Charity | Deploying regulatory remedies efficiently

The commissions annual review of its regulatory case work Charities Back on Track summarises key lessons arising from our compliance cases with charities and will be of interest to all lawyers advising charity trustees  especially trustees with whom the commission is exploring a potential regulatory issue. The report also serves as a statistical analysis of the volume and nature of our investigatory case work.

Our Risk Framework, first published on our website in January, explains how we now assess concerns raised about individual charities. In essence, we ask three questions: do we need to be involved; what is the nature of the risk; and what is the most effective response to it. Factors that help us answer those questions include: whether the concerns fall within our remit; whether they call for the use of powers only we have; what impact the concerns might have on the charitys beneficiaries and assets; whether there might be wider implications for other charities; and what guidance and advice already exists to support a resolution. We only get involved, and only use our regulatory powers, where that is really the best way of resolving a problem, an approach which reflects our statutory duty to use resources in the most efficient, effective and economic way and to be mindful of best regulatory practice.

In the most serious cases we may need to open a statutory inquiry. This allows us to make use of the full range of powers at our disposal, including to obtain documents, protect charity assets, freeze charities bank accounts, which does not prevent it from operating; trustees or interim managers can ask for our permission to access their funds, and to remove trustees.

The cases we consider most serious are those in which there is evidence or serious suspicion of misconduct or mismanagement by a charitys trustees and cases in which risks to the charity or to public confidence in charity more generally is high. This will include cases in which charity assets, services or beneficiaries are at immediate and/or high risk of abuse or harm. Our priority is always to ensure trustees meet their legal duties and requirements, stop the abuse or non-compliance and take robust action where it is appropriate and proportionate to do so.

Serious concern Charities Back on Track has identified key areas of concern:

Failures of governance and trusteeship: Trustees have a wide discretion to make decisions on their charitys behalf but with this freedom comes important responsibilities. Failures of trusteeship include concerns about breaches of governing document, unmanaged conflicts of interest, and concerns about fundraising governance.

Fraud and financial crime: While charities are no worse affected than other sectors of the economy, our case work and research by the National Fraud Authority (NFA) show that financial crime continues to affect the work of too many charities.

Concerns about safeguarding vulnerable beneficiaries: Trustees of charities which work with vulnerable beneficiaries have a duty of care to their charity which will include taking the necessary steps to safeguard and take responsibility for them.

Failures to monitor and verify the end use of funds: Charity trustees have a duty to ensure their charitys funds are used for legitimate purposes and are reaching the intended beneficiaries. This means carrying out appropriate due diligence checks on individuals and organisations that give money to or receive money from their charity and managing any risks they identify.

Concerns about charities set up for illegal or improper use: It is rare for the commissions casework to uncover concerns that a charity has been deliberately set up for illegal or improper purposes. However, criminals do sometimes set up charities for the purpose of abusing them to generate private profit or gain.

The commission has identified three areas of high regulatory risk needing a public strategic response from the commission. These are tackling fraud and financial crime, safeguarding vulnerable beneficiaries and counter-terrorism. Back on Track also explains our strategies for responding to these and includes case studies of investigations concluded in 2011 and 2012.

Charities Back On Track is available at www.charity-commission.gov.uk/library/track_12.pdf