By Marion Lee, CFRE
A thief has three characteristics: first a thief is not recognized by you as being a thief; second, he robs you of what you have without your realizing it at the time; and third, a thief leaves you feeling foolish after you have been robbed.
In this article, I ‘d like to explore why theft happens, how to work smarter to prevent this happening in your nonprofit and how to recover when it does happen. This article is over 18 years in the making. I have lived the devastating discovery of a theft, assisted in the discovery process, and watched as the perpetrator was prosecuted. It changed my life. For many years, the questions, the grief, and the feeling of responsibility and betrayal were my close companions. Money was stolen, people I was responsible for were hurt, people I trusted betrayed trust and I had to face my own inadequacies as a leader. There is more peace now, but it was hard fought through important internal battles of trust and self-confidence.
Since January of 2017, our organization has direct knowledge of six cases of theft in Central and South Texas with an estimated loss of just under $5 million dollars. All but one nonprofit will probably recover from the loss, but when people steal from a nonprofit more than money is lost. Services to children and fragile populations are diminished or cut altogether. Quality of life programs for everyone in the community are affected. And the people closest to home, the donors, staff, volunteers and volunteer board will suffer loss of trust, jobs, fear, insinuation and rumor, investigation and a level of stress that is for some, unbearable.
Since 2011, there have been 1,100 reported cases of embezzlement (misappropriation of funds committed to one’s trust) in the nonprofit sector (IRS). This figure may seem small compared to the 1.5 million nonprofits operating in the United States today until you begin to dig deeper. The 1,100 reported cases are documented only through the IRS electronic filing of 990s. They do not include cases reported through paper filing, which are hard to compile, nor do they include the cases that are not reported to the IRS or to legal authorities. The number of unreported cases is conservatively estimated to be at least ten times greater than those recorded (IRS).
In a 2006, a documented study conducted by faculty from New York University, in conjunction with the Association of Certified Fraud Examiners, estimated that charities had suffered a theft in charitable funds of $40 billion or 13% of total gifts to charity in 2005. Twelve years later, the study has updated losses to approximately $49.6 billion, the majority of which go unreported and unpunished.
We live in a time when if you make it easy for someone to steal from you, someone will.
–Frank Abagnale (focus of the movie “Catch Me if You Can”)
And he would know. Mr. Abagnale is one of the most celebrated confidence tricksters in America, lecturer for the FBI and now leads his own consulting company which focuses on financial fraud. In his article, “Embezzlement”, published in the Financial Fraud Law Report, Mr. Abagnale discusses the primary reasons fraud and theft occur in nonprofit and forprofit environments:
While “not worth it” to law enforcement, to the nonprofit, those lost funds meant cutting a program, potential reprisals from the funding source (government funds) and last, but not least, the thief would face no repercussions and live to steal another day. To another organization that needed the funds to provide hot meals and a safe place for the elderly in their community, it meant the closing of the center until they could regroup. Mr. Abagnale believes that prevention is truly the only recourse, as punishment and recovery of funds is very rare.
Wisdom cannot be stolen…it can only be shared
–Jefferson Smith (no, not Jimmy Stewart, although he might have said it)
Putting policies in place
It only takes one step to change. Sometimes in nonprofit organizations the smallest step means so much, but it seems to take an army to make it happen. Small administrative, overworked staff are frequently unable to face one more task, but let’s parse this out:
Making the decision to investigate and prosecute is very difficult. When asked, my opinion is the same as it was many years ago and I can only state my own beliefs – the beliefs of a person raised by my great grandfather, a District Criminal Judge in Bexar County for 32 years. A crime is a crime. No matter how you dress it up, it’s a crime to steal and if you hide it, for any reason, in my opinion, you become a part of the crime. If you fail to report it and fail to do everything in your power to bring the individual to justice, then you are accomplice to the crime. If you do it to protect your reputation, then you lack integrity. I paid dearly for this opinion, but it is the one decision I made years ago that I do not regret.
But he that filches from me, steals my good name.
— William Shakespeare
So, let’s talk about the people that get caught in the vortex of an embezzlement. Not the donors or the people you serve, but that quiet group: the board, the staff and the perpetrator.
