Nonprofit Fraud: Bid-Rigging, Kickbacks and Faulty Payments

Day 25 of 30 Days of Fraud

The Nonprofit Theft

We think of nonprofits as nice places where only noble things happen. But sometimes the leaders tasked with accomplishing the nonprofit’s mission prey on the organization itself, harming the very people the organization is designed to help.

One such nonprofit leader was charged with bid-rigging, receiving kickbacks, and making fraudulent payments to vendors.

Nonprofit fraud

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The Department of Justice charged a “former director of operations at…a Manhattan substance abuse treatment center, with bid rigging, conspiracy to defraud, and income tax evasion, in connection with a conspiracy to embezzle approximately $2.34 million from the organization over an eight-year period.”

The Department of Justice stated the charges stemmed from the director “conspiring with several outside vendors to rig bids and allocate contracts awarded by”  the nonprofit “for the supply of food, meat, health and beauty supplies, baby supplies, office supplies, printed materials, janitorial supplies, and medical supplies from 1990 until at least April 1998. According to the charge, the director steered nearly $10 million in contracts to those vendors.”

The director was charged with taking kickbacks totaling at least $364,000 in cash or goods and services from vendors to ensure receipt of contracts.

The Department of Justice went on to say, the director “and seven unidentified vendors embezzled at least $2.342 million” from  the nonprofit “by issuing false and fraudulent purchase orders to each of the seven vendors, who in turn issued corresponding invoices for goods and services that were never delivered or provided.”

The Weaknesses

The first weakness is having a leader who was concerned more about his own personal wealth than the people he serves. Auditors often refer to this as the tone at the top–it’s the ethical makeup of those in charge. Without a positive, honest culture, fraud is more likely to occur.

The second weakness is the bidding process never really happened. There’s a reason for bidding: To keep everyone honest, and to ensure the lowest price for the organization.

The third weakness is a lack of accounts payable controls (or the circumvention of such policies, if they existed). Collusion between an organization’s leaders and vendors can wreak havoc. In such cases, the vendors send invoices, but no service or product is provided. Since someone in the nonprofit is approving the invoice (with knowledge the invoice is fictitious), there is no gatekeeper, no one to prevent the theft. Actually, the person approving the invoices is aiding in the fraud.

The Fixes

First, fire leaders who are unethical. An organization–especially a nonprofit–can’t afford the damage that such people do.

Second, solicit real bids. Sealed bids should be received and opened in a public meeting.

Third, ask board members to review and vet the nonprofit’s vendor list, especially those vendors receiving payments over a certain threshold (e.g., $50,000). Possibly, ask your external auditor to verify the existence and work of key outside vendors.

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One thought on “Nonprofit Fraud: Bid-Rigging, Kickbacks and Faulty Payments

  1. It is also helpful if the Board Treasurer or Chair of the Audit Committee is well-known to the staff and is approachable. Whistleblower procedures should be established and communicated to staff.