Fraud Guidance & Policy Template
Humentum has developed an anti fraud and bribery policy template for use by NGOs, which complements our Fighting Fraud in NGOs training course. It is free, and designed to be edited to match your needs and circumstances.
What is Fraud?
Fraud is the act of intentionally deceiving someone in order to gain an unfair or illegal advantage (financial, political or otherwise)
Fraud is typically carried out by an NGO’s own staff, or their partners’ staff. Sometimes money may be leaking out of the organization for a long time undetected.
Typical examples of fraud include:
- stealing money or assets
- abuse of procurement process, often collusion with suppliers to pay inflated prices
- pocketing of cash receipts
- bribes paid to NGO staff by suppliers or beneficiaries
- supplies sold for personal gain
- staff being paid inflated expenses (supported by false receipts)
- the same activity being funded by two different donors
- unauthorized personal use of assets (eg telephones, vehicles)
- resources given to ghost staff or beneficiaries, who do not really exist
Fraud is not uncommon, but reliable statistics are very hard to come by because organizations are understandably reluctant to talk about frauds they have experienced.
Why do people commit fraud?
Understanding the motivation of fraudsters is key to making strategies for prevention. Without wishing to oversimplify a clearly complex area, research indicates that fraud is most likely to occur when the following factors are present:
Where the amount of money flowing through NGOs is large and internal controls are weak, it is easy to commit fraud, and the risks of getting caught are low. Where there is little consequence for being caught, or someone knows they are protected by powerful people, the door is wide open.
The vast majority of NGO employees do not resort to fraud to meet their needs. But the stress of finding school fees or medical bills for scores of dependents, or similar pressures, can lead people to convince themselves that they need the money as much as the beneficiaries do.
The expectations of family members. The desire to be successful. The embarrassment of being less ‘successful’ than your peers. The demands of an addiction. All these can feed into wanting more than you have.
What starts out as a small need, easily met by a small fraud, can grow into a habit whereby someone feels compelled to continue stealing to maintain a certain lifestyle. If fraud is habitual within the organizational culture, even honest newcomers can get sucked in, given rewards in return for silence.
Fraudsters justify their actions to themselves. Staff are more likely to commit fraud if they are de-motivated, disgruntled, do not share the organization’s vision, where there is a wide gap between highest and lowest paid staff, and where they do not feel appreciated or valued.
NGOs take money into poor areas, sometimes with weak oversight and unclear goals. The level of temptation and external pressure may be high and staff may not always feel much loyalty to an NGO or its values. In this context, it is not surprising that some money is misused.
Fraud prevention and avoidance
The most important first step that NGOs can do to combat fraud is to recognize that it happens.
Here are some practical ideas to help create a culture where fraud is less likely to occur in your organization. Clearly none of these will work in isolation. Taken together they may reduce the risk. There is no one easy solution.
Include ‘honesty’, ‘integrity’, or ‘stewardship’ in your organizational values, spelling out in your own words what they mean for your organization.
- VISION AND MISSION
Think of creative ways to ensure staff frequently engage with and are inspired by the vision or mission – display it prominently, talk about it in meetings, put it at the bottom of emails or have a quiz with a prize to see which members can say it from memory.
- INVOLVE BENEFICIARIES MORE
Where beneficiaries are involved in planning and budgeting, and effort is made to share financial information with them, they are often more effective in ensuring that resources are used properly than distant donors. See the listen first framework for more ideas.
- INCREASE STAFF CONNECTION WITH BENEFICIARIES
Share positive stories of how beneficiaries have been impacted by the NGO’s activities, and as reminders of the ongoing need. Ensure that office based staff are also able to visit the field once in a while.
Recruit freely and fairly on the basis of merit. Ensure the process is transparent. Consider engaging an independent recruitment consultant if there have been problems in the past.
- RECRUITMENT – INTERVIEWING
When interviewing new candidates, consider asking questions such as:
– Have you had any experience of fraud in any of the places you have worked? – without naming any names, please would you tell us a bit about what happened and how you felt about it?”
– ‘What would you do if you discovered someone senior to you in the organization was defrauding the organization?’
