Charities are not immune to fraud. In some instances charities are specifically targeted by criminals due to their perceived lack of controls and heavy reliance on trust based governance.
Whilst there is an increasing awareness of fraud risk in the charity sector, and a growing concern by the Charity Commission over weaknesses in controls, failure to respond appropriately to allegations of fraud can increase the risk to a charity’s reputation, jeopardise the public’s trust in the charity, and future income streams.
This article covers some key points to consider when responding to fraud.
A response plan
While it is said to be impossible to eliminate the risk of fraud to any organisation, it is possible to mitigate some of the harm fraud can cause. One approach is to prepare for the worst, by developing an incident response plan which will also help the organisation to act quickly.
A response plan should set out what actions a charity should take if it detects fraud and who will be responsible for (and undertake) those actions.
In developing a response plan, charities should consider the extent of their obligations in the event of fraud. These may include notifying the Commission, insurers, certain grant providers, or internal committees formed by the trustees.
The response plan should list a nominee trustee and a member of senior management who would take responsibility for an investigation and should also set out the options available to the charity and the circumstances they should be pursued. These options may include:
pursuing appropriate disciplinary action against employees;
making an insurance claim (where fraud is covered by the charity’s policy);
seeking to recover lost funds through the civil courts; and reporting to the authorities.
A response plan should also consider how the charity will manage stakeholders’ expectations and set out agreed media contacts and actions.
The Charity Commission expects charities to report actual or suspected serious incidents of fraud as soon as is reasonably possible – immediately after the charity becomes aware of the incident. A delay in reporting may affect the Commission’s assessment of the risk to the charity and how the charity is dealing with the incident.
Furthermore, the number of options available to a charity may diminish in the event of a delay in taking action: evidence may be lost, destroyed (or, in the case of electronic evidence, overwritten) and there is a risk that losses may continue after the charity discovers an incidence of fraud and takes no action.
Seek experienced professional advice
Not only is there the need for charities to act swiftly in response to fraud, it is recommended that they seek advice from appropriately experienced professionals.
Forensic accountants and investigators can assist the charity to secure evidence and witness testimony, minimising the risk of contaminating that evidence. There is a significant risk of compromising an investigation if evidence is not gathered in accordance with best practice and police regulatory codes, and the Defence will seek to dismiss any claims or allegations based on compromised evidence.
A key example is digital evidence – it can be tempting to log on to a suspect employee’s computer and look at electronic documents in case there is something incriminating saved on the hard drive. However, opening up an electronic document can change key information about that document such as the last modified author and date. The Defence will challenge the reliability and admissibility of any document shown to be opened by a curious trustee. Forensic technologists will assist investigators to secure forensically sound images of computer servers, hard drives and mobile telephones which can then be reviewed and used as evidence, without compromising that evidence.
Another key consideration is obtaining appropriate legal advice to assist the charity to navigate through its options and its reporting obligations. A specialist solicitor will be able to help articulate an appropriate report to the Commission and will be able to provide advice in relation to the likely success of any civil recovery based on evidence gathered during the investigation. Solicitors can also work well with investigators, providing advice on the best direction of any investigation with a view to maximising the possibility of success in any action.
Lastly, charities should consider getting advice from media and public relations professionals. It is important for the charity to be ready to respond to any inquiries which could arise from the fraud incident.
Senior Manager, Forensic Services
T: +44 (0)20 7131 4562
By necessity, this briefing can only provide a short overview and it is essential to seek professional advice before applying the contents of this article. This briefing does not constitute advice nor a recommendation relating to the acquisition or disposal of investments. No responsibility can be taken for any loss arising from action taken or refrained from on the basis of this publication. Details correct at time of writing.
This article was previously published on Smith & Williamson prior to the launch of Evelyn Partners.