What organisations need to know about new anti-fraud measures
Fraud is a problem for all businesses, including charities and organisations with exempt charity status. In fact, a recent DBO study* found a 7% increase in charities reporting fraud or attempted fraud in 2023 from the previous year.
A new piece of legislation coming later this year aims to tackle fraud head-on. Samantha Pritchard, partner in our charities team, details the legislation and how organisations can ensure they’re prepared for the changes.
The importance of anti-fraud measures for charities
Fraud can cause substantial damage to a charity, and this damage is not limited to the actual financial loss the fraud may cause.
It can extend to fractured relationships with service users, donors and funders, reputational damage with regulators and the public, and the additional cost, resource, time and distraction of then investigating the fraud and dealing with external agencies.
All charities must, therefore, have appropriate controls in place to prevent fraud and to lessen its impact should it occur.
The controls will vary from charity to charity according to the level of risk that they face but each charity must consider this carefully, not least to ensure that the trustees discharge their legal duty to safeguard the charity’s assets and ensure they are applied to further its charitable purpose.
Where a fraud amounts to a serious incident because of the significant loss to the charity’s money or assets, then a serious incident report must be submitted to the Charity Commission. There may be additional obligations to report to other external agencies, depending on the circumstances.
New failure to prevent fraud offence
Large charities will soon be subject to new anti-fraud measures due to come into force later this year under the Economic Crime and Corporate Transparency Act 2023.
The Act introduces a new offence of “failure to prevent fraud”; under which an organisation can be found liable where certain fraud offences are committed by an employee or agent for the organisation’s benefit and the organisation is found not to have reasonable fraud prevention procedures in place.
The Act is designed to combat the number of fraud offences in the UK, which were reported to amount to 41% of all crime in 2022.
Who will the new offence apply to?
The new offence will apply to organisations that satisfy two or more of the following criteria:
- More than 250 employees
- More than £36 million turnover
- More than £18 million in total assets
If resources are held across a group, and the group cumulatively meets the threshold, then the offence will apply to the whole group.
Where the fraud arises in a subsidiary, the liability can be attached to the subsidiary that failed to prevent fraud or to the parent entity where the fraud benefitted the parent entity and it failed to take reasonable steps to prevent it.
This has the potential to make a charity responsible for a fraud committed by the staff of a trading subsidiary. This therefore underlines the need for charities in group structures to ensure they have adequate controls in place to oversee the activities of their trading subsidiaries.
Which types of fraud are captured?
The following are specified offences under the new Act:
- Fraud by false representation;
- Fraud by failure to disclose information;
- Fraud by abuse of position;
- Obtaining services dishonestly;
- Participation in a fraudulent business;
- False statements by directors and trustees;
- False accounting;
- Fraudulent trading; and
- Cheating the public revenue.
It should be noted that some of these offences could arise from warranties and representations made in legal documents, annual reports and similar.
What are the consequences?
An organisation found guilty of the new offence can be subject to an unlimited fine, determined at the discretion of the court, in light of the circumstances of the crime.
What action should be taken?
There is the possibility that the above criteria will be widened to bring more organisations into scope, so it is important that all charities take action now to ensure their current systems are working effectively, or to take the opportunity to enhance their controls and procedures.
It is anticipated that Government guidance will be published to help organisations understand the procedures which will be deemed reasonable to prevent fraud. In the meantime, charities should:
- Carry out a fraud risk assessment to spot weaknesses and make changes where necessary;
- Review any anti-fraud policy and consider if it remains effective to combat the fraud risks facing your charity and any subsidiary entities;
- Ensure an adequate whistleblowing policy is in place to encourage the reporting of suspicions relating to fraudulent activity; and
- Provide fraud awareness training to trustees and staff of the charity and any subsidiary entities.
The Government has released a policy paper that provides further detail in relation to the new failure to prevent fraud offence.
For more information on the failure to prevent fraud offence, or on charity law in general, please contact Samantha using 0191 211 7905 or [email protected].