When people think of charities, they may think of their local charity shop staffed by loyal volunteers or perhaps a rescue home looking after stray animals. But many may not think of charities as multi-million pound businesses and there is huge cause for concern with warnings issued by the National Fraud Intelligence Bureau.
The charity sector has an annual income of £76 billion, meaning charities attract significant amounts of money. Unfortunately this means they also attract significant numbers of fraudsters. The Charity Commission estimates that the scale of charity fraud could be as much as £2 billion per year.
But the threat to charities is not purely from external hackers or organised criminals. Approximately one third of frauds against charities are insider frauds. These are frauds committed by a person from within the charity, such as a trustee, employee or volunteer.
Recent high profile examples of insider fraud include:
- a British Red Cross payroll manager jailed for 2 years after a £360,000 fraud; and
- the former chief executive of Birmingham Dogs Home jailed for 5 years after transferring £900,000 of the charity’s money to his personal account.
These cases highlight the vulnerability some charities have to insider fraud.
Insider fraud obviously has a financial impact for charities; but the impact can be greater than just a loss of money. Charities are heavily reliant on the goodwill of the public and its donors in order to function. Stories relating to internal mismanagement and unscrupulous employees damage a charity’s reputation, and reduce the likelihood the public will want to donate to or fundraise for them.
This reputational and financial damage then limits the ability of the charity to promote and complete the vital work they undertake in society. To protect themselves, it is essential that charities are fully equipped to minimise the threat from internal fraud.
A Charity Commission research report from April 2018 identified that nearly 70% of the insider frauds it analysed were enabled either through excessive trust placed in a single individual, or a lack of challenge and oversight to the fraudster’s actions. This suggests that the problem is partly a cultural one, and that the attitudes of charities towards insider fraud need to change.
The Charity Commission has published its top 10 tips for fraud prevention:
- Aim to develop a counter fraud culture.
- Guard against excessive trust and complacency.
- Promote fraud awareness within the charity and train staff to identify suspicious activity.
- Ensure trustees and employees are not afraid to challenge someone if they suspect wrongdoing.
- Encourage employees and volunteers to raise concerns. If they don’t feel able to raise this internally, they can use the Charity Commission’s whistleblowing procedure.
- Implement financial controls that everyone signs up to.
- Conduct an annual review of fraud risk and internal controls.
- Consider having a dedicated fraud officer on the board.
- Conduct pre-employment screening, with more in depth reference checks for individuals who could be involved in high value transactions.
- Report suspected fraud to the Charity Commission and Action Fraud.
Following the Charity Commission’s guidance should greatly reduce the likelihood of any insider fraud occurring. However if any fraud is identified, it should be immediately reported to both the Charity Commission and Action Fraud. This reporting is the responsibility of the trustees, and is essential in order to demonstrate that the trustees are adhering to their legal duty of running the charity with reasonable care and skill.
Catherine Carlton is a senior associate in our corporate team based in Exeter. The team are ranked as the number one corporate team for SME’s in the South West by Chambers independent guide to the legal profession. To contact Catherine, please call 01392 210700 or email firstname.lastname@example.org.