Preparing to be more compliant against charity fraud
In our own way, each of us does what we can to prevent failure. “Failure is not an option’’ is how the saying goes. It is an inaccurate statement as failure is always an option. And charities are no different from any individual or other organisation in that respect. They want to succeed in what they set out to do.
Charities have this desire to succeed because any success will be of benefit to those they look to help. Avoiding failure is worthwhile because it ensures that help can be provided. But now a new stimulus for charities to avoid failure may be on the horizon – the need to stay on the right side of the law.
As I write this, the UK government is weighing up whether organisations should face criminal charges if they fail to prevent business crimes such as money laundering and fraud. Nothing official has yet been announced but the idea has been floated through appropriate channels.
Considering proposals
Attorney General Jeremy Wright chose his first major speech in the post to flag up the idea. He told a conference in Cambridge that the Government was “considering proposals for the creation of an offence of a corporate failure to prevent economic crime’’.
No more details are forthcoming as yet but it sounds as if the offence, should it come into force, would follow similar lines to the failure to prevent bribery under Section 7 of the Bribery Act.
Like that section of the Bribery Act, the onus is on organisations and individuals to take responsibility for those acting on their behalf. But any such new offence of corporate failure could have a much greater effect on the legal landscape than Section 7 has had. And as charities are vulnerable to fraud and money laundering, the implications of any such new offence could be huge for them.
Charity vulnerability
Let us be clear, bona fide charities are set up with the very best of intentions. But their favourable tax status can make them vulnerable to abuse by those looking to benefit from financial wrongdoing.
Tax relief on donations, tax affairs not having to be made publicly available and the ability to make donations in cash are three aspects of charities’ ways of working that can make them appealing to those wanting to use them for illicit gains.
Whether it is tax evasion, money laundering or the funnelling of cash around the globe, the freedoms enjoyed by charities are attractive to the criminal. This is why any proposed new offence of corporate failure could pose a problem for charities.
If you think this is baseless scaremongering, think again. The Charity Commission has stated that in 2013-14 it had fraud totalling £13.5m reported to it. The Commission emphasised that this was only the figure for the fraud it had been notified of and indicated that the true scale of such fraud was likely to be far larger.
Data from accountants BDO and the National Fraud Authority have put the true scale of charity fraud at ten times this figure; at the bare minimum.
Charity procedures
At this stage, the authorities are not talking of this new offence as a direct attempt to make charities tighten up their anti-fraud procedures. But regardless of the motivation behind this new proposal it will have implication for charities – and it does appear to have prominent supporters.
The major political parties have not voiced any objections, the Serious Fraud Office’s Director David Green first talked of the possibility of such an offence a year ago and there is little doubt that it would make it easier for the SFO and its counterparts to bring charges. The scene is, therefore, set for such legislation.
In his speech, the Attorney General talked of the need to have “correct laws and structures in place to tackle fraud and corruption, and to improve detection of money laundering’’ and noted that the Bribery Act was now starting to bear fruit in terms of prosecutions.
Whether any new offence of corporate failure would match or surpass the Bribery Act remains to be seen. But that is not the only uncertainty surrounding an offence which has been carefully promoted without having been officially made public.
Strong compliance
It almost goes without saying that such an offence would make the issue of compliance even more important for charities. Strong compliance procedures would be the only realistic way to prevent any possibility of a charity facing prosecution for corporate failure.
If the issue in such prosecutions is to be whether a charity was reckless enough to allow – or at least provide the opportunity for – an employee or associate to commit a fraud, money laundering or tax evasion then compliance has to play a huge role.
Compliance will not only help reduce a charity’s vulnerability to such a prosecution, it will also play a major role in any defence should a corporate failure charge be brought. But compliance can only be of value in such circumstances if it is genuine, thorough and part of a charity’s ongoing attempt to make sure it is serious about functioning within the law.
Lip service
It cannot be merely a charity paying lip service to the idea of following the letter and spirit of legislation. Turning a blind eye to wrongdoing, hoping it is not going on or simply being unaware of it has seen many companies facing a wide variety of charges in the past – now such an approach could be about to become an offence in its own right.
Only properly thought out, carefully introduced and rigorously maintained, reviewed and revised compliance procedures are likely to be adequate protection against the proposed new offence.
At present, we wait to see the details of any such offence and the opportunities the legislation will offer for defence solicitors. Certainly, compliance will loom large in any defence but much will depend on the precise scope of the legislation.
Where will the line be drawn as regards what the legislation classes as recklessness or negligence when it comes to corporate failure? At the moment, we do not know- and so we cannot make any exact assumptions about how wide a net this offence will cast over charities and businesses.
We need to see the precise details to understand what the Government will view as an innocent mistake or an understandable oversight and what it will consider to be reckless or negligent activity that turns a blind eye to, is wilfully ignorant of or even condones economic crime.
Wide effect
Although we do not know the details, however, the “broad brush’’ of the proposed law is very wide indeed. It will clearly affect charities and will prompt many of the questions that some in business were asking when the Bribery Act was first mooted: How am I supposed to comply with this? What is my current risk of prosecution under this new law? What changes do I need to make to my operation?
Such responses could be termed knee-jerk compliance, just as the Bribery Act prompted thoughts and actions among many who realised they could be at risk of prosecution. It is likely that this new offence will have the same effect; certainly when we know a few more details about it. Charities would be foolish not to respond to this challenge.
In many ways, having the Attorney General signalling the Government’s intention was the clearest possible way that the state could provoke thought among charities, companies and individuals about their future obligations to quell economic crime.
The situation may well prove to be that those who are thinking about it now – or are at least aware of it – are not the ones who will pay the price when corporate failure finds its way onto the statute books. At the moment, there will be charities and other organisations which are run in such a compliant fashion – with clear, anti-fraud procedures in place - that any such new offence will have no impact on their dealings.
Then there are those who may not be so driven to be compliant but who may, on hearing of the Government’s proposals, be motivated to design out the potential for wrongdoing in their charity to ensure they do not fall foul of this publicised, new offence.
So it will be those charities and companies which are unaware of the legal developments and the obligations placed upon them which are most likely to find themselves answering to the charge that they failed to prevent economic crime.
Prosecution targets
When this offence becomes a reality, the Government and its agencies will be using it to make sure that such organisations are brought to book. These are the ones which the authorities may already have their suspicions about - the ones which may have been associated in some way with those practising fraud or money laundering and yet could not be proved to be directly involved.
These organisations will be ones which have already flown close to the sun legally speaking, but which were never shown to have committed an offence, the ones which have existed on the margins of current business law.
If charities do not now act to ensure they are legally compliant then they could be among the first prosecuted for what could prove to be very costly failures.
