The Charity Commission for England and Wales has published a report outlining its findings into how insider fraud, namely fraud committed by a trustee, staff member or volunteer, is affecting charities.

The study reveals that cultural factors, such as placing excessive trust or responsibility in individuals, or lack of internal challenge and oversight, contribute to 70% of insider fraud. The Commission emphasises the importance of a strong counter fraud culture and consistently applied controls in countering the threat of insider fraud.

Being a victim of fraud can be very damaging, and perhaps particularly so for a charity that is built on foundations of public trust and confidence. It is upsetting for trustees, staff, volunteers and beneficiaries and the reputational damage caused is often significant, and can even extend to the sector as a whole. Of course the trustees also have a due to protect their charity’s assets and resources and to make sure that they are only used for the benefit of furthering the charity’s aims.

In our experience prevention is the best cure when it comes to fraud. A robust risk assessment should be conducted irrespective of the size and stature of the charity. Adequate systems should also be implemented to detect fraud if it is committed and there must be a plan in place to ensure an effective response. For each of the these three components, the charity might like to think about the following:

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 has a large number of volunteers?

2. Look at the level of fraud awareness within the charity. Is the charity alert to the potential new fraud risks?

Fraud detection

1. Identify red flags such as 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.

4. Ensure thorough checks and controls are in place (these could be computerised and/or manual processes).

The response

1. Assemble a core team of people to work together in investigating and combatting the fraud. Depending on the size of the charity consider identifying representatives from Human Resources, IT, Finance and the Management Team. It is recommended to also involve legal advisors as soon as possible and consider whether any other external help is required.

2. Take steps to ensure that the fraudster is not aware that you have identified the potential fraud. It is very important that the 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, bring a civil claim and/or a criminal prosecution.

Charity publication Third Sector has reported several insider frauds in recent months including a project manager who was jailed for three years for stealing £216,000 from a Christian charity and a trustee who lied about charity donations to fraudulently claim £155,840 in Gift Aid repayments. We hope that the Charity Commission’s report will serve to encourage many more within the sector to take the necessary steps to implement an anti fraud culture and seek to avoid such incidences in the future.