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Dominik Opaliński discusses combatting insider fraud in the Charity Sector in The Times Law Brief

  • October 04, 2018
  • By Dominik Opaliński, Partner

Intelligent Preparation, Sharper Focus and Strong Leadership – the Key to Combatting Insider Fraud in the Charity Sector

Increasing numbers of charities are falling victim to some type of fraud or abuse. Recent figures published by the Charity Commission’s Fraud Advisory Panel show that fraud alone is estimated to cost the charity sector £2,300,000,000 per annum. This eye-watering figure does not include the intangible and potentially catastrophic cost that fraud can have on staff morale, or the reputational ‘brand’ of charity among existing or potential donors who regard such incidents as examples of financial mismanagement.

A common abuse experienced by charities as committed by trusted and often unsupervised employees, as highlighted recently in the media, is ‘insider fraud’. Unfortunately, insider fraud may occur for a long period of time before being detected, often by chance. Insider fraud is a form of dishonesty, such as false representation, failing to disclose information or abuse of position, the goal being either self-gain or to cause loss to the charity itself.

The ability to detect insider fraud depends not just in the resilience of the charity’s financial governance, but also through its staff having the requisite knowledge, awareness and skills to effectively identify indicators of fraud. Reducing opportunities through strong human resource procedures, proportionate financial controls and ongoing training for all staff and trustees in fraud recognition; helps demonstrate to donors that the charity is managing its assets responsibly and in so doing, is serious in tackling insider fraud.

Effective whistleblowing process trusted by both staff and volunteers, is an integral component of any strong and resilient anti-insider fraud culture within a charity if employees are able to speak up about any concerns they have in confidence, knowing these will be listened to and acted upon.

Charity Trustees are under a legal duty to manage the resources of their charity responsibly and ensure that charity assets (including its reputation) are protected, used appropriately and all accounted for. This duty to act responsibly is often referred to as the ‘duty of prudence’, a duty to take all reasonable steps within their power as a trustee to avoid causing harm or loss to the charity. Charity trustees are expected to know when to report incidents of actual or suspected fraud to the Charity Commission. Of the 2,182 serious incidents reported to the Charity Commission in 2016-17, nearly a quarter involved issues of theft and fraud.

Many charities – large and small – still lack a proper understanding of the risks that poor financial management and internal control pose or appropriate countermeasures. The fight against insider fraud, as with safeguarding, often boils down to inadequate investment of time and resources internally. Risk, as Warren Buffet said, is not knowing what you are doing. In the context of the third sector, risk is the inability to identify or understand how insider fraud can occur within the charity, or in not being properly prepared or vigilant enough to tackle it.

What really matters to potential and/or existing donors when things go wrong is not only how the charity makes amends, but also the speed of the reaction and strength of leadership focus on knowing what to do in accordance with established procedure and best practice.

Tackling fraud is a strategic priority for the Charity Commission. It is encouraging charities to get involved in the third annual Charity Fraud Awareness week (22 – 26th October), as part of its drive to make charities more aware, resilient and open about fraud within the sector.

This article was originally published in The Times Law Brief and can be accessed behind a paywall here

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