Failure to control and document use of charity funds can lead to serious problems

September 30, 2011 | By: .(JavaScript must be enabled to view this email address) Mark Blumberg
Topics: Canadian Charity Law

Here is an interesting report involving a UK charity with many lessons that can be learned by Canadian charities.  The UK charity raised money for the Tsunami in 2004 and the Pakistan earthquake in 2005.  In 2006 there were allegations in the media that the UK charity was involved with supporting terrorism.  The Charity Commission of England and Wales spent a number of years investigating.  “The Inquiry concluded that from the information examined, there was no evidence to indicate that the trustees diverted charitable funds for unlawful or non-charitable purposes. However, the Commission concluded that the trustees were unable to satisfactorily verify the end use of charitable funds in both Indonesia and Pakistan. It found that the measures taken to control, monitor and document the use of charitable funds by third parties overseas were insufficient. This prevented the charity’s trustees from being able to demonstrate that those funds had been used legitimately and in furtherance of the charity’s purposes.”  “The report provides various lessons for the wider charity sector which directors and trustees are encouraged to read. The lessons include the steps which trustees should take to put safeguards in place to mitigate the risk of charitable funds being used unlawfully. This is particularly important for charities working overseas and potentially working through partners. The report provides important advice on trustee responsibilities in financial management and the supervision of overseas activities, and the importance of charities having effective governance where all trustees are aware of their responsibilities in terms of setting polices, decision making, and ensuring the charity is run in line with its governing document and general law.”

If you want to understand the Canadian rules for foreign activities see:  http://www.globalphilanthropy.ca/index.php/blog/comments/cras_new_guidance_on_foreign_activities_by_canadian_charities

http://www.charitycommission.gov.uk/RSS/News/pr_crescent_relief.aspx

“Commission publishes inquiry report into international charity Crescent Relief
29 September 2011

The Charity Commission, the independent regulator for charities in England and Wales, has published an inquiry report into the charity Crescent Relief (London) (registered charity no. 1087724). The charity’s main activities included emergency relief and reconstruction work in Pakistan following the 2005 earthquake and the construction of, and ongoing support to, an orphanage in Indonesia following the 2004 Tsunami.

The Commission became aware in August 2006 of media allegations linking the charity with a conspiracy to commit terrorist offences. The police examined this issue and the charity as part of its wider investigation known as Operation Overt. Due to the serious concerns about the charity and individuals connected to it the Commission opened a statutory inquiry on 22 August 2006. As a result of Operation Overt, no individuals connected to the charity were convicted of terrorist offences.

The Inquiry looked at; whether funds of the charity, or funds raised on its behalf, had been used unlawfully, the financial management of the charity by its trustees, the supervision of overseas activities and the governance of the Charity. The Inquiry opened on 22 August 2006 and closed on 29 September 2011 with the publication of this report. The Inquiry was prolonged in order to avoid prejudicing the criminal investigation, which took precedence over the Commission’s investigation, and the time taken to obtain evidence from overseas.

The full report is published today on the Commission’s website.

Due to concerns that the charity’s assets might be at risk the Commission used its powers to make two freezing orders on the charity’s bank accounts held in the UK. This safeguarded charitable funds while concerns were being investigated but enabled the Commission to authorise appropriate legitimate payments.

The Inquiry concluded that from the information examined, there was no evidence to indicate that the trustees diverted charitable funds for unlawful or non-charitable purposes. However, the Commission concluded that the trustees were unable to satisfactorily verify the end use of charitable funds in both Indonesia and Pakistan. It found that the measures taken to control, monitor and document the use of charitable funds by third parties overseas were insufficient. This prevented the charity’s trustees from being able to demonstrate that those funds had been used legitimately and in furtherance of the charity’s purposes.

As a result of its findings the Commission has made an Order to direct the trustees to carry out a governance review of the administration and management of the charity and implement the outcomes of that review, reporting back to the Commission no later than 12 months from the date of the Order. The Commission will monitor the trustees’ compliance with the Order.

The report provides various lessons for the wider charity sector which trustees are encouraged to read. The lessons include the steps which trustees should take to put safeguards in place to mitigate the risk of charitable funds being used unlawfully. This is particularly important for charities working overseas and potentially working through partners. The report provides important advice on trustee responsibilities in financial management and the supervision of overseas activities, and the importance of charities having effective governance where all trustees are aware of their responsibilities in terms of setting polices, decision making, and ensuring the charity is run in line with its governing document and general law.”

Here is a copy of the full report:
Inquiry Report -Crescent Relief (London) from the Charity Commission.

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Charity Lawyer Mark Blumberg

Mark Blumberg is a partner at the law firm of Blumberg Segal LLP in Toronto and works almost exclusively in the areas of non-profit and charity law.

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