Industry expertise | August 2024 Not-for-profit organizations brace for fraud and cyber-attacks

Check washing fraud has been around for a long time, but it’s becoming increasingly prevalent.^{Disclosure 5} Often intercepting incoming or outgoing mail, criminals wash away the payee’s name and sometimes the dollar amount on stolen checks, giving them a signed and dated “blank” check.

As more organizations adopt electronic funds transfers, ACH fraud is growing too. Criminals look to change the ACH payment instructions, redirecting the funds to their own accounts.

NFPs can also fall victim to billing fraud schemes where individuals use non-existent vendors or goods to steal funds. Expense reimbursement fraud is a perennial risk. Nonprofit organizations can sometimes rely more on trust than regimented reimbursement procedures—increasing this risk.

Criminals employ a wide array of cyber threats against nonprofits, the most common being business email compromise (BEC). In a typical BEC attack, cybercriminals impersonate an external vendor or internal senior executive to trick accounting and finance personnel into redirecting payments or providing sensitive data. These attacks can be made directly on an email system or through compromised third-party vendors.

Phishing represents another prevalent method of attack. Aimed at a broader audience, it typically features a large volume of emails that appear to come from trusted sources. When recipients click on links or download attachments, they may unwittingly install malware on their device or arrive at a fake website that the hackers set up to obtain login credentials.

Ransomware attacks have become routine occurrences in 2024. After infiltrating an organization’s network, cybercriminals lock down critical data or systems and demand a ransom for their release. This violation can create major disruptions to nonprofits and can lead to losing sensitive information and creating risk for the organization and its donors.

Ransomware attacks can precipitate a data breach, which may be the criminals’ primary goal as they penetrate systems specifically to steal donor or beneficiary information. Following a data breach, the consequences can escalate to include reputational damage and potential legal ramifications, in addition to the financial impact and disruption they cause.

Education and training. Education is the most powerful tool to prevent fraud and cybercrime. Unfortunately, it’s a tool that doesn’t always get adequate attention in the nonprofit world. The Association of Certified Fraud Examiners reports that among all types of organizations, NFPs are the least likely to implement fraud awareness training programs—despite the elevated risks they face.^{Disclosure 6}

Leaders should prioritize ongoing training and awareness programs to educate staff and volunteers on fraud schemes and cybersecurity best practices, including how to recognize and respond to red flags, such as:

• Changes to wire instructions
• Impersonation of parties involved in transactions
• Communications—emails, phone calls, or texts—that exhibit potential risk signs and arouse suspicion, including those that:
  • Demand immediate action
  • Ask for sensitive information
  • Occur outside of regular business hours
  • Contain spelling or grammatical errors

Educate your staff about verifying changes to payment instructions before acting on them. Ensure that employees use only authenticated phone numbers and contacts to confirm changes and requests that arrive via email, text, or phone call.

Make fraud awareness and prevention a recurring topic of discussion and foster a culture of vigilance with an emphasis on identifying and reporting suspicious activity.

Strong internal controls. Institute the strongest internal controls possible within your organization’s structure. When feasible, segregate duties for financial transactions so a single individual isn’t responsible for approving, making, and recording payments. Make sure that multiple parties regularly review all financial activities and records.

Replace fraud-prone checks. Choose safer, electronic forms of payment like commercial credit cards, ACH, and Real Time Payments (RTP®) when possible.

Cybersecurity best practices. Many small and mid-sized nonprofits have budget and personnel constraints, but there are several effective risk-reduction strategies you can take—even with limited resources:

• Update technology systems, devices, and software with the most current security protections—apply all patches and updates as soon as they’re available.
• Back up data regularly, and store the backup in a secure, off-site location.
• Allow only authorized individuals to access devices and sensitive data.
• Use single sign-on (SSO) systems.
• Require strong passwords and two-factor authentication.
• Prohibit personal use of the organization’s devices and networks.
• Seek guidance from IT professionals to identify vulnerabilities.
• Establish a cyberattack response plan.
• Invest in cyber insurance.

Even with a strong defense, cyberattacks can happen. For quick and effective action, every organization needs to create a response plan before an attack happens.

2. Test your incident response plan periodically, under various scenarios. Cyberattack drills provide team members with an opportunity to practice their response steps, identify potential problems, and become familiar with how the response unfolds. This kind of “dry run” can reduce stress levels and improve the speed and performance of implementing your plan when an incident occurs. Responding on the fly often results in higher incident costs, excessive legal liability, and added reputational harm.

3. Revisit and update your plan regularly to reflect emerging, real-world threats and evolving best practices, as well as any changes in the organization. Be sure to replace team members who can no longer serve.

4. Make your plan available offline. A cyberattack may lock you out of your systems.