How to Ensure Due Diligence in Grant Management to Avoid Fraud

Due diligence in grantmaking is the structured set of checks a funder performs to confirm who the applicant is, whether they’re eligible and capable, and whether funds can be traced to legitimate intended uses. 

It’s essential for protecting charitable assets and safeguarding public trust, especially when grants are issued in higher-risk contexts; and the higher the risk or the more significant the partnership, the more due diligence is required. 

This article covers common types of grant fraud, critical checks to perform, and some red flags to look out for. 

Due Diligence in Grant Funding and Why it Matters

Due diligence protects grant makers in several ways:

• Prevention: It raises the barrier for opportunistic fraud, as simply stating that checks will be performed can deter abuse from less-experienced bad actors.
• Detection: It increases the chance of noticing inconsistent narratives, fabricated documentation, duplicate funding, or related-party conflicts before funds are disbursed.  
• Assurance and accountability: It helps a funder prove that funds were used for intended purposes and that risks were managed proportionately, which is critical for reputation and compliance. 

A report by the UK’s National Audit Office shows why this matters at-scale. It explains that the estimated level of loss from overpayments on government schemes ranges from less than 0.1% up to 10.2% due to both fraud and error, and that 20% of the government’s Grant Management Function’s annual savings (around £1.9 billion) could be achieved by reducing overpayments through better risk, control, and assurance.

Common Types of Grant Fraud and Red Flags

Grant fraud usually falls into one of three categories. It’s also worth noting that the risk can increase in situations where emergency funding is being disbursed. This is simply because with more applications, there’s a higher chance of opportunists seeking funding they’re not truly entitled to – and with grant managers being under more pressure during such times, there’s greater risk of this type of conduct going undetected. 

Conflicts of Interest

Conflicts of interest arise when individuals in a position to influence grant-funded decisions have a personal stake in the outcome and fail to disclose it. These situations aren’t always fraudulent by nature, but they become problematic when hidden or unmitigated.

Examples include:

• A grantee purchasing goods or services from a company in which they or a family member hold a financial interest.
• A board member recommending a grant to an organisation they’re personally affiliated with, without removing themselves from the decision-making process.
• A funding programme officer participating in the evaluation of applications submitted by a former employer or other associate.

Materially False Statements 

Another category of fraud involves deliberate misstatements in grant applications, progress reports, or financial submissions. These are often designed to secure funding under false pretences or hide non-compliance.

Examples include:

• Exaggerating the scope of a project or inflating its potential outcomes during the application process.
• Falsely claiming compliance with eligibility criteria (e.g., stating the organisation is registered, audited, or governed in a certain way when it isn’t).
• Submitting fabricated or altered documents, such as forged credentials.
• Charging unallowable costs to a grant (e.g., expenses that fall outside the grant’s scope, period of performance, or cost principles) while disguising them as eligible items.
• Misrepresenting staff time or salaries to increase reimbursement.

Strong documentation reviews, budget cross-checks, and clear cost definitions are essential to avoid being misled.

Theft

While less common than the above categories, outright theft and embezzlement do occur in grant-funded environments, especially where internal financial controls are weak.

Examples of grant-related theft include:

• Accounting staff creating false transactions or ghost vendors to siphon funds.
• Grantee employees using organisational credit cards for personal purchases, then attempting to categorise them as allowable grant expenses.
• Double billing, where grantees submit duplicate invoices for the same work across multiple funders.
• Charging for personnel who aren’t actually working on the funded project.
  

Key Red Flags to Look For

When assessing applicants, look out for the following signs which increase the risk of fraud:

• Poorly-defined roles and responsibilities within the proposed project, or staff that lack appropriate skills (also consider fraud awareness skills).
• Weak internal controls like unclear or undocumented procedures for managing the project and managing finances, having one individual in control of finances, and a lack of separation of duties.
• Duplicate or overlapping funding for the same project without disclosure.
• An insufficient fraud risk assessment (in cases where applications or business cases must include this).
• Generic governance documents.
• Requests for full payments up-front without milestones.

Key Due Diligence Checks in Grant Management

The exact workflow should be tailored to your jurisdiction, sector, and risk appetite. Regardless, high-quality due diligence typically includes the steps below.

Legal Status, Financial and Capacity Checks

Start by confirming the legal status of the applicant through authoritative sources such as Companies House, the Charity Commission, or other regulatory bodies. For certain grant types (e.g., health, education, or international programmes), check for licenses, registrations, or certifications required to operate in their sector or location. For international grants, sanctions screening may be required.

Collect and assess:

• Recent audited financial statements.
• Organisational budgets and forecasts.
• Cashflow projections for the proposed grant period.

Red flags might include persistent deficits, opaque reporting, or overreliance on a single funding source.

Also review the organisation’s operational capacity. Ask about staffing levels, past project delivery, and any capacity-building initiatives underway. If the project requires them to scale up significantly, assess whether the necessary systems and personnel are in place.

