In Rehab: Restoring a team after an insider fraud

When I arrived at my last employer’s headquarters on my first day as their new head of counter-fraud, I did not know that the vacancy had arisen because my predecessor had committed… fraud.

The last person to hold that office had stolen nearly £65,000 using false invoices from fake companies. He had been arrested, would plead guilty at court and receive a custodial sentence. Despite the lurid headlines, the organisation was open about what had happened.

1If a humanitarian or global development organisation gets serious about tackling fraud and corruption, then it will detect cases – possibly in significant numbers. As my organisation invested in counter-fraud efforts, for example, we saw recorded suspicions in its global operations nearly treble in three years (this, of course, reflected a rise in vigilance and engagement rather than incidents).

But what happens after an incident of insider fraud or corruption, when the dust settles?

rippleThe job does not finish with the dismissal or conviction of the suspect(s). These incidents have long tails – there is work still to be done to rehabilitate the project or business unit in which the incident took place. An incident represents a severe breach of trust; workers may feel abused and betrayed. The ripples can spread wide.

How we go about rebuilding a team and restoring a business function depends hugely on the circumstances of the case, and there is no ‘one-size-fits-all approach. Although we only have space here for a few pointers, I have learned some lessons from helping teams like mine to overcome setbacks like this – these considerations may be helpful for you too.

First things first

The aftermath of an incident is the time to ask some basic questions: Could this happen again, and are there any other vulnerabilities we can spot?

Startup Stock PhotosHopefully, the organisational response included a lessons-learned exercise, generating changes to implement. This should look beyond the internal controls, also into enabling factors such as culture, communication and awareness.

That said, a fresh and full fraud and corruption risk assessment of the department can be helpful. Are there other vulnerabilities beyond the affected processes? An unexpected further case – just as things settle  – can create more uncertainty for the team if more changes to processes are necessary. Instead, let’s make all the adjustments we need to now (and capture the benefit of a sense of ‘moving on’) rather than risk constant change for the team.

planningNow is also a good time to do some contingency planning. Is the incident serious enough that it could result in regulatory interest, onerous remedial controls applied by institutional donors, or put future funding at risk, for example? We can prepare for these.

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Remember to seek advice. Overcoming an incident of fraud or corruption is a risk-rich activity. Consider engaging with HR, internal communications, legal, any dedicated counter-fraud or ethics or integrity office, staff health and/or other relevant specialists.

Treat people as individuals…

colored-pencils-179167_1920Team members will respond to the matter differently. While some may be relatively unaffected, others may not. It is important to note that where staff have made a commitment to an organisation on the basis of their values – perhaps more common for charities, nonprofits and NGOs than for private sector organisations – a breach of trust could be more impactive. Perhaps there could even be a grief reaction for some team members.

sadLook out for, and respond to, the traditional symptoms of stress, low morale and anxiety. These might include absenteeism, disciplinary issues, a rise in complaints, and disillusionment. An incident can impact upon personal and professional confidence, and colleagues may feel fear, shame or embarrassment. Will the incident create a funding crisis, putting their jobs at risk? Will staff have to justify themselves to an angry public? Consider access to staff support systems, and formal interventions such as counselling and facilitated debriefing.

16404-a-woman-in-a-business-meeting-pvBe a compassionate and responsive manager. Avoid assuming you understand how people feel or why they behave the way they do. Instead, in your one-to-one meetings with team members, explore how they are experiencing the crisis and responding to it. Remember, of course, to make it clear that this is pastoral and not investigative. Similarly, it is important to restore individuals’ sense of control. In a way, employees in whose midst an act of fraud or corruption occurred are victims of abuse. Solicit and listen to their concerns and visibly respond to them.

Accept that restoration may take time. Do not assume that the passage of time, themes in office chatter or improved productivity are signals that everybody has moved on. While these might be positive indicators, look out for those left behind.

