Preventing charity fraud

Recent research shows that charities are increasingly aware of the risk of fraud and defences are improving, but some charities still have much to do.

In this guest article, Alan Bryce, Head of Development, Counter Fraud and Cybercrime at the Charity Commission for England & Wales reports on the work the commission is doing to tackle fraud in the sector.

Changing how charities think about fraud is key to making the charity sector more resilient. The starting point is to accept that every charity will, at some point, be the victim of fraud. In the digital age, with some 70% of frauds now cyber enabled, sadly, this is inevitable. What matters is that charities can demonstrate they have done everything they reasonably can to prevent fraud and have arrangements in place to identify and respond appropriately when a fraud occurs. With all the guidance and good practice that is now available there is really no excuse for any charity not to play an appropriate, proportionate role in the fight against fraud.

Understanding the threat

There has been relatively little sector specific research available to help understand the nature of the threat facing charities. So, last year, the Charity Commission – in partnership with the Fraud Advisory Panel – undertook the largest ever charity fraud survey in the UK, and potentially worldwide.

We asked a representative sample of 15,000 registered English and Welsh charities to complete a voluntary fraud survey. This achieved an impressive 22% response rate – reflecting the increasing importance many charities now place on tackling fraud and reducing the harm it can cause. For the first time we now have statistically significant findings to inform our understanding of the fraud risk faced by charities. It also provides a useful comparison with a similar, although much smaller, survey undertaken by the Fraud Advisory Panel in 2009. So, what were the main findings?

Perceptions of fraud risk

  • Charities are increasingly aware of the risk of fraud. Acknowledging the threat of fraud is the first step towards adoption of effective fraud prevention defences: l More than two thirds of charities (69%) think fraud is a major risk to the charity sector (51% in 2009).
  • A third (33%) think fraud is a greater risk to the charity sector than other sectors (25% in 2009).
  • In general, larger charities (particularly those that have suffered fraud) are more likely to acknowledge the risk of fraud.

However, there is still far more that charities can do to protect themselves:

  • 85% of charities think they’re doing everything they can to prevent fraud, but almost half don’t have any good practice protections in place.
  • Less than a third (30%) of charities have a whistleblowing policy (18% in 2009).
  • Less than a tenth (9%) of charities have a fraud awareness training programme (4% in 2009).
  • Charities believe they are vulnerable to fraud because of a lack of fraud awareness training (28%), and over reliance on goodwill and trust (26%) and/or excessive trust in one or more individuals (22%).
  • Just under half (47%) think their charity contributed in some way to the fraud occurring, with nearly a third (30%) stating their charity was too trusting.
  • A third (33%) did not report the fraud to any external organisation, such as the police or Charity Commission.

Of greatest concern is that more than a third (34%) of charities think they’re not vulnerable to any of the most common types of charity fraud. Charities’ recognition of their potential vulnerability is an important step towards ensuring that vital counter fraud defences are in place and operating effectively.

About a third of charities have yet to acknowledge the significant threat that fraud now poses to the sector. And about a third are unaware of the vulnerabilities common to charities that fraudsters seek to exploit and have yet to adopt the good practice arrangements needed to increase resilience.

The good news is that this can be addressed easily. More than eight in 10 frauds are identified as a result of financial controls at the charity, by audit or whistleblowing. So, rigorously applying basic controls can make a huge difference and can be implemented with little or no additional cost.

As part of our research we talked to three charities that had all adopted good-practice procedures, including enhanced fraud awareness training for staff and volunteers, a simplified reporting framework and better whistleblowing arrangements for staff to raise concerns. These resulted in an approximate threefold increase in the total number of fraud reports in these charities over a five-year period. As a result, a significant number of frauds were uncovered that wouldn’t otherwise have been identified.

Analysing charity frauds

  • Mandate/Chief Executive Officer (CEO) fraud is the most common type of fraud targeted against charities. This involves impersonation of either legitimate organisations the charity deals with, or senior staff of the charity itself, usually conducted via hoax emails.
  • More than half of charities (53%) knew who committed the fraud.
  • Nearly two-thirds (60%) of frauds occurred over a six-month period.

Guidance and assistance

The full results of the survey can be found in the Charity Commission report Preventing Charity Fraud, published in October 2019 as part of International Charity Fraud Awareness Week. https://www.gov.uk/government/publications/preventing-charity-fraud-insights-and-action

I would encourage charities to download the report and complete the fraud prevention checklist. All charities, regardless of their size and type, can demonstrate their commitment to tackling fraud by adopting Tackling Charity Fraud: Eight Guiding Principles. A summary of the eight principles, endorsed by charity regulators in Scotland, Northern Ireland, USA, Australia and New Zealand, can be found in our report.

There’s plenty of free information and guidance available to help charities fight fraud. The Charity Commission, together with the Fraud Advisory Panel and partners from the Charities Against Fraud group, have produced a series of resources (including helpsheets, webinars, videos and good practice guides) as part of International Charity Fraud Awareness Week. These are available at: https://www.fraudadvisorypanel.org/charity-fraud/resources/

https://www.gov.uk/guidance/protect-your-charity-from-fraud

FIND OUT MORE

If you would like more information about how to protect your charity from fraud or to discuss a specific matter, please email [email protected] or call 020 7551 7777 and ask to speak to Rob Oakley or Mindy Jhittay.


This information is necessarily of a general nature and doesn’t constitute legal advice. This is not a substitute for formal legal advice, given in the context of full information under an engagement with Bates Wells.

All content on this page is correct as of April 21, 2020.