legality and competence.

How can NGOs respond?

There is much that an NGO, charity or nonprofit can do to minimise the risk of abuse by money-launderers. Some of the cornerstones of a framework might include:

  • A clear organisational policy, together with an owner for the issue;
  • A system of regular and meticulous risk assessment that identifies what could happen and how best the NGO can minimise these risks;
  • Procedures that prevent, monitor and detect suspicious transactions, and meaningful due diligence of third parties (staff, volunteers, contractors, consultants, partners etc) – both informed by the risk assessment;
  • Good quality training and communication to staff and managers, prioritising the roles most likely to encounter the risk and that considers induction, reinforcement and performance management;
  • The embedding of the framework into the NGO’s governance systems and across all operations (including and especially programming), together with its ongoing monitoring and regular review.

 

FFCHGDSFind out more about the risk that fraud and corruption pose to humanitarian and global development organisations, and how they can better deter, prevent, detect and respond to it, in my book! Click here to get your copy of Fighting Fraud and Corruption in the Humanitarian and Global Development Sector from the Routledge website or Amazon!

Aid diversion to terrorists: 3 things NGOs need to know

This week I’ve been in Nairobi, Kenya, delivering workshops for local NGOs on minimising the risk of money-laundering and terrorist financing. Preparing the material led me to reflect on some of the conversations I’ve had with NGO managers about reducing the risk that physical assets, funds and stock might fall into the hands of those designated as terrorists, or subject to financial sanctions.

Diversion_11This presents a very challenging issue for NGOs that work in high-risk areas, and one with significant tensions at its heart. These include the tension between minimising the risk of diversion versus disrupting the delivery of aid, competing obligations on the ground, and the wider balancing act between regulation and enforcement versus guidance and capacity building.

It does not help that the international regulatory picture and sectoral response are far from coherent, and subsequently it is understandable that there are widespread misunderstandings. This is not an exhaustive article, of course,  but we’ll explore (in no particular order) some of the most common areas that have popped up in my conversations around the sector.

Audit may be unlikely to pick up incidents.

16811751576_856ea1d5f2_oAudit is a helpful process that assists managers to meet their organisational goals and minimise risks. It is not its purpose to detect financial crime (less than 20% of detected fraud cases are identified this way). That’s assuming, of course, that systematic and independent audit even happens – in remote programmes, conflict zones or humanitarian emergencies, whole projects in some organisations may see little or no independent review at all.

NGO managers need to avoid the errors of assuming that a detection-free audit is an all-clear, or that it is solely the duty of auditors to prevent and detect financial crime, rather than everybody’s responsibility. ‘Protection money’ or ‘taxes’ paid to terrorist groups can be masked as vague costs, such as ‘transport’ or ‘security.’ If identity and sanctions list checks of partners, contractors, consultants, staff and volunteers were not conducted, auditors won’t necessarily pick up positive hits either. Audit may help identify vulnerabilities, but it cannot be relied upon to spot incidents.

Instead, according to FATF, factors that might elevate an NGO’s risk include programmes in close proximity to terrorist groups, and/or those that are ‘service’-oriented; these could include construction and distributions (i.e. operations more likely to involve the movement of physical assets, funds or stock). An NGO in this position needs to ensure that it implements a meaningful risk management cycle, creating space to look for vulnerabilities and taking reasonable precautions. Risk assessment is only a bureaucratic ‘tick-box exercise’ if we let it be – it can be a powerful method to spot what could go wrong and do our best to prepare for it.

Transferring all the risk to local partners isn’t fair.

afghanistan-90761_1920In my book, I suggest that a chain of unbridled risk transfer from back-donors to INGOs to local partners has the opposite effect of protecting funds – it increases the risk of fraud and corruption. In the end, too much risk derived from decisions taken in coffee-laced, air-conditioned meetings in Brussels, London and Kabul sits on the shoulders of one Afghan worker standing in the sun at a checkpoint in Badakhshan. This is poor risk management, poor partnership-working, and poor diversion prevention.

