Appreciating and addressing the scale of charity fraud
For a number of years legal, risk management and insurance professionals have been warning that charities are vulnerable to fraud, as if the constant stream of publicity about charities being caught by fraud wasn't enough of a message! Thankfully, the message seems to be getting through. Let's consider the situation.
The Fraud Advisory Panel and the Charity Commission have just published a guide, “Tackling Fraud in the Charity Sector’’, which outlines how charities can deal with fraud. This guide is essentially a summary of points considered at a well received conference of the same name last year.
While the guide may be a useful move in the battle to tackle fraud, its publication is perhaps more notable for what has been said at the time of its release. Both the Fraud Advisory Panel and the Charity Commission admitted at the guide’s release that fraud was inevitable in the voluntary sector.
Damning indictment
Such a comment is a damning indictment of charities’ vulnerability to fraud. And although the Commission has talked in detail in previous years about the estimated extent of fraud in charities, an admission that such illegality is inevitable is worrying.
As a prime example, the former chair of the Asda Foundation has been jailed for three years after admitting stealing £180,000 from the charity to pay for his partner’s dance company.
Paul Kelly, 55, who was also Asda’s vice president of corporate affairs, was sentenced at Leeds Crown Court after admitting seven counts of fraud by false representation. He had diverted funds that were supposed to go to victims of the 2014 Somerset floods to Murley Dance; which was run by his partner, David Murley.
Kelly, who had also served as a government adviser on food policy, alcohol and obesity and had been an ambassador for Prince Charles’s Business in the Community charity, was suspended and eventually dismissed by Asda after an internal investigation.
Asda must surely now be reviewing elements of its anti-fraud procedures to prevent this happening again. But you have to wonder if the latest guide would have been useful in preventing this episode.
Fraud resilience
The 20-page guide contains tips for charities on how to prevent, detect and respond to fraud, and outlines the need to build “fraud resilient’’ charities.
Two years ago, the Charity Commission put annual losses to charities due to fraud at £13.5m. It warned that this was only the fraud that had been identified and reported – meaning much more may have gone unnoticed. Other estimates have put charity fraud at a minimum of £148m a year – a huge figure for anyone to try and tackle.
The situation as the guide is issued, therefore, is that the national organisation for charities is stating that fraud is inevitable among its members and does not know how much of it is going on.
This is not a criticism of the Commission; it is more of a summary of the problem. The Commission itself has previously talked of charities’ complacency putting them at risk of fraud. And now it wants to attack the problem.
The issue now is whether a 20-page guide is sufficient to tackle and eradicate multi-million pound fraud in charities.
Unique organisations
Charities are unique organisations which rely on large amounts of trust and goodwill. Unfortunately, this can be their undoing when it comes to fraud.
They can be run by a small army of volunteers, which means minimal costs and an informal approach to organisation. This, unfortunately, can lead to a great potential for fraud as no one is either knowledgeable enough or in a suitable position to identify any suspicious activity or introduce systems to prevent it.
Alternatively, a charity can employ professional staff to ensure things are run “properly’’. The drawback here can be that a large amount of trust is placed in a very small group of people who may have the ability and overview of the charity to carry out fraud and prevent any scrutiny of their wrongdoing.
Crime proceeds
But staff and volunteers do not pose the only risk. Charities are exempt from paying tax on many sources of income, charities’ tax affairs are not made publicly available and contributions can be made in cash. All these factors make them attractive to someone on the outside looking to either hide their proceeds of crime or embezzle funds from an organisation.
This is not mere suspicion. The Organisation for Economic Co-operation and Development (OECD) has made it clear that charities are regularly used for dubious loans and investments which involve large amounts of cash being moved abroad.
Faced with such a situation, it is unlikely that a 20-page guide will have all the answers. Some useful advice, most definitely, but not a comprehensive strategy for preventing and identifying fraud.
Thorough policy
Every charity has to have a thorough, well thought-out anti-fraud policy. It needs to establish firm fraud prevention guidelines to identify what it believes would constitute fraud. It must examine closely the potential for fraud among its staff and the way it works.
Every charity also needs to consider how it should react to fraud allegations, who should be responsible for preventing, detecting and reporting it, and how best to develop a whistleblowing culture.
In short, each charity needs to examine every aspect of its existence to assess the risks and determine where precautions need to be introduced. Financial controls need to be introduced, trustees have to be aware of their legal obligations and clear, detailed records have to be kept.
Trust cannot be seen as the be all and end all when it comes to running an honest enterprise – it actually has to be designed out.
Many charities may feel daunted by this. This is understandable as many volunteers and paid staff will never have thought they would have to battle fraud. If this is the case, specialist fraud lawyers are among those with the relevant expertise who could help devise an anti-fraud policy after carrying out an in-depth review of a charity’s workings.
Such an idea may appear radical or even “over the top’’ to many charities. They may feel no need to revise the way they have worked for decades and may be confident that there is no fraud going on under their roof. This could, possibly, be the case for some charities.
Clearest terms
But when we have the Charity Commission, Fraud Advisory Panel and the OECD all talking in the clearest possible terms about the definite existence of large scale fraud in the charity sector, it would be unwise for charities not to make a comprehensive effort to either identify it or prevent it happening to them.
Tackling Fraud in the Charity Sector is a useful publication that helps put fraud on the agenda. But charities have to treat it as a starting point rather than the end of the battle against fraud.
