Category Archives for "Corruption"

Nonprofit fraud
Jan 23

Nonprofit Fraud: Bid-Rigging, Kickbacks and Faulty Payments

By Charles Hall | Corruption

We sometimes think of nonprofit fraud as nonexistent. After all, these are the good guys. But today we see that nonprofit theft does occur–and to the detriment of those most in need.

The Nonprofit Fraud

We think of nonprofits as lovely places where only noble things happen. But some nonprofit leaders prey on not-for-profit entities, 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

Picture is courtesy of AdobeStock.com

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 vendors embezzled at least $2 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.”

Later, the director pleaded guilty to bid rigging, fraud, and tax charges.

What was the harm to the nonprofit’s 600 substance abuse patients? Well, money that should have aided the needy went into the pockets of fraudsters.

The Weaknesses

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

The second weakness was the bidding process never happened. There’s a reason for bidding: It keeps everyone honest, and it ensures the lowest price for the organization.

The third weakness was 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. The person approving the invoices is aiding in the fraud.

The Fixes

First, fire unethical leaders. Nonprofits can’t afford the reputational damage.

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). Alternatively, ask your external or internal auditors to verify the work of key outside vendors.

how bribery works
Nov 16

How Bribery Works: How to Understand It and Prevent It

By Charles Hall | Corruption

The World Bank estimates that over $1 trillion in bribes are offered each year. Today we look at how bribery works and how you can prevent it.

The Theft

The FBI performed a sting operation involving two mid-Georgia city council members. The Bureau’s court complaint alleged that two city council members contacted a city vendor requesting a bribe. The vendor, according to the complaint, had previously provided services to the city. But when the contract came up for renewal, the city officials sought monetary encouragement (also known as cash) to continue the arrangement.

how bribery works

Picture is courtesy of AdobeStock.com

The vendor’s president, once aware of the proposed bribe, contacted the FBI, which in turn conducted the sting. On the arranged date, the company CFO delivered $20,000 in cash to the city council members. The conversation was recorded as the payment was made. The arrests followed soon thereafter.

The bribe was unsuccessful in this case, but, all too often, the bad guys receive the cash, and the organization suffers. How?

Vendors usually don’t absorb the cost of the bribe. They pass the expense along to the organization in the form of increased invoice billings, or the vendor will, in some cases, provide substandard products or services. Either way, the organization suffers, and the villain walks away with cash or a free vacation or a free car or…well, you get the picture.

The Weakness

The root of bribery lies in unethical leadership. Organizations should vet each key employee before hiring, making sure the person has historically acted in an upright manner. (In the case above, the citizens must vote for ethical leaders.)

The city had no fraud hotline. The Association of Certified Fraud Examiners biennial survey has repeatedly shown that corruption is often unearthed by tips–often through a fraud hotline. What is a fraud hotline? It is any means that an organization provides its employees to report a potential theft. (See below.) Bribery can occur even when organizations have the best of controls, but hotlines are a key defense.

The Fix

Organizations can increase communications about potential theft by:

  • Providing a 24/7 phone number–it can be a 1-800 number (employees call and report any information anonymously)
  • Provide employees with an email address where they can report suspected fraud
  • Ask employees to report red flags (signs of fraud) to a designated person in your organization

To mitigate corruption, implement these controls (there are others, but these will help):

  • Require sealed bids that are opened in the presence of multiple people (mainly for larger purchases)
  • Implement a whistleblower program (include vendors)
  • Require announced periodic vendor audits
  • Implement a conflict of interest policy
  • Implement a bribery prevention policy (include gifts)
  • For significant construction contracts, monitor all phases of the project, including solicitation of bids, awarding of the bid, development of the contract, on-site construction, and related billing, and contract change orders (don’t trust the builder to do this for you).
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