The flow needs to be inverted. Rather than just responsibility flowing from back-donor to local organisation, communication about the nature of the risks needs to flow the other way, and provoke increased investment in capacity-building and shared responsibility. There are difficulties with reconciling programmatic objectives and terrorism risk (‘what if we really can’t access that population without a payment?’), but we will not start to address these if agencies hide behind risk transfer to avoid the conversation.

Relying on assurances of non-prosecution is dangerous.

getoutofjailIn 2015, the UK government issued guidance describing the risk of a prosecution for a terrorism offence as a result of involvement in humanitarian efforts or conflict resolution as ‘low.’ This was encouraging in terms of the British government’s recognition of the vital need for humanitarian work in conflict zones and the difficult circumstances in which it occurs. However, we need to be cautious about how we respond to this in terms of our investment in minimising the risk – we might have been here before.

In 2010, the Bribery Act led to a flurry of compliance activity amongst NGOs keen to avoid prosecution for failing to prevent bribery. According to some, however, unnamed British officials apparently indicated to nervous NGOs that their organisations were not the focus of this legislation and appeared to imply that they would not be paid much attention. Some perceive that, sadly, this well-intentioned move contributed to a dwindling of effort amongst some NGOs in developing meaningful compliance frameworks. (Ironically, in this regulation with strong ‘prevention’ requirements, it is the dwindling of effort and its consequences that could potentially elevate the chances of prosecution!)

Save_the_Children,_Westport,_CT,_USA_2012Implied assurance of non-prosecution is always caveated, is not always made by those with the correct authority, and might not relate to that which is perceived. The British guidance note, for example, does not indicate whether it is referring to placing resources in the hands of terrorists (potentially s15-18 Terrorism Act offences), failing to have sufficient systems to prevent sanctions breaches (potentially a s34 Terrorist Asset Freezing Act offence of neglect), failing to report a suspected funding offence (s19 Terrorism Act), or some of those, or none – and so on. In any event, any decisions would be made on the basis of the prevailing circumstances of the case and it is worth noting that Save the Children International were investigated by the Metropolitan Police for allegedly failing to report a suspected incident of theft by a terrorist group in Somalia.

This situation also comes with an ethical choice – if we are not to be prosecuted, is it okay to commit the offence? Our donors and supporters may have something to say about that.

Assurances of the low probability of prosecution are not literal Get Out Of Jail Free cards. Instead, a pragmatic response for NGOs might be to continue to do all that is reasonable to comply with regulations, invest in proper systems to reduce the risk of both incidents and non-compliance, and maintain dialogue with authorities on the implications for humanitarian operations generated by the intricacies of their regulatory regimes. And there is no substitute, of course, for professional legal advice.

Conclusion

As with many of the corruption risks facing NGOs, the issues are complex and difficult. NGOs require the understanding – and patience – of the public, their donors and host governments. However, there is much that NGOs can do to reduce these risks.

Many of the systems and approaches that minimise the risk of diversion represent good governance and management – creating space for proper planning and monitoring of operations, ensuring that open internal communication channels exist, investing in the coherent verification of outputs, the diligent management of third parties, and so on. Getting these things right in areas where we are more able to do so reduces overall exposure, allowing us to focus our problem-solving on the areas where things are more challenging.

Improving transparency – or, in old money, having the conversation – will start the ball rolling.

Going local: Could national NGOs prevent more fraud than international agencies?

Last year, UN investigations into several small, local partner NGOs in Somalia resulted in estimates that up to 79% of disbursed funds (in the region of US$3m) could have been stolen, with suggestions that some of it could have fallen into terrorist hands.

The local partners of international agencies vary widely; the term encapsulates an enormous number of diverse organisations, from grassroots collectives to municipal authorities, educational institutions, and local (or ‘national’) NGOs. The relationships themselves are also diverse.

