If there was a non-profit dedicated only to do audits of development and humanitarian projects in developing countries, would you be interested in donating to such organization?

The idea is that these audits would save collective money by unveiling cases of corruption, and if these can be cheap enough to touch most of the actors in a certain community, they could radically change an operating environment, saving millions of dollars in funding.

Audits could be free or low cost, solicited or unsolicited. In collaboration with the charity, with their donors, or with nobody, like a citizen's action. 

I have lived in a developing country for 6 years, I have reason to believe that embezzling could cut from 10% to 50% of donations received by charitable organizations in humanitarian and development settings. I can't back the statement because the data is really not there, but I am extremely confident about it.

For some of the small ones, this is mostly institutional corruption or survival corruption: an expense such as the cost of renting cars is inflated by forging justifications documents, and the positive balance gets re-allocated to salaries and overhead costs that no donor wants to pay them, and they are still doing their work. 

I don't think an NGO/audit firm like this should exist to destroy other NGOs. That would be an overall bad outcome. That is why nobody does much about this unspoken "secret". Many of the small NGOs really don't have any way to run without doing this, given that donations from individuals are rare and small in developing countries.

I think an NGO like this should be able to build capacities without destroying. To help the institution to transition from institutional or survival corruption to a corruption-free organization, while advocating to donors for a removal of harmful concepts like "overhead", or giving a grant without being allowed to pay for salaries. These absurd rules are at the root of the problem and should be lobbied out of donor's handbooks.

Because donors should pay more, and in the end the charity does the work, one might think this is not a big problem, but it is:

  • Fraudulent practices get passed on: Expertise on fraud is built.
  • Tolerance for fraud among staff, participants, and management becomes really high.
  • It is a massive waste of time, energy, and intelligence

One might also think that given that most of these charities and projects are not highly effective, this should not be a priority cause. However:

  • The scope of the problem is so huge that there should be some significant impact
  • These are the institutions that must implement malaria, cash transfers, and other highly-effective programs as they scale-up around the globe.
  • Some of these programs are very effective, even if it just by a combination of chance and low prices. There is just no proof because rigorous evaluation is not being conducted.

Moreover, corruption exists everywhere, not only in sketchy small NGOs. Even GiveDirectly had a massive case. They have invested a lot in a great anti-corruption unit now.  

Most charities and even their donors don't have the resources to engage in good audits, and even when they control financial reports they don't really get to the details. Controlling a financial report or even conducting a spot-check while being in and from another country is more costly: you miss the very basic option of making a phone call to the third party to verify, or visiting.

There are many options to operate:

SOLICITED:

  1. A confidential audit exercise to help small NGOs transition out of corruption, accompanied with a training plan that includes fundraising. At the end gives you an audit report that is presentable (the worst issues get solved and not disclosed in detail) for free - this is something that most NGOs need.
  2. A community anti-corruption unit, running not for one, but for any NGO which is interested. They just need to register their programs for free. Just the fact that you are using a third-party verifier boosts your credibility and makes you look better in front of partners. If your staff are stealing from recipients, you get to know too.

FREE AUDIT OR SCAN

Working with donor agencies to offer them what they usually get very expensive from their financial experts and auditors at a cheaper rate, if it is not an audit, we can call it a deep scan, one that helps them flag issues that call for a legal audit.

UNSOLICITED: 

Monitoring funding and operations from UN agencies should be a universal right, and even if the country office is not interested you can make a big ruckus by reporting directly to the headquarters or to a journalist. Even if you don't have financial information, you can do evaluation of operations and investigate rumors of diversion of aid.

There is much information on social media (details on projects), organisation's websites (annual reports, financial and technical, list of donors), or on donation pages such as GlobalGiving.org (cost of stuff, budget, and then final beneficiaries), a local team can easily flag issues and approach the donors´ anticorruption units and headquarters with no actual conversation with the charity team. Once they get flagged the bigger institutions will do a proper audit.

