Author: Azizur Rahman
1 October 2012
6 min read
AZIZ RAHMAN, FOUNDER OF SERIOUS CRIME SOLICITORS RAHMAN RAVELLI, HAS HANDLED SOME OF THE BIGGEST AND MOST HIGH-PROFILE FRAUD AND BUSINESS CRIME CASES IN RECENT YEARS. HERE HE ADVISES CHARITIES ON HOW TO PREVENT A CULTURE OF FRAUD CREEPING IN - AND WHAT TO DO IF FRAUD IS SUSPECTED.
There can never be any doubt that charities are devised, founded and run with the best of intentions. As we know, a charity exists to improve the lot of some group or sector of society who are receiving either no help or inadequate assistance.
The paid staff and unpaid volunteers involved in with charities often go way beyond the call of duty to ensure that their organisation can bring the maximum benefit to those most in need of it. Let's never forget the great work that is done. However, let us also never forget to exercise a little caution.
Charities, like any public company or private organisation, can vary in size and structure. However, what they will have in common is that much work is carried out voluntarily and that sources of income may never be continuous. As a result, many charities employ two types of staff. There is the paid professional hired for their expertise and there is the unpaid volunteer who diligently carries out one or a number of functions – such as book-keeping, publicity, membership records – for little or no reward.
If a charity is large enough to be able to employ professional staff the chances are that its size means it has a genuine need for them. And if smaller charities have not reached that stage it makes sense to make the very best of the volunteer talents available. In the first scenario, therefore, a vast amount of knowledge about the charity is concentrated in one person while in the latter a number of people will each have their own specialist areas. But whichever scenario a charity faces it has to be aware of the potential for fraud within itself.
There are currently cases working through the UK court system that involve charitable trusts being used to allegedly funnel money around the world. Like many fraud prosecutions, these ones are complex, international and involve huge amounts of money. To the uninitiated, reading about a charitable trust's involvement in a major international criminal operation may seem perverse. But there are a number of reasons why involvement in an existing, legitimate charitable organisation or the creation of one for completely criminal reasons would be attractive to a fraudster.
Perhaps most importantly, the tax status of a charity is appealing to the criminal. In the UK, a charity is exempt from tax on many of its sources of income, providing that income is used for charitable purposes. Tax relief is available on donations from individual and corporate donors and while a charity's accounts are public documents, the tax affairs of charities and donors are not publicly available. And, arguably most importantly, charitable donations can be made in cash without any banking record being available. Such a situation is clearly attractive to someone who wants to avoid tax or hide the proceeds of ill-gotten gains. Of course, in Britain HM Revenue and Customs (HMRC) reviews the activities of charities and looks for unusual patterns of donations in their accounts and tax returns. But HMRC has only limited manpower and will always struggle to sift through the activities of every charity in pursuit of fraud. “A Report on Abuse of Charities for Money Laundering and Tax Evasion'' by the Organisation for Economic Co-operation and Development found that suspect charities are being used as a vehicle for suspect tax-free loans and investments, with money being transferred overseas.
But on a simpler level, charities can fall prey to the criminal intentions of those working for them. Earlier on, I mentioned the scenarios where either one person has the all-encompassing overview of the running of a charity or it is run by a small group of people who share the responsibilities. Either can provide the potential for fraud. The “man at the top'' with the overview can manipulate the books to hide the fact that he is syphoning money off while smaller charities run by volunteer groups may lack the operating systems and the expertise to prevent or recognise wrongdoing. The result can be a loss of a charity's assets but also a loss of its reputation as public confidence in it – and willingness to give it money – diminishes. This year, the National Fraud Authority estimated that fraud had cost UK charities £1.1 billion a year. Whether it is done by taking donation money, abusing the charity's assets and accounts or instigating bogus financial transactions, fraud can hit charities hard. So what must be done?
First and foremost, every charity must develop an anti-fraud policy. This means that the charity must draw up a series of guidelines, outlining what it considers to be fraud, how it will respond to allegations of fraud and the responsibility of individuals within it to prevent, detect and report fraud. Ideally, this policy will explain to whom people can report suspicions of fraud. No such policy can function adequately unless the charity has carried out a full risk assessment of all its operations. A charity's trustees must work through all its activities and procedures to examine how its work is carried out, what scope exists for potential fraud and what improvements could be made regarding security. It may be that such a review would be best carried out with the assistance of an expert, such as a lawyer who specialises in fraud cases, a representative of a law enforcement agency or an appropriate representative from one of the umbrella organisations for the charity sector. A whistleblowing culture of reporting any suspicions should be encouraged, so that no one believes they will be criticised for voicing their concerns.
Whatever anti-fraud policy a charity introduces and however it adjusts its activities in the wake of any review, it must make sure it has appropriate financial controls in place. A charity's trustees have a legal duty to protect its assets and this is especially important regarding the manner in which its proceeds of fundraising are handled. It may be difficult for smaller charities but there has to be a clear segregation of duties when handling finances. Complete records of all activities should be kept and a system of spot accounts and donor data. In addition, all financial activity should be reviewed regularly. There should be a culture of “no short cuts'' – no pre-signed blank cheques issued, no slow paying in of donor cash and immediate and full recording of all transactions.
It may not always seem necessary at first glance, yet even the slightest suspicion of fraud should be notified. What may at first seem a minor suggestion of wrongdoing – not worthy of recording – may later come to be seen as part of a pattern of prolonged fraudulent activity. Trustees and other senior figures in a charity should not be afraid to make a formal note of any possible misdemeanour and those working below them should feel that the whistleblowing culture means they are free to come forward and express their concerns.
Fraud can be hard to detect so open discussion is needed if any possible fraud is to be uncovered. Accounting discrepancies, missing documents, unusual looking patterns of payments and transactions may all be genuine mistakes or have a valid explanation. But those explanations must be sought by those with the charity's best interests at heart. Only by looking for such explanations can matters be resolved. If questions are asked and only vague answers are given, if those handling the cash are adamant they would rather “manage on my own'' when help is offered, if the financial reports now seem much more complex than in previous months or if audits are being delayed then there may well be reason for serious investigation.
If matters are to be investigated there has to be a clear procedure. Just as it is vital that people within the charity must know who to contact with their suspicions, that person has to know exactly what they need to do when receiving any such reports. They have to decide how to investigate the allegation and whether the police or other authorities need to be alerted. Staff should be kept informed – although they do not need to know every single detail – so they are aware of what is happening. The person who has the task of responding must ensure that the charity's bank accounts and all other assets are secure, with access blocked to anyone under suspicion. This person must also decide exactly what should be said to the trustees, who have a legal duty to safeguard the charity, and what can be mentioned if the press come asking questions.
Alerting the authorities and informing people connected with the charity is never enough. If a charity is to make itself more capable of preventing fraud it has to learn from what has happened, tighten its procedures and review its approach to HR and security.
The OECD says in its report that there should be greater cooperation and exchange of information between between tax and law enforcement authorities regarding charities. But for now at least, the charities have to look out for themselves.
Aziz Rahman is Senior Partner at Rahman Ravelli and its founder. His ability to coordinate national, international and multi-agency defences has led to success in some of the most significant corporate crime cases of this century and top rankings in international legal guides. He is recognised worldwide as one of the most capable legal experts regarding top-level, high-value commercial and financial disputes.