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Adequate procedures - tackling charity sector fraud

With talk of the regime of 'adequate procedures' introduced by the Bribery Act being extended to cover fraud we look at how this might affect charities and what action they need to take.

In a counter fraud context, a high-risk area for one charity may be the opposite for another simply because it operates in a different sphere of activity. This implies that the counter fraud lead’s task in a charity is not an easy one, but there are issues which should feature on every charity's counter fraud to do list.

With the role of charities featuring increasingly in the media, from international aid provided in war torn regions to local food banks, there is increased pressure to provide services and closer scrutiny as to how charities are undertaking their activities. Some charities may view their counter fraud operations as a largely unwelcome drain on valuable resources when they could be using funds to help those less fortunate. However, major donors, both private philanthropists and public bodies, are increasingly looking for surety about how their funds are used. Members of the public, who have always given generously to good causes, also want to know that the charities they support have effective financial management systems.

Trustees and senior executives of charities should therefore focus on what new counter fraud legislation may require from them in the future, recognise that it is good practice and stay ahead of the implementation curve.

Under the Bribery Act procedures need to be proportionate, have top level commitment, cover assessment of risk, due diligence on third parties, be fully communicated including the use of training and be appropriately monitored and reviewed. New legislation is likely to take a similar approach with the driver being a proper risk assessment covering all of a charity's activities. It is accepted there are pressures on charities that work against the introduction of adequate procedures, particularly smaller ones. However, these procedures should largely already be in place.  

Trustees have a legal duty to take all necessary steps to protect their charity's funds as well as ensuring their charity has internal and financial controls and proper and adequate financial records. The Charity Commission's website assists in this respect by providing a wealth of information on good practice for charities. In particular Chapter 3 of the Commission's 'Protecting Charities from Harm: Compliance Toolkit' covers fraud and financial crime and gives an overview of key frauds, prevention and detection and how fraud should be addressed when it happens. 

Nevertheless, notwithstanding the advice that is freely available and tailored to charities, we still find there is much work to do to counter the impression that charities are a soft touch when it comes to fraud.

Some key issues to focus on

Doing the basics right

Individuals often become involved in a charity because of a genuine interest in its objectives. However they may be inexperienced in business and financial matters, including fraud related issues, and will not necessarily recognise 'red flags' without counter fraud training. One example is change of bank account details frauds (a fraudster maintaining they are a legitimate supplier) which often rely on failures to recognise false email addresses and to follow procedure. This largely requires an effective administrative process to counter;

Ensuring that appropriate checks are undertaken on all staff

This includes volunteers because that may have access to charity income through fundraising or assets, notably in shops if the charity has a retail arm. These are the two areas where members of the public are most likely to come into contact with charities and a fraud can result in substantial adverse publicity and consequent reductions in donations;

Not getting enough information

Relying on individuals or organisations they know little or nothing about to deliver supplies, food or cash to potentially difficult areas. This could be done with the best of motives but may result in fraud and staff covering up transactions if they are contrary to agreed procedures leading to the criminal offence of false accounting.

Charity fraud from a different perspective

Charities (just like ordinary companies) can be set up with the primary intention to commit fraud or misrepresent that they are a charity. A search on the Charity Commission's website will provide a useful overview of a charity's operations such that it is a registered charity, its financial status and trustees. However if an organisation is newly registered then only limited material will of course be available so further information should be sought on an organisation's merits.

Small changes can make a real difference

With change of bank account details frauds for example, fraudsters will focus on large amounts about to become due for payment. The press also regularly feature those in positions of authority in charities who defraud their organisation, perhaps small scale to begin with but which often increases substantially over a period. This is not a case of 'petty pilfering' but actions which can affect the financial position of a charity and indeed its very existence.

Thinking about adequate resources now will bring added focus on counter fraud procedures across the sector. The key message from the Charity Commission's November conference 'Tackling fraud in the charity sector' is that prevention is by far the best approach. Fraud needs to be talked about and this will not deter donors, as some of the largest UK charities recognise by doing just that in their annual accounts. If charities show they are taking the issue seriously, by their thoughts and actions, fraudsters may no longer take the view that the sector can be an easy touch. Your money and my money will go to those who deserve it most.

Find out more about adequate procedures in Fraud risk, 'adequate procedures', and local authorities.

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