See no evil, hear no evil, and speak no evil!
Despite the growing level of funds channelled through NGOs (or maybe because of it), fraud and corruption continue to be a highly sensitive topic, with most NGOs reluctant to openly discuss it. This was highlighted a few years ago, when Médecins du Monde initiated a study in an attempt to open up discussion on corruption within the humanitarian aid sector (one of the most corruption prone areas of development). Of the 17 largest French NGOs contacted for a confidential interview, accounting for more than 80% of all French humanitarian aid, 11 refused to participate. Attitudes such as this, a general lack of transparency within the sector, and a scarcity of empirical evidence available on fraud and corruption, has resulted in the topic avoiding appropriate scrutiny.
Following on from my article on NGO accountability, this is the second in a series of three blogs examining NGO accountability and corruption. Its focus will be on what we know about actual corruption within the NGOs.
‘Rose-tinted’ glasses’: Corruption only happens in NGOs working in the developing world … or does it!
When the topic of corruption is raised, the natural inclination is to point the finger elsewhere. In the case of Northern NGOs, this tends to be at their counter-parts operating in the developing environments of the South. This was brought home to me in a discussion with a CEO & President of a North American based INGO last week, who stated with absolute conviction, that the ‘real’ need for anti-corruption measures was in Southern NGOs, as those in the North (like his) could safely “rely” on their external auditors and internal risk management systems to prevent it from happening. When I pointed out that the latest ACFE fraud survey showed that he had twice the chance of uncovering a fraud within his INGO by accident (at 6%) then it being uncovered by his external auditors (at 3%), he was a little taken aback. That aside, just how accurate was his assertion that the problem of fraud and corruption within the NGO / non-profit sector is limited to certain parts of the world?
While research available on NGO corruption is predominantly drawn from newspaper articles of fraud reported in national NGOs in the North, it represents the tip of the iceberg, as a KPMG survey has found that 77% of all fraud investigations never reach the public domain, and 54% are not even communicated internally. In a 2014survey into fraud in the Australian NGO sector, 54% of respondents advised that they did not report fraud to the Police because of “concerns relating to the impact of future funding opportunities, and potential damage to the organisation’s reputation”. While over 90% of respondent’s viewed it as a problem for the non-profit sector as a whole (in another show of ‘finger pointing’), only 1 in 4 saw it as a problem for their own organisation!
Those in Glass Houses Shouldn’t throw stones: Fraud and corruption is in our own backyard
Despite the ‘cone of silence’ built up around the topic, fraud and corruption within the NGO / non-profit sector is not limited to certain parts of the world only. Supporting this are the following:
- A Working Paper by The Hauser Center for Nonprofit Organizations at Harvard University, found that a significant problem existed within the NGO sector, and that fraud amongst non-profit entities in the North was on the rise. Action to counter it was not always taken, due to a growing lack of regulatory resources.
- The UK’s National Fraud Authority found that in 2012, fraud was estimated to have cost the charity sector in England, Scotland and Wales £1.1 billion annually, with serious incidents reported to the UK Charity Commission almost doubling in the previous year
- In October 2013, The Washington Post published an article highlighting the potential extent of fraud and corruption within the US non-profit sector. Analysing the annual returns filed between 2008 and 2012, they found that over 1,000 NGOs had checked the box indicating that the organisation had ‘become aware of a significant diversion of assets during the year’; attributable to theft, investment fraud, embezzlement and other unauthorised uses of funds. Most of these were of a serious nature and not publicly reported. Important details were routinely omitted from the filings, with around half of the organisations not even disclosing the total amount lost.
- According to the Economist (February 2014), a 20-month police investigation, uncovered evidence of widespread misuse of funds provided to around 600 Greek NGOs working overseas between 2000 and 2008; and, last month, the head the country’s public administration watchdog advised that 9 out of 10 NGOs subjected to checks by the national tax office officials appeared “problematical”.
- While the list continues, one thing is clear, Northern NGOs are not immune to fraud and corruption, and cannot rely on their “external auditors and risk management systems” to deal properly with the issue.
Who are committing these frauds?
An exploratory study of NGO corruption (again in the North) published in the International Journal of Voluntary and Nonprofit Organizations, found that all of the irregularities examined involved money, were opportunistic in nature, and were motivated by self-interest (greed), perceived entitlement, or sexual fulfilment. Of greater importance though, was the finding that the majority of cases involved the elite of the organisation (principally the CEO or CFO), pointing to key failures in overall governance and oversight at board level. This was mirrored in a global KPMG fraud survey carried out in 2011, which indicated the ‘typical fraudster’ to be a senior manager within an organisation.