Working with partners is crucial, offering international organisations deep insights into the localised causes, enablers and solutions of the issues that their missions tackle, as well as (often) heightened access to beneficiaries. Helping to establish, grow and support local civil societies is also vital to the future of global development.

file0001839386335.jpgBut there is a tension. Case studies such the UN’s experience in Somalia support a perception amongst many in the sector that, generally speaking, working with local partners represents an elevated fraud and corruption risk. A range of reasons are commonly cited for this, but the most common perhaps is where partners carry lower capacity and capability in finance and wider management by comparison to that of the international agencies, or donor expectations.

Another way to look at it

In the current global development paradigm, the perception of this risk may be accurate. But not only shouldn’t it surprise us – research suggests that across all sectors, smaller organisations are the most vulnerable to fraud – it also isn’t the whole picture, and rather belies the role played by international actors, including NGOs, institutional donors and development agencies, in perpetuating this vulnerability.

Ways in which these agencies leave the relationships open to fraud and corruption, and can inadvertently help to maintain the vulnerability of local organisations, can include:

  • Failing to assess or adequately build capacity, or issuing funds in excess of that assessed capacity;
  • Failing to operate in a true partnership – instead treating the partner as a sub-contractor, irrespective of its fundamentally different nature;
  • Unbridled and unmanaged risk transfer – sometimes down a long funding chain;
  • Failure to follow a proper engagement cycle (including strategic planning, assessment and selection, effective engagement and monitoring, and objective evaluation and review) which includes the consideration of fraud and corruption risk at each stage;
  • Cultural insensitivity, failing to factor in cultural differences around the perception of things like contracts and transactions.

But things could be different. In fact, there are some ways that local organisations could be better at deterring and preventing fraud and corruption than their international agency partners.

 1. They have local, contextual knowledge

Somgirharcon1The first is the very reason international agencies often work with them in the first place – they understand their local environment. They know where the risks are, and are in a strong position to evaluate how to reduce them. This can mean more informed planning (how long does it take to get that permit without paying a bribe?) and risk management, if the space is given to it.

2. They are closer to the action

flower-768504_1920Whether in remote programme management or not, local partners are often physically closer to project delivery or able to more efficiently move around and interact. This is a substantial advantage for monitoring, and the detection of red flags.

3. They might be part of local accountability systems

gambia-239849_1920Development expert Jennifer Lentfer tells a great story of an encounter with a Liberian village elder in which he described ‘hot money’ and ‘cold money.’ It was an illustration of how local accountability systems exist, but development money might not connect with them – denying it the investment of local communities necessary for greater oversight. Carefully-selected local partners may be part of such systems in a way that international agencies might not, presenting opportunities for greater deterrence of fraud and corruption.

4. They’re increasingly assisted by technology

mark-516277_1920The global coverage of telecommunications is expanding as fast as its costs are declining, meaning that much humanitarian and development work is happens underneath its umbrella. This means that innovative software and hardware solutions to manage and monitor programming are increasingly available and affordable.

So what?

So how can international actors respond to this – reducing the role that they play in perpetuating the cycle, and instead helping local civil societies to unlock this counter-fraud potential?

1. Actually build capacity

IMG_4460
Counter-fraud workshop for local NGOs underway in the Philippines

However many project proposals mention capacity-building, it often does not happen, or if it does, it does so without the clear assessment of need, a plan, and an evaluation phase that are so important for it to actually have effect. Where the capacity and capability of a potential partner is assessed pre-engagement, this should provide the basis for a capacity-building plan. What can we live with, and how do we need to help the partner to grow?

As international NGOs challenge themselves to look for ways they can devolve responsibility, funding and power to local civil societies, helping them to improve their resilience to fraud and corruption would be a great start.

2. Consider the risk of fraud and corruption at each stage of the partner engagement cycle

Fraud and corruption risks vary as a project progresses. At the outset, kickbacks and nepotism can cluster around selection processes. Towards the end, as short-term employment contracts expire, theft of funds and stock can begin to climb in likelihood. At each stage, both partners should give space to identifying the risks and how best to protect the partnership.

3. Seek their advice, and that of national staff

It should be uncontroversial to point out that expat workers are not local experts. And local experts are available – in the partner, and in international agencies’ national staff. Agencies need to take the time to actually ask these reservoirs of knowledge about how best to squeeze fraud and corruption out of this work, and do so in sufficient time that the information can be applied. When I conduct counter-fraud awareness workshops, it is always exciting to hear local participants’ innovative and contextually-relevant ideas.

Conclusion

friends-1027840_1920There are corrupt local organisations out there, of course, who have the sole or corollary aim of gaining access for their principals to international agencies’ funds. But the vast majority of local organisations whom I have encountered have been full of passionate people doing amazing work in difficult circumstances. Robust selection processes are needed to ensure that these are the partners who are taken on.

There are other necessary changes of course – Mango currently champion universal financial management standards for NGOs, which would significantly improve transparency and accountability. But for now, there is much that international agencies can do to truly contribute to local civil societies – not just write about it in their annual reports.

FFCHGDSFind out more about the risk that fraud and corruption pose to humanitarian and global development organisations, and how they can better deter, prevent, detect and respond to it, in my book! Click here to get your copy of Fighting Fraud and Corruption in the Humanitarian and Global Development Sector from the Routledge website or Amazon!

5 psychological traits undermining your NGO’s fight against fraud and corruption

As humans, we love to think that we’re rational, sensible people making rational, sensible choices. The problem is that modern research suggests that this is pretty far from the truth, and that there are common biases and errors that affect our thinking.

As NGOs, charities and non-profits, some of these can really impact upon our efforts to reduce fraud and corruption to an absolute minimum. Here’s a little selection of some of those that I think I’ve observed.

1. Availability bias

AVAILABILITY BIAS-2In 2010, there were a number of shark attacks off the Egyptian resort of Sharm el-Sheikh. In the following weeks, it seemed to me that the news was full of shark encounter stories. What was going on? Had sharks suddenly become more aggressive? No – this was availability bias in action, a mental shortcut in which we rely on the most immediately available information to make decisions, without considering how that information became available. All that was happening, was that the media were reporting more on the subject, and that I was more attuned to the matter. (David Mcraney uses a similar example in his great book, You Are Not So Smart.)

Fraud and corruption love availability bias. These two creatures naturally hide, so availability bias means that senior managers are usually responding to more readily-apparent risks, often de-prioritising fraud and corruption. And when these phenomena are off the radar, they can blossom until they’re too big to ignore – and then it’s too late; public scandals are imminent.

Instead, we need to recognise that the unique nature of humanitarian and development agencies gives these risks high likelihoods and impact. So, they should be made a standing organisational priority, with their own reporting framework that provides management information on both the perceived risk areas and the performance of countermeasures.

2. Loss aversion

LOSS AVERSION-2Research suggests that we feel losses more intensely than gains – so if you lost a £100,000 sports car, you’d feel that much more powerfully than you would if you won a £100,000 sports car in one of those airport car lotteries. This emphasis leads to an aversion to losses that can be stronger than the lure of benefits.

Committing to counter-fraud and corruption work means that in the long run, we have more money with which to help our beneficiaries and are more sustainable – our work is more resilient to catastrophic reputational events, and we could enjoy greater public trust. But these less tangible long-term benefits face a big challenge from very tangible short-term losses. Spending more money on anti-fraud mechanisms, or refusing to pay bribes, can mean we slow down (or perceive a lessening in) our operational delivery. That means helping fewer beneficiaries by comparison to our expectations. So implementing a counter-fraud and anti-corruption agenda can appear to come at a loss – not a gain.

Counter-fraud specialists need to clearly articulate the benefits of counter-fraud and corruption work, using every available means. This requires creativity and effort. Further, donor agencies and private supporters need to leverage the NGOs they fund, making it clear that this better way of operating represents their expectation.

3. Rationalisation

RATIONALISATION-2Celebrated psychologist Dan Ariely conducted an interesting experiment in which he placed dollar bills and cans of Coca-Cola around the campus of an American university. When he went back, the dollar bills were all still there – but the Coke cans had gone. (You can read about this, and other experiments, in his fantastic book Predictably Irrational.)

What might be happening here is that the less like money something seems, the less like stealing it feels. This is rationalisation, the process of making something we want to do (even something dishonest) fit with our own self-respect.

This is really important for NGOs, because although we might have good controls for cash handling, do we take sufficient protective care of our physical assets, and the stock in our warehouses? Studies like this one would seem to suggest that these items are at a high risk too.

4. The fundamental attribution error

fundamental-2When you’re driving, have you ever noticed that if someone else makes a mistake, then they’re an idiotic and dangerous driver – but if you make a mistake it’s because you were interrupted by a passenger, the car needs servicing, or you were responding to something another car was doing? This effect is known as the fundamental attribution error – the tendency to ascribe the actions of others to their own internal factors, but yours to external factors.

Something we sometimes do in NGOs is to assume that people who commit fraud and corruption are fundamentally bad people that we need to keep out of our organisations. When we do this, we forget that people are complicated, and can become perpetrators while inside our organisations.

In Donald Cressey’s enduring ‘Fraud Triangle’ theory of behaviour, anyone can behave dishonestly if the pressure on them is sufficient, if they have an opportunity to do it with a sufficiently low chance of detection or meaningful sanction, and if they can rationalise (justify) it in their minds. Though our thresholds for each may vary, we all have a triangle, and might progress towards or away from those thresholds according to the factors acting on us throughout our lives.

This is important for NGOs, because it means that all our physical assets, funds and stock are at risk from all our staff, all of the time.

The best way to respond to this is to commit to an ongoing, holistic programme of activity that deters, prevents, detects and responds to fraud and corruption – and which is considered as fundamental to our business as having an HR or IT function.

5. Learned helplessness

learned-2A few years ago, in a Middle Eastern country, I was delivering a workshop for managers on reducing fraud and corruption. A lady interrupted me to say, ‘but this is just the way things are here!’

When I encounter that view, it reminds me of an experiment conducted by psychologist Martin Seligman. Seligman found (by accident) that if dogs received electric shocks while they were unable to escape, they would learn to accept their fate and even when an escape route became available later, the dogs wouldn’t take it. The effect is known as learned helplessness.

When we work in complex and difficult places, we can sometimes give in to learned helplessness. This phenomenon lies to us with such thoughts as ‘this is just how business is done around here,’ or ‘we can’t do this work in any other way.’

The truth is that for every problem there is an opportunity – even if that sometimes means doing things the long way round, or investing more funds in doing them. Helpful approaches include maximizing local contextual knowledge, incorporating a realistic and informed planning phase, and seeing response activities like investigations as business improvement tools that fuel a virtuous cycle of self-improvement – what can we learn in order to become more resilient?

What other effects have you seen in action, and how best can they be countered?

 

FFCHGDSFind out more about the risk that fraud and corruption pose to humanitarian and global development organisations, and how they can better deter, prevent, detect and respond to it, in my book! Click here to get your copy of Fighting Fraud and Corruption in the Humanitarian and Global Development Sector from the Routledge website or Amazon!

Trust issues: Does a ‘culture of trust’ make your NGO effective, or vulnerable to fraud and corruption?

Photo 10-02-2016 10 23 37 (1)

Years ago, as a teenager, I walked past a bakery in my home town which had a ‘part-time Saturday work – inquire within’ sign on the window. In I went, and asked the lady at the till whether I could apply. She summoned a flour-dusted gentlemen from the back, and asked him: ‘What do you think – a young man?’

He gave me a cursory glance up and down, shook his head, and said: ‘No.’

The baker vanished again, and the lady shrugged. I left, dejected and wondering whether they thought a female candidate might be more trustworthy.

friends-1027840_1920Trust is very important in the workplace. We know that ’empowerment’ is probably a key factor in employee satisfaction, and that there might be a link between the quality of staff performance and their sense of that. We also know that there is a level of trust inherent in all controls, and that humanitarian and global development organisations need to devolve substantial responsibility in (for example) emergency operations, distant field offices, and when working with volunteers. Trust is an important lubricant for our operations. Untrusting workplaces feel austere: morale-deserts that suck the moisture of life out of us.

There is, however, a tension between the need to trust, and the risk of abuse – such as fraud and corruption. Some have argued that the scale of trust in charities, NGOs and non-profits elevates their vulnerability to fraud, a perception with which a 2009 survey of UK charities seemed to agree.

When you unpack it, it is hard to find justifications for the idea that charity, NGO and non-profit workers are more trustworthy than those in other sectors. Such an idea would seem to imply that people are either honest or dishonest, and one can determine which is which from their career choices. This is patently untrue – people are complicated, and are the products of factors acting upon and through them.

Instead, there are good reasons to look again at the extent of our cultures of trust.

chameleon-384957_1920Firstly, fraud and corruption are designed to hide and masquerade, like chameleons, stonefish or those alarming wobbegong sharks. Instances can look (for example) like the product of poor training or non-compliance through operational stretch – there’s always an excuse for anomalies. Arguably, if we are too trusting, we never dig deep enough to find out when something dishonest is afoot.

Secondly, the Association of Certified Fraud Examiners (ACFE) found in 2012 that 87% of the occupational fraudsters they studied had never been charged or convicted of a fraud-related offence, while 84% hadn’t been punished or dismissed by a previous employer for fraud-related conduct. They were ‘clean (and trusted) skins.’ Noting that this is the second Pesh Framjee reference on this blog (sorry, Pesh), no wonder he said at a recent conference in the UK: ‘In God we trust, everybody else we audit.’

Thirdly, when NGO managers cite a ‘culture of trust’ in their organisation, they need to ask themselves – is this really a conscious, intentional, planned and managed organisational culture – or a phrase being used to cover mismanagement such as conflict-aversion or complacency?

So, how do we reconcile this tension? For many NGOs, non-profits and charities, the first step is the recognition than an alternative is needed – a culture of trust that isn’t at the expense of vigilance. While trust is important, fraud and corruption can be enabled when:

  • The organisational culture is not intentional, monitored and reviewed;
  • Trust is used an excuse for failing to maintain proportionate visibility of work, ask questions, and challenge managers and staff – or for failing to build the capacity of staff, volunteers or local partners to manage resources effectively;
  • Trust is allowed to extend into complacency, such as permitting the absence of, or non-compliance with, meaningful internal controls and risk management.

Here are six suggested ways we can foster trust, at the same time as reducing the risk of fraud and corruption.

1. Ensure that sufficient checks are conducted before a person is let into a culture or position of trust

nose-156596_1280Don’t just seek two employment references – after all, what self-respecting fraudster volunteers damaging referees? Consider:

  • Conducting dip-sample checks on the contents of CVs (some research suggests a significant proportion of applicants lie about qualifications);
  • Joining an information-exchange service such as CIFAS;
  • Ensuring that criminal record checks are conducted in a timely fashion (and consider using a commercial checking agency);
  • Obtaining local legal advice on checking the internet footprint of applicants – contrary to popular belief, it is often not unlawful to Google applicants as part of the background check process.

2. Develop a good understanding of the signs that your trust is being abused

OLYMPUS DIGITAL CAMERA

Know what ‘red flags’ – signs that something might be wrong – look like. Organisations like the ACFE and the World Bank publish lists of them online. Being trusting does not mean failing to ask questions or probe anomalies – prompt action is needed where red flags are identified.

