Grant-making charities and fraud: staying alert

Earlier this year, the Football Foundation was defrauded of £200,000 by an individual who posed as nine football clubs asking for funding. Fraser White, who has been imprisoned for 32 months, made 34 separate applications for grants from the Foundation, with the proceeds reportedly spent on funding White’s trip to the football World Cup, various luxury items and his visit around Qatar. Fortunately, the Foundation identified the fraud and notified the police, but not before it had lost vital funds as a result of White’s actions; funds which otherwise would have made their way to genuine beneficiaries.

The story serves as an important reminder of the need for robust internal processes to guard against fraudulent activity. In this article we share the important questions charity trustees should ask when considering how best to protect their charities against fraud and some of the key resources available to support you.

The importance of robust fraud protection

All charities, whether they are grant making charities or otherwise, need to carefully consider the processes they have in place to detect and deter fraud. This is arguably even more important for grant making charities, as organisations managing substantial sums to be distributed as grants.

When making grants, charities should not underestimate the importance of sound financial (and internal) controls alongside risk management. Fundamentally, trustees should be asking themselves the following the questions.

• Are you aware of the risk?

It is important to consider the key fraud risks for your charity in light of your activities and operations before taking any decisions as to how best to tackle those threats.

For grant making charities it is important to be vigilant against fraudulent activities such as applications from fake charities or projects, or applicants requesting funding from multiple sources for the same (supposedly charitable) activity.

Fraudulent activity is not just an external risk. The Charity Fraud Report 2022 cited that the biggest threats to the charities surveyed were from internal sources (e.g. the misappropriation of cash (or assets) by staff and volunteers).

Charity trustees must consider how to best protect the charity’s assets from those looking to “work the system” from the outside and those internal to the organisation who might seek to exploit weaknesses in policies and procedures. As a starting point, charity trustees should familiarise themselves with the Charity Commission’s guidance on protecting against fraud.

• Have you got appropriate policies and procedures?

Charities must have the appropriate policies and procedures in place, but what this involves will very much depend on the nature and activities of your charity.

For grant making charities it is important to put in place appropriate policies and procedures. This includes considering the appropriate level of due diligence to be carried out against applicants for grants. Often, it pays to be “politely sceptical”, ensuring that any funds awarded by the charity are protected, and at the same time, protecting the charity’s reputation.

The Charity Commission has helpful guidance on Due diligence, monitoring and verifying the end use of charitable funds, and the Charity Excellence Framework has a wealth of resources for trustees to use, including due diligence checklists and templates.

Policies you should consider adopting include:

1. Grant-making policy
2. Due diligence policy for awarding grants
3. Fraud awareness policy and a fraud response plan
4. Cyber security policy and a cyber response plan

Other helpful tools might include undertaking a fraud risk assessment or introducing fraud awareness training to help those within the charity to detect fraud, especially before any grants are made. Implementing controls will help you to prevent fraud and will also assist you to demonstrate to the Charity Commission that you have taken all appropriate and reasonable steps to satisfy your duties as charity trustees to safeguard your charity’s assets. This is particularly important if the worst should happen and your charity does become the victim of fraud. Provided you have taken appropriate and reasonable steps to protect your charity, the Charity Commission will be unlikely to criticise you, as it does accept that no system of protections and safeguards is entirely impenetrable.

• Are you evidencing the decision to make grants, as well as the grants themselves?

All applications for grants should be carefully considered, and evidence should be available in the charity’s records to show how decisions have been taken. In particular, the trustees must be able to show how the charity’s purposes will be furthered through the provision of the grant.

All grants, no matter how big or small, should be evidenced in writing. Grant agreements do not need to be long documents, however they should detail the key provisions of the grant such as how the grant is to be used, whether the charity can pause or clawback the grant, and what happens should the applicant’s plans change or if the recipient breaches the terms of the grant agreement. Formal grant agreements provide a better degree of protection for the charity and certainty to both parties.

Should you need any guidance on the types of documentation to be using, please do contact a member of the Birketts Charities Team.

• Do you know the resources available to you?

There are several useful resources available to grant making charities. We have highlighted some particularly helpful and informative ones below.

1. The National Council of Voluntary Organisation’s Fraud Guidance
2. The Association of Charitable Foundations’ ‘Tackling Grant Funding Guide’  
3. Birketts’ Administration and Clerking Packages for Grant Making Charities

Charity Excellence Framework has also introduced a new AI resource for those who wish to explore third sector resources in more detail. The Ask Me Anything tool is a quick and useful mechanism which is designed to assist users with searching through the myriad resources available to trustees online to bring them into one easy to access place.

The Birketts view

Having the correct controls in place and asking the right questions will not only help you to protect your charities’ funds and reputation, but it can lay the foundations for efficient and effective internal processes. In turn, the threat of fraud will be reduced, and you will be able to demonstrate that you are fulfilling your duties as charity trustees to safeguard your charity’s assets.

Charity Fraud Awareness week will take place this year between 27 November and 1 December. The week aims to help charities tackle fraud and cybercrime by raising awareness and sharing good practice, and it encourages as many charities as possible to take part.

Should you need any assistance or guidance with the grant making process or implementing suitable policies or procedures for your charity (or help with setting up and running your grant making charity), please do get in touch with a member of Birketts’ Charities Team who would be more than happy to help.