THE INCIDENCE, ORIGINS AND IMPACT OF FRAUD IN THE CHARITABLE SECTOR

Fraud is often referred to as a ‘victimless’ crime, but in reality it poses a very real risk to all businesses, especially charities.

A recent national survey concluded that fraud within the charity sector in the UK could be worth as much as £680 million.  Of those charities surveyed 49% reported that, in the incidents of fraud they detected, the sum involved was less than £1,000.  On this basis, it would appear that episodes of fraud are occurring with worrying frequency. 

The legal position : The first attempt to codify the term ‘fraud’ was made under the Fraud Act 2006 and identified three ways in which a fraud could be perpetrated: false representation, failure to disclose information and abuse of position.  Prior to that fraud was a common law offence and when prosecuting the courts looked to case law for guidance. 

Types of fraud : The types of fraud charities are exposed to are broad and encompass everything from cash and credit card offences, identity theft, to individuals using the goodwill associated with a charity’s name to defraud unsuspecting third parties.  The survey showed fraud was not restricted to financial dealings; theft of both personal information and charity assets were also recorded.

Who’s committing the fraud? : Whilst only 25% of charities viewed staff as their biggest ‘liability’, the study indicated that 40% of fraud was committed by paid employees, 78% of whom acted alone.  Evidently the trusting ethos that pervades charitable organisations can be their downfall when it comes to detecting fraudulent behaviour.

How are Charities responding? : Although 60% of charities said they had a fraud ‘policy’, only 14% acknowledged that they had disseminated that policy to their staff.  The onus here lies with the trustees to ensure that fraud is being addressed with the same diligence as any other ‘commercial’ matter.  Where a charity is a company, notably one limited by guarantee, the trustees will also be directors and a failure to address fraud appropriately may give rise to criminal sanctions.

The implications : The repercussions for charities can be felt at every level from a loss of trust and/or morale amongst employees to waning confidence from would-be donors and the risk of a tarnished media image.   Similarly it may be that the charity’s very raison d’être is undermined if specific projects are consequently denied funding by the effect of the fraud.

Of those surveyed only 51% recovered some or all of the money they had lost.

What can charities do? : Charities need to approach fraud as a serious business risk and appreciate that where opportunity, pressure (i.e. incentive) and attitude (i.e. the ability to reconcile) coincide, then frequently fraud arises.  The threat posed by that risk and consequences of being subjected to fraud should be dealt with proportionately.

The trustees have a responsibility not only to strengthen governance but also to enhance financial controls.  It is crucial to have an anti-fraud policy in place which is well run, clearly communicated and encourages all staff to take a role in protecting their charity from fraud.  Whilst the current economic climate may not be a forgiving one, it is not a time to economise on protecting your business.

For further information on this article or any other Charity related matters please contact Chris Harper.