Raul Larios

Is Fraud at Non-profits Significant?

Met Council LogoI recently completed a professional certification at New York University in Non-Profit Accounting & Government Reporting, and the subject that troubled me the most is the rising incidence of fraud at tax-exempt organizations (TEOs). Since 2008, most nonprofits are required to file the new revised IRS Form 990 and disclose any “significant diversions” of their assets. By significant, the Internal Revenue Service means losses of $250,000 or more suffered by the tax-exempt as a result of theft, fraud or embezzlement.

Analysis of this new IRS data reveals that the number (and dollar amounts) of reported diversions is huge, especially here in New York. This was brought to light a couple of months ago by Joe Stephens and Mary Pat Flaherty at the Washington Post after an extensive review of thousands of non-profit filings from 2008 through 2012. (You can read the full story here.) They found that TEOs have been scammed out of hundreds of millions of dollars. And we’re not talking about small, under-staffed TEOs. The victims range from AARP ($250,000 embezzlement) to the Maryland Legal Aid Bureau ($2.5 million). Here in New York, the victims range from well-known hospitals such as Vassar Brothers Medical Center in Poughkeepsie ($8.6 million) to such venerable Ivy-League institutions as Columbia University ($5.2 million).

However, one significant diversion in New York that you will not yet find in a public Form 990 because it is so recent is the case of the Metropolitan Council on Jewish Poverty. Just a few months ago, the Board of Directors of the Met Council (as it is commonly known here in New York) received an anonymous letter alleging an insurance kickback conspiracy between its CEO William Rapfogel and its insurance broker, Century Coverage Corporation. Apparently, Century was inflating the premiums on the insurance plans it sold the Met Council, to the tune of $5 million.  Supposedly, the CEO was kicked backed over $1 million in cash, with his co-conspirators getting the remaining $4 million. Allegedly, some of that $4 million was then funneled back to City and State politicians who had steered government grants to the Met Council.

For those of you not familiar with the non-profit industry in New York City, the Met Council was one of the most venerable and respected social service groups in the Jewish community, with an annual operating budget of approximately $27 million (according to the most recent Form 990 publicly available, which is for year ended 6-30-2011).  Nearly $12 million of the Council’s expenses that year were financed with state and local government grants (in other words, with your taxpayer money).

According to the New York Times, long-time CEO William Rapfogel was so respected in the Jewish community that he was sometimes referred to as “the prince of the Jews”. He was also extremely influential in City and State government circles. He was close, personal friends with the powerful Speaker of the New York State Assembly, Mr. Sheldon Silver, and with many other lawmakers whose friendship he cultivated over the years, and who have directly or indirectly steered millions in City and State grants to the Met Council.

By the way, the owner of insurance broker Century Coverage (a prominent Breslov Hasidim by the name of Joseph Ross) pleaded guilty shortly after his arrest in November. He is said to be cooperating fully with the authorities in the hopes for leniency. Both the current Met Council CEO (William Rapfogel) and the former CEO from 1989 to 1992 (Rabbi David Cohen) were arrested, as was the former CFO from 1991 to 2009 (Herbert Friedman) on a long list of charges including grand larceny, money laundering, criminal tax fraud, conspiracy and falsifying business records. It seems that the scam has been in place since the early 1990’s!

Upon discovery of the embezzlement, the Board acted correctly in firing Mr. Rapfogel and informing the authorities. It should come as no surprise to you that government regulators temporarily froze millions in grants and contracts that had already been approved for the Met Council, pending an investigation. But what should surprise you was how quickly the charity was cleared of any wrongdoing (in less than 60 days).

Even more surprising was that the State required only a few basic reforms of the non-profit, such as putting in place a code of ethics, and policies for conflicts of interest and anti-nepotism. Also, it’s to appoint 2 new independent directors and submit to monitoring of its compliance by an outside inspector general.

That’s it…?!  You might be wondering how could such a large tax-exempt organization not have a code of ethics, or policies to deal with conflicts of interest and anti-nepotism in the first place?  And more importantly, would these reforms have even prevented the fraud?

Equally troubling to me is the fact that the scam was only discovered thanks to an anonymous letter — and not through the Met Council’s auditors or the Board’s audit committee or any government oversight. It’s in these failures by the auditors, the Board and the government agencies that awarded the grants where the real problems lay, not in some deficient code of ethics.

In my opinion, the State should have fired the auditors and all the Met Council’s senior accounting & finance leadership, as well as replaced the entire Board of Directors. In addition, it should have appointed an independent inspector general to investigate and reform its own State agencies that awarded these grants without the proper oversight. Only then are you truly starting to address the problems.