I think it could be extremely cheap to run such an organization, and an office of 3-4 people with salaries of local staff (200-1,000$) can easily work on one project per month, maybe faster, evaluating funding up to 1,500,000$ in one month. There are some basic verifications that can be potentially automated and/or delegated to volunteers (confidentiality would be an issue but it can be sorted by sourcing information without providing original sources), reducing the process to a few days. The process can be scaled up with local offices in different countries and regions of different countries. The staff and team should remain quite anonymous for their safety.

What do you think? I go back to my original question, would you donate to such charity? Do you see the value?

The numbers are extremely rough and below the standards of this forum, forgive me because I am just playing with this idea. 

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2 comments, sorted by Click to highlight new comments since: Today at 2:36 PM
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Hi Marc! This is an interesting topic that I hadn't thought much about, so thanks for posting! I have a few quick comments:

I have lived in a developing country for 6 years, I have reason to believe that embezzling could cut from 10% to 50% of donations received by charitable organizations in humanitarian and development settings. I can't back the statement because the data is really not there, but I am extremely confident about it.

Data on corruption numbers/scale of problem: Through A quick google search (<5 minutes) I found some interesting numbers on this by the Centre for Global Development which sugests the % is much closer to 10% than 50%. One thing that's interesting is they suggest using ‘the percentage of aid that delivers the impact it was designed to' to provide an upper-end figure for corruption  (of course, not all impact is lost due to corruption). But looking at something like this might reveal bigger issues in aid - for example, a charity choosing interventions that are not very effective. 

Additionally, it seems that the topic of corruption in NGOs is a pretty common concern (~5 million results), and there seem to be a number of proposed solutions. It may be useful to first evaluate existing interventions/organisations, and consider the benefits of supporting existing organisations or starting a new one in this space, and the value of focusing on this issues vs others. 

Thank you so much for your comment.

 

I also had browsed the same result before writing the post, and although I agree on it not being near 70%, I think the study quoted is not representative and deep enough, that is why I went for my 10-50% estimate (which, with a 40% gap, is not really an estimate ;D).

My observation is that small organisations and smaller donors with less strict financial reporting mechanisms apply systematic cuts from any budget line (creating “blind” budgets, or in Spanish we would say “Budget B”), anything can be gotten cheaper. It would probably be more like 10%-50%, with most cuts going from 20 to 35%. Funnily enough, they then solve many problems out of the project budget with those resources, problems that efficient budget management techniques and transparency can address. But with a starting point that accepts proper compensation of workers. I think (and this is somehow a different idea) that advocating for as much as 25% overhead or more, and then extremely strict financial management standards for the remaining 75%, looking for the maximum efficiency and cheapest prices, while controlling for quality, would be a huge improvement. Maybe donors could offer something like “if you save X from spending in the grant, and you get the same results, we give you half, or one quarter of X as unrestricted funding by the end of the grant”. In this spin-off of idea what I am proposing is advocating to donors a change in their approach to grantmaking, one that can help good but corrupt NGOs into good and well structured NGOs that can account for funds and have better future perspectives because of that. 

As organisations get bigger, and more professional, it gets more dangerous. Then they would look only at some budget lines (generally, procurement and salaries), and the bite will be smaller. The World Bank is a great organisation and their partners would fall into the second category, so I think the data used in that article is not representative enough.

Second article

My problem with existing solutions is that they ask of the NGOs to behave better without really showing how and why. Small NGOs should have great audit departments but it is not very realistic:  My point is first they think they need to be corrupt to survive, and they can’t afford good audits on their projects because their donors don’t pay for it! Bigger NGOs should control their partners better, but every time there is such a scandal it is a huge embarrassment and somebody’s fault, and they know that everyone is doing it anyway so they are rather afraid of truly looking too closely, and even they don’t have the resources to audit everything properly. For example, UNICEF and most big donors would use a spot-check method to determine fraud (getting a selection of expenditures, not at random, but based on risk, and make findings from there). This is because it is costly to audit a full budget. What if this organisation I am pondering was to partner with them and offer third-party verification for all expenses of a project for free? 

It is a very ugly business, and most people shy away from it. Most of the article reads like a compliance issue, that everyone should try to follow. I think there should be a different approach, one that can get people excited about it, such as this idea that citizens in developing countries have the right to audit aid assistance just like they have the right to ask questions about government spending.