According to James G. Sheehan, chief of the New York State Attorney General's Charities Bureau, embezzlement and fraud is "surprisingly common" among charities in the state, New York Nonprofit Media reports.
Although the National Children's Leukemia Foundation, which the bureau investigated and the attorney general's office sued in late July for using only $57,541 of the $9.7 million it raised from donors for charitable purposes, was "an extreme outlier," there are potential problems hiding in plain sight, Sheehan told NYNM, even at organizations that are otherwise ethically run. "One of the things we do tend to see a lot of is embezzlement and fraud within the organization, often by very trusted people. The classic model of an embezzler is someone who never takes a vacation. They're very good at what they do. People like them. They're relatively quiet."
Fraud is "especially common in organizations that have had the same leadership for a long period of time," said Sheehan, pointing to the Metropolitan Council on Jewish Poverty, whose former executive director and CEO William Rapfogel was jailed for his role in a $9 million scheme that stretched over two decades. The solution for preventing fraud in the first place, he added, is to have systems in place that dissuade would-be fraudsters and encourage an organizational culture of accountability. Among the "red flags" signaling potential problems are a lack of term limits for board members and cursory audits, which, when done well, should include an examination of weaknesses in the organization's control processes, how accurate its reports are, and "fraud brainstorming" — imagining how or where the charity could be exploited.
"People are committed to the mission," said Sheehan. "But sometimes the first stop is: Who's in this business that we know. And that often is a board member. So making sure you have strong conflict of interest rules and related party rules is really important to making your decision work."