Why do they steal? When I interviewed some perpetrators, the answers are oddly the same:
“They owed it to me,” tops the charts. People who steal from nonprofits feel that they work long hours for low pay, little-to-no recognition and they are owed the funds for their dedication.
“I had to so that I could support the image expected of me.” Maybe this says something about the messages we are sending in our work environments. This tells us that our interview questions should focus on asking candidates about about their values and how we fulfill our mission.
“It wasn’t their money anyway, somebody gave it to them so…”
And my personal favorite, “It is no big deal, because no one got hurt.”
We don’t often hear about what goes on behind the scenes when fraud is discovered. The focus always seems to be on how much money was stolen, sometimes who stole it and how, but rarely do you hear about the people who are left to pick up the pieces, staff and board members who share in the aftermath.
For all members of the nonprofit, initially there is a profound sense of shock and disbelief. The successful embezzler is usually someone who is well liked, fun, charming, compelling and the go-to person in the office. Get rid of your image of the dark loner working in a small office, keeping to themselves. Board members ask each other and themselves how they could not have seen it. Staff gathers to compare notes and ceaselessly examine how they could have kept it from happening. They have a sense of guilt, self-doubt and helplessness.
And, finally, comes the fear. In a fraud situation, the staff sadly, is guilty until proven innocent. Unless the mode of theft is clear cut, there is always the chance that more than one person was involved. They along with everyone connected to the situation should be vetted and cleared. It is a lengthy, time-consuming process which is distracting, often feels degrading, and instills a sense of distrust within the remaining group. Additionally, staff members worry that they will lose their jobs, lose respect within their community and be tainted in a way that will harm them professionally as well as personally. They wonder, should they stay or seek employment elsewhere. Some leave as soon as possible but most remain, true to the mission and the people they serve. Their hearts and minds are focused on keeping the programs alive and helping the people they serve.
Board members experience all of the above and for some, this includes a profound sense of responsibility. Upon their shoulders lies the decision on next steps: sweep it under the rug, or grapple with the full gamut of discovery and prosecution? Over the years, we have found that approximately one-third of the board resigns upon the discovery of the fraud hoping to escape liability, notoriety and responsibility. One-third will remain, but take an inert position, heads buried in the sand, just hoping it will be over soon, and one-third, brave souls, step up to actively support the organization through the troubled times. They support the staff, accept interim positions, make hard decisions that may lead to facing the media, communicating with law enforcement, and taking the heat.
Profile of an Embezzler
In a study conducted in 2005 (updated in 2016), The Hauser Center for Nonprofit Organizations at Harvard University in partnership with the Association of Fraud Examiners, developed a profile of an embezzler. They found that the majority of individuals who committed fraud were married women, median age of 41, with children. They steal on average, $160,000. Men who steal are usually married, with children, between the ages of 35 and 55, and steal considerably more, with an average of $350,000. Embezzlers have many of the characteristics that remind me of front line responders and fighter pilots. Intelligent, perceptive, highly skilled in predictive behavior, with a high-threshold for anxiety and risk-taking. Most understand that nonprofit leadership will not prosecute due to their own fear of exposure. Although the embezzler realizes if caught that their employment will be terminated, (in 5% of the cases, the individual is not terminated), but they will keep the money or the goods and lay low in a job outside of the nonprofit sector until enough time passes, and they can step back into a position where it is made easy for them to steal again.
So where do we go from here?
Nonprofit organizations are likely to discover a theft or fraud situation more quickly and endure it with less trauma if they have taken the measures outlined above and established the clear, definitive policies and procedures they need before the fraud occurs. We are blessed to work in an industry that changes the world on a daily basis where we: laugh often and much, find the best in others, try to leave the world a better place, and know as we turn out the lights that one life may have breathed easier because of our mission.***
*Organizations should have scripts when providing references to make sure they are being factual.
** Be sure to have a policy on providing references and consult an attorney on how to best provide a reference for someone who has stolen from the organization.
***Exerpt from What is Success? By Ralph Waldo Emerson.
Nothing in this article should be construed as legal advice. If you have specific issues with theft or suspect theft at your organization, please consult with legal counsel or the authorities.