13 June 2018
The Charity Commission’s recent regulatory case reports and statutory enquiries draw out some important lessons in governance & compliance for charity trustees. The reports usually arise from either complaints made to the Commission or from negative publicity in the media, and can result in penalties, guidance or advice for the individual charity as well as recommendations to charities more generally.
The Royal Institution of Great Britain
The Royal Institution was under investigation for leasing part of its premises to a company managed by a trustee, as well as for using money to pay for the refurbishment of its premises from a variety of funds that were held on particular terms and in breach of those terms. The funds used were restricted funds, expendable endowments, and permanent endowments held under a variety of different terms.
The Commission decided not to impose penalties on the charity in relation to the lease because it was at a commercial rate and disclosed in the charity’s accounts.
In relation to the use of the charity’s restricted funds, the Commission required the charity to put a repayment schedule in place to ensure the funds will be reinstated and to establish a Management Advisory Committee to rebuild reserves.
The report highlights the need for charities to have in place robust financial controls to ensure that restricted funds are applied in accordance with the terms on which they are held.
It also serves as a reminder that trustees are legally obliged to authorise any disposal of property to a connected person and report it as a related party transaction in the charity’s accounts.
Multiple Sclerosis Society
The report into the MS Society raised issues for any charity which operates across the different regulatory regimes in the UK.
The MS Society, an unincorporated association registered as a charity in England ran into difficulties over the management of the ‘National Council’ in Scotland. The constitution of the English charity’ established National Councils for operations throughout Great Britain and the Scottish National Council had its own constitution. Opinion within the charity was divided as to whether the Scottish National Council was a separate charitable entity or a constituent part of the English charity. Trustees of the charity suspended and withdrew the powers of the Scottish National Council, even though it was not clear whether they had the power to do so. There were several internal grievances and complaints and the Patron of MSS Scotland, JK Rowling, resigned in April 2009 as a result of the internal wranglings.
The matter has been resolved by a comprehensive governance review and MS Society members voted to have a single constitution for the MS Society at the AGM last September. At a special general meeting of the Scottish National Council, its members voted to remain part of the united MS Society. Authority will still be delegated to a newly constituted Council in Scotland and the MS Society has registered as a cross-border charity with the Office of the Scottish Charity Regulator.
This case highlights the importance for all charities to have constitutional clarity. Where the trustees are given the power to delegate functions, whether to regional or national bodies, the terms must be clearly defined and the charity should adopt a structure which facilitates their activities. Charities registered in England & Wales that also operate in Scotland or Northern Ireland should also note that they must comply with the requirements of the OSCR and the Charity Commission for Northern Ireland (which is expected to open for registrations later this year).
The IDB Foundation
This inquiry looked into allegations that the proceeds of a fundraising golf tournament in Spain organised by the charity, estimated at £350,000, were not sent to a Spanish voluntary organisation working in Africa as the fundraising literature claimed. The inquiry resulted in the charity being struck off the register of companies as well as the register of charities.
The Commission reported the matter to the Police in 2006, who were already investigating the founding member for fraud. The Commission used its powers during the investigation to freeze the charity’s bank account and is now distributing the protected £30k to charities with similar objects.
The warning to charities is that trustees must be familiar with their obligations under charity law to act in the best interests of the charity and protect the charity’s assets. Fundraising is not a charitable object in itself and must be done for the purposes of the main charitable activities.
The inquiry looked into claims in a national newspaper that this international development charity made payments to the Al-Ihsan Charitable Society, in contravention of UK and US financial sanctions and asset freezes. The charity is a designated financial target in the UK and US due to their suspected involvement in terrorism financing. Click here for the current list of UK designated financial targets and click here for US targets.
The Commission cleared the charity of any wrong-doing and gave public assurance that the allegations were unsubstantiated.
If charities have financial dealings with a designated financial target under counter-terrorism legislation in the UK, they risk committing a criminal offence. As well as checking the lists using the links above, you can sign up for email notifications of changes on both the UK and US Treasury department websites.
International Tiger Moth Charity
The charity provided flights to sick children in a Second World War Tiger Moth aeroplane. The Commission opened an inquiry into concerns about the financial management of the charity, the qualifications of the Operations Manager and his family connections with a number of trustees, as well as complaints about the airworthiness of the plane.
The Commission provided regulatory guidance and advice on the charity’s governance following its finding that there was a lack of financial control, no conflict of interest policy, no evidence the charity was managing conflicts of interest or safeguarding the beneficiaries appropriately. The charity is no longer operating and was removed from the Register in July 2008.
For charities generally, the Commission drew out some fundamental lessons:
- trustees must maintain their independence and not put themselves in a position where their personal interests conflict with their duty to act in the best interests of the charity;
- financial and administrative controls must be put in place and monitored effectively in order that the charity uses its funds for the activities it has been set up to carry out; and
- where charities work with children, the trustees must put safeguards in place for their protection.
The case is a timely reminder of the new requirement for all charity managers to be ‘fit and proper persons’ under the Finance Act 2010, to ensure that the charity remains eligible for charitable tax reliefs.
An interesting additional point arose regarding the Tiger Moth aeroplane’s insurance policy. The insurance cover was subject to a condition that the insured party complied with all requirements of relevant authorities. The fact the charity did not have a certain ‘Certificate of Airworthiness’ gave rise to a risk that the insurance policy had been invalidated. Charities should be aware that insurance policies can easily be invalidated by regulatory non-compliance.