Nonprofit fraud has become increasingly prevalent in this day and age. In this article, we explore the different types of fraud and share actionable tips to help you maintain nonprofit fraud prevention in your organization.
Did you know that 10% of fraudulent cases worldwide are reported by nonprofit organizations? Nonprofit fraud prevention has become critical as technology continues to evolve and fraudsters become increasingly slick.
Keep reading to learn more about nonprofit fraud, how to protect your organization, and how to report the misuse of nonprofit funds.
Nonprofit fraud refers to the misuse or misappropriation of funds or resources given to a nonprofit organization. Nonprofits are often prone to fraudulent attacks due to a lack of resources on hand, with many failing to pay close attention to security measures.
A data breach can have severe consequences like losing your donors’ trust, damaging your nonprofit’s reputation, and potentially exposing donors’ sensitive personal information.
Nonprofit organizations are more prone to embezzlement and fraud than you might think. Having an actionable nonprofit fraud prevention strategy is important to avoid breaches and ensure you can raise funds successfully while protecting sensitive data and maintaining trust.
Organizations encounter many types of nonprofit fraud. Educating yourself on the types of nonprofit fraud and how they can hinder you from realizing your mission is the first step to nonprofit fraud prevention.
Let’s spotlight some nonprofit fraud types.
Deceptive fundraising refers to misleading tactics used by fraudulent or unethical nonprofit organizations to solicit donations. These methods often include misrepresenting the purpose of an organization or being deceptive about how funds will be used or benefit the cause they’re meant to serve.
Misappropriation of funds refers to when funds raised by a nonprofit are misused or stolen for personal gain or activities that fall outside of an organization’s cause. This type of nonprofit fraud can have serious legal consequences for a nonprofit organization.
Embezzlement is a form of nonprofit fraud in which funds or assets entrusted to a nonprofit organization are used for personal gain rather than the purpose of the organization. A staff member or volunteer often commits this form of internal theft.
Spam donations are not necessarily a form of nonprofit fraud, but they are worth mentioning as an example of scams that can happen to your organization. This refers to when scammers make fraudulent or fake donations to a nonprofit using stolen credit card information.
When a transaction is successful, scammers use the card information for other transactions. The chargeback fees associated with these “donations” can cause financial damage to your organization.
From conducting internal audits to maintaining transparency, there are several ways you can ensure nonprofit fraud prevention.
Establishing internal controls early on can minimize the risk of nonprofit fraud and help you identify suspicious activity rapidly.
Start by ensuring segregation of duties so that no single person is responsible for accounting tasks. Delegate tasks like financial reporting, bookkeeping, access, authorization, and similar activities to separate individuals. For example, if one person has logged a mailed check made by a donor, a separate person should deposit it into your nonprofit’s bank account.
This ensures that critical financial processes are split to avoid conflicts of interest and potential fraud.
Building on the segregation of duties, encourage a culture of transparency and whistleblowing within your organization.
Encourage your teams to speak up if suspicious activity is suspected. This will be easier to implement when duties are segmented amongst various individuals, ensuring multiple eyes are on processes at all times.
Consider creating a whistleblowing policy so that staff and volunteers feel protected by your organization if they decide to speak up on potentially fraudulent activities.
Only 20% of nonprofits have a policy in place to protect them against cyberattacks. Protect your organization with a fundraising platform that follows industry-leading security standards, like Donorbox.
Look for a platform that offers fraud protection and round-the-clock monitoring, PCI compliance, and multi-factor authentication, at the very least.
Fundraising platforms that have dedicated security teams working in the background also provide additional support and reassurance. These measures help ensure that your organizational data – and that of your donors – stays well-protected.
Charity assessment organizations like Charity Navigator and GuideStar provide a credible platform to promote your organization’s mission, programs, impact, and financial information with donors, foundations, and corporations. These sites also score your organization on things like impact and results.
Registering your nonprofit on a platform like this boosts transparency and increases donor trust.
Knowing how to identify common red flags of embezzlement and fraudulent activity is essential to ensuring nonprofit fraud prevention in your organization.
Below are some warning signs of embezzlement in a nonprofit, as shared by Civic Reinventions Inc.:
Your Board of Directors is directly responsible for preventing and detecting fraudulent activity. Put clear financial policies in place to easily spot warning signs and stay vigilant.
