When there’s a failure to comply with fundraising rules
The architects of the Gin Act 1751 (aimed at reducing our gin consumption) would be turning in their dry graves at the gin revolution of recent years. Times evidently change, and now gin drinkers can do their bit for charity by buying a bottle of the botanical spirit, in this case Captain Sir Tom’s Gin.
Otterbeck distillery was presumably excited to partner with the Captain Tom Foundation, and likely had both philanthropic and legitimate commercial intentions in doing so. The charm, dignity and determination of Captain Sir Tom propelled him to national treasure status and his universal appeal would naturally render his brand an attractive and lucrative prospect.
The scope to benefit charitable causes through such a brand is significant, as is the appeal of association with it for a commercial business. Increasingly, businesses have developed social consciences, driven both by a genuine desire to do good and by the commercial benefits of doing so, through increased customers, sales, brand loyalty and goodwill.
This is not sinister: for profit businesses exist for commercial gain and their philanthropic activities may not be wholly altruistic. There is, however, relevant charity law to abide by.
Commercial participation
When a commercial business promotes the purchase of a particular product or service by citing that purchases will lead to a charity receiving a donation from the business, the law considers this commercial participation. Legal requirements governing such arrangements are in place to ensure that:
- Consumers are fully aware, prior to purchasing goods or services, that a charity will benefit from their purchase and to what extent.
- The business and the charity have agreed at the outset, in writing, the terms of the arrangement between them.
- The charity actually does receive the benefits due to it and can hold the business to account.
To qualify as a commercial participator, the business must be operated for gain and not be either a fundraising business or a company connected with the charity. It must also specify that the promotional venture will benefit a particular charity, rather than merely identifying a particular charitable cause.
The law requires a commercial participator to:
- Enter into a written agreement with the charity in question.
- Apply a solicitation statement whenever it represents that charitable contributions will be given to the charity. This statement must be available to the consumer prior to purchasing the goods or services and must clearly identify the recipient charity (and, if more than one, the proportions in which each will benefit) and the amount to be received by the recipient charity or charities.
- Ensure that the charity has access to the commercial participator’s records regarding the arrangement.
- Look after money or property acquired as a result of the arrangement and ensure it is transferred promptly to the charity.
Additional requirements apply to ventures promoted during television, radio or telephone campaigns.
Compliance for trustees
The onus is on the commercial participator to comply with these legal requirements and it is unlawful (a criminal offence, punishable by fine, as regards most elements) for it to proceed without doing so. Charities, however, are not free from rules, with trustees required to ensure compliance with various duties. Registered charities are required to disclose their involvement in commercial participation arrangements (and to confirm whether written agreements are in place) in the annual return submitted to the Charity Commission.
Charities which are required to have their accounts audited must disclose any commercial participation arrangements during the audit process. There are also negative consequences for charities which allow commercial participation arrangements to proceed without being legally compliant.
The Commission views the failure to ensure compliance with charity law as mismanagement by charity trustees and this could prompt - at best - questions from the Commission, with the potential for such questions to develop into a statutory inquiry. This could lead to the Commission taking regulatory action against the trustees or the charity or both.
The charity will also have breached the Code of Fundraising Practice, overseen by the Fundraising Regulator. Standards applicable to charities working with commercial participators are detailed in the Code and charities registered with the Fundraising Regulator are required to comply with these standards. The Commission, though, expects all charities to adhere to these standards, regardless of registration with the Fundraising Regulator, and the failure to do so could result in regulatory trouble.
Substantial reputational damage
Falling out with regulators is not the only risk. As the Captain Tom Foundation has discovered, the reputational damage for a charity involved in non-compliant commercial participation is potentially substantial. The loss of public trust and confidence in an affected charity could be as irretrievable as the good health and fortune of the residents of Hogarth’s Gin Lane.
Commercial participation is only one ingredient in the charity fundraising cocktail. The typical mix includes events, lotteries and prize draws, public collections such as street or house to house collections, mailings and digital fundraising and activities undertaken by the professional fundraisers’ who charities engage.
Specific laws and regulations apply to each method by which modern charities raise funds, and there are particular rules to follow in situations where either an excess or an insufficiency of funds is raised in response to a particular appeal.
