Vulnerable targets: How not-for-profits can prevent money laundering and fraud

by Kasia White 

The risk of fraud is a serious concern for all types of businesses, but it can be particularly crippling to a not-for-profit (NFP) organization for which a damaged reputation can have devastating consequences.

To avoid unwanted publicity, NFPs may be reluctant to report fraudulent acts when they occur, making the true scope of the problem ultimately unknowable. It’s estimated, however, that organizations in all industries throughout the world lose approximately 5% of revenue to fraud each year, according to the Association of Certified Fraud Examiners’ (ACFE’s) most recent global study, “Occupational Fraud 2024: A Report to the Nations.”

Brad Sargent, CPA/ABV/CFF, CFE, CFS, CIRA, CCA, CRFAC, FABFA, founder and managing member of The Sargent Consulting Group LLC—a Mokena, Ill.-based firm dedicated to business valuations, economic damage calculations, expert witness services, financial investigations, and forensic accounting—says 5% is a lot to lose for NFPs. “If something like this happens, it can literally create an existential crisis for an organization,” Sargent stresses. “The entities themselves don’t want their donor base to know because they’ll stop donating. There’s a real incentive in the NFP world to sweep these things under the rug.”

Why NFPs are vulnerable targets

According to Sargent, NFPs are more susceptible to fraud for two main reasons.

First, NFPs are more susceptible to fraud because their budgets are usually tight—they don’t allocate funds for robust accounting teams.

“These are entities that are intentionally being run not to make money, so they don’t have proverbial deep pockets like a for-profit business often does in comparison,” Sargent explains. “Being vigilant and having procedures in place costs money that NFPs just don’t have, so they’re running very lean.”

Second, everyone at an NFP is working for the “common good,” so there’s less suspicion of bad actors in these settings.

“Typically, the people that manage NFPs are much more focused on fundraising revenue to do better for the community. They’re not thinking, ‘We need more accountants to watch over our books and records because somebody could steal from us,’” Sargent says.

Unfortunately, this kind of mindset could put an organization at risk. According to the ACFE’s 2024 report, nonprofits suffered a median loss of $76,000 per fraud scheme. The study broke down occupational fraud schemes into three categories: statement fraud, corruption, and asset misappropriation (the most common type). Additionally, more than half of all cases came from the following five departments: operations (14%), accounting (12%), sales (12%), customer service (9%), and executive/upper management (9%).

“The one asset that people steal and embezzle is cash,” Sargent notes. In his experience, he’s seen this among a large number of cases involving religious organizations, such as churches.

“People steal from them over and over again because who would steal from a church?” he says. “Well, if you’re the controller or the financial person at a church and there’s money there, and you have a situation where you need that money, sometimes you give in to the temptation.”

Robert Nordlander, CPA, CFE, sole shareholder of Nordlander CPA PLLC in North Carolina, says other types of fraud in the NFP sector typically involve credit card abuse, as well as check or payment tampering. Federal crimes, such as money laundering, are less common.

How to spot red flags

Nordlander, who spent more than 20 years chasing tax evaders and money launderers around the world as a special agent with the IRS Criminal Investigation Division, advises CPAs to be aware of what constitutes money laundering.

In his online presentation, “Money Laundering 101 for CPAs,” Nordlander highlights the three prongs of the money laundering federal crime statute (18 U.S.C. 1956), including concealment, spending, and promotion of illegal activity. Nordlander stresses that money launderers often try to conceal the true nature of their activities by using complex transactions, multiple accounts, and shell companies.

He cautions that all accounting and finance professionals should be suspicious of clients—or colleagues—who aren’t forthcoming with information or who use complicated financial structures that make it difficult to trace the source and destination of funds.

“If you know what a straight stick looks like, everything else is crooked,” Nordlander says. “If you’re a CPA, particularly an auditor, and you start seeing weird disbursements that aren’t related to the business, you have to perk your ears up when there’s a bizarre expenditure of the money.”

Nordlander urges CPAs to be on the lookout for these three red flags:

1. Questionable transactions that aren’t conducive to the business.
2. Missing books and records.
3. Suspicious customers or suppliers.

“If you know what the industry is supposed to look like as a good auditor, anything that’s not normal is abnormal,” Nordlander warns. “Don’t ignore the abnormal—if you see something, look into it and ask more questions.”

What can CPAs do to prevent fraud?

Dean Polales, JD, partner at Polales, Horton & Leonardi LLP in Chicago, says it’s crucial for NFP management to be aware of potential issues and work with their CPAs on how to do appropriate authentication of the money coming in and going out.

“NFPs have to have good compliance programs in effect, with respect to how they fundraise, how they value in-kind donations, and whether they involve themselves in valuing the contributions they receive,” Polales stresses. “Their accounting practices should be very accurate, involving quality individuals who understand the rules and follow them.”

But that’s not always the reality. Polales, who has 35 years of experience as a trial lawyer, pointed to a famous case involving a former comptroller and treasurer of Dixon, Ill. In 2013, Rita Crundwell was sentenced to 19 years in prison for stealing $53.7 million from the city over the course of two decades.

“This happened because there was no real compliance and audit function, and when the FBI got onto it, they found many years of Crundwell stealing money, buying horses, and living the high life—nobody ever looked at it,” he says. “Becoming a victim of a crime depends on your internal processes and procedures, the audit function, and accurate accounting.”

Crundwell was eventually caught when her substitute found her secret account while she was on an extended vacation. According to Polales, this is actually a creative way for organizations to protect themselves—making all employees take mandatory two-week vacations.

“If something doesn’t balance, somebody else in the organization is going to notice and report it,” he says. “A lot of people get caught that way.”

How else do employees get caught? According to the ACFE’s 2024 report, tips were the most common way fraud was exposed. Other common detection methods reported included internal audit (14%) and management review (13%).

“A lot of NFPs run on trust and their mission,” Polales says. “Since most of the funds go to their mission, they have to realize that their mission must include the protection of the organization that’s carrying out the mission—and there are costs associated with that in terms of time, effort, and money.”

Since most fraud is an internal problem, the best way to combat it is by implementing rigorous hiring and onboarding processes, Sargent suggests. This can be accomplished by performing background checks on prospective new employees, providing in-depth job applications, calling references, and running credit checks.

“If you show somebody who’s thinking about joining your organization that you’re going to investigate their resume and their background thoroughly, you’re sending them the message that, ‘Hey, if you come on board here, we’re going to keep an eye on you,’” Sargent stresses. “Even if you really don’t or really can’t, at least in the onboarding process, you can send the deterring message that you’re diligent, detail-oriented, and care about your assets. It’s a low-cost way for any entity to help prevent fraud.”

Kasia White is a freelance writer who specializes in profiling small businesses, covering the musical products industry, and interviewing leaders of globally renowned companies.

Reprinted courtesy of Insight, the magazine of the Illinois CPA Society.