While suspicious activity does not directly mean a person is guilty of nonprofit fraud, it can lead to further scrutiny from your board members, which can help with prevention.
Failure to report the misuse of funds to the necessary entities can lead to severe penalties for your nonprofit organization. Here is what you need to know about how to report the misuse of nonprofit funds.
If reporting to the IRS, your nonprofit should report fund mismanagement on your annual Form 990 submission.
Be sure to provide a detailed account of the misuse of nonprofit funds and the steps your organization has taken to prevent it from happening again. The more information you provide, the smaller the chance of a full audit from the IRS.
Important note: Remember not to include the accused person’s name in your report to avoid potential defamation. And, include the active case number or contact information for the investigative officer.
Fraud and embezzlement must be reported to the appropriate law enforcement agencies.
As with the IRS, provide as much detail as possible about what happened and the steps taken to mitigate and enforce nonprofit fraud prevention in the future.
There are many rules involved with grants and how funds should be used. Be sure to report fund mismanagement to the relevant grant-making organization immediately. Check the grant guidelines and discuss a potential reimbursement process, if applicable.
More than 100,000 organizations have trusted Donorbox to provide a secure and effective fundraising solution. We safeguard your sensitive data through industry-leading security standards, including PCI DSS compliance and fraud detection and monitoring.
Here’s how we keep nonprofit organizations that use Donorbox protected:
Our dedicated security team monitors every campaign for fraudulent activity and uses state-of-the-art automated monitoring and anti-fraud technologies.
This helps minimize the risk of security attacks and reduces chargeback fees to your organization, which can sometimes amount to up to $30 per chargeback – a significant financial burden for your organization.
Our partnership with Stripe and PayPal ensures a secure donation process.
Stripe’s native fraud detection technology, Stripe Radar, detects and blocks any fraudulent transactions using machine-learning technology.
Our other payment processing partner, PayPal, ensures your account and information remain secure through advanced fraud detection technology, data encryption, Transport Layer Security (TLS), and secure HTTPS connections.
Every Donorbox donation form is protected from spam and automated bot activity with invisible reCAPTCHA. This helps keep your donation forms secure and protects sensitive donor and organizational information from malicious attacks.
reCAPTCHA helps validate donation attempts and shows a visible reCAPTCHA challenge to suspicious attempts. Each donation attempt needs to pass through the following filters:
Once a donation request passes all these checks, we send it to our payment processors to create a transaction.
We don’t store any sensitive credit card information on our servers or share it with external parties, excluding your preferred payment processor (Stripe or PayPal).
All card and bank data is tokenized before any cards are charged. This ensures your donors’ information remains protected from potential hackers or fraudulent activity.
We maintain the highest level of protection from common threats, including Distributed Denial of Service (DDOS) attacks. This ensures you receive any potential donations to your campaigns and stay protected from malicious attacks.
Donorbox enables multi-factor authentication on your organization’s account, with every unique and secure session token you input adding an extra layer of security.
Any third-party integrations you use on your account are also protected against cyberattacks through secure session tokens and access controls.
SSL/TLS technology protects every Donorbox donation form, keeping your checkout process secure.
Donorbox and our payment processors, Stripe and PayPal, are also PCI-compliant, ensuring all your online donations and payment information remains completely secure 24/7.
Donorbox donation forms are linked to Cloudflare CDN. Cloudflare is a content delivery network (CDN) that helps block donation attempts based on suspicious user behavior and protects against DDoS attacks.
Additionally, any updates you make to your donation form are rapidly reflected on global servers worldwide.
This means that, if supporters access your donation form from the server their browser is linked to, they will see the latest version of your donation form, boosting scalability and accessibility for you and your donors.
As technology and fraudulent attacks continue to grow at scale, nonprofit fraud prevention is an essential aspect of protecting organizations from evolving threats. A fundamental starting point? Choosing a secure and robust fundraising platform that prioritizes security as much as you do.
Donorbox’s high-level security standards and scalable fundraising software help nonprofits like yours raise donations while protecting sensitive information so you can continue the good work you do.
Sign up today to see why more than 100,000 organizations have trusted us to raise a collective $3 billion and counting!
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Jamy-Lee Holt