Fraud in Not-for-Profit and Charitable Organizations:

Trust is Not an Internal Control

Erin Egeland, MBA, CPA, CGA, CFI

Accounting Professor – Vancouver Island University

Chair -Accounting Department

Secretary/Treasurer – ACFI

Past President – Local MHA

All charities are not-for-profit

All not-for-profits are not necessarily charities.

• There are over 170,000 charitable and nonprofit organizations in Canada. 1

• 85,000 of these are registered charities (recognized by the Canada Revenue Agency).

• The charitable and nonprofit sector contributes an average of 8.1% of total Canadian GDP, more than the retail trade industry and close to the value of the mining, oil and gas extraction industry 2

• Two million Canadians are employed in the charitable and nonprofit sector 1

• Over 13 million people volunteer for charities and nonprofits.

Imagine Canada’s Research note (Lasby, 2012) shows that Canadians regularly engage with charities:

Canadians annually donated $10.6 billion dollars to charities and nonprofits (2010 survey figure).

12.5 million Canadians volunteered in 2010, almost half the population aged 15 years and over.

These volunteers contributed 2.1 billion volunteer hours, translating to 1.1 million full-time jobs

Source: 2016 ACFE Report to the Nations on Occupational Fraud and Abuse.

Canada represents 4% of the cases in this study.

“The university is a registered charity, and under Section 149 of the Income Tax Act (Canada) is exempt from the payment of income tax. This exemption does not extend to the wholly-owned subsidiary, MacEwan Downtown Corporation.” (McEwan University 2016 Annual Report)

“University Discovers Online Fraud.” (McEwan University)

When was it discovered? August 23, 2017 What happened? A series of fraudulent emails convinced university staff to

change electronic banking information for one of the university’s major vendors.

Phishing scheme Value of the fraud? The fraud resulted in the transfer of $11.8 million to a bank

account that staff believed belonged to the vendor.

”…two glaring gaps in our organization. The first, the lack of controls in the process of changing client information, was corrected immediately after the fraud was discovered. New levels of approval are in place, which include checks that ensure that an incident of this nature will not happen again.

The second gap, the lack of employee awareness and

education about phishing scams, is also being addressed. We will reintroduce our IT security awareness campaign, and we are developing an online IT security awareness course targeted at employees. The university is strongly considering making successful completion of this course a prerequisite for employee access to our information systems.” (Deborah Saucier – President)

York University (“York” or the “University”) was incorporated

under the York University Act, 1959 and continued under the

York University Act, 1965 by the Legislative Assembly of

Ontario. The University is dedicated to academic research

and to providing post-secondary and post-graduate

education. The University is a registered charity and under

the provisions of Section 149 of the Income Tax Act (Canada)

is exempt from income taxes. (2017 Annual Report)

Michael Markicevic fraudulently received $233,635 in 2009 and $209,854 in 2010 from York U.

Former Assistant VP and Head of Campus Services and Business Operations.

Charged with fraud and laundering the proceeds of crime.

engaged in financial improprieties

2004 Director of Security, Parking and Transportation Markicevic rose to Asst VP to manage 1,000 employees and

a budget of $120 million, plus $100 million for special capital projects.

In 2007 - he hired Phil Brown (ex-Director of Maintenance)

whom he knew had a gambling problem and money troubles, and gave him signing authority for invoices.

Collusion - their scams began with invoices for work that

was not actually done, paid to a clothing store company owned by a friend of Jack McCann, then a York carpenter and union boss, who was also in on the scheme,

Started a new company for the primary purpose of invoicing York for work not done.

Brown signed 21 invoices, Markicevic signed eight,

totaling more than $350,000 over two years. Markicevic created a kickback scheme for drain repair

work on a student parking garage, in which he had the contractor do extensive work at his property.

Had a crew of York employees clean up, repair and

renovate his home in Collingwood after a flood, for which he submitted an insurance invoice for almost $30,000.

York’s audit report, filed in court and marked “strictly confidential,” concluded in August 2010 that “serious control failures” helped the alleged fraud along.

Failures included: collusion between employees and outside

contractors;

bogus work orders;

skirting bid processes;

no confirmation of costs by zone supervisors and

inadequate background checks of some employees. (van Alphen, 2013)

Perry Fontaine, Head of Operations and founder.

Offered high quality care programs for the residents of Sagkeeng First Nation and its neighboring areas suffering from alcohol and drug abuse.

During the period from the early 1980’s to 2000, Virginia Fontaine Addictions Foundation served as many as 12,000 people with its 75 employees (R. v. Fontaine, 2009).

http://canlii.ca/t/24675

Facts of the Case Misappropriation of public funds, fraud against the government, bribery of officers, and breach of trust. Co-conspirators: Paul Cochrane, an assistant deputy minister of health and Patrick Nottingham, the ex-regional director of Health Canada’s First Nations and Inuit health programs in Manitoba Between 1991 and 2000, the centre received $97.5 million in funding from Ottawa and part of those funds were diverted to pay for luxury vehicles, homes, NHL hockey tickets and vacations for all 3 conspirators and their families.

