Insider fraud in charities: might you be at risk?


18 May 2018

“…the thing that is worse than death is betrayal….” ~ Malcolm X

Betrayal is a strong word, but when a trusted colleague is found to have defrauded a charity, it is precisely what many within the organisation and its intended beneficiaries will feel. While no one wants to work in an organisation where their every move is monitored and there is a total absence of trust, there is an important balance to be struck between complete faith in the integrity of all and overwhelming, soul-sapping bureaucracy.

Previous research carried out by the Charity Commission has shown that around one third of frauds at charities are thought to have been committed by those working for or governing the charity (an insider fraud). The results of a recent study by the Charity Commission show that almost three-quarters of insider frauds committed within charities are assisted by excessive trust or responsibility being placed on particular individuals.

This latest study looked at a number of high profile cases ranging from insider frauds committed by charity employees (including a finance director), an employee of a charity’s partner organisation and a charity chair. The sums involved ranged from £35,000 in the case of a charity chair, £45,000 in the case of an office co-ordinator through to nearly £1m in the case of a charity finance director. In several cases, the frauds took place over a number of years.

Since publication of the study, we have seen the former chief executive of a well-known charity facing jail after defrauding it of £700,000. Fraud can take place at every level if the right controls are not in place and a culture of openness and freedom to challenge the actions of others within a safe environment does not exist. One case study reveals that the fraud was only discovered once new trustees were appointed and raised concerns about the absence of controls, showing that charities should keep their procedures and controls under active, regular review.

The Commission’s findings show that preventing fraud is not all about having a perfectly drafted counter-fraud policy. While such a policy can help focus minds on risk areas and identify appropriate controls, they are of no use if “put in a drawer” and not acted upon. Policies must be implemented throughout the charity - from volunteers to the chair of trustees.

In addition, encouraging people to be vigilant and to be aware of particularly concerning behaviour is important. This can be addressed through appropriate training. This is not about undermining staff collegiality, but rather supporting proper procedures for the benefit and protection of all those working within a charity for the good of its beneficiaries.

Charity trustees should be mindful of their duties to protect the assets of their charity and ensure that proper governance is in place. Insurance might not always compensate for all losses where proper procedures are not in place or inadequate. Reputational damage through media coverage can also have a far greater impact on the finances of a charity than the immediate funds lost through the fraud in question.

The Charity Commission has published a selection of case studies, which help to illustrate how things can go wrong if governance is inadequate. The Commission has also published guidance and resources to help charities protect against fraud.

At Birketts, we can help charity trustees and senior managers with the development of both appropriate and practical policies and procedures. We also offer training for charity trustees, staff and volunteers on these issues via our Shaping Excellence Programme. Should your charity find itself the victim of a suspected fraud, we can advise you on the steps that you should take, including making a Serious Incident Report to the Charity Commission.

If you have any concerns about the policies and procedures within your charity, or if you are interested in finding out more about our training offering, or if you believe your charity has suffered a fraud, please contact Erika Clarke or Liz Brownsell or another member of the Birketts Charities and Social Enterprise Team.

This article is from the May 2018 issue of Essential Trustee, our newsletter for charity trustees and senior management. To download the latest issue, please visit the newsletter section of our website. Law covered as at May 2018.

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Authors

Liz Brownsell

Senior Associate, Co-Head of Charities and Social Enterprise

+44 (0)1473 406383

+44 (0)7525 735802