Preventing, detecting and responding to fraud within charities

The Law Society Gazette and Third Sector recently reported that a number of charities, including Guide Dogs for the Blind Association, Yorkshire Cancer Research, the British Heart Foundation and the National Trust, issued a claim against a former solicitor, Linda Box. They claim to have been deprived of a legacy gift from a Will of which she was the co-executor. Box was sentenced to seven years in prison in 2017, having admitted to 12 offences of fraud, theft and forgery while working as a senior partner at a firm of solicitors in Wakefield, having stolen approximately £4 million. The fraud is said to have been conducted using a process known as “teeming and lading” whereby money is moved between client accounts to hide a shortfall or theft.
 

In this case, the charities are the victims of fraud but this type of conduct, abusing a position of responsibility in relation to financial processing and reporting for personal advantage, is also commonplace within charities. Indeed in 2019, the Annual Fraud Indicator estimated that internal frauds were annually costing the charity sector in the region of £2.5 billion. However, such activity can often be hard to detect and consequently in order to be best protected charities should ensure that:

1. a risk assessment has been conducted in order to ascertain if the organisation may be particularly vulnerable to this (or another) type of fraud. For example, something that is often seen in conducting this exercise is one individual at a charity having sole charge and responsibility for all financial processing and reporting. This clearly leaves the charity unnecessarily exposed. The introduction of internal controls to ensure adequate checks are in place for making and authorising payments, or rotating responsibility for certain tasks in high risk areas to ensure no one person has control for an extended period of time, are relatively straightforward ways to alleviate the risk;
2. there is a sufficient level of fraud awareness within the charity. If awareness is found to be lacking, training should be implemented as a priority to ensure that employees at all levels have a basic knowledge of potential threats and what to look out for; and
3. an appropriate anti-fraud policy is in place. This is central to a charity’s ability to reduce the risk of fraud and can also act as a deterrent to potential fraudsters. The purpose of the policy is to provide a definition of fraud and define authority levels, responsibilities for action, and reporting lines in the event of suspected, attempted or actual fraud. 

When it comes to the detection of fraud, it is important to know the warning signs. Red flags might include a sudden change in an employee’s behaviour or missing documents or records. Thorough checks and controls are central to identifying possible anomalies. A checklist alerting employees to look out for certain things can be a useful tool as can ensuring that they are comfortable in reporting suspected fraudulent activity. The latter requires a culture of transparency and clear communications making it known that everyone associated with the charity has a responsibility for being vigilant. A written procedure that deals with how to report suspected fraud confidentially is also important (an internal disclosure is likely to be less damaging than a report made to an external third party).

If a fraud is detected (internal or otherwise), failure to react quickly and properly to investigate can have potentially disastrous consequences, not least the possible destruction of crucial evidence necessary to pursue criminal or civil proceedings. A tailored fraud response plan clearly setting out what steps should be taken when a suspected fraud is first identified (and subsequently) will therefore assist greatly in ensuring a considered but efficient response should the worst occur.

There is a distinction to be drawn between a charity being forced to pursue a claim to recover loss as a consequence of fraudulent activity falling outside of its control, such as the case of Linda Box, and a charity falling victim to internal fraud whereby steps could (and indeed should) have been taken to protect against such risk. Charities are built on foundations of public trust and confidence and every effort should be made to avoid being unnecessarily exposed to fraud and the associated potential financial and reputational damage.

Further information

If you are a charity or charitable body and would like to receive a copy of Kingsley Napley’s Fraud Prevention Toolkit please contact us. You may also be interested in reading our earlier blog – “How to guard against and respond to fraud in the charity sector”.

Should you have any questions, please contact a member of our team. We have longstanding experience of helping charities deal with fraud (civil and criminal), financial crime and financial abuse. Our multi-disciplinary litigation team leaves us particularly well placed to assist charitable bodies in civil claims dealing with fraud, whether that be helping to put in place the necessary measures to ensure that the charity is best protected or dealing with the situation once potentially fraudulent activity has been identified.

About the author

Katherine Pymont is a Senior Associate at Kingsley Napley. She has a broad spectrum of litigation experience including civil fraud, wills, trusts and inheritance disputes, reputation management, contractual disputes and professional negligence. She regularly advises charities in relation to fraud exposure and legacy disputes.