It is beyond the scope of this article to outline all the applicable rules, but trustees should always ensure that any fundraising activity complies with the rules relevant to that particular activity. They should not assume such professional fundraisers they may have engaged have removed this responsibility from board level.
There are core principles underpinning the statutory obligations placed on trustees and which also inform the code. The four values enshrined at the beginning of the code set the tone:
- LEGAL: all fundraising must be legally compliant.
- OPEN: all fundraisers must engage openly with the public about their process and provide further explanation when asked, where appropriate.
- HONEST: fundraisers must act with integrity and be clear with the public about which cause they are fundraising for and how a donation will be used.
- RESPECTFUL: fundraisers must always be respectful in their dealings with the public.
Broadly, and pursuant to the four values, the Code of Fundraising Practice requires charities to apply all funds raised for the cause for which they were raised and to adhere to any conditions attached to individual donations. They must maintain records of donations (including any related conditions) and must not indicate that funds are restricted to be spent on a particular activity or purpose if in fact no such restriction applies. When appealing for funds for a specific purpose, charities must explain what happens if too much or little money is raised.
Complaints investigated
The Fundraising Regulator investigates complaints about charity fundraising practices and considers whether the code has been breached. Summaries of its investigations are published on its website for two years and organisations involved are named, whether or not complaints are upheld. The Fundraising Regulator also publicly identifies organisations which persistently fail to action requests made through the Fundraising Preference Service for organisations to cease making direct marketing communications to them.
Matters may be referred by the Fundraising Regulator to other relevant regulators, including the Commission and the Information Commissioner’s Office. The consequences of referral may include other regulatory action. For example, depending on the circumstances, the Commission may conclude there has been mismanagement by trustees (which could ultimately lead to their removal) and the Information Commissioner may impose a fine regarding a data breach.
Fundraising scandals of recent years (for example, the suicide of extensive charity donor Olive Cooke and the unsavoury methods deployed by the Presidents Club) have spotlighted clear breaches of the code’s values, as well as individual standards and relevant law. And the consequent blow to public trust and confidence in charity fundraising causes sector-wide damage.
Tax consequences
Legal failings in charity fundraising may also lead to negative and potentially expensive tax consequences, including, for example, where there are breaches of the rules on non-primary purpose trading or VAT exemptions for fundraising events.
Charities must also remember that it is a criminal offence for a registered charity with a gross income in its last financial year in excess of £10,000 to fail to state its registered charity status on a range of documentation, including such documentation which solicits (expressly or impliedly) money or other property for the benefit of the charity. Equally, it is a criminal offence to misrepresent that an institution is a registered charity (if it is not) when soliciting money or other property for its benefit.
As fundraising practices develop and evolve over time, so do charities, as they keep pace with changing economic, social and legal circumstances. A well run charity regularly reviews its objects and its governing document to ensure that they remain up to date and fit for purpose. Such review may identify necessary amendments or a need for substantial change, such as restructuring the charity. Whenever changes are made, it is incumbent on trustees to understand fully the implications of such changes and adapt their management and administration of the charity accordingly.
If a charity amends its objects, its trustees must ensure it operates within the new objects from the date of their adoption, not the previous objects with which longer serving trustees are so familiar. If a charity restructures as a corporate entity, with the protection of limited liability that affords the trustees, don’t waste the time, effort and expense of restructuring (not to mention risking liability) by contracting with the charity’s CEO personally as trustees, rather than the corporate charity employing them.
Where an organisation has been operating as an informal group of well-meaning and like-minded individuals, and then establishes a registered charity through which to conduct its activities, its trustees must take the time to understand their duties and responsibilities.
Fiduciary duties
These include fiduciary duties, promoting the charity’s purposes for the public benefit and acting in the best interests of the charity and its beneficiaries, acting within the charity’s powers and in accordance with its governing document, being prudent, acting collectively, avoiding having interests which conflict with the duty of undivided loyalty to the charity, not profiting from being charity trustees and ensuring compliance with charity law.
Publicity suggests that the Captain Tom Foundation has been shaken by the various regulatory recces into its activities, and it may yet be stirred. Trustees can avoid similar scrutiny by scrupulous adherence to the law and standards relating to fundraising, understanding the legal and administrative impact of changes they make to their charities, and regularly reminding themselves of their core duties. When life gives you lemons, pour the gin.
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