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A B C D E F G H I J K L M N O P R S T V W Y

Charities

Trustee Diversity
Friday 1st December 2017

New research commissioned by the Office for Civil Society and the Charity Commission recommends that charities do more to promote diversity on their boards and encourage applications from women, young people and people from ethnic minority and socially diverse backgrounds.

The report was delivered by a consortium led by Cass Business School and the Cranfield Trust, in which approximately 3,500 trustees were surveyed in order to identify current statistics in relation to the diversity of trustee boards.

Generally speaking, the research found that there are twice as many male trustees as there are female, and that the overwhelming majority of trustees are white, older and possess an above average income and education. Interestingly, further research conducted by Charity Data actually illustrated that one in every twelve trustees are named either John or David! Nonetheless, despite this lack of diversity, research also found that trustees ‘feel positively’ about their role and the personal reward and satisfaction it provides them with.

A more detailed account of the findings is as follows:

·         Men comprise 71% of charity chair persons and 68% of charity treasurers;

·         the average age of charity trustees is 55 – 64, over half of whom are retired;

·         75% of charity trustees have household incomes above the national median;

·         60% of charity trustees possess a professional qualification and 30% possess post-graduate qualifications;

·         71% of charity trustees are recruited by way of an informal process;

·         80% of charities do not have staff/volunteers and so their trustees take on both a governance and executive role;

·         70% of trustees are involved in charities with an income of less than £100k per year;

·         Charity trustees report lacking relevant legal, digital, fundraising, marketing and campaigning skills at board level;

·         Charity trustees are concerned in relation to their skills in dealing with fraud and external cyber-attacks;

·         Only 6% of charity trustees seek external advice, guidance or training; and

·         On average, trustees donate approximately 5 hours per week to their role.

The Commission has since published a response to the research, available at: http://bit.ly/2k3KPJG. The response illustrates the growing importance of charities in modern society as they perform a wide range of public functions, deliver an increasing number of public services and tackle a plethora of ongoing issues.

Helen Stephenson, Chief Executive at the Commission, advised that whilst the research findings do offer encouragement, they highlight fundamental issues in relation to the diversity of trustee recruitment.

In a recent statement Stephenson explained that “trustees make a vital contribution to our society, and communities up and down the country rely on their voluntary efforts”, but that “trustees do not reflect the communities charities serve. Charities are therefore at risk of missing out on the widest range of skills, experience and perspective at board level”. This is reflected in the research as trustees themselves report lacking skills in key areas, including digital skills.  

A lack of diversity can also result in a ‘group think’ culture, whereby decision making often goes unchallenged. Diversified boards, including a variety of experienced individuals and personalities helps to guard against this sort of culture which inevitably inhibits the true potential of many trustee boards.

It is hoped that the research encourages charities to promote diversity amongst their boards and to provide existing trustees with the support they require.

Comment

It comes as no surprise that the research discussed above has identified a lack of diversity. The role of trustee is one that requires high levels of care and attention and is more often than not a voluntary role. With this in mind, it naturally follows that those more likely to take up such a role are those individuals with more time to dedicate to the role, hence why over half of all trustees are retired. However, this is not to say that it is impossible to find the time required to dedicate to the role whilst also working. What charities should take away from this research is that they would benefit from a balanced and diverse trustee board and should actively consider this when recruiting trustees.

Indeed the new Charity Governance Code lists diversity as one of its seven key principles and advises charities to encourage inclusive and accessible participation, recruit diverse trustees and monitor and report on their boards’ diversity.

With charities playing an increasingly more important role in society, it is important that they have a diverse driving force, enabling the charity to deliver its objects to the best of its ability.  

Rebecca Tucker is a Paralegal in the Charities and Social Enterprise Department at Brabners LLP. If you would like to discuss any of the points raised in this blog please do not hesitate to contact Rebecca on 0151 600 3064 or rebecca.tucker@brabners.com


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Protecting your charity against fraud
Tuesday 31st October 2017

Last week saw the Charity Comission focus on fraud in the charity sector and, to coincide with Charity Fraud Awareness Week, the Commission updated its guidance in relation to protecting charities from fraud.

Speaking at the launch of Charity Fraud Awareness Week, Helen Stephenson, the Commission's new chief executive, warned that many instances of fraud within the sector currently go unreported and that this can have a “devastating” impact on voluntary organisations.

The updated, and more interactive guidance (available at http://bit.ly/2z8JLdX), sets out how trustees should report fraud, how trustees should protect against fraud and provides a variety of ‘best-practice templates’ for charities to use when combating fraud.

The Commission is keen to note that by reporting fraud, charities are not only able to access essential advice required for them to address the issue at hand, but they are also helping build a clearer picture of the scale of fraud affecting the wider sector.

A clearer picture will inevitably assist the Commission in its attempts to combat the issues surrounding fraudulent activity affecting charities. With a greater grasp on the statistics, the Commission will be able to pinpoint exactly what type of fraudulent activities are affecting which charities. This is reflected in its updated guidance which dedicates a section to cyber fraud.

The Commