Fraud and corruption: 10 tips for obtaining buy-in from your NGO’s Board

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The Commonwealth corruption conference and anti-corruption summit in London last week saw the full engagement of civil society. Leaders from big household name NGOs were active online and in person, taking the opportunity to challenge a range of related injustices. It was exciting and encouraging, but these events should prompt those NGOs to ask themselves, ‘how effective are our own organisational counter-fraud and corruption frameworks?’ If the question needed underlining, we also learned that the US government is investigating allegations of corruption affecting NGOs in the Syria emergency response.

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US humanitarian aid bound for Syria

What Boards need to do in order to reduce fraud and corruption risk is well-trodden ground. But for international NGOs, one of the great challenges can, in fact, be the Board. As your organisation’s counter-fraud lead, what do you do if members of your Board don’t recognise that fraud and corruption is a problem? Or merely give it lip service, unwilling to invest in meaningful risk reduction efforts? Or worse, are content to turn a blind eye to the risk of physical assets, funds and stock falling into the wrong hands if most aid gets through?

Obtaining the buy-in of an NGO’s Board isn’t about selling them a product – we need their ongoing support and ownership. It’s about changing perspectives; a long haul, not a quick win. So, in helping to generate that ongoing support, I’ve found that these tips (which are not exhaustive and in no particular order) have assisted my colleagues and I; perhaps they might help you too.

1. Educate to effectuate

apple-256261_1920Fraud and corruption has, historically, not been well understood in this sector. Your Board may have a low or rudimentary understanding of the risk and how to respond to it. This means starting at a basic level, making no assumptions, taking the time to address myths and misconceptions and playing a longer game. ‘Educate as you go,’ Willie Oelofse from Deloitte Kenya told NGOs at a conference in January. As we do so, of course, it’s important to remember that counter-fraud is a good news topic – your organisation may be at high risk, but actually there’s a lot that can be done to reduce it. Boardrooms are learning environments too.

2. Keep it simple

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Board members are busy. NGOs (especially humanitarian agencies) are often very responsive, and Board members’ attention is divided between competing thematic risk areas and arising issues. Use your time with them wisely. Proposal documents and assessments, for example, should be short or with executive summaries. Don’t bury key messages in a risk assessment document the size of a telephone directory.

3. Speak from within

people-men-grass-sportCivil society is under attack the world over, and the issue of their fraud and corruption exposure can be something that sends Board members running for their shields and helmets  – especially if it is perceived to come from an out-group rather than in-group. Take charge of how the matter is framed. Don’t let them entrench in defensive positions to ‘fend off’ your ‘attack,’ or sit in a ‘prospective client’ chair to listen to you ‘pitch’. Instead, use their business language, show your understanding of the difficulties they face, and speak from inside their group. Explain the landscape around them, and how you can help them navigate across it.

4. Remember that they’re individuals

colored-pencils-179167_1920People make decisions differently and on the basis of different values. For example, I am a big fan of the MBTI, which is one of a range of models that can help us to understand how we like to work and how best to relate to others. Models like these can really help to improve workplace relationships. So try to understand each member of your Board as a person, and what really drives their decisions. Some will be persuaded by cold, hard data, others by less tangible matters such as how your agenda relates to values, supports people, and so on.

5. Bring the risk to life

DSC06922Fraud and corruption, especially at a strategic level, can be abstract concepts. Help the Board to connect by painting a picture of the risk with case studies. If you don’t have any in your own organisation, then perhaps partners, donors or other organisations have some they will let you use? If not, then find cases in the public space affecting comparable organisations. If you’re really struggling, consider using fictional examples – but remember to state that they’re fictional!

6. Show the benefits

cost-benefit-analysisNGO Boards are often allergic to anything with a whiff of extra expense, especially if it is ‘overhead’ or ‘administration’ flavoured. So explain the benefits of the agenda not just in terms of what it prevents, but also what it gains – efficiency, effectiveness, quality improvement, and so on. Much of counter-fraud work synergises with good management (an example arises from the world of retail – smiling as a customer enters not only deters shoplifting by making the individual feel noticed, but is also good customer service!).

7. Take an evidence-based approach

evidenceNGO Boards manage a lot of risks, only some of which materialize. Using evidence helps them to appreciate how fraud and corruption sits, whether that evidence is perception-based, representative sampled, or from other diverse sources. Cast the evidence net wide – consider staff surveys (especially anonymous surveys), risk assessments, project and programme evaluations, audit reports, security reports, academic research and open source. This may mean that you need to start by improving the detection of incidents, in order to gather enough material. Be cautious with the use of quantification estimates, as these can be inherently open to challenge by those feeling resistant, and with over-stating the case (being debunked seriously damages credibility). Remember to cater for any risks created by the counter-fraud agenda, and to consider any donor or legal obligations.

