Too many charities are failing to tackle the growing problem of insider fraud in the sector, according to damning Charity Commission research. Published in April, this research found “excessive trust” placed on staff, volunteers and trustees and a “lack of challenge or oversight” are key factors in around seven out of ten cases of this form of crime.

Among poor practice is not regularly checking bank statements and having financial transactions and cash collections handled by just one person. The research also found a lack of clarity in many organisations over who is responsible for financial controls. Additionally, while many charities have systems in place to counter such poor practice and prevent fraud, in a quarter of cases (24 per cent) these are not being effectively applied.

This particular research also documented how fraudsters can be found across a charity’s organisation, most prominently among employees (in 43 per cent of cases), with a third of incidents involving a trustee and in one in ten cases the crime was carried out by a volunteer.

Among the most high profile recent cases involved John Briers, the former chief executive of Age Concern South Tyneside. In May he was found guilty of stealing more than £700,000 from the charity over an eight-year period by paying cheques into his own account.

“It is impossible to point at a particular employee type and say ‘definite fraudster’,” says Brian Shorten, chairman of the Charities Securities Forum, which represents security professionals in the sector. “Anyone can defraud their employer,” he adds, if they have the motivation to steal coupled with the belief that they can get away with it.

The drive to steal

Fraudsters’ drive to steal can sometimes be that they think the crime is justified, Shorten explains. For some that is simply that they need the money, others may see it as a loan they plan to pay back, while for some it is out of anger as they have been passed over for promotion, he adds.

As an indication of how badly the sector can be at spotting potential fraudsters, Shorten says that many incidents are only discovered by chance. “Often the fraudster is the last person you would suspect, and the fraud is discovered by accident, for example the fraudster goes on holiday and another member of staff takes over.”

In light of the report’s findings, the regulator issued a stark warning that change is needed in the sector to ensure charities better understand fraud and are able to tackle it. Failure to prevent insider fraud can be devastating, according to the regulator’s research. Not only can
it cost vital income, this form of crime can also lower staff morale and in one case a charity had to close as a result.

Andrew O’Brien, the Charity Finance Group’s director of policy and engagement, says charities need to recognise that “it is not a question of if you will be defrauded, it is a question of when”.

O’Brien cites research from accountants Crowe Clark Whitehall in its 2017 Annual Fraud Indicator, which highlights both the scale and growing cost of this form of crime to the sector. The findings revealed charities lost £2.3 billion through fraud last year, up significantly on 2016’s figure of £1.9 billion.

“We are at risk and just because we are charities it doesn’t mean that we are any different to any other business,” he says. “Fraud is everywhere and the Charity Commission is right to focus on the culture change needed.” Once that shift in thinking has taken place, charities can start focusing on a detailed review of their current processes and how they can be altered to better tackle fraud, he adds.

Eliminating risk

Specific advice from Mia Campbell, head of anti-fraud charity Fraud Advisory Panel, is to improve pre-employment screening of all staff and trustees to check that there are no discrepancies in their identity, qualifications and work history.

This is particularly effective, she says, at identifying “career fraudsters” who “can and do deliberately seek out positions within charities”. She adds: “Effective fraud prevention begins with good governance, good organisational culture and sound financial management. Having the right tone at the top is essential.

IT controls, to identify and prevent unscrupulous activity, are also a must.” For O’Brien, improving the financial literacy of the organisation as a whole is “absolutely essential” to help spot fraud and ensure no single individual has too much control over transactions and funds.

“Far too much fraud happens in our sector because people in charities do not feel numerately confident or financially literate. They end up trusting the treasurer, finance manager, or chief executive far too much regarding control of money, with no oversight.”

“Charities need to invest in training for all staff, not to ridiculous levels, but to the extent that they can challenge and report,” he adds. For large charities appointing a dedicated security specialist can also help, says O’Brien. This role can be a useful focal point for staff to raise concerns and also coordinate training to help staff spot fraud.

“I don’t think every charity should think ‘okay, we are a £10 million organisation, thus we should hire a counter fraud specialist,” says O’Brien. “If you are a grant-making charity for example, it might be that you instead make the process of issuing grants better.”

But for those who recruit such a role, Shorten warns against assuming “no one else is responsible or interested” in fraud. “By making every user aware of their responsibilities, and giving them a clear path to report unusual actions, the number of people looking after security increases exponentially. This will also give staff a better feeling of belonging,” he says.

Whistleblowing

Alan Bryce, the Charity Commission’s head of development and operational intelligence, urges charities to make sure they encourage whistle blowing, to give staff the confidence to challenge and report incidents.

“Staff need to be encouraged to speak out when things don’t seem right, and to be vigilant, he says. “We urge all charities to foster a culture where staff, trustees and volunteers are reminded of the need to challenge any concerning behavior.”

The Charity Commission’s research indicates there is considerable work to be done to persuade staff that their charity is taking fraud seriously and will act on reports. This research found that among the 54 charities surveyed almost half (43 per cent) did not report an incident to the Charity Commission. A similar proportion (38 per cent) failed to alert the police, including Action Fraud, the force’s specialist national fraud centre.

“Fear of reputational damage and loss of funding can act as barriers to external reporting,” says Campbell, who adds that reporting is vital to put off potential fraudsters and set an example to others in the sector. This will “ultimately improve sector-wide resilience”, she says, adding that reporting fraud “also makes it more difficult for fraudsters to charity-hop”.

Bryce also emphasises how reporting fraud helps the sector as a whole. “Reporting serious incidents, such as fraud, to the Commission also helps us to gauge the volume and impact of incidents within charities. It also helps us to understand the risks facing the sector as a whole, including any new emerging trends, which we can them alert the wider charity sector to,” he says.

Reporting fraud can also greatly enhance rather than damage a charity’s reputation, adds O’Brien. Not only does such reporting show funders and the donors that a charity is tackling fraud but it also allows the charity to take control of the media narrative around incidents,
he says.

O’Brien points to the recent fundraising scandals, involving poor practice by third party organisations, as an example where charities were forced to react to a negative story “which made it worse as it looked like the sector was out of touch”.

“We have to be on the front foot on this and take it (insider fraud) seriously. That is the message we are giving to charities. If you take active fraud measures you are going to save your charity money – that’s a positive. If we get a positive framework in place we can also insulate ourselves from potential negative media reaction,” he says. ■

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