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Frauds in Corporate Social Responsibility (CSR) Activities in India

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An EY Forensic & Integrity Services’ report has said, Companies could see frauds in their Corporate Social Responsibility (CSR) programs as they may not have the bandwidth to conduct due diligence or monitor these amidst Covid-19 pandemic.
The frauds in CSR projects is not a new process. There is an obvious gap in the law making it possible for fraudsters to take advantage and siphon the funds meant for social or environmental projects.

Why do Frauds Happen in CSR?

The CSR mandate in India has converted the CSR funds into public money rather than mere philanthropic funds. It is now a responsibility of corporates to not only allocate the necessary funds but also set up a team to implement structured CSR projects. The mandate has brought about a transformative change in India Inc. in terms of enthusiastic participation by them for social and environmental causes.
However, often, these for-profit companies do not have bandwidth to have a dedicated team in place to implement and monitor their CSR projects as they have for their business operations. In fact, it has been observed that many companies have just one or two dedicated employees in CSR teams who are also loaded with some other responsibilities. Many companies do not have even that, and an eye is kept on CSR projects by the HR teams. This gap has given a chance for many middlemen to enter the field in the garb of CSR consultants and encourage the CSR funds to be spent on fake CSR projects.
The situation has been intensified especially amid COVID-19 pandemic where the companies have limited staff, therefore lesser time to monitor the allocation of funds efficiently.
The Report by EY Forensic and Integrity Services titled Corporate Social Responsibility in India: re-engineering compliance and fraud mitigation strategies said, Lack of due diligence on implementation partners, weak governance and limited management involvement are contributing to ethical lapses and fraud in corporate social responsibility (CSR) programs. These state of affairs are prevalent in 75 per cent of companies. According to the report, there is a high dependence on third parties to execute CSR programs, 65 per cent of the companies that participated in the research sample of the report, did not have a clear due diligence policy and only 45 per cent admitted to checking the past record of implementation partners.
The report also highlighted the willingness of companies to spend the CSR funds for COVID-19 relief. However, they do not have structures in place that would help them detect the frauds and take preventive measures. This may lead to inefficiency and inadequacy of funds amid the pandemic.
More than anything though these frauds are not merely the loss of public money. It is a dent on the integrity of the company who releases the funds and on the inefficiency of the government for leaving such a major loophole in the law which can lead to such corruption. While the government figures out a way in which the fault can be addressed, the companies need to take effective measures to ensure that such frauds do not take place and the CSR funds get allocated to the desired causes.