Governance learned from Charity Commission investigations

Charities Back on Track: governance lessons learnt from

Charity Commission investigations

Dave Walker

Investigations & Enforcement Team

The Headlines

• The overwhelming majority of charities are well governed & well managed

• We assessed & dealt with 1,413 serious concerns, of which 28 were escalated to investigation

• We completed 85 investigations (of these, 9 were statutory inquiries)

• We completed 215 Monitoring cases• But, many charity trustees are

– still making too many basic mistakes in managing their charities, which leads to serious problems

– failing to report serious incidents to us

Key Themes

• Poor Governance (serious failings in trustee duties and responsibilities)

• Inadequate financial controls• Safeguarding vulnerable beneficiaries• Dealing with allegations of links to terrorism• Failures in fundraising• Political activity and campaigning• The damage of disputes• Problems with stakeholder consultations

Common Issues - what are we seeing?

• Pre investigation assessment cases: – Breach of Governing Documents – 591– Reports of Serious Incidents – 393 – Fraud & Theft – 113 – Management & Maladministration – 65– Alleged Serious Criminal Activity – 54– Beneficiaries at Risk – 53

• Monitoring cases:– 66% related to poor governance

• Investigations:– Trusteeship issues – 56– Accounting issues - 25

Reporting Serious Incidents

2011-12 2010-11 2009-10

Reports of Serious Incidents 1,027 849 451

Whistleblowing reports 120 35 53

Our impact

• Protected £3.9m charity assets at risk

• Monitored over £254m of the charity sector’s income

• Published 55 investigations reports

• Used our regulatory powers on 188 occasions

Key regulatory risk areas

• Our Risk Framework Application Guidance identified 3 regulatory risk areas where we should have a public strategic response:

– Strategy for dealing with Safeguarding Children & Vulnerable Adults Issues in Charities

– Strategy for dealing with Fraud, Financial Crime & Financial Abuse of the Charity Sector

– Counter-terrorism strategy

Case study 1

Safeguarding vulnerable beneficiaries

Beneficiaries at risk

• ‘A charity which supports disabled people’

• Anonymised case study of an inquiry

• Objects – to enable disabled people to be fully included in all aspects of society

• Allegations from two Councils that the trustees had knowingly employed as CEO a convicted sex offender (‘A’) & refused to carry out CRB checks

• Also alleged that ‘A’ was awaiting trial for a similar past offence. ‘A’ was subsequently acquitted of this charge

Issues examined by the inquiry

• The inquiry examined:

– The suitability of ‘A’ to be an employee of the charity

– The circumstances of the recruitment & employment of ‘A’

– The charity’s safeguarding policies and procedures– The trustees' management of risk to the charity’s

reputation & assets caused by the involvement of ‘A

Our findings

• ‘A’ was unsuitable to hold the position of CEO

• Mismanagement in the administration of the charity in relation to the employment of ‘A’

• A serious lack of effective governance of the charity

• The trustees had failed to discharge in full their duties & responsibilities to the charity & its beneficiaries given their failure to have effective safeguarding policies and procedures

Regulatory action and outcome

• We suspended ‘A’ from the charity

• ‘A’ has now resigned his post as CEO

• We provided extensive regulatory advice & guidance to the trustees

• We required the trustees to implement a number of actions relating to the charity’s governance & the development of safeguarding policies and procedures

Wider issues

• Trustees have primary responsibility for safeguarding in their charity

• They must always act in their beneficaries’ best interests & take all reasonable steps to prevent any harm to them

• Trustees also have duties to manage risk & to protect the reputation & assets of the charity

• They must develop & put in place appropriate safeguarding policies & procedures & undertake on-going monitoring

Case study 2

Poor governance in charities

Poor governance in charities

• Anonymised case study of an inquiry

• The charity runs a day care & respite centre for severely disabled adults

• The Commission was anonymously informed that the Chair was being investigated by the police for alleged fraud against a public body

• The Chair was also the paid CEO

Issues examined by the Commission

• The inquiry examined:

– Misuse of charity resources

– Unauthorised trustee benefits, relating to the way the charity employed & paid its CEO

– Governance of the charity

– Non-co-operation with the Commission

Our findings

• The Chair had misused the charity's invoices resulting in two police cautions for fraud