3. Have proportionate internal controls…

scales-36417_1280Having a culture of trust does not mean having no, or inadequate, controls. Neither, of course, does it mean an onerous filing cabinet’s worth of policies, procedures and systems (in fact evidence suggests that too many, or too demanding, controls reduces compliance). It means having just enough to manage the risks – an ongoing cycle of design, implementation and review of proportionate internal controls. It also, of course, means having an effective organisational counter-fraud and corruption framework.

4. …and actually follow them

Counter-intuitively, it is the failure to follow policies, procedures and systems that can often be so corrosive to trust in the workplace. Following some but not others makes staff feel untrusted, wondering ‘why am I being checked on this but he isn’t on that,’ and allows suspicions to develop when others are routinely non-compliant without challenge (‘is she committing fraud or taking kickbacks? Did she bribe the manager to turn a blind eye to it?’). Not only does routine non-compliance make it much harder to identify dishonest non-compliance, but it also leaves staff uneasy and confused – the norms of their workplaces unclear.

file0001490820453Instead, to feel safe, secure and successful, we all need to know where the boundaries are, and we all need feedback on our performance. After all, if we are mission-oriented, then ‘oversight’ is about colleagues working together to maximise our effectiveness and efficiency in delivering that mission, right?

5. Articulate the value of policies, procedures and systems

SDRandCo (54)One of the things we can do to reduce the perception that having and following rules represents a failure to trust, is to re-frame activities like due diligence and monitoring. We need to be clear with managers and staff about our expectations, and explain that following policies, procedures and systems is about:

  • Transparency. It means we are all accountable to each other, and it’s easier to spot what is wrong when right is the norm;
  • Teamwork. NGOs can be big organisations, and when we follow procedures, it enables colleagues and teams in other departments to do their job – knowing what to expect from us and when;
  • Totality. Nobody likes going through airport security and being zapped, prodded and rummaged. But we all accept it, because we know it’s needed to deter and prevent a very small number of people who could create a catastrophic event. In the same way, we all need to adhere to policies, procedures and systems, because of the small number of people we need to catch misbehaving.

6. Develop internal culture with intentionality

A defence against the use of a ‘culture of trust’ as an excuse for poor management might be to define the organisational culture we do want, and what the indicators of it might be. That way, poor management behaviours are easily compared against this standard.

Internal culture is something that happens whether it is intended or not – and it only needs a few people in an organisation for one to develop. Taking hold of it and shaping it to be an effective force-multiplier for our missions can be very powerful.

Trust can be a great asset – as long as it is sited within a culture that also actively reduces the risk of fraud and corruption.

 

FFCHGDSFind out more about the risk that fraud and corruption pose to humanitarian and global development organisations, and how they can better deter, prevent, detect and respond to it, in my book! Click here to get your copy of Fighting Fraud and Corruption in the Humanitarian and Global Development Sector from the Routledge website or Amazon!

Mind your head: How the push for low overheads in charities raises the risk of fraud

Caution ticker

Caution ticker

In December, an outfit called the True and Fair Foundation drew the ire of the UK third sector with a report attacking the amount spent on ‘charitable activities’ versus other spending such as ‘overhead.’ The analysis was flawed (Pesh Framjee comprehensively dismantles it here), but the incident was notable as yet another attack on NGOs which played to the idea that costs not seen as directly related to delivery are wasteful at best and, at worst, self-serving. It is a notion that some researchers have argued leads to a ‘non-profit starvation cycle,’ pushing non-profits into a race to the bottom for lower and lower declared overheads.

Proponents of the drive for ever-lower ‘overhead,’ ‘administration’ or ‘support’ costs are often unclear (or contradictory) about what expenditure is actually meant. The impact of the drive is that many NGOs are incentivised to cut to the bare bone anything with a whiff of ‘support cost,’ and which cannot be said to directly relate to delivery. This can include finance, human resources, IT, investment in systems, supply chain management, procurement, wider logistics and other costs.

