A mix of honour-cum-law bound mechanism for corporates to undertake philanthropy in the spirit of larger socio-economic goals beyond profit-making was the thought that has now made Corporate Social Responsibility (CSR) a leading activity for companies. To put things in perspective, Rs. 12,000 crore was spent in 2018-19 alone in CSR work. However, problems persist with regards to implementation, fraud, oversight and other management related issues, arising particularly after the high dependence on third-party implementation partners that compromise the integrity of the project.
The exact nature of the problems, the loopholes, the kind of irregularities, specific instances, gauged with comprehensive feedback from the companies themselves have been outlined in a report by EY Forensic and Integrity Services. The study identifies weaknesses and shortcomings like the absence of due diligence of the implementing entity, absence of coherent CSR policies of the companies itself; lack of involvement board and top management in the policy-making and oversight; classic misappropriation tactics involving bogus and inflated expenditure or bogus beneficiaries; and lack of domain expertise and knowledge of processes in investigating suspected frauds are some of the areas that have been identified.
The scale and extent of these problems in corporate India can be gauged from the fact that 75% of the study’s respondents depend upon third party partners to execute their CSR work. Moreover, 65% did not have a defined due diligence policy that covers third-party entities in their ambit. The study recounts a case where a leading conglomerate prevented a potential fraud after it brought in external forensic investigators to assess the four shortlisted NGOs for implementing its CSR program before it was rolled out. “The due diligence revealed issues around legal disputes, regulatory defaults and crucial information about the funding channels of the two of the four NGOs. The company’s CSR committee was, therefore, able to make an informed decision when finalizing an ethical execution partner for their CSR project,” said the study.
Merely investigating the third party implementation partner is one part, having a formal policy that identifies, categorizes and lays down procedures to address is the next, as 75% of the respondents did not have such guidelines. The fault lines are even further widened owing to the absence of oversight or involvement from the companies’ boards, where 56% of the respondents reported no such mechanism, again tying into having a formal CSR policy in the first place. Annual and bi-annual reports of the CSR activities “helps manage the efficacy of CSR programs, right from the stage of identification to the integration of its principles into the organization’s mission statement,” said the report.
Paired with categorical policies on the roles and responsibilities of the CSR committees and employees, which themselves are aligned with the company’s own goals is another measure to cover grey areas in implementation and execution of CSR programmes. With 24% of the respondents not having a CSR policy and 20% not having defined the above such roles, is a welcome situation to breed unethical practices and frauds.
The study has identified irregularities – committed by both the companies’ employees or the implementation partner – like financial misrepresentation; conflict of interest; tax evasion; ghost beneficiaries (or ghost CSR activities); diversion of CSR funds; irregularities in disbursal of CSR funds; fraud in the procurement of goods and services for CSR projects and; inflated CSR expenditure on travel, food, entertainment, transportation and salaries.
The EY report mentions the case of an NGO that was subjected to a forensic background check by a pharmaceutical company before implementing their CSR project. “It was discovered that the NGO was previously accused of misusing project money and key stakeholders were allegedly diverting funds to other businesses. It also revealed a possible conflict of interest situation, where one of the company’s senior executives (and decision maker to select an implementation partner) was a close associate of a key stakeholder in the NGO. Such ‘internal risks’ emanating from the company’s employees itself inspire practices like inflating the size and scope of the project to extract more funds; diversion of funds or activities to committee or board or management’s relatives or personal stake or connection or; choosing a public trust intentionally to take undue advantage of the absence of centralized repository of information on them.
Lack of regulation, oversight and forensic due diligence of third-party implementation partners has led to frauds like a free training programme for underprivileged persons being charged by the entity while also inflating records showing a higher number of enrolled versus attendee trainees. Placements were not also offered and there were discrepancies in the locations of the training centres itself, all of which combined were severely draining the companies’ funds.
In another instance, a large metal and mining company received a whistle-blower complaint about various malpractices by the CSR partner, including ineffective utilization of funds, inflated expenses and favouritism. External forensic consultants that covered detailed discussions with the company; reviewing CSR-related documents; progress reports and the selection criteria; off-site discussions; public domain searches, and; forensic imaging of the machines of certain suspected employees found multiple areas of potential conflict of interest including a parallel NGO run by one of the employees. There were also cases of bribery, favouritism; violated SOPs; repeated work assigned to same NGO despite unsatisfactory work as well as kickbacks to certain employees. The firm immediately fired the employees while initiating legal action against the other staffers.
The study, therefore, recommends companies to institute proper reporting mechanisms in case of internal inquiries post the emergence of frauds. The investigating teams are suggested to possess knowledge on investigation processes and; expertise to gather facts at the grassroots level.