8. Align with organisational objectives and strategy

marketing-board-strategyJust as is the case with private and public sector organisations, the counter-fraud agenda needs to directly support the organisation’s mission. This needs to be clearly elucidated so that Boards can see that counter-fraud is a mainstream activity, rather than a distraction.

9. Obtain a sponsor

hands-people-woman-meetingIn March’s Charity Finance magazine,  I explained why fraud and corruption needs to be a standing priority for NGO Boards. But in addition to this, the counter-fraud agenda needs a champion at Board level. Benefits of this include how the champion can look out for synergies with other business areas as they’re discussed.

10. Put in the legwork

Startup Stock PhotosA ten-minute agenda item at a Board meeting is not enough to ensure that a Board truly embraces counter-fraud and corruption. Obtain regular meetings with each member to explore their own position and build their buy-in – especially before key decisions are to be made. Similarly, the counter-fraud agenda needs to align not just to the organisation’s mission but to the agendas of those individual Board members. How does countering fraud help, not hinder, the aims of the person in front of you?

11. Bonus tip!

Why not get the members of your Board a copy of Fighting Fraud and Corruption in the Humanitarian and Global Development Sector? It explains the risk, busts myths and misconceptions, and sets out ways for NGOs to minimise the risk. It’s out now with by Routledge, pick up a hardback or e-reader copy via the Routledge website or Amazon!

FFCHGDS

 

 

 

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

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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.

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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 round in circles: Do NGOs and fraud hide from each other?

In the Foreword to my book, Fighting Fraud and Corruption in the Humanitarian and Global Development Sector, fraud expert Jim Gee mentions the ‘un-virtuous’ circle of fraud detection in the third sector.

I thought I’d draw up what this circle might look like. The starting point, as previous blog posts have mentioned, is that fraud and corruption hide. So, in essence, the un-virtuous circle means that NGOs, nonprofits and charities can lose physical assets, funds, and stock regularly and in potentially significant quantities without any red lights appearing on management’s dashboard. It is fuelled by a fear of the consequences of detection – the potential impact on public reputation, donor relationships, staff morale, and project delivery.

The un-virtuous circle might look like this:

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water-783355_1920Another way to think of this concealed drainage is like corrosion under your car – unless you go looking for it, you won’t ever realise its presence, scale and danger… until your car falls apart in the middle of the motorway. You may fear the consequences (e.g. costs involved) of detecting the corrosion and needing to deal with it, but these costs in the long run are less than those that the motorway incident might involve.

Concealed drainage vs squeezing every drop from our resources

background-906145_1920As public scrutiny of the sector rises, together with increased recognition of the scale of fraud and corruption risk facing such organisations, we need to move to a virtuous circle, fuelled by a desire to secure donor, public and staff trust by evidencing accountability and transparency. A virtuous circle might look like this:

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In this circle, global development organisations invest in a counter-fraud framework that detects incidents, allowing them to take an evidence-based approach to developing ever-more effective counter-measures and therefore reduce their exposure to fraud and corruption.

Improving the detection of fraud and corruption

‘But what if my organisation really doesn’t have any fraud?’ one might ask. Possibly, but given the scale and nature of the risk factors affecting humanitarian and global development organisations, wider under-detection is a better explanation of low detection.

A holistic approach means that countering fraud and corruption is not just about detecting suspicious matters, but detection is an important strand. In addition to effective and embedded detective controls (such as inventories and reconciliations), key detective methods for humanitarian and global development organisations should include:

  • Clear ‘overt’ reporting mechanisms for staff and third parties to raise concerns with line management;
  • Confidential reporting mechanisms for staff and third parties to report with an expectation of confidentiality and safety;
  • Dedicated work to build trust in ‘overt’ and confidential systems amongst staff, and to communicate and promote these systems;
  • Beneficiary feedback mechanisms;
  • The use of electronic systems to identify ‘red flags’, anomalies and patterns;
  • Proactive examinations of records (‘fraudits’);
  • Information-sharing with third parties, such as other INGOs or information exchange services;
  • Methods to provide early-warnings of incidents, or rising risk, in local partners;
  • Investment in the wider components (deterrence, prevention, response, strategic management, cultural development, and enabling activities) of a holistic counter-fraud and corruption framework that support the detection agenda.

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!

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

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