Perry Fontaine: set up illegitimate consulting firms that skimmed millions of

dollars in program payments from Health Canada; forged documents; he engineered the fraud.

Paul Cochrane: received more than $200,000 and gifts in exchange for directing

more than $70 million in contracts to the centre. He received the money in kickbacks included nearly $30,000 in

travel to Florida and the Caribbean as well as cash, which he used to buy a condominiums in Mont Tremblant, Quebec.

Patrick Nottingham: approved $6 million in funding to the center; received kickbacks.

75 employees lost their jobs

Sagkeeng First Nation in Manitoba; “It also leaves “the wrongful impression that it’s really the poor administration of the aboriginal community that caused the fraud” (CBC.ca, 2015).

Those suffering with drug and alcohol addictions.

Canadian taxpayers

Families

Perry Fontaine

Fontaine had convinced Cochrane and Nottingham to increase funding to the treatment centre over the course of several years.

In exchange, Fontaine diverted centre funds to two consulting firms — one controlled by Nottingham and his wife, and another controlled by Fontaine.

The centre paid the consulting firms on the pretext of providing services to the centre but in reality, the firms provided work of no value, and the money was paid to Nottingham and Fontaine, who also directed money back to Cochrane

The 9 year scheme began to unravel with a 2000 newspaper report of a Caribbean cruise taken by Fontaine and 70 centre staff, along with Cochrane.

Health Canada ordered a forensic audit, which

took 3 years to complete. Funding was halted in December 2000 due to

uncooperative staff during the forensic audit. Centre staff had described Fontaine as a

manipulative bully, who threatened other board members to get his way.

Fontaine:

Pleaded guilty on all charges

Sentenced to 3 years in prison for fraud and bribery.

Ordered to pay $1.8 million in restitution

Cochrane: sentenced to a year in jail after pleading guilty to fraud.

$211,000 in restitution

Nottingham: conditional sentence of 2 years less a day and ordered to repay $1.14 million.

Fontaine:

received $2.36 million.

exotic trips, fancy cars and expensive jewelry

He paid himself more than $800,000 in vacation and retirement settlements after he quit the facility.

Cochrane:

received more than $200,000 in cash and gifts in exchange for funneling more than $70 million in contracts to the centre.

kickbacks included nearly $30,000 in travel to Florida and the Caribbean, several SUVs and tens of thousands of dollars in cash, which he used to buy condominiums in Mont Tremblant, Que.

• Pressure, or money/ego/entitlement

THEN…..

Forensic Accounting and Fraud Investigation (FAFI) Program

Launched in 2012; 100% online; 2 years.

Endorsed by the Association of Certified Forensic Investigators of Canada (ACFI)

Advanced standing in the ACFI designation path

NOW….

Rebranding and design in process; 12 – 15 months; 100% online.

Graduate Certificate not Advanced Diploma.

Enriched content; compressed delivery.

Endorsed by ACFI

Expected launch in January 2019 (hopefully sooner).

To provide specialization in the growing field of government and corporate fraud investigations, forensic accounting, fraud prevention and compliance.

For professionals working in a related area such as law enforcement, banking, accounting, legal services, government or regulatory bodies, insurance industry, etc.

Fraud and Commercial Crime

Accounting and Finance for Fraud Investigators

Fraud, Commercial Crime, and Evidence

Forensic Investigations and Asset Recovery

Compliance through Ethical Organizational Cultures

Forensic Accounting and Data Analysis

Forensic Accounting – An Integrated Case.

To supplement:

an existing business or criminology diploma or degree

Accounting designation

Law degrees

Any other related credential or training.

Fraud Ethics and Research Education Centre (FEREC)

Collective repository of all Fraud related cases, data, research from all industry sectors, etc.

Sponsorship?

Erin Egeland MBA, CPA, CGA, CFI

Chair – Accounting Program, VIU

Faculty of Management

Email: Erin.Egeland@viu.ca

1. National Survey of Nonprofit and Voluntary Organizations (Hall et al., 2004).

2. Satellite Account of Nonprofit Institutions and Volunteering (Statistics Canada, 2009)

http://sectorsource.ca/research-and-impact/sector-impact

https://www.macewan.ca/wcm/MacEwanNews/PHISHING_ATTACK

Van Alphen, 2013, The Star.com

https://www.thestar.com/news/crime/2013/03/12/york_university_staff_knew_about_fraud_but_didnt_report_it_documents_show.html