Government $ + Nonprofit Lax Internal Controls = Theft Waiting to Happen

This hypothesis is based only on anecdotes, but it appears that there are an increasing number of reported high-dollar thefts from charities that involve a mix of government funding – and so potentially lots of money – and lax internal controls that unfortunately are all too common at nonprofits. In this space we have reported on perhaps the largest such instance, which is the Feeding Our Future scandal in Minnesota that allegedly added up to at least $250 million. But there have been a number of other, alleged multi-million dollar scandals that involve similar fact patterns, including:

• The FBI is investigating an Orange County, California nonprofit that the County is suing based on claims that it misused more than $13 million in COVID-19 relief funds. The daughter of a County Supervisor works for the nonprofit, Viet America Society, and has also been named in the lawsuit. Additional coverage: L.A. Times (subscription required); N.Y. Times (subscription required); Orange County Register.

• The U.S. Attorney’s Office in the Eastern District of Missouri announced late last month the indictment of a St. Louis nonprofit executive who allegedly fraudulently obtained “more than $2 million in funds intended to feed low-income Missouri children, both before and during the coronavirus pandemic.” Coverage: St. Louis Post-Dispatch (subscription required).

• The CFO of the Detroit Riverfront Conservancy pled guilty late last month to stealing nearly $15 million from the nonprofit. As an earlier Detroit Free Press article detailed, the theft raised serious questions about the nonprofit’s internal controls, including not only with respect to its privately provided funds but also the at least $15 million in direct government grants received over the past decade and the $3 million per year provided by the city of Detroit for operating costs.

• In August the U.S. Attorney for the Southern District of New York announced the conviction of the “shadow executive director” of a nonprofit for stealing millions of dollars from the federal Head Start Program. Apparently the defendant lied to the U.S. Department of Health and Human Services when forms he submitted claimed the nonprofit had an independent board of directors and controls in place to guard against fraud, waste, and abuse.

And I could keep going, especially if I included smaller dollar amount cases that state and local authorities are investigating or prosecuting. As Professor Nicolas Duquette (USC) commented for the Detroit Free Press article about the Detroit Riverfront Conservancy, reliance on nonprofits to handle public business can present a “fundamental problem” for accountability. These examples raise the concern that a perhaps not sufficiently appreciated downside of governments farming out the provision of public services to nonprofit organizations is that this farming out often comes with substantial funds but not sufficient internal control requirements.

Lloyd Mayer