NGOs are typically value-based organisations that depend, in whole or in part, on charitable donations and voluntary service. Although, the NGO sector has become increasingly professionalised over the last two decades, principles of altruism and voluntarism remain key defining characteristics and they still lack the sophistication of corporate entities in levels of security and anti-fraud practices.
NGOs deal with large amounts of cash while reaching the most rural and inaccessible parts of the country and work in areas of the world which are subject to conflict and instability. Due to small-scale operations and lack of expertise, most local vendors in these areas do not maintain and issue a commercial document for purchases of materials or services. In such a situation, producing legitimate documentation by NGOs is a bona fide challenge. Circumstances like these, where large amounts of cash are involved with minimalistic documentation, augment and amplify fraud vulnerabilities.
The sources of fund generation of NGOs are basically out of: Volunteered funding: From many international donors and also some Indian institutional donors.
Income from field activities: This includes income from land and assets like buildings and facilities, Income from consultancy or training and workshop fees, interest on funds, etc.
Self-contributions: This is a distinct category, where the NGO appeals to the public and persuades individuals and groups to support its cause. By far the most difficult of the three methods.
Rural India, poverty, large number of under privileged children and social issues such as AIDS attract immense foreign funding. With the ease of access and reach to the developed nations, funding from International organisations for NGOs in India for sustainable community development is very frequent. Especially, regions of India, where there are very minimal interventions by the government, non-profit making organisations reach the poor and the sufferer. Several NGOs have carried out great work and deserve ovation for creating awareness amongst villagers, educating them about optimum utilisation of their land, livestock and other resources.
However, the quantum and ease of foreign donations with minimalistic compliance requirement has resulted in the emergence of several fake organisations with a motive to siphon off this easy money in the name of development. The NGO sector is one of the most vulnerable sectors to fraud and criminal practices, including, in extreme cases, the potential for misuse for the purposes of money laundering and terrorist financing. These vulnerabilities are due to a number of factors such as :
The donors, especially foreign organisations, face considerable threat and risk to reputation with regard to falling prey to unethical players while assisting in the so-called social cause of uplifting societies.
NGOs rarely have established governance mechanisms whereby their members and supporters can hold them accountable for their activities. In contrast, other major actors in the societynotably governments, corporations and unions maintain long established albeit imperfect instruments of governance and responsibility. Often budgets provided in proposals given to foreign donors are overstated. In several cases, the ground reality is that very nominal amounts are spent when it comes to incurring expenditure for the field activities agreed in the proposals. Overstating expenses by creating fake bills, inflating employee expenses, misrepresenting field activities and misreporting the financial status to donors are some malpractices prevalent.
In a scenario where foreign donors and government authorities are facing continuous threat to their goodwill, their ultimate objective of helping the sufferer, building self sustaining groups, making sure their colossal monetary efforts reach the people in need, both worldly and in principle, the contributors should take following measures:
Even a single fraudulent act by staff or a volunteer can destroy a community’s trust in their mission (a trust that they have probably nurtured for years), and cripple the largest, most well meaning NGO.
On the other hand, NGO managers and administrators seeking ways to prevent fraudulent activities should discuss the topic with a suitably qualified auditor who can advise on best practice guidelines and policies. They should also put emphasis on streamlining business processes and implementing basic financial controls. NGOs are required to devise a continuous monitoring and compliance programmes for daily activities and reporting. Similarly, international donors should take professional help in carrying out above checks for reasonable reliance over the activities and financial management at such NGOs.
By Navita Srikant and Ajay Sharma: The authors are Partner & Senior Consultant, Fraud Investigation & Dispute Services, Ernst & Young…