On 18 January 2019 the Charity Commission published its final report on the abuse of charitable status by the Cup Trust (the ‘Trust’), one of the most significant inquiries for charity regulation in the last ten years.
The Charity Commission's investigations into the Trust began in 2010. However the statutory inquiry which has just concluded was only launched in 2013 and, following a dismissed appeal by the charity’s corporate trustee, then ran for almost 6 years in parallel with various disciplinary and remedial actions against the Trust, its trustee and other personnel.
The severity of abuse perpetrated by the Trust was exceptional, but there is much for all charities to learn from the report and inquiry about the Charity Commission's approach to compliance.
Understanding the Cup Trust scheme
Mountstar (PTC) Limited (‘Mountstar’), a BVI company, was the corporate trustee of the Trust with ultimate control and management of its activities, and the focus of the Charity Commission's report. However a web of connected companies and partnerships were also involved in the scheme, with three common participants – Mr Jenner, Mr Mehigan and Mr Stones.
The Trust was used to facilitate a number of complex and circular transactions where the Trust attempted to claim gift aid on artificial donations to provide the participating individuals with a personal tax benefit. The scheme provider had then envisioned charging the Trust for the sum of the gift aid reclaimed as a fee for introducing the 'donors'.
This involved substantial income and expenditure in the charity's accounts, but with a marginal surplus of charitable funds left over to be applied for it's charitable activities. The Trust raised almost £176.5million in 'donations' in 2010 but only paid out around £166,000 to charitable causes over three years. Indeed at the point it was closed in 2017 the Trust only had remaining funds of £11,529.84, which were transferred to a hospice charity.
The Charity Commission’s report
The Charity Commission’s final report follows its prior use of disqualification powers under the Charities (Protection and Social Investment) Act 2016 to disqualify Mountstar and its directors from being charity trustees for 15 years. The charity had also been removed from the register of charities and its remaining assets distributed for charitable purposes.
The Charity Commission concludes in its report, in the strongest terms, that ‘there was clear misconduct and mismanagement' by Mountstar in allowing the charity to participate in a tax avoidance scheme and under the influence of directors’ conflicts of interest - which were so serious as to render Mountstar’s decision-making inherently incompatible with its fiduciary duties.
While the Charity Commission finds no strict loss of charitable funds emphasises the severity of the abuse on the facts, noting that this matter had ‘greatly damaged public trust and confidence in both the Trust, necessitating its closure, and in charities more widely'.
The legacy of the Cup Trust case on charity regulation
Although it has perhaps not attracted the same number of headlines as recent inquiries into 'household name' charities, the Cup Trust saga has had far reaching implications for charity regulation over the last 9 years.
Charities are now facing a period of more proactive regulation, with an emphasis on the Charity Commission's statutory duty to increase public trust and confidence; much of this rooted in the criticism the regulator received in its dealing with the Cup Trust.
When the Cup Trust story first broke in the press the Charity Commission was heavily criticised for being seen to let the Trust's abuse happen as the principal regulator of charities. In particular, Margaret Hodge, Chair of the Committee of Public Accounts in 2013, damned the Charity Commission‘s handling of the case and called for a review of its operations.
The National Audit Office carried out an extensive review in this vein and also published a 32-page report into the regulator‘s handling of the Cup Trust abuse, concluding that it; 'narrowly focused on the legal position and paid insufficient attention to the wider issues of public detriment which it would have been appropriate to pursue further.‘
The final report from the inquiry acknowledges some of the changes at the Charity Commission advanced in response to the Cup Trust scandal. The Charity Commission’s Head of Investigations Harvey Grenville reflects on the inquiry to say; 'the Commission has learnt from this case: over recent years, we have significantly strengthened our approach to identifying and dealing with risks facing charities, have improved our pre- and post-registration processes and are more proactive and robust in using our legal powers to ensure trustees comply with their legal duties and responsibilities'.
Foremost among the changes stemming from the Cup Trust scandal is the introduction and use of extra powers for the Charity Commission under the Charities (Protection and Social Investment Act) – notably its powers to disqualify trustees (eventually used in the inquiry) and to issue official warnings.
We also note that the Charity Commission's current online form for charities looking to register with it was updated last year to include two questions, perhaps informed by the abuse eventually conducted by the Trust – whether an organisation intends to a) take part in any other arrangement (besides Gift Aid) which might reduce the amount of tax payable by any other person, or b) hold any funds or assets in overseas investment companies or trusts.
Lessons for the sector
The effect of this long inquiry has been felt by the whole sector; it has contributed to the development of the Charity Commission's regulatory approach and been the catalyst for it now enjoying a suite of new compliance powers. It may also have contributed, along with the press coverage of charity malpractice in 2018, to the Charity Commission's renewed focus on 'public trust and confidence' as its regulatory rationale. This looks set to guide its approach now and into the future and we recommend all charities take stock of the Cup Trust report's 'issues for the wider sector'.
