Helping NGOs do more with their money

Fraud

Fraud is a deliberate improper action which leads to financial loss to the organisation and usually also results in financial gain to the fraudster.

Fraud is typically carried out by an NGO's own staff, or their partners' staff - often by people you have previously trusted. Sometimes money may be leaking out of the organisation for a long time undetected.

This page includes:

Typical examples of fraud include:

Fraud is very common indeed but reliable statistics are very hard to come by because organisations are understandably reluctant to talk about frauds they have experienced.

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Why do people commit fraud?

Motivation

Understanding the motivation of fraudsters is key to making strategies for prevention. Without wishing to oversimplify a clearly complex area, research indicates that the majority of fraudsters are motivated by one or more of the following:

Opportunity Where the amount of money flowing through NGOs is large and internal controls are weak, it is easy to commit fraud, and the risks of getting caught are low. Where there is little consequence for being caught, or someone knows they are protected by powerful people, the door is wide open.
Need Clearly, the vast majority of poor people do not resort to fraud to meet their needs. But the stress of finding school fees for scores of dependent children, and similar pressures can lead people to convince themselves that they need the money as much as the beneficiaries do.
Habit What starts out as a small need, easily met by a small fraud, can grow into a habit whereby someone needs to continue stealing to maintain a certain lifestyle. If fraud is habitual within the organisational culture, even honest newcomers can get sucked in, given rewards in return for silence.
Low morale Staff are more likely to commit fraud if they are de-motivated, disgruntled, do not share the organisation’s vision, where there is a wide gap between highest and lowest paid staff, and where they do not feel appreciated or valued.


NGOs take money into poor areas, sometimes with weak oversight and unclear goals. The level of temptation and external pressure may be high and staff may not always feel much loyalty to an NGO or its values. It is not surprising that some money is misused.

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Fraud prevention and avoidance

The most important first step that NGOs can do to combat fraud is to recognise that it happens.

Here are some practical ideas to help create a culture where fraud is less likely to occur in your organisation. Clearly none of these will work in isolation. Taken together they may reduce the risk. There are no easy solutions.

1. Values

Include ‘honesty’, ‘integrity’, or ‘stewardship’ in your organisational values, spelling out in your own words what they mean for your organisation.

2. Vision and mission

Think of creative ways to ensure staff frequently engage with and are inspired by the vision or mission – display it prominently, talk about it in meetings, put it at the bottom of emails or have a quiz with a prize to see which members can say it from memory.

3. Involve beneficiaries more

Where beneficiaries are involved in planning and budgeting, and effort is made to share financial information with them, they are often more effective in ensuring that resources are used properly than distant donors. See the listen first framework for more ideas.

4. Increase staff connection with beneficiaries

Share positive stories of how beneficiaries have been impacted by the NGO’s activities, and as reminders of the ongoing need. Ensure that office based staff are also able to visit the field once in a while.

5. Recruitment

Recruit freely and fairly on the basis of merit. Ensure the process is transparent. Consider engaging an independent recruitment consultant if there have been problems in the past.

6. Recruitment - interviewing

When interviewing new candidates, consider asking questions such as :

7. Recruitment - references

Always follow up references by phone (written references rarely reveal much) asking open questions such as ‘Are you able to tell me an example of any time when this person demonstrated their personal honesty or integrity?’

8. Induction

Discuss your fraud policy (and recent history if relevant) with new joiners. It is better that they hear it from you than others. Make sure there is an explicit expression of the new joiner's expected behaviour. ‘Whatever you have experienced before, this is the way we do things here’.

9. Employee commitment

Encourage employees to make a voluntary annual commitment to act with integrity, report suspicious behaviour and act in the interest of beneficiaries at all times. This could be in writing, or said together in a meeting.

10. Pay levels

Set pay levels not so low that people are expected to steal to be able to live, and not so high that people's main motivation for wanting to work in the NGO sector is primarily financial. Set targets and monitor the % gap between the highest and lowest paid staff.

11. Management by walking about

Managers should try to get out there and talk to beneficiaries and staff, and visit programmes. Don’t make assumptions or rely on paperwork and written reports.

12. Financial management training

Financial systems are often perceived as complicated and confidential. Empowering a wide range of staff to engage with the financial records, and ask critical questions when reviewing financial reports should enable alarm bells to go off earlier. Try to ensure that your Board members, senior managers, programme staff and finance staff are trained. See details of Mango’s training course Practical Financial Management for NGOs: Getting the basics right.

13. Develop a risk register

Identify key fraud risk areas based on your area of operation. For example, insider loans, ghost employees, misappropriation of cash receipts, procurement deals and theft of construction materials.  See the Guide page on risk assessment, including a sample risk register.

14. Develop a good internal control system

In particular, pay special attention to the high risk areas of cash and bank, procurement, fixed assets and construction. Ensure you have adequate segregation of duties.  See the Guide page on internal controls.

15. Internal audit

Consider engaging a trusted, competent, local (to the country or at least region) person to carry out periodic internal audits, with their findings reported to the Governing Body, and even beneficiaries or donors.

16. Look out for the warning signs of fraud

Watch out for typical signs such as records not being up to date, someone’s lifestyle being inconsistent with their salary etc. (See Top Tips 2 for more examples.)

17. Be aware of power relations

Do any individuals have power to the extent that they are above question and not accountable to anyone? Real power may bear very little relationship to a documented organisational chart.

18. Whistle blowing

Establish whistle blowing procedures that make it possible for suppliers, beneficiaries and staff to whistle blow in confidence if they have suspicions. Ensure that suppliers, beneficiaries and staff know how to whistle blow if they need to (eg print on Local Purchase Orders, include in contracts, display on notice boards etc).

19. Take action on fraud or suspected fraud

See below for ideas for what to do if you are faced with a fraud. Lack of action and communication sends a strong message that fraud is acceptable.

20. Written fraud policy

Document your fraud prevention and management strategies into a fraud policy. See examples here.

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Dealing with a fraud

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Fraud is hard for NGOs to come to terms with because it involves a betrayal of trust and because it can lead to negative reports which could damage fundraising. But the real betrayal of trust is to donors, staff and the beneficiaries who could have been helped by the NGO but were not.

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