For the past couple of years, investment fraud has been the costliest type of scam reported to the FBI’s Crime Complaint Center. The FBI generally defines investment fraud as schemes where criminals misrepresent themselves or lie to victims to gain control of assets that the perpetrators then mishandle or steal. This may not sound like something that could endanger your not-for-profit, yet it is.
If you have an endowment or stash of operating reserves, a shady investment advisor could pose as a legitimate and experienced expert and trick you into handing it over. Here’s how to avoid this type of scheme, as well as how to maintain your nonprofit’s image as a responsible financial steward.
Outsider risk
One way investment fraud differs from occupational (employee) schemes is that its perpetrators usually are outside professionals: brokers, bankers, financial planners, investment advisors or even self-styled money experts. Sometimes these thieves are registered or licensed and have no previous criminal record. Increasingly, social media “influencers” perpetrate investment fraud schemes or sometimes unwittingly participate in them by spreading the word to their followers.
Of course, the amount of damage a dishonest staff member can do with occupational fraud is usually limited. For a crooked investment advisor who controls a nonprofit’s endowment, the sky’s the limit.
Form 990 rules
When investment fraud strikes, it can cause significant financial losses. But the harm it does to a nonprofit’s reputation with donors and the public could be even worse.
Tax-exempt organizations are required to disclose on their Form 990 whether they’ve experienced a loss of more than $250,000 or 5% of their total budget or assets to fraud. If so, they must describe the incident on Schedule O. This data becomes public and is likely to be reported by charity watchdog groups and, depending on your nonprofit’s profile, the media.
Hire a trustworthy advisor
So how can your organization help ensure it’s hiring a trustworthy advisor? First, beware of unrealistic promises. Advisors who guarantee immediate results or promise a certain consistent annual return are either lying or incompetent. Legitimate advisors should discuss the risk of losses and ask questions about your organization’s investment policy (or help you develop one), including the types of investments you want to avoid.
Second, be wary of investment fund managers who don’t submit to outside audits or report their results publicly. Instead, look for an advisor who’s both transparent and accessible. For example, your board likely holds meetings after business hours and your investment advisor needs to be able to meet with them to discuss your portfolio’s holdings and recent results.
Ask for referrals
To find an individual who’s not only honest but also a proficient investor, ask for referrals. Other nonprofits can be valuable sources because their advisors will have nonprofit experience. Also contact your CPA, attorney or other trusted advisors for referrals. Once you have a couple of names, research them and ask your board to review and select one. Even after you’ve engaged an investment advisor, your board needs to closely monitor the professional’s decisions and the account. Contact us for suggestions.
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