What all of these, and other studies and surveys have shown, is that the accumulating number of alleged and substantiated cases of fraud and corruption, are not isolated or sporadic events limited to particular countries or parts of the world, but are a function of a broader global problem.
Corruption within development NGOs in the South
Having briefly looked at the North, how sure are INGOs and other development actors who rely on Southern delivery partners, that the funds transferred into their care are used for the intended purpose?
While the Internet is littered with stories of Southern NGO corruption, and the rise of BINGOs (or briefcase NGOs), research on the topic of actual corruption within Southern NGOs is all but non-existent. What is available has tended to primarily focus on development INGOs that straddle the North/South divide (i.e. raising funds in the North to pay for the delivery of programmes in the South).
While far from scientific, a cursory Google search of the terms ‘corruption’ and ‘development INGOs’, highlighted only four cases of actual corruption (outlined below):
|Oxfam International||2006||Indonesia||USD 20,000 procurement fraud, in Oxfam´s Aceh operations resulting in disciplinary action being taken against 22 employees|
|World Vision International (WVI)||2005 to 2007||Liberia||Theft of more than USD 1 million of foodstuffs (intended for programme beneficiaries) by three WVI employees. Two of the three were subsequently arrested and extradited to the US where they were found guilty of 13 charges, including Conspiracy to defraud the US Government,Mail Fraud, Wire Fraud, False Claims, and Tampering with a Witness.The USAID funded project was designed to provide food and work for people emerging from the lengthy civil conflict in Liberia.WVI had been selected by another INGO, Catholic Relief Services, as a sub-grantee for the food distribution and food-for-work parts of the project.|
|Norwegian Refugee Council||2012||Pakistan||Charges of corruption and mismanagement in NRC’s Bajaur Agency operations, resulting in the termination of 16 employees – including two senior managers – and the replacement of the agency’s coordinator|
|Oxfam International||2014||UK||Fraud and theft, resulting in the jailing of Oxfam’s former head of counter-fraud ,for the embezzlement of more than £64,000 while investigating alleged cases of fraud committed by aid workers in Haiti.|
In the case of the Oxfam Aceh incident, the following comment – by Nicholas Stockton of Humanitarian Aid Accountability International – is worth noting (as it supports the earlier assertion that most cases of NGO fraud and corruption are not reported): “I hope that this isn’t interpreted … as Oxfam being the only one with problems. They are, in fact, the only ones to come out to deal with the problem”
Types of corrupt practices
Notwithstanding the small number of cases highlighted above, an analysis of four donor agencies and four INGOs in 2011, found that the risk of internal corruption in NGO operations was significant, and that many international donors – and NGOs themselves – had not taken a comprehensive approach to managing corruption risks. It found that the range of potentially corrupt practices committed by development NGOs was “extensive”, and that many of these practices took place within routine institutional operations, as well as within programme and project activities. The five most commonly documented forms of corruption identified were:
- Inflated, duplicate, or fictitious invoices for goods and services procured for a project
- “Ghost” employees, participants or beneficiaries that inflated the cost of project activities
- Kickback arrangements in procurement of goods or services or in hiring of project staff
- “Double-dipping”, or seeking or accepting funds from more than one donor for (parts of) the same project.
- Fictitious NGOs, or politically connected organisations set up to win public contracts (including those setup to act as delivery partners for INGOs)
While it covers the main forms of financial corruption, I would argue that the list is incomplete, as it excludes any form of non-financial or social corruption (such as favouritism and conflict of interest) embedded in many parts of the developing world. While no explanation has been given for this exclusion, one reason could be the difficulty of outsiders getting close enough to view or record it.
The above findings are further supported by a case study of corruption within in an NGO operating in Malawi, which not only highlighted the nature and extent of internal corruption, but indicated that NGOs and INGOs were subject to the same – or similar – types and levels of corruption confronted by the society’s in which they operated.
So what does this all mean?
While the bulk of cases never reach the public domain, fraud and corruption is increasing, and is affecting NGOs operating in both the North and the South. So insidious is it, that unless action is taken to manage it, the moral authority that the non-profit sector currently enjoys will soon be reduced to a thin veneer, which if splintered, has the potential to undermine the (public) trust on which the industry is built.