Governance Checks

Good governance is a fundamental indicator of accountability. Due diligence should include:

• Verifying board members, directors, or trustees against public records.
• Ensuring there is a clear separation between governance and day-to-day management.
• Reviewing key policies on procurement, anti-fraud, whistleblowing, conflicts of interest, safeguarding, and financial controls.

If key policies are missing, outdated, or unimplemented, that may require further scrutiny. Funders may also assess board meeting frequency, board composition, and committee structures, especially for larger or long-term grants.

Beneficiary and Grant Programme Verification

Confirm that the grant’s intended beneficiaries and the proposed delivery model are both credible and coherent. This may involve reviewing the logic model or theory of change and checking for consistency between needs assessments, target populations, and planned outputs. Also confirm any partnerships or sub-grantees in the application.

Common sense should be applied here, as not all activities will allow for the identification of individual beneficiaries, especially humanitarian or emergency relief efforts.

Site Visits

Validating the reality on the ground is helpful during the application process and as part of the ongoing due diligence process – especially for higher-risk or higher-value grants. Funders can check the facilities, staff, processes, beneficiary access, and confirm whether the reality matches how the organisation presented itself on paper.

Reference Checks

Speak to other funders, partners, or relevant authorities, especially when working with a new or unfamiliar organisation. Confirm whether they delivered as promised, whether they would fund them again, and ask if there were any noteworthy concerns. These conversations can reveal details that application forms won’t.

Conflict of Interest Screening

Require written declarations from applicants, internal staff, and reviewers, and check for related parties in procurement/sub-awards. If potential conflicts are identified, request mitigation plans, such as independent audits or recusal from decisions.

Ongoing Financial Oversight

Once funds are awarded, funders must continue monitoring the use of funds and delivery of agreed outcomes. Releasing funds in line with milestones tied to specific activities helps manage risk and align payments to performance, and periodic financial reports show how funds are being spent against the approved budget. Look for variances and follow up on unexplained deviations.

Some funders require grantees to submit annual audited financial statements or even commission special-purpose audits for large projects.

Programmatic monitoring should be tied to measurable outputs and outcomes, with site visits, interviews, or surveys used to validate progress claims.

Due Diligence for Different Grant Sizes

Not all nonprofit organisations will require the same checks, as due diligence should be proportionate to grant value and risk.

For small or microgrants, basic identity and legal checks, light financial reviews, and conflict of interest declarations are often enough, along with milestone-based reporting. For riskier or higher value grants, add in governance and reference checks.

Large grants accompanied by high risk or in regulated sectors will need extensive checks, including deeper financial checks, site visits, and more frequent reporting. External specialists may be required to perform certain checks for medium to large grants. Grantmakers may also be pulled into AML/CFT requirements when funding cross-border work.

How Grant Management Software Supports Due Diligence

A grant management system can help operationalise and strengthen due diligence, which is especially helpful for funders managing a high volume of grants. Of course, it doesn’t eliminate the need for human judgment or independent verification, but it can substantially increase the consistency and visibility of due diligence practices.

Here’s how it helps:

• Automated checks and alerts: Funding management software can identify missing documents and basic eligibility issues early, reducing manual errors and improving screening speed. AI takes this efficiency to a new level.
• Centralised document management: A cloud based GMS securely stores due diligence documents in one place for easy access and review.
• Transparent review processes: Flexigrant, for example, provides reviewers with a portal to record assessments, note concerns, and score applications, reducing the administrative burden and ensuring process integrity.
• Audit trails: All system activity is tracked, with time-stamped records of changes, decisions, and approvals, creating a robust audit trail.
• Budget and disbursement oversight: Tools for tracking allocations, spending, and milestones help ensure that funds are used as intended and provide real-time visibility over grant performance.
• Communication channels: Built-in CRM tools encourage open communication with grantees, making it easier to raise concerns and for them to report potential fraud.
• Real-time progress monitoring: Dashboards and milestone tracking features help grant managers oversee implementation and notice delays or deviations.
• Data collection and visualisation: Robust reporting and BI tools capture financial and programme data, making it easier to detect anomalies and share insights with stakeholders.
• Data security: Due diligence involves handling sensitive personal and organisational data. A good GMS supports compliance with GDPR/UK GDPR (and regulations in other regions) and embeds principles like secure storage, access controls, and retention management.
  

Conclusion

In summary, common types of grant fraud include undisclosed conflicts of interest, materially false statements and, less frequently, theft. To prevent it, effective due diligence is necessary throughout the grant lifecycle.

The strongest approaches combine authoritative verification, governance and financial scrutiny proportionate to exposure, and validating the reality beyond documents.

Finally, a grant management platform can help embed due diligence in everyday processes. Through automation, it increases screening speed and accuracy. It enables transparent review processes and budget management, and provides open lines of communication. Centralised document management streamlines reporting, and BI features provide visibility across the full grant lifecycle.

To learn more about how Flexigrant supports due diligence, contact us today.