Author: Nicola Sharp
24 September 2014
5 min read
Charities are becoming targets for fraud, according to an official report. The safest approach, therefore, is to trust nobody.
It is supposed to be charities that look after the vulnerable and make sure that those least capable of protecting themselves are given some sort of help. So it may come as a shock to many people that charities are in need of protection. They are, according to recent research, very likely to be the targets of many people who see them as an easy touch when it comes to grabbing some ill-gotten gains.
The Charity Commission has made this clear in its most recent report. According to the Commission, losses to charities reported to it in 2013-14 totalled £13.5m. This figure would be alarming enough if it was not for one other issue raised by the Commission: it believes this amount is merely the tip of the iceberg. The Commission’s head of investigations and enforcement David Walker has made it clear that this reported figure is well below the estimates for the real value of fraud that is being perpetrated against charities. Mr Walker is at pains to emphasise that the £13.5M is only the amount of fraud that has been identified and reported by charities. Putting it bluntly, it is only the fraud that charities have noticed and let others know about.
The Commission believes that the amount of fraud that has either not been spotted or has been recognised but not – for whatever reason – been reported is much, much larger. Mr Walker admits that nobody knows the true nature and scale of fraud across the sector as a whole. Such an admission is itself a concern. After all, if the organisation that regulates charities is openly admitting it has no real idea how much fraud is being carried out on its members what chance is there of anyone being able to identify it? Or at least prevent it from happening?
What is perhaps most worrying, however, is the range of estimates for the scale of the unknown fraud that the Commission is warning about. Previous data from the National Fraud Authority, and from the accountancy firm BDO have estimated losses to charities from fraud at somewhere between £148m and £1.65bn a year. When looking at these figures it is hard to determine just what is the most concerning. Is it the huge amounts that are being talked about? After all, if such organisations are losing such fortunes this is clearly a worry. Or is it the vast discrepancy between the estimates? Such a large difference between £148M and £1.65bn seems to indicate that absolutely no one is in a position to tell us how much is actually being taken out of charities.
Mr Walker believes that charities’ complacency may go some way to explaining the scale of the problem. He talks of a “this can never happen to us’’ culture in charities which only serves to increase their vulnerability as any organisation that will not contemplate its vulnerability to fraud is instantly making itself an easier target. Such practices as writing blank cheques appear, amazingly, to be common. There cannot be many organisations or companies where blank cheques are floating around, almost waiting to be abused. But that appears to be the problem with charities. This issue of trust is – while admirable – a cause of their vulnerability.
It is, of course, true that charities do a great deal of work to improve the lives of the poor, unfortunate and disadvantaged. Both their staff and their volunteers put in more than their fair share of effort to make sure charities do the very best for those they have been set up to assist. But charities can vary hugely in their size, nature and methods of operating – and so can their personnel.
If a charity employs professional staff, it is placing a large amount of trust in a very small group of people. This group – and it may even be just one person - has more knowledge than anyone else of all aspects of the way the charity functions. Smaller charities may not have the need or the resources to hire professional staff and, as a result, they will rely on a small group of volunteers to carry out the important tasks. Charities, therefore, tend to be split between those that have a huge amount of trust placed in one person – or at most a very small group – and those where the responsibilities are spread around a number of people who each have a specialist area. The situation may vary from charity to charity but there is no doubt that both these scenarios offer potential for fraud. Professionals at the top can doctor the paperwork to hide any illegality while volunteers can struggle to introduce systems to either prevent or recognise wrongdoing. The obvious risk is that the charity loses its assets, its reputation and its ability to attract future donations.
But that is not the only risk. Charities must bear in mind that they can be seen as attractive to people looking to move ill-gotten gains around the world. For a start, charities are exempt from paying tax on many of their sources of income. Tax relief is available on donations, charities’ tax affairs are not made publicly available and contributions to them can be made in cash; leaving no official documentary evidence. To anyone looking to hide money from official scrutiny, such an arrangement is ideal. The authorities do try and police the affairs of charities but their resources are limited and, as was confirmed by the Organisation for Economic Co-operation and Development, charities are regularly used for dubious loans and investments that involve large amounts of cash being moved abroad.
So what can charities do to minimise the risk of wrongdoing from both within and outside their walls? To put it simply, they have to develop an anti-fraud policy. Each and every charity should – if it has not done so already – create guidelines that identify what it considers to be fraud, what the potential for fraud is in its organisation, how it should react to fraud allegations and who should be responsible for preventing, detecting and reporting fraud. Every charity has to look at everything it does with a clear head in order to assess the potential risks and the areas where security needs to be introduced or enhanced. If a charity feels incapable of doing this itself, it must use an expert such as a specialist fraud lawyer, someone from an official law enforcement agency or an employee of one of the organisations that represents the charity sector. Charities must introduce and emphasise a whistleblowing culture that encourages reporting of any suspicions.
Financial controls have to be put in place, trustees must be left in no doubt about their legal obligations and clear, comprehensive records are essential. The element of trust should be designed out of all aspects of a charity’s functions so that nothing is left to chance. Fraud is often difficult to recognise and what may look suspicious could turn out to have a genuine explanation. But charities have to make sure that they have systems in place to ensure such suspicions are flagged up as early as possible and acted upon.
Any investigations must follow a clear procedure and everyone must know who to contact with their suspicions. That person must be in no doubt what they must do when such suspicions are brought to them. They must know how to investigate the allegation and how to determine whether the police or other authorities should be brought in. At the same time, this person must immediately make sure that the charity's bank accounts and all other assets are secure, with no one who is under suspicion able to gain access to them. What needs to be said to the trustees and the press also has to be part of the pre-arranged procedure.
Nothing can be left to chance. And absolutely nothing can be based on trust.
Nicola is known for her fraud, civil recovery, arbitration and business crime expertise, her experience of leading the largest financial disputes and multinational investigations and her skills in devising preventative measures and conducting internal investigations for corporates.