Charity Fraud: Are Trustees too Trusting?

Recent media coverage highlights several high profile charity fraud cases, where charities have been defrauded by internal members of staff at an executive level, leading to losses of hundreds of thousands of pounds.

Similarities between cases have shown that the perpetrators of fraud often exploit the Board of Trustees’ lack of financial experience to leverage a high degree of control and autonomy over charity funds and financial reporting.

Ideally, the Board of Trustees should include at least one member with financial expertise. Sadly, due to the reliance on volunteers, it is not always easy to recruit such expertise, meaning that often the Board falls short of this skillset.

Trustees of a not-for-profit organisation who wish to support a good cause may not recognise where deficiencies exist in how the charity’s finances are controlled, or how financial information may be manipulated in order to cover a fraud and conceal the movement of funds stolen by a fraudster.

As forensic specialists, we are experienced in fraud investigations in the not-for-profit sector and provide Court compliant Expert Witness reports for both Civil and Criminal investigations on the quantum, methodology, and full impact of the fraud to assist the Police and Crown Prosecution Service, by tracing the diversion of funds.

Some recent examples of Charity Fraud reported in the media are:

Team Wearside

Team Wearside assisted individuals in the Sunderland community to gain employment by offering training, advice and additional qualifications. In March 2018, three former employees of Team Wearside were convicted of fraud in excess of £450,000.

Two of the three employees were Chief Executives of the charity, holding a position of trust due to their senior role in the running of the charity and existing longstanding business relationships in the local community.

Records were falsified by the fraudsters in order to claim funding from a local college and another smaller, local charity. The level of misappropriated funds led to the second defrauded charity to close permanently, with 23 jobs lost, demonstrating the wide reaching and devastating effect of a fraud on charities, which provide valuable services to a community.

Age Concern South Tyneside

In May 2018, the former Chief Executive of Age Concern South Tyneside was convicted of three counts of fraud in respect of misappropriating charitable funds in excess of £700,000 over an eight year period.

As a result of the fraud, the charity sustained irrecoverable losses and was forced to close in August 2016.

Our North East member firm, Tait Walker conducted the forensic investigation into the fraud to assist the Crown Prosecution Service in unravelling the various methods of fraudulent activity and quantifying the financial benefits received by the fraudster, to the detriment of the charity and the benevolent causes it supported.

Evidence was found of falsified supplier invoices, inflated salary and bonus payments, duplication of expenses submitted and pension payments which were made to the fraudster personally. No high level checks were in place to verify or approve the level of expenditure made by the former Chief Executive, and the lack of supervision resulted in spending going unchecked for years, including funds paid into his own bank account.

The organisation’s systems and controls were poor, particularly surrounding the finance function, which led to the fraud becoming greater over time once the fraudster became more confident in his actions, not being detected due to a lack of internal review or overview from the Board of Trustees.

The Judge said there was compelling evidence surrounding the fraud, resulting in the fraudster receiving a significant custodial sentence of seven years – the maximum available for the value of funds stolen and the crimes he was convicted of.

Butterwick Hospice

In May 2018, the former Chief Executive Officer of the Butterwick Hospice in Teesside was found guilty of credit card fraud, whereby charitable funds and public donations were misused to cover personal expenditure of £100,000.

The fraudster had held this senior position for 21 years and abused his position of trust for his own personal gain. He pleaded guilty at the doors of the Court and is expected to serve a custodial sentence to be determined at a hearing on 11 June 2018. The three recent cases discussed in this article highlight some common weaknesses in not-for-profit organisations, where the opportunities for internal fraud to occur could have been minimised by having robust internal systems and controls surrounding access to charitable funds and the supervision of activity of even the most senior of employees by the Board of Trustees. A regular review of systems and controls should be undertaken, seeking expert advice where required.

Financial expertise on the Board of Trustees is essential and if it cannot be found on a voluntary basis, the Board of Trustees should seriously consider paying for outside expertise. This is not only key to reducing the risk of fraud, but also essential to fulfil the legal obligations of both the organisation and the Board of Trustees.

The chance of staff collusion and intent to circumvent controls is an unavoidable risk, however, if you suspect a fraud, it is essential to take early advice from financial and legal experts in order to accurately quantify the full extent of the losses sustained and to preserve continuity of ongoing trading.

We have produced a month to month guide for charity trustees, ‘11 Key Steps for Trustees, 1 Giant Leap for Your Charity’, to help them to upskill and improve standards in a stepped and measured way. Each month, a different area of concern for trustees is covered and leads you through the issues, giving clear advice and signposting where you can find extra guidance. Internal Financial Controls is covered in Month 2.

If you have any questions or if you are concerned that your charity may be susceptible to fraud, please contact Hannah Farmborough or call on 0207 429 4147 to be put in contact with a member of our Forensics team.