Looking a Gift Horse in the Mouth: Risk Management for Nonprofit Organizations


A long-standing debate in the nonprofit sector is whether such organizations should operate like businesses. Regardless of one’s stance, few nonprofit professionals and volunteers will dispute the importance of protecting their organization’s reputation. Unfortunately, reputational risk mitigation is frequently not afforded the requisite level of attention required to protect nonprofits against a host of serious threats including employee, donor, and volunteer malfeasance. While no risk mitigation strategy can claim 100% efficacy, the deterrent factor is invaluable.

Commitment to their organization’s mission is a shared value of many nonprofit employees. Dedicated staff members are especially valued in the nonprofit sector where organizations typically operate under the mantra, do more with less. Unfortunately, the impactful work of nonprofit organizations is often used as a diversion by a small number of employees who engage in nefarious activities including fraud and theft. The damages caused by these bad actors can be threefold—reputational, financial, and legal. 

In August, The Washington Post reported that an accounts manager of a nonprofit affiliated with the University of South Florida’s medical system admitted to having stolen nearly $13 million dollars over several years. Although it took several years, the manager’s superiors eventually grew concerned by increasing accounts receivable balances and launched an investigation which was escalated to the FBI. A statement by the university announced, “USF is a victim of a serious crime by a person who held a position of trust.” This incident highlights the need for nonprofits to thoroughly vett employees holding positions of trust, both prior to hiring and throughout their tenure. 

Checks of senior nonprofit employees should be conducted randomly to catch bad actors off guard while being comprehensive in nature. Notably, the Association of Certified Fraud Examiners’ (ACFE) Report to the Nations 2020 Global Study on Occupational Fraud and Abuse revealed more than one-third of nonprofit frauds were committed by senior managers. One useful investigative tool is AI social media monitoring. While financially savvy fraudsters will typically employ various concealment strategies, their scams can be quickly unraveled by a sloppy social media post announcing an extravagant purchase or revealing a pattern of seemingly unusual behavior including a sudden passion for travel or signs of addiction.

Exploitation by donors with ill intent is another challenge,and is often overlooked by nonprofit organizations due to their reliance on fundraising. Prioritization of annual fundraising goals can lead organizations to intentionally ignore or look past red flags, such as an unexpected offer of a major donation from an unknown donor. It’s imperative for nonprofits to identify the identity, location, and affiliations of major donors to avoid becoming entwined in a money laundering or terrorist financing scheme. 

While the hesitancy of many nonprofits to allocate hard-fought funding to the establishment of a risk mitigation program is understandable, such an initiative should be considered as an investment in the organization’s long term health, as opposed to an unplanned short term expense. Within the past year, the susceptibility of nonprofits to be exploited led to collaboration by the Treasury Department’s Financial Crimes Enforcement Network (FinCEN) and Federal Banking Agencies to issue a joint fact sheet offering banks guidance in providing due diligence for nonprofit clients. Notably, the fact sheet advised applying a risk-based approach. One benefit of such a strategy for nonprofits is that it ensures risk mitigation spending is aimed at the organization’s most pressing pain points, as opposed to utilizing an overly broad approach without regard to an organization’s annual budget.

Not to be overlooked in risk mitigation efforts are an organization’s volunteers, with an emphasis on board members. Consider that at some nonprofits, particularly smaller ones, volunteers can have a significant impact on the organization’s operations, with responsibilities between lay and professionals frequently blurred. Similar to senior employees and major donors, board members warrant in-depth checks. Aside from having influence over strategic direction including budgets and fund allocation, board members often fill community facing roles, including being featured significantly in marketing materials. Not to be overlooked when vetting board members are conflicts of interest which can harm the organization’s reputation, erode organizational trust, and result in future legal consequences including voided agreements and financial penalties.

Accordingly, any misbehavior by senior lay leaders, both in the course of their organizational responsibilities or outside activities, can cause significant reputational harm. Gaining a balanced understanding of a board member’s reputation can be challenging, since individuals affiliated with other organizations with whom the individual is currently involved with, will typically be reluctant to share adverse information, due to concerns of harming their personal or organizational reputations. This provides an excellent opportunity to utilize discreet source inquiries to gain reputational insights of the lay leader from individuals operating in the same circles.
The thought of valued employees, donors, and volunteers causing significant damage is a troubling yet realistic threat to nonprofits. Protect your organization against reputational, financial, and legal threats by developing a risk mitigation plan. To learn more, reach out to Vcheck Global’s team of experienced due diligence investigators.

Seth Harlan is Senior Associate, Market & Regulatory Affairs at Vcheck Intelligence.

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