CSR: Preventing Fraud in Corporate Social Responsibility

The Ministry of Corporate Affairs has made an internal CSR committee mandatory for every company spending on corporate social responsibility (CSR) in India. Such a committee comprising Board members and top executives monitors the CSR policy and calculates risk. However, fraud and unethical spending by external agencies and the internal team could go undetected in conglomerates with a vast workforce.

Although the CSR committee is in charge of keeping an eye on inflated bills and improper utilisation of funds, EY Forensic and Integrity Services published a report last year which found that as many as 65% of Indian companies don’t even have a due diligence policy. In fact, their latest report says that there will be more embezzlement in CSR in the midst of the COVID-19 pandemic.

CSR personnel have unknowingly hired NGOs that existed only on paper. Companies have donated large sums of money to projects that never saw the light of day. Fraudsters have tricked ESG officers into sponsoring plantation drives that never really happened. For example, a PSU poured crores into a CSR sanitation project to build a certain number of toilets in rural Northern India. A number of individuals and agencies were meant to coordinate the construction of toilet blocks and the water supply. The project was deemed “complete” on paper. The CSR team was told that a large number of the villagers had stopped the practice of ODC (open defecation) because they were using the new toilets.

However, when the monitoring authorities went to the site a year later, the reality was foul. There was not a single toilet in sight! The space marked for the construction stood empty. Somewhere along the way, the crores meant for village toilets had been funnelled into the pockets of dubious individuals.

Preventing fraud in CSR

Avoiding such anomalies is not impossible in the digital age. The MCA has become more stringent about transparency in the recent past. There was talk in 2019 of imprisonment of defaulting corporate executives for norm violations. Although the proposal was dropped to a monetary penalty, it showed how serious the MCA is with regard to non-compliance. Fraud in corporate social responsibility amounts to embezzlement and corruption.

Full disclosure is non-negotiable for NGOs looking for CSR funding. The same is true for companies with respect to sustainability reports. They need to disclose directorships and complete details of the committee. No matter how big or small the sum the company has allocated for CSR, it should put forth a set of criteria that implementation partners are required to meet before they are shortlisted. This ranges from general information to financial dealings and employee details of the NGO. Once the NGO is on-boarded, the CSR team should draw up a formal contract with the full terms and conditions, the process of remuneration and billing to avoid any kind of fraud.

Auditing and monitoring

It is up to the CSR team members to regularly visit the project site for actively monitoring progress. Surprise visits to vendors are also worth investing time into. Regular audits will prevent gaps in the implementation of the activities planned. Looking at the accounting books will also keep a tab on payouts uncalled for. Internal stakeholders should be encouraged to report any suspicious transactions or activity they might spot. Companies that protect whistleblowers are known for preventing fraud before it becomes entrenched in governance.

The company’s integrated annual report and sustainability / CSR report should have full disclosure of the CSR committee structure, projects completed and funding dispensed. Eventually, it is up to the senior management to establish that preventing fraud in corporate social responsibility ventures is non-negotiable.