Fraud Examination with Disappointing Results


Summary:

A volunteer in a charity organization noticed unusual relationships and transactions and decided to investigate. What he found was fraud – funds diverted by a staff member to friends.

Background:

A religious, charitable organization was very active in matching available funds with specific needs of families. They did not hand out cash. Instead, they paid directly for groceries, car repairs, home repairs, etc. Detailed files were maintained for each of the “clients” providing information on dates of meetings, services needed, services provided, and vendor payment information. A dedicated volunteer noticed that some of the files were not being updated. In other cases, the relationship and payments were not documented at all. The reason given was that everyone was overworked, and they were more intent on meeting the mission of the organization than “filling out paperwork.” The volunteer, with the approval of the Board of Directors, began working on reconstructing data for the client files. It became obvious to the volunteer that payments were being made to one specific vendor on a regular basis when no services were being provided. At this point, the project went from cleaning up paperwork to investigating fraud.

The oversight board ignored warnings about what was discovered. They eventually ordered the volunteer to stop all work and to not discuss his “opinions” publicly. However, with the approval of one board member, the volunteer took the information he had gathered to local law enforcement. Prosecutors determined that there was good reason to look further but encouraged the volunteer to contact Arxis to help put together a well-documented case that they could prosecute.

Arxis Work:

Thousands of pages of documentation were provided for review. The records provided were inconsistent and incomplete. This was due to limited information available to the volunteer without access to all relevant data. Work was done to complete an analysis of a single client from commencement of the relationship through payments of a vendor to establish expectations of process and documentation. Even this step was impossible. Without the ability to benchmark, it became nearly impossible to prove unusual or unauthorized transactions.

Analysis was done to determine the documents that would be needed to complete the investigation. In meeting with the volunteer, it became apparent that without the approval of the oversight board or key members of management the documents could not be obtained without the weight and reach of law enforcement. Since law enforcement already referred the matter out for documenting the case and providing evidence, it was obvious they were not able or willing to pursue that step.

Result:

In a case where there was significant evidence of malfeasance, there was the inability to document it sufficiently to prove the legal elements of the crime to a trier of fact. This case highlighted two common hurdles to prosecuting fraud. First, it is not always possible to gather evidence sufficient to meet the standards required to pursue a conviction. Second, in an organization where there is a culture that tolerates or encourages fraud, it is difficult, if not impossible, for one or two people to identify and eradicate fraud. There is enormous pressure on nonprofit organizations to never publicly admit financial malfeasance. Therefore, in these situations, there is little motivation to pursue the matter when malfeasance is found.