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January 21, 2014 - Posted by | New York | , , , , , , , , ,

7 Comments »

  1. SOURCE – The ‘Alliance for Nonprofit Management’ LinkedIn Group:

    DR. EUGENE FRAM (Professor Emeritus at Saunders College of Business, Rochester Institute of Technology) – Raul: See: Want to Avoid Fraud Look to Your Board. Nonprofit World September-October 2010, p19.

    RAUL LARIOS – Thank you, Dr. Fram, for referring me to your September 2010 article in Nonprofit World. Excellent recommendations in how a Board of Directors can do a better job at preventing fraud in their organizations!

    Comment by Raul Larios | January 24, 2014 | Reply

  2. SOURCE — The ‘Alliance for Nonprofit Management’ LinkedIn Group:

    JOSEPH WOLLACK, CPA (Old Saybrook, CT Lewitz, Balosie, Wollack, Rayner & Giroux, LLC Certified Public Accountants) — A huge fraud, but how can the auditors be blamed for not identifying a fraud that was largely outside the entity? Kickbacks get discovered primarily when someone squeals, as in this case. The board should be held accountable for not requiring competitive bids for insurance at least every few years. Hopefully the investigation will also identify the politicians who were involved. Adopting a code of ethics is a start, but the organization needs a culture of ethics. This needs to start at the top. If top management are criminals, putting a code of ethics on paper is meaningless. I imagine that the CEO was a controlling person who managed to manipulate the board. It would be interesting to know the length of time the board members have served and what their compensation was.

    RAUL LARIOS — Joseph, many thanks for your insightful comments. I totally agree with you that a culture of ethics starts at the top. Sometimes, however, an ethical culture may appear to exist but in reality it’s not there (as was the case with the highly respected Met Council CEO who turned out to be a long-time crook). This is where I suspect the auditors may have failed the Board.

    I know that fraud detection is not the primary purpose of outside auditors, but they are usually very well-equipped for detecting it. I wonder if the Met Council’s auditors observed the premium overcharges, or the lack of competitive bidding for insurance every few years? If so, did they bring this to the attention of the Board at the annual audit exit meetings?

    If so (and thus we could assume that the Board failed to act), did the auditors escalate the matter by putting their observations in writing? Did the Board’s failure to act ever make it into the auditor’s opinion letter?

    Given that the debunked Met Council CEO was a highly charismatic individual of extraordinary standing in the community, maybe the auditors just got caught under his spell and forgot the adage: trust but verify.

    Comment by Raul Larios | January 24, 2014 | Reply

  3. EUGENE FRAM (Professor Emeritus at Saunders College of Business, Rochester Institute of Technology) — Raul: In the case of nonprofits, an active audit committee with a robust assessment process can help.

    Comment by Raul Larios | January 25, 2014 | Reply

  4. MARILYN DONNELLAN (President at Nonprofit Management Services, LLC) — I think that fraud is a big issue, but the underlying issue is even bigger: lack of internal financial management controls….which can lead to fraud. Too many EDs have no training in financial management and leave it to staff without correct checks/balances in place. While Eugene is right about an active audit committee, I would prefer a set of board-approved policies/procedures that are monitored through a finance committee or internal operations committee.

    Comment by Raul Larios | January 25, 2014 | Reply

  5. EUGENE FRAM — Marilyn: I was not clear. I see the audit committee as determining, for the board, whether or not these policies and being implemented. For example, the board, not the audit committee, has final responsibility for establishing policies for having effective internal controls in place.

    Comment by Raul Larios | January 25, 2014 | Reply

  6. MARILYN DONNELLAN — Absolutely agree, Eugene.

    Comment by Raul Larios | January 25, 2014 | Reply

  7. Why is this theft of a charity not a bigger scandal than it already is?? I’ve been reading all day about this & several things that strike me: 1.not only was met council recipients of private donations but local & state pols were able to steer TAX PAYER dollars to this organization. Knowing that the charity was pilfered by mr. Rapfogel & his cohorts, that would essentially mean that public monies were stolen. 2. According to news reports, rapfogel was hiding a sum of 420,000 $$ in his home which he shared with his wife, judi, who just so happens to be the chief of staff to sheldon silver who has been thoroughly disgraced. Are you telling me she had NO knowledge of what her husband was doing at the charity or that there was nearly half a million in stolen funds in her home? Cmon!!

    Comment by Richard ML Devaney | August 5, 2017 | Reply


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