• The Chair had received unauthorised trustee payments as the CEO of the charity

• The trustees had not followed our regulatory advice on how to manage the unauthorised trustee payments & the suitability of the Chair

• The trustees had exerted insufficient management control over the charity

• The charity was inquorate

Regulatory action and outcome

• We appointed 7 additional trustees• We provided the existing & newly appointed

trustees with regulatory advice on their legal duties & responsibilities

• The Commission's involvement ensured that the Chair resigned from the board of trustees & from the position of CEO

• The charity elected new trustees & a new Chair of the board

Wider issues

• Trustees have equal responsibility & so must act jointly

• Trustees must act solely in the charity's interests & not for personal advantage

• Trustees' personal interests must not conflict with their duty to act solely in the charity's best interests & they must be able to demonstrate this

Wider issues

• Trustees must manage their charity according to the provisions of its governing document

• Generally, a trustee cannot become an employee of their charity, nor can an employee become a trustee

• Trustees have a duty to ensure their charity's reputation is not brought into disrepute because it fails to manage risks or complaints properly

Case study 3

Delivery of aid overseas

Delivery of aid overseas

• Criminal investigation in UK underway, raising concerns about a trustee

• Commission’s role concerned with trustees & any indication of misconduct or mismanagement

• The Inquiry examined: – whether funds of the charity, or funds raised on its behalf,

had been used unlawfully – financial management of the charity & the supervision of

overseas activities – governance of the charity

Delivery of aid overseas

• Charity using local partners to deliver aid, seemingly unchecked

• The Inquiry took into account in its investigation – the charity's particular size & income level – that the charity often needed to act quickly to

respond to a disaster situation– the practical challenges the charity faced as a

result of working internationally, & in particularly remote & volatile regions

Outcome:

• No evidence to indicate that the trustees diverted charitable funds for unlawful or non-charitable purposes

• But, the trustees were unable to satisfactorily verify the end use of funds overseas

• Insufficient measures to control, monitor & document the use of charitable funds (in this case by third parties overseas)

Outcome:

• Unable to account for funds & did not follow processes & checks when spending money

• This placed the assets of the Charity at risk & was mismanagement by the trustees in the administration of the charity

• Issues arose from operation of overseas bank account

• The trustees fell short of duties

• But they were committed to future good governance

Wider issues

• Due diligence and monitoring is part of trustees’ duties to protect assets & their duty of care

• Financial transparency is crucial to help maintain the confidence of the public who give money to charity

• It may be more challenging for charities working in challenging areas overseas to maintain the same standards of transparency & accountability as would apply in the UK, but they must strive to do this

Case study 4

Charitable appeals: trustees’ duties

Charitable appeals: trustees'’ duties

• Anonymised case study of a Regulatory Compliance Case

• On-air appeals made by radio stations after the 2004 Indian Ocean tsunami & 2005 Pakistan earthquake

• The radio stations are not charities, but because the appeals were made for charitable purposes, the funds held fell within the Commission’s jurisdiction

• The signatories to the bank accounts were therefore trustees of the funds

• Complaints that the funds had not been applied for the charitable purposes for which they were raised

Issues examined by the Commission

• The investigation had two aims:

– To examine whether those responsible for organising the appeals acted appropriately in respect of their retention of the funds raised

– To ensure the proper application of the funds

Our findings

• The trustees had not considered at the time of the appeals how the funds were to be used & whether this was clear to donors

• The trustees were under a duty to apply the funds within a reasonable period given the urgency of the crises

• They had not acted appropriately in their delay to apply the funds

• Donors would have expected funds to have been applied quickly, not 5-6 years after the disasters

Regulatory action and outcome

• We used our regulatory powers to obtain banking information about the appeals’ account

• We provided regulatory advice & guidance about charitable appeals & the legal duties and responsibilities of trustees

• The funds (in excess of £180,000) have been awarded to two charities working in the areas affected by the tsunami & earthquake

Wider issues

• Funds raised for charitable purposes fall within the Commission’s jurisdiction

• Those who manage such appeals are trustees & have legal duties & responsibilities

• Public expectation that funds from disaster appeals will be quickly applied

• Need to consider whether they have the capacity to deliver/ better to raise funds for another better placed organisation

• Donors must be able to give confidently

Charities Back on Track: governance lessons learnt from

Charity Commission investigations

[email protected] Investigations & Enforcement