Nonprofits lose money to fraud

Posted by Christine, October 30, 2013

The Washington Post details how nonprofit organizations often lose money to internal fraud and embezzlement. The story is written by Joe Stephens and Mary Pat Flaherty. 

Part of the story is below but it is worth reading in its entirety.

For 14 years, the American Legacy Foundation has managed hundreds of millions of dollars drawn from a government settlement with big tobacco companies, priding itself on funding vital health research and telling the unadorned truth about the deadly effects of smoking.

Yet the foundation, located just blocks from the White House, was restrained when asked on a federal disclosure form whether it had experienced an embezzlement or other “diversion” of its assets.

SEE ALSO: Read about how a trusted bookkeeper was embezzling money from a nonprofit rowing club in Virginia, plus how this story was reported.

Legacy officials typed “yes” on Page 6 of their 2011 form and provided a six-line explanation 32 pages later, disclosing that they “became aware” of a diversion “in excess of $250,000 committed by a former employee.” They wrote that the diversion was due to fraud and now say they believe they fulfilled their disclosure requirement.

 Cheryl Healton is Legacy’s founding president and chief executive.

Records and interviews reveal the full story: an estimated $3.4 million loss, linked to purchases from a business described sometimes as a computer supply firm and at others as a barbershop, and to an assistant vice president who now runs a video game emporium in Ni­ger­ia.

Also not included in the disclosure report: details about how Legacy officials waited nearly three years after an initial warning before they called in investigators.

“We’re not innocent in this,” said Legacy chief executive Cheryl Healton. “We are horrified it happened on our watch. . . . The truth hurts — we screwed up.”

A Washington Post analysis of filings from 2008 to 2012 found that Legacy is one of more than 1,000 nonprofit organizations that checked the box indicating that they had discovered a “significant diversion” of assets, disclosing losses attributed to theft, investment fraud, embezzlement and other unauthorized uses of funds.

The diversions drained hundreds of millions of dollars from institutions that are underwritten by public donations and government funds. Just 10 of the largest disclosures identified by The Post cited combined losses to nonprofit groups and their affiliates that potentially totaled more than a half-billion dollars.

While some of the diversions have come to public attention, many others — such as the one at the American Legacy Foundation — have not been reported in the news media. And The Post found that nonprofits routinely omitted important details from their public filings, leaving the public to guess what had happened — even though federal disclosure instructions direct nonprofit groups to explain the circumstances. About half the organizations did not disclose the total amount lost.

The findings are striking because organizations are required to report only diversions of more than $250,000 or those identified as having exceeded 5 percent of an organization’s annual gross receipts or total assets. Of those, filing instructions direct nonprofits to disclose “any unauthorized conversion or use of the organization’s assets other than for the organization’s authorized purposes, including but not limited to embezzlement or theft.”

send a tip: Has your nonprofit experienced a significant diversion of assets? Contact the reporter.

As part of its analysis, The Post assembled the first public, searchable database of nonprofits that have disclosed diversions, available at ­wapo.st/
diversionsdatabase
. Groups on the list were identified with the assistance of GuideStar, an organization that gathers and disseminates federal filings by nonprofits.

Examples of financial skullduggery abound in the District, throughout the Washington region and across the United States.

A few blocks from Legacy’s offices on Massachusetts Avenue, the nonprofit Youth Service America reported two years ago that it discovered a diversion in 2009 of about $2 million that had been “misappropriated” by a former employee. After The Post asked about the incident, he was charged in federal court and in June was sentenced to four years in prison for theft.

A few blocks in the other direction is the Alliance for Excellent Education, which disclosed four years ago that investment manager Bernard L. Madoff’s Ponzi scheme had wiped nearly $7 million from its balance sheets. In a statement to The Post, officials there called the figure a “paper” loss.

A few blocks farther is AARP, the national charity that advocates for older Americans. In 2011, it disclosed two incidents with losses totaling more than $230,000, attributed to embezzlement and billing irregularities. An organization spokesman said no one has been charged in those incidents.

And just outside the Beltway, the Maryland Legal Aid Bureau, with offices throughout the state, disclosed two years ago that a former finance director and an accomplice had been convicted of making off with $1.1 million; officials there said in interviews they now think the total loss was closer to $2.5 million.

Investment fraud was blamed for some of the largest losses identified. Funds linked to Madoff’s scheme, which bilked investors across the country for decades, reportedly drained $106 million from Yeshiva University and its affiliates, $38.8 million from the Upstate New York Engineers Health Fund and $26 million from New York University, according to the disclosures they filed.

But hefty sums disappeared in many other ways, too:

●The Global Fund to Fight AIDS, Tuberculosis and Malaria, based in Geneva but registered and largely financed in the United States, reported in 2012 that it had found evidence of misuse or unsubstantiated spending of $43 million in grant funds.

●The Conference on Jewish Material Claims Against Germany, a New York-based charity for Holocaust survivors, reported in 2010 that it had been bilked out of $42 million in an elaborate, decade-long conspiracy by swindlers who created thousands of fake identities. A spokesman said the estimate has since been raised to $60 million.

●The Vassar Brothers Medical Center in Poughkeepsie, N.Y., in 2011 reported a loss of $8.6 million through the “theft of certain medical devices.” A medical center spokeswoman said a confidentiality agreement prohibited her from explaining further.

●The Miami Beach Community Health Center in 2012 reported losing $7 million to alleged embezzlement by its former chief executive, later convicted of theft.

Columbia University disclosed in 2011 that it had been defrauded of $5.2 million in “electronic payments.” A university spokesman confirmed that the disclosure referred to an incident involving a former university accounting clerk and three associates, later convicted of redirecting $5.7 million meant for a New York hospital.

●And the 140-year-old Woodcock Foundation of Kentucky, which awards scholarships to students in need, disclosed that alleged fraud by a former chairman drained more than $1 million from its accounts, leaving the charity with assets totaling just $8.

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