Fighting fraud in nonprofits: How best to protect donor dollars

Nonprofit organizations play a vital role in meeting societal needs, from disaster relief to education and healthcare. However, the very attributes that make nonprofits’ missions so critical — such as their focus and their reliance on public trust — also make them vulnerable to fraud.

Worse yet, fraud within the nonprofit sector can divert resources from those in need, damage donor confidence, and tarnish the reputation of charitable organizations that have been victimized by fraud. Understanding common fraud schemes and how to protect yourself as a donor is essential to ensuring that contributions are used effectively.

Common types of fraud in nonprofits

There are several common types of fraud that nonprofits encounter and understanding how these methods can prevent nonprofits from fulfilling their missions is important. Often, nonprofit fraud involves more complex motives, as these organizations face unique challenges in fraud prevention. With limited resources for oversight and a heavy reliance on trust, nonprofits are particularly vulnerable to fraud, including risks similar to those seen inside corporations.

While insider corporate fraud is typically driven by personal financial gain — such as falsifying reports for bonuses or stock manipulation — nonprofit fraud tends to involve issues like mismanagement, misallocation of funds, or misleading claims about an organization’s impact. The plethora of reasons behind fraud in this sector make it more difficult to target, making it all the more necessary that donors be vigilant. Some common types of fraud that affect nonprofits includes:

• • • Cybercrime and phishing scams — Nonprofits manage sensitive donor and volunteer data, making them vulnerable to cyberattacks. Fraudsters may employ phishing tactics through email or other online channels to steal personal information, putting both the organization and its supporters at risk.
    • Embezzlement — Employees or volunteers may divert funds intended for the nonprofit’s mission for their own personal use. Embezzlement can undermine an organization’s ability to provide services and harm its reputation.
    • Fundraising scams — Fraudsters frequently take advantage of crises, such as natural disasters, by impersonating legitimate nonprofits to solicit donations. These scams prey on the generosity of donors and divert funds from legitimate causes.
    • Vendor fraud — Fraudulent billing schemes are common, with vendors overcharging for services or delivering sub-par products while invoicing for higher-quality ones. These fraudulent practices drain funds that should be used for charitable purposes.

Real-world cases of nonprofit fraud

To understand this real-world impact of nonprofit fraud, a look at some notable cases can highlight how fraud can undermine a nonprofit’s finances, mission, and public trust. In fact, to best grasp the real-world impact of nonprofit fraud, it’s helpful to examine some high-profile cases in which organizations encountered major challenges. These examples highlight the risks and consequences of fraud within the nonprofit sector.

The Red Cross and Haiti — In 2010, the Red Cross faced significant scrutiny following the Haiti earthquake. Reports revealed that a large portion of the funds raised for disaster relief never reached the victims directly. This case highlights how even well-known nonprofits can face fraud allegations, especially when large sums of money are involved.

United Way phishing scam — In 2018, the United Way fell victim to a phishing scam in which cybercriminals tricked staff into revealing login credentials. While no donor data was stolen, the breach highlighted the vulnerability of nonprofits to such scams and emphasized the importance of training staff to recognize phishing attempts and better secure sensitive information.

City of Chicago vendor fraud — In 2018, a nonprofit providing services to Chicago’s homeless population was caught in a vendor fraud scheme. The vendor overbilled the city for services it didn’t deliver, amounting to millions of dollars in overpayment losses. This case underscores the risks of vendor fraud in nonprofits and highlights the need for strong oversight and auditing to protect donor funds.

Feeding Our Future fraud — In 2022, Feeding Our Future, a nonprofit dedicated to providing meals to children and families, was caught up in a massive fraud scheme. The organization allegedly inflated the number of meals served and diverted millions of donor dollars intended for child nutrition programs into personal accounts. Additionally, the scheme involved submitting false documentation to federal agencies.

How donors can protect themselves

These cases highlight how nonprofits can become entangled in fraud. And while nonprofits are vulnerable, donors also play a crucial role in ensuring their contributions are used responsibly. By taking proactive steps, donors can help ensure that their funds are directed to legitimate causes and used effectively.

By staying informed and vigilant, donors can help ensure that their donations make a meaningful impact and are not lost to fraud. Some key actions you, as a donor, can take include researching the charity. By utilizing trusted platforms such as Charity Navigator, GuideStar, and the Better Business Bureau to assess an organization’s financial health, transparency, and track record, you can determine a charity’s legitimacy. You also should verify a nonprofit’s tax-exempt status through the IRS database and review its financial reports. In fact, you should request and review the nonprofit Form 990, an annual financial disclosure required by the IRS that offers valuable information on how funds are being allocated within the nonprofit.

Further, reputable nonprofits offer regular updates on how donations are spent and the impact of their programs. Be cautious of organizations that aggressively solicit donations or fail to provide clear information about their activities. And avoid sharing personal information via email, phone calls, or text messages.

Finally, if you suspect fraudulent activity, report it to the appropriate authorities, such as the Federal Trade Commission or your state’s Attorney General’s office.

While these precautions are essential in safeguarding your contributions, it’s equally important to recognize potential warning signs of fraud that could compromise your donation. By staying alert to red flags, you can ensure your funds are being directed to legitimate organizations and used as intended.

Watch out for red flags

Recognizing key signs can help protect not only your contribution from being misused but ensure your dollars are supporting legitimate causes. Some important red flags include the use of high-pressure tactics. Reputable nonprofits respect a donor’s time and decision-making process. If an organization pressures you to donate quickly, it’s a cause for concern.

Also, if an organization offers inconsistent information or exhibits a lack of transparency, that could be another red flag. You should always verify claims about an organization’s success or financial needs through independent sources. Any organizations that refuse to share financial documents or program details should be avoided.

Further, be cautious about receiving unsolicited emails or text messages. Never click on a link without verifying it. Always manually type web addresses and make sure they end with .org, as this is the most common web domain suffix for nonprofits and charities. Also, the FBI advises donating by check or credit card, and you should be very cautious of donation requests that are asking the donor to use cash, gift cards, wire transfers, or virtual currencies.

Recognizing these warning signs helps protect your contributions and ensures your funds support legitimate causes. For donors, staying vigilant is crucial to safeguarding their donations and making a real impact in the nonprofit sector.

Conclusion

Fraud in the nonprofit sector can have devastating consequences for both the organizations it affects and the donors who place their trust in them. However, by taking due diligence seriously — researching charities, monitoring transparency, and being vigilant for red flags — donors can help ensure their contributions make a meaningful impact. Trustworthy nonprofits prioritize accountability, enabling them to fulfill their missions while safeguarding donor dollars.

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You can find more ways to detect and prevent fraud here