Charity Employee Fraud –

Trustees face increased risk of prosecution and financial liability

Last month we reported on the worrying growth of employee fraud within the Charity sector and the Government’s unpopular attempts to address the problem (click to view). In continuation of this topic, here we highlight the difficulties faced by trustees in protecting the charity against fraud, and their potential risk exposures should they fail to do so.

Internal financial controls

 In June 2010 the Charity Commission published its latest guidelines to help protect charities against risk of financial loss, waste, theft and fraud. CC8 – Internal Financial Controls for Charities outlined a number of processes and procedures for internal financial controls, whilst emphasising the duty of trustees to “safeguard their charity’s assets and take steps to ensure the charity is protected against financial abuse.”

 The Commission’s guidance suggests: a segregation of duties to avoid a single member of staff recording and processing transactions and to prevent mistakes and dishonesty; it should be standard practice for cheque signing and other financial transactions to require two or more authorities and signatures; access to cash, cheque books, equipment and computers should be regulated; and the increasing need to ensure access to information contained on computers is regulated and password protected – especially given the rise in the number of charities using internet banking.

 Above all, the Commission is keen to point out that should there be deemed to be a “reckless failure” to implement financial controls, this could result in personal liability on the part of the trustee(s).

 Trustees Indemnity insurance

 In order to protect against potential liability claims and expensive legal costs as a result of a claim, trustees can purchase cover in the form of Trustee Indemnity insurance (TII). Following a provision in the England and Wales Charity Act 2006, trustees are now legally entitled to use charity funds to purchase TII providing they meet certain conditions and there is nothing in the charity’s governing document that prohibits such expenditure (however, where there is a specific prohibition, the charity can apply to the Charity Commission to proceed with such a purchase).

 Importantly, trustees cannot, however, protect against personal liability for losses caused to a charity if: they have acted unlawfully or outside the charity’s governing document; if they commit the charity to debts greater than its assets; or commit the charity to taking on a debt knowing that it will not have the means to pay it back.