Corruption threatens Africa’s nonprofit and charity sector

By David Loxton

South Africa has a vibrant non-government sector, and yet the prevalence of corruption among nonprofit organisations (NPOs) could be its undoing.

As a specialist in cyber crime and fraud, and having accumulated considerable experience as a lawyer focusing on white-collar crime, I’ve worked with a number of NPOs in various sectors throughout Africa. Most recently, I was called upon to investigate fraudulent activity at a global NPO with operations in various jurisdictions in Africa. My fraud risk assessment revealed that corruption had cost the organisation R8.5m.

Nor is this the first instance of fraud at an organisation specifically formed to take care of the country’s interests. I was once asked to investigate donations of vehicles and equipment at a high-profile SA children’s charity, where none of the cars or computers actually made it to the charity’s premises. Instead, they remained at the homes of senior employees and were used by them and other employees for the daily school run and trips to the shopping malls.

This is deplorable. NPOs rely on donors’ money to remain viable. There’s a very real need for NPOs to ensure that their corporate governance practices are just as sound as those of their corporate peers. It is a particular irony that NPOs tend to ignore or overlook this necessity when their very structure makes them vulnerable to fraudsters. The problem is that NPOs obviously cannot afford to pay extravagant salaries, so staff members often feel justified in looking for gaps.

Exacerbating the issue is the fact that they don’t follow regulations when it comes to structuring boards. Frequently, family members are called upon to act in this capacity and it’s unlikely that someone is going to blow the whistle on a sibling. Furthermore, NPOs are often founded and managed by very powerful, dominant personalities who are so passionate about their cause that they tend to overlook corporate governance. Other board members tend not to challenge the leader of this NPO, when in fact board members should be tasked with questioning the chair’s decisions.

Because NPOs rely on volunteers to staff their organisations, it’s inevitable that their accounting and auditing practices are often substandard. Fraudsters are all too aware of this, and often target NPOs, posing as volunteers.

My sentiments are echoed by Mervyn King, author of the King report on corporate governance, in the latest trialogue report. King notes that there is a duty on the corporates that assist NPOs: rather than viewing their donations as a corporate social investment (CSI) tick-box exercise, it is critical that they ensure they approach corporate social responsibility with awareness and build it into their overall business strategies.

King also recommends that NPOs approach compliance with the same rigour as any business. “Approach governance as a mindful value-add, by constantly asking yourself whether the manner in which you are making decisions or managing the business will impact adversely or positively on effective controls within the business, sustainable value creation, trust and confidence in the entity, and legitimacy of operations,” King writes.

Given that South African companies invest R9bn in CSI activities every year, the need for such awareness is clear. It’s vital that NPOs focus on installing the right governance structures. With these in place, there is no need to spend money on specialist attorneys and fraud experts to investigate cases of corruption — instead, these funds can go, as intended, towards their causes. The best course of action would see NPOs lessen their dependence on donors, and concentrate instead on setting up their own enterprises, such as food gardens.

Interestingly, the most recent trialogue report found that NPOs are increasingly starting to rely on self-generated funds. This is a significant difference from previous years, when sources such as donor funds and the government were the largest source of financial support. In fact, 44% of all South African NPOs followed this course of action. That said, South African companies continue to be key roleplayers in NPO funding. In 2017, this source accounted for 21% of all NPO income. Only 15% of NPOs generated their own income.

How long will it be until SA corporates are put off by the culture of corruption, and end their benevolence? And what will happen to the beneficiaries of the NPOs when they do? Unless NPOs start to adopt a long-term approach and change their operating models they may face extinction.

• Loxton heads up Africa Forensics & Cyber, specialists in fraud, online and white-collar crime. He is also CEO of Loxton Attorneys, which focuses on employment law.

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