- RECRUITMENT – REFERENCES
Always follow up references by phone (written references rarely reveal much) asking open questions such as ‘Are you able to tell me an example of any time when this person demonstrated their personal honesty or integrity?’
Discuss your fraud policy (and recent history if relevant) with new joiners. It is better that they hear it from you than others. Make sure there is an explicit expression of the new joiner’s expected behavior. ‘Whatever you have experienced before, this is the way we do things here’.
- EMPLOYEE COMMITMENT
Encourage employees to make a voluntary annual commitment to act with integrity, report suspicious behavior and act in the interest of beneficiaries at all times. This could be in writing, or said together in a meeting.
- PAY LEVELS
Set pay levels not so low that people are expected to steal to be able to live, and not so high that people’s main motivation for wanting to work in the NGO sector is primarily financial. Set targets and monitor the % gap between the highest and lowest paid staff.
- MANAGEMENT BY WALKING ABOUT
Managers should try to get out there and talk to beneficiaries and staff, and visit programs. Don’t make assumptions or rely on paperwork and written reports.
- FINANCIAL MANAGEMENT TRAINING
Financial systems are often perceived as complicated and confidential. Empowering a wide range of staff to engage with the financial records, and ask critical questions when reviewing financial reports should enable alarm bells to go off earlier. Try to ensure that your Board members, senior managers, program staff and finance staff are trained.
- DEVELOP A RISK REGISTER
Identify key fraud risk areas based on your area of operation. For example, insider loans, ghost employees, misappropriation of cash receipts, procurement deals and theft of construction materials. See the Guide page on risk assessment, including a sample risk register.
- DEVELOP A GOOD INTERNAL CONTROL SYSTEM
In particular, pay special attention to the high risk areas of cash and bank, procurement, fixed assets and construction. Ensure you have adequate segregation of duties. See the Guide page on internal controls.
- INTERNAL AUDIT
Consider engaging a trusted, competent, local (to the country or at least region) person to carry out periodic internal audits, with their findings reported to the Governing Body, and even beneficiaries or donors.
- LOOK OUT FOR THE WARNING SIGNS OF FRAUD
Watch out for typical signs such as records not being up to date, someone’s lifestyle being inconsistent with their salary etc.
- BE AWARE OF POWER RELATIONS
Do any individuals have power to the extent that they are above question and not accountable to anyone? Real power may bear very little relationship to a documented organizational chart.
- WHISTLE BLOWING
Establish whistle blowing procedures that make it possible for suppliers, beneficiaries and staff to whistle blow in confidence if they have suspicions. Ensure that suppliers, beneficiaries and staff know how to whistle blow if they need to (eg print on Local Purchase Orders, include in contracts, display on notice boards etc.).
- TAKE ACTION ON FRAUD OR SUSPECTED FRAUD
See below for ideas for what to do if you are faced with a fraud. Lack of action and communication sends a strong message that fraud is acceptable.
- WRITTEN FRAUD POLICY
Document your fraud prevention and management strategies into a fraud policy.
Dealing with a fraud
- All allegations of fraud must be treated seriously and investigated as soon as possible. Internal investigations must be fair and take the time to gather real evidence before coming to conclusions. This is a detailed and time consuming job. The police may be able to help, particularly in bringing the perpetrator to justice and recovering funds.
- An investigation may help you understand how to avoid the same type of fraud happening again in the future. But: ‘extreme cases make bad laws’. It is better to change your rules and policies after careful reflection because they have to work for normal times, as well as extreme cases.
- NGOs should record the details of each fraud and the actions they take in response in a fraud register. This is an important document for monitoring fraud and for learning how to strengthen controls in the future.
- Consider sharing your experience and submitting a case study for posting on the website, so that others can learn from you. You may omit your organization name if you would prefer.
Fraud is hard for NGOs to come to terms with because it involves a betrayal of trust and because it can lead to negative reports which could damage fundraising. But the real betrayal of trust is to donors, staff and the beneficiaries who could have been helped by the NGO but were not.
Do you need help with a fraud investigation? Learn more about how we can help.