How to guard against and respond to fraud in the charity sector

It has been widely reported that fraudsters are currently seeking to exploit the situation with COVID-19. Alarmingly, Action Fraud reported an increase in coronavirus related fraud by 400% in March. With fraud estimated to cost the charity sector in the region of £1.9 billion every year already, it is no surprise that charities too are falling victim to such attacks and any increase is only likely to compound the unprecedented challenges charities face.
 

With large volumes of people self-isolating and working from home, instances of cyber-crime would seem particularly rife. In 2019, over a quarter of charities reported cyber security breaches, which included phishing emails, where others impersonate an organisation online, viruses or other malware, such as ransomware (a form of software preventing effective control of data stored on a device until a ransom is paid).

The complexity of cyber-crimes is ever evolving and it can be increasingly difficult to detect. In order to be best protected against all types of fraud, charities need to regularly review their own potential exposure and take the necessary steps to guard against the threat of fraud as well as have a plan in place to ensure an effective response if fraud is detected.

Below we outline some of the critical questions, which all charities, irrespective of size and stature, should be asking themselves to identify areas of risk and detect fraud and how to best respond if the charity has been a victim of fraud.

Risk assessment

1. Consider which of the charity’s activities leave it most vulnerable to fraud. For example, does only one individual have sole charge and responsibility for financial processing and reporting or does the charity have a large number of volunteers that are more difficult monitor?
2. Look at the level of fraud awareness within the charity. Is the charity alert to the potential new fraud risks, such as phishing, cyber-hacking of financial accounts and interception of email communications to third parties containing sensitive financial information?
3. Does the charity have an appropriate anti-fraud policy? The purpose of this 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.

Fraud detection

1. Spot the warning signs - for example red flags might be irregular invoicing, a sudden change in an employee’s behaviour or missing documents or records.
2. Implement staff training and make it known that everyone associated with the charity has a responsibility for being vigilant and keeping an eye out for any signs of fraud.
3. Publish a procedure dealing with how to report suspected fraud confidentially.
4. Ensure thorough checks and controls are in place (these could be computerised and/or manual processes).

Response

1. Assemble a core team of people to work together to investigate and combat the fraud. Depending on the size of the charity, consider identifying representatives from Human Resources, IT, Finance and the Management Team. For smaller charities, Trustees involvement at an early stage is important.
2. Take steps to ensure that the fraudster is not aware that you have identified the potential fraud. It is very important that any evidence is preserved.
3. Conduct a thorough investigation with a detailed record (but be alert to the fact that any documents created may have to be disclosed in subsequent legal proceedings).
4. Consider the legal options. You may want to terminate the employee’s employment, involve the police in bringing a criminal prosecution or bring a civil claim to try to recover funds.

Ultimately, knowledge is key when it comes to charities guarding against fraud and implementing an anti-fraud culture in order to seek to avoid incidences of fraud should be high on every charity’s priority list. Charities must take preventative steps now to ensure that they do not find themselves unnecessarily exposed to fraud and the associated potentially devastating ramifications. If COVID-19 is to have a positive impact on anything from a charity’s perspective, let it be the impetus to prioritise dealing with the risks of fraud.

Please note that the information contained in this blog is correct at the time of writing and it does not constitute legal advice and specialist advice should be sought in individual circumstances.

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.

For further information, you may also be interested in reading some of our other blogs about fraud. See also our blog series for charities with a range of topics including litigation, crisis management and investigations.

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 authors

Ryan Mowat is a Partner at Kingsley Napley. He acts for private individuals, charities and businesses in a wide range of disputes and complex litigation. He is consistently recognised in the legal directories, including Chambers & Partners and Legal 500, for his expertise as a litigator.

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.