Avoiding Investment Fraud in Nonprofit Organizations

Posted by admin on Oct 10, 2017 9:00:00 AM

Investment fraud in nonprofit organizations, such as Ponzi schemes, is common. A 2013 analysis by The Washington Post found that more than 1,000 nonprofits had discovered fraud at their organizations between 2008 and 2012. Fraud cases can cause significant financial loss for not-for-profits, but the biggest consequence is often the loss of donors and the marring of the organization’s public reputation. Donor loss can, of course, have long-term financial implications beyond the initial post-fraud loss.

The Form 990 and Investment Fraud Disclosure

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How does The Washington Post and the public know about these fraud cases? Organizations must report nonprofit fraud on their Forms 990 whether they’ve experienced a significant loss to any illegal “diversion” that exceeds the lesser of 5% of gross receipts, 5% of total assets or $250,000. This disclosure is in Part VI, Section A of every Form 990. Such data becomes public and is likely to be reported by charity watchdog groups and the media, as it was in The Washington Post analysis, which is still republished widely. 

Hiring the Right Advisors to Avoid Investment Fraud

One way investment fraud differs from occupational fraud is that its perpetrators generally are outside advisors — not employees. They may be brokers, bankers, financial planners, investment advisors or even self-styled money experts. In many cases, thieves are registered or licensed, enjoy good reputations in their communities, and have no previous records of wrongdoing.

How, then, can your organization avoid hiring a crook? First, beware of unrealistic promises. If an advisor guarantees immediate results or annual returns of 20% — even in years when the general stock market is down — he or she is either lying or incompetent. Also be wary of investment fund managers who don’t submit to outside audits or report their results publicly.

Instead, look for an advisor who encourages you to discuss investment goals and risk concerns. Your advisor should understand your organization’s investment policy — or be willing to help you develop one. Accessibility is important, too. For example, your board likely holds meetings after business hours and your advisor needs to be able to meet with them from time to time.

Ask other nonprofits, or your attorney or CPA, for investment advisor referrals. Moreover, make sure your board scrutinizes your advisor’s investment recommendations, carefully reviews performance reports and constantly monitors account balances.

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