This has a range of consequences for the effective operation and development of NGOs, but a particular ramification is the increased vulnerability to fraud. Anecdotally, my NGO counter-fraud colleagues and I rarely see a case of fraud or corruption where significant improvements to prevention – that is, having policies, procedures and systems,  proper management oversight, the independent review of both, and a coherent riskLiberia map management framework – would not have significantly reduced the chances of it happening.  An example might be World Vision’s experience in Liberia, where staff stole approximately $1m of food and construction materials. World Vision’s statement following the case listed a number of changes in the wake of the fraud.

Key ways that NGOs can more effectively prevent fraud and corruption, thus living out the stewardship that their donors and supporters expect, include:

  • Conducting fraud and corruption risk assessment before and throughout a project;
  • Performing due diligence on new staff, contractors, consultants and local partners;
  • Designing,  implementing and complying with robust systems of financial control;
  • Conducting proper checks before authorising expenditure, and keeping accurate records of stock movement;
  • Utilising electronic systems where possible, making funds and stock easier to track;
  • Properly monitoring and evaluating projects;
  • Training staff and managers in how to identify and respond to the signs of fraud and corruption.

What becomes clear, of course, is that many – if not all – of these require investment in what some might think of as overhead, administration or support costs. Conducting checks before authorising payments, for example, requires staff to do it. As they say in the theatrical industry, it’s about ‘bums on seats.’ Both the bum, and the seat, are support costs.

This narrative, and the resultant dynamic, can leave NGOs who respond to it more vulnerable to fraud and corruption. The damage is not just limited to prevention, either – it also impacts upon detection. Because fraud and corruption are designed to hide, they are unlikely to be picked up without investment in the systems and functions to do so. This contributes to the ideal conditions for fraud. The idea that low overhead, administration or support costs automatically mean greater resource for delivery is immediately debunked – because without them, at least some of that delivery can be happily and secretly stolen.

firefighterIronically, of course, a driver behind the flawed narrative is a desire to see good stewardship in NGOs. But in the same way that it would not represent good stewardship for a fire department to send firefighters into burning houses without protective clothing, it does not represent good stewardship for charities to move resources around without sufficient protective systems clothing those resources. Although there is, of course, a balance to strike – enormous overhead, administrative and support costs are a red flag – under-investment in prevention, and the infrastructure that makes prevention happen, is a key enabler of fraud and corruption for NGOs.

Five suggestions to change the dynamic

  • Reduce the extent to which your NGO fuels the paradigm. Avoid semantic games and creative reporting about what costs are, and are not, ‘delivery’ or ‘administration.’ Be clear in reports about what broad terms mean;
  • Celebrate the value of ‘support-side’ work. Supporter marketing usually focuses on delivery activities – consider promoting and explaining the powerful contribution made by what might be thought of as ‘administration’. Delivery happens because of support costs – not in spite of them;
  • Educate courageously in the public space. The Charity Defense Council (of which Dan Pallotta is a director) in the US is a good example of clear and determined voices tackling the pressure on charities;
  • Take every opportunity to claim ‘support-side’ funding. Where institutional donors make funds available for support costs, use them. If funding is available for a compliance officer, for example, employ one!
  • Invest in ‘overhead’, ‘administration’ or ‘support’ in the first place. These expenditures may not come with the inspiring business cases or immediate sense of reward that programmes might, but they are no less vital for making sure that those programmes happen, and that they are the best and most sustainable they could possibly be.

 

FFCHGDSFind out more about the risk that fraud and corruption pose to humanitarian and global development organisations, and how they can better deter, prevent, detect and respond to it, in my book! Click here to get your copy of Fighting Fraud and Corruption in the Humanitarian and Global Development Sector from the Routledge website or Amazon!

 

Welcome!

file00099997224.jpg

Welcome to the blog devoted to helping humanitarian and global development organisations to reduce fraud and corruption.

Posts are filed according to the different components of the holistic approach and some of the key issues in tackling fraud and corruption in development today.

Click on the category of your choice to get started!