Embezzlements, Other Diversions Drain Millions From Nonprofits

Posted on October 29, 2013

More than a thousand U.S. nonprofit organizations acknowledged
in public documents filed between 2008 and 2012 that theft, investment
fraud, embezzlement, or other unauthorized uses of funds had resulted
in a diversion of their assets, the Washington Post reports.

An analysis by the Post and GuideStar of organizations that checked
 a box on their Form 990 indicating they had discovered a
"significant diversion" of funds found that just ten of the largest
disclosures involved combined losses potentially totaling more
 than half a billion dollars. The question about diversions was
phased in by the IRS over three years starting in 2008 and
appears only on federal disclosure forms submitted by larger
nonprofits; private foundations and smaller groups submit alternative
 forms or none at all.

The Post also found that nonprofits routinely omitted important
details from their public filings, even though federal disclosure
 instructions direct them to explain the circumstances of such diversions.
Moreover, organizations are only required to report diversions of
 more than $250,000, or those that exceed 5 percent of an
organization's annual gross receipts or total assets, which suggests
 that many more incidents involving smaller amounts likely go unreported.

While investment fraud such as Bernard L. Madoff's Ponzi scheme was
blamed for some of the largest diversions or losses — including
$106 million at Yeshiva University and its affiliates, $26 million at
 New York University, and nearly $7 million at the
Alliance for Excellent Education — many cases involved embezzlement
 by employees. The American Legacy Foundation, for example,
suffered an estimated $3.4 million loss linked to phantom purchases
of computer equipment but waited nearly three years before calling in
 investigators. Youth Service America reported that it discovered a
diversion in 2009 of about $2 million that had been "misappropriated"
by a former employee; Columbia University disclosed in 2011 that it
had been defrauded of $5.2 million in "electronic payments," an incident
 in which a former accounting clerk and three associates were later
 convicted of redirecting $5.7 million meant for a hospital; and the
Louisville-based Woodcock Foundation disclosed that alleged fraud
 by a former chairman drained more than $1 million from its accounts,
 leaving the charity with assets totaling just $8.

According to the Post, a 2012 study by security firm
Marquet International concluded that nonprofits and religious
organizations accounted for one-sixth of major embezzlements
 in the U.S., second only to the financial-services industry. Christopher
T. Marquet, who heads the firm, told the Post that oversight at
nonprofits is often inadequate and that supervisors are too trusting.
 "The control structures in these organizations are much weaker,"
said Marquet.

"It's sadder when it happens to a nonprofit," said the Rev. Raymond
Moreland of the Maryland Bible Society of Baltimore, which was
victimized by a former secretary who falsified checks and misused
credit cards to steal $86,000 from the organization, then concocted
a series of fake audit reports to cover her trail. "You go out of your way
to trust a nonprofit. People give their money and expect integrity,"
said Moreland. "And when the integrity goes out the window, it just hurts
 everybody. It hurts the community, it hurts the organization, everything.
It's just tragic."

As part of the project, the Post has created a searchable public
database of nonprofits that have disclosed diversions.

Flaherty, Mary. Stephens, Joe. “Inside the Hidden World of 
Thefts, Scams and Phantom Purchases at the Nation's Nonprofits.” 
Washington Post 10/26/13.

Primary Subject: Philanthropy and Voluntarism
Location(s): National