How Your Non-Profit Can Avoid Investment Fraud

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23 Aug How Your Non-Profit Can Avoid Investment Fraud

Investment fraud, such as Ponzi schemes, can cause significant financial losses for non-profits, but the harm it can cause an organization’s reputation with donors and the public may be even worse. Non-profits are required to disclose on their IRS Forms 990 whether they have experienced a significant loss to any illegal ‘diversion’ that exceeds the lesser of 5% of gross receipts, 5% of total assets, or $250,000. Such data becomes public and is likely to be reported by charity watchdog groups and the media.

To avoid such consequences, your non-profit needs to screen investment advisors carefully. Here is how:

Profile in deceit

One way investment fraud differs from occupational fraud is that its perpetrators generally are outside advisors — not employees. They may be brokers, bankers, financial planners, investment advisors, or even self-styled money experts. In many cases, thieves are registered or licensed, enjoy good reputations in their communities, and have no previous records of wrongdoing.

How, then, can your organization avoid hiring a crook? First, beware of unrealistic promises. If an advisor guarantees immediate results or annual returns of 20 percent — even in years when the general stock market is down — they are either lying or incompetent. In addition, be wary of investment fund managers who do not submit to outside audits or report their results publicly.

The right stuff

Instead, look for an advisor who encourages you to discuss investment goals and risk concerns. Your advisor should understand your organization’s investment policy or be willing to help you develop one. Accessibility is important, too. For example, your board likely holds meetings after business hours and your advisor needs to be able to meet with them from time to time.

Ask other non-profits, your attorney, or CPA, for investment advisor referrals. Also, make sure your board scrutinizes your advisor’s investment recommendations, carefully reviews performance reports, and constantly monitors account balances. Contact us for more suggestions for finding a trustworthy investment advisor.