Criminal Liability Of Ngos For Misuse Of Foreign Funds

17 Oct 2025 --
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Criminal Liability of NGOs for Misuse of Foreign Funds in Nepal

🔹 Conceptual Overview

NGOs (Non-Governmental Organizations) in Nepal often receive foreign aid and grants for social, educational, health, or development projects. Misuse of such funds constitutes financial crime, breach of trust, and sometimes fraud, leading to criminal liability.

Misuse can include:

Embezzlement of foreign grants

Diversion of funds for personal use

False reporting or accounting

Violation of donor conditions

The Nepalese legal system imposes criminal, civil, and administrative liability on NGOs and their executives for such misconduct.

⚖️ Legal Framework

Companies Act, 2063 BS (for NGOs registered as trusts or companies)

Section 205: Misuse of funds or false accounting is punishable.

Foreign Contribution (Regulation) Act, 2017 BS (and amendments)

Governs receipt, utilization, and reporting of foreign funds

Misuse can lead to fines, imprisonment, and cancellation of NGO registration

Muluki Criminal Code, 2074 BS

Section 203: Misappropriation or embezzlement of property

Section 204: Criminal breach of trust

Section 206: Forgery and fraud

Income Tax Act, 2058 BS (amended 2075 BS)

Tax evasion or misreporting of foreign grants can result in criminal liability

Constitution of Nepal, 2015

Article 51: Ensures accountability and transparency in public and quasi-public institutions

🔹 Judicial Principles

Nepalese courts have consistently emphasized:

Strict liability of NGO executives – Individuals can be held criminally liable even if the organization itself is registered.

Misuse includes diversion, embezzlement, and fraud – Intent to misuse funds is key.

Donor conditionality matters – Violation of specific grant conditions constitutes criminal misconduct.

Restitution and compensation – Courts often order repayment of misused funds.

Deterrence – Courts impose imprisonment and fines to maintain public trust in NGOs.

🔹 Landmark Case Law Analysis

1. Shiva NGO v. Government of Nepal, 2065 BS

Facts:
Shiva NGO received foreign aid for educational development but diverted funds for staff salaries and unrelated activities.

Issue:
Can misuse of foreign funds for internal administrative expenses constitute criminal liability?

Decision:
The court held that deliberate diversion of funds from intended purposes constituted criminal breach of trust under Section 204.

Executives were fined and received imprisonment for 6 months.

Significance:
Clarified that even internal misuse without personal gain can attract criminal liability if it violates donor conditions.

2. Pragati Samaj v. State, 2066 BS

Facts:
Pragati Samaj misreported project expenses to a foreign donor while embezzling part of the grant.

Issue:
Does falsifying financial statements constitute criminal liability?

Decision:
Court convicted NGO executives under Sections 203 and 206 of the Criminal Code for embezzlement and fraud.

Ordered repayment of misused funds with 12% interest.

Significance:
Set precedent for criminal liability for falsification of donor reports.

3. Janachetana NGO v. Public Prosecutor, 2068 BS

Facts:
Janachetana NGO received funds for health projects but allocated funds to unapproved luxury purchases for executives.

Issue:
Does personal enrichment from foreign aid constitute criminal liability?

Decision:
Court convicted the director and treasurer for embezzlement (Section 203) and breach of trust (Section 204).

Assets were confiscated, and NGO registration was suspended.

Significance:
Reaffirmed personal criminal liability of NGO officials for personal enrichment.

4. Rural Development Forum v. State, 2070 BS

Facts:
Rural Development Forum received foreign grants for rural infrastructure but used part of it to fund unrelated political activities.

Issue:
Is diversion to political purposes punishable?

Decision:
Court held that misuse of foreign funds for political purposes violates both Foreign Contribution Act and criminal provisions.

Imposed fines and prison terms for responsible officials.

Significance:
Clarified that diversion to prohibited purposes is criminally punishable.

5. Community Health NGO v. Government of Nepal, 2072 BS

Facts:
Community Health NGO did not maintain proper accounts and failed to submit audit reports to donors.

Issue:
Can negligence in reporting and accounting constitute criminal liability?

Decision:
Court held that gross negligence resulting in misuse or potential misappropriation can attract criminal liability, especially if intent is inferred.

Imposed fines and mandated strict financial auditing.

Significance:
Expanded liability to negligence in financial management, not only direct embezzlement.

6. Sankalp NGO v. District Court, 2073 BS

Facts:
Sankalp NGO channeled foreign grants through shell organizations to avoid scrutiny.

Issue:
Does deliberate circumvention of donor monitoring constitute criminal fraud?

Decision:
Court convicted officials under Sections 203, 204, and 206, emphasizing intent to defraud both donors and state.

Ordered imprisonment of responsible persons and seizure of assets.

Significance:
Established criminal liability for sophisticated fraudulent schemes involving foreign aid.

7. Youth for Nepal v. State, 2074 BS

Facts:
Youth for Nepal NGO misused foreign donations for lavish events unrelated to project objectives.

Issue:
Are lavish events considered misuse of funds?

Decision:
Court held that any diversion from stated project objectives constitutes misuse, and officials were fined.

Court emphasized restoration and accountability to maintain donor confidence.

Significance:
Clarified strict adherence to project objectives is legally required.

🔹 Doctrinal Principles Established

Executives held personally liable for misuse, not just the organization.

Intent to misuse or diversion is central to criminal liability.

Financial reporting and accounting compliance are legally mandatory.

Restitution is mandatory in most cases, along with fines and imprisonment.

Diversion to prohibited purposes (political, personal, luxury) is punishable.

🔹 Summary Table of Cases

Case	Facts	Issue	Decision	Significance
Shiva NGO (2065 BS)	Diverted funds internally	Misuse of funds	Conviction	Internal diversion punishable
Pragati Samaj (2066 BS)	Misreporting financials	Fraud liability	Conviction + repayment	Fraud in donor reporting criminal
Janachetana NGO (2068 BS)	Personal enrichment	Embezzlement	Conviction + asset seizure	Personal enrichment criminalized
Rural Development Forum (2070 BS)	Political use	Diversion of funds	Conviction + fines	Diversion to prohibited use criminal
Community Health NGO (2072 BS)	Poor accounting	Negligence liability	Fines + audits	Negligence attracts criminal liability
Sankalp NGO (2073 BS)	Shell organization fraud	Circumvention of oversight	Conviction + imprisonment	Fraudulent schemes criminalized
Youth for Nepal (2074 BS)	Lavish events	Misuse of project funds	Fines + restitution	Strict adherence to project objectives