…But re-build the team

Teams can be fragile creatures, and discovering that someone was out for themselves can undermine the workplace trust that allows them to function.

gambia-239849_1920Clear communication. Rebuilding trust requires the open communication of reliable content. Low information creates anxiety, more information helps manage our ‘fight or flight’ crisis response. Concealing the matter from the team is, therefore, more likely to sow suspicion and fear than peace and confidence. Be as open as you can about what has happened, and what will now happen, within the boundaries of policy, employment law and data protection legislation. As you describe the future, avoid over-promising – employees need clear and consistent messaging from management. If you cannot make promises, don’t; recognise uncertainty and explain what is being done to reduce it.

Similarly, set the right key messages for staff and stakeholders. Absolutes (‘this will never happen again,’ ‘rogue employee,’ ‘isolated incident…’) and over-reassuring can be risky for expectation management.  More sustainable messaging might include that fraud and corruption are normal business risks which we can reduce but not eliminate, and that the best way to respond to incidents is to use them to make us stronger.

Allow the opportunity to debrief. Ask staff what the incident has meant for them, and for the team. Consider soliciting suggestions on how to move forward, which can demonstrate management’s ongoing belief in the wider team (despite the actions of one). It also helps to empower the team to claim their status back, and move forward.

Team_Building_LanzaroteFoster trusting relationships. Ensure that teams meet as regularly as possible, in person or via teleconferencing. Consider holding team-building events, reflective away days and/or ‘how are we doing’ agenda items in meetings. These measures can improve understanding, interaction and trust between team members.

Arrange a good-quality fraud and corruption awareness workshop. This will not only help reduce the risk of incidents, but will also help staff to feel empowered; the best workshops help to generate a sense of solidarity and support amongst the honest majority. Be cautious not to let it feel remedial.

beautiful-day-1374424_1920Lead by example. We know that employees look to the behaviour of their managers to determine their own. So be present; you cannot role-model behaviours and attitudes if you cannot be seen by anyone. Be positive and show how you treat what has happened constructively, managing risk, avoiding blame, taking care of your colleagues (and yourself), and using the incident to make the business unit stronger in the future. As one casualty of a fraud or corruption incident is honesty, ensure that you are (and are seen to be) authentic. So, for example, if you feel hurt, vulnerable or confused, consider sharing those feelings with the team. This helps to normalise these emotions.

Avoid blame. This includes the narrative that we create around the perpetrator. It is tempting to turn them into the catch-all receptacle for all that has gone wrong, but this risks helping to foster a blame culture that can trip us up later. Furthermore, it can help us to move on from a crisis if we are able to see that there are things we could have done differently.

Get back to business-as-usual as quickly as possible

roadReaching project milestones or completing tasks puts clear blue water between the incident and the present, assisting both staff and stakeholders to move on. It also, of course, ensures the progress of the project or business unit. Embed, as rapidly and effectively as possible, any changes to processes to reduce the risk of a recurrence.

Remember the big picture – the goals and values of your organisation. Trust may have been betrayed on this occasion, but a refocus on why we all come to work in the first place can assist everyone to work hard towards recovery.

Thanks to Liz Crowe, Wellbeing at Work Specialist, for her contributions to the content. Liz tweets @lizcrowe2, or visit her website at LizCrowe.org.

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!

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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

 

 

 

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!

Kangaroo court: Why do NGOs need to get fraud investigation right?

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NCA headquarters, London

Early in my training at the Serious Organised Crime Agency (now the National Crime Agency, NCA), my colleagues and I shuffled into a classroom for a presentation on an old case – the 1975 murder of Lesley Molseed. That morning, however, was not about the case’s tragic victim, but about its tragic conviction. Stefan Kiszko, convicted of Lesley’s murder, was innocent – and some refer to it as the ‘worst miscarriage of justice of all time.’

The horror of the Kiszko case presents a litany of police and legal failures that resulted in an innocent and vulnerable man going to prison for 16 years, where he was physically assaulted, became mentally unwell and died soon after his eventual release. Its inclusion in our training was to help us appreciate the importance of getting investigation right – particularly the boring bits. And it worked; as some of my later colleagues would grumblingly attest, my passion for investigative detail, precision and order has burned ever since.

Median detected fraud loss by sector, 2016-2Scarce resources make it even more important to steer clear of avoidable mistakes. Recently, the ACFE’s regular study of detected fraud worldwide reported similarities in losses between government and not-for-profit organisations – and yet while government departments might enjoy considerable investigative resources, this is often not the case for NGOs. In this article, then, we’ll explore (in no particular order) some common errors that can help turn NGO fraud and corruption investigations into a ‘kangaroo court‘. In all cases, of course, local legal advice should be sought.

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Rushing the investigation

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John Nettles, who played the detective in Midsomer Murders

In my home country, there’s a great TV show called Midsomer Murders. Each week, the dogged detective wanders around an English countryside village chatting to people about a murder, and – after just over an hour – confronts the suspect (who, naturally, confesses in full). Roll credits.

In real life, an internal investigation of fraud or corruption is not like that. It is best thought of as a project which builds a corpus of robust material that can be used to inform decisions that manage risk and improve organisational resilience. It also a project which creates risks as well as minimising existing ones. It takes time, and care, and caution.

Humanitarian or development programmes are often under considerable pressure, but failing to allocate sufficient time to an investigation can mean missed evidential opportunities, employment (or even human) rights abuses, severe damage to trust in the workplace, and inaccurate ‘lessons learned’. In short, rushing an investigation is a false economy.

Not having or following our own policies and procedures

road-sign-464659_1920This includes failing to have and apply lawful and proportionate performance management and disciplinary policies and procedures, internal suspicion reporting systems, and external reporting mechanisms (for example, to regulators). This exposes programmes to an array of risks, including confused or inconvenienced stakeholders, invalidated insurance, and accusations of bias (with the subsequent legal action). Being shown to have failed to follow your agency’s own protocols can be a rapid way to lose a case involving a former employee.

Expecting an inappropriate burden of proof

scales-36417_1280In some country contexts – especially conflict zones and fragile states – a criminal justice outcome for a case of employee fraud or corruption may be very unlikely for an NGO. While we should usually proceed with the intent to take a case to court, we must recognise that sometimes a disciplinary outcome (such as dismissal) has to be enough.

Generally speaking, the weight of evidence required in a disciplinary hearing is lower than that required to convict someone of a criminal offence in a court – and yet NGO disciplinary panels may erroneously expect that heavier burden. Critical concepts like ‘burden of proof’ and ‘circumstantial’ or ‘direct’ evidence might not always be well understood by such panels.

This can mean that NGOs fail to apply the correct sanctions, which can damage the trust of whistleblowers and keep dishonest people inside our organisations (or conversely, punish the wrong people). Ensure that you seek local legal advice.

Inadequate transparency with institutional donors

fence-470221_1920It is easy to see why implementing partners might want to carefully manage what their donors see and how it is framed. Many donors seem increasingly risk-averse, and have a history of unhelpful, disproportionate reactions.

The problem is that this creates a vicious circle; low transparency generates heightened suspicion, and heightened suspicion elevates the likelihood of strong reactions. These might include suspended disbursements, parades of reviews that trample evidence into worthlessness, and onerous emergency controls that strangle programming. It also undermines the NGO’s internal culture of transparency and accountability – how can managers ask their staff to model these values if they do not do so themselves with donors?

Instead, honesty with donors enables them to appreciate the challenging contexts in which their projects are being implemented, heightens their trust of an NGO’s systems to prevent and detect corruption, contributes to our own internal anti-corruption cultures, and may enable us to access more investigative or audit resources through the donor.

Using investigators without sufficient training or experience

Money In God We Trust

In an ideal world, every NGO’s internal investigation would be conducted by dedicated counter-fraud specialists. In reality, large NGOs process more investigations than they have dedicated staff to cover and smaller NGOs don’t even have dedicated staff. Investigation frequently falls to audit, finance, legal, logistics or security teams.

An internal investigation is a serious undertaking that manages a dizzying array of risks to people, the organisation, and itself. Lives have been threatened in the course of such activities. If dedicated staff are not to be used, then NGOs, charities and nonprofits should invest in proper training and development for those charged with investigations, or use third party providers. These things are not luxuries, but part of the cost of working in the modern world.

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!

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

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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!

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:

Slide1

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:

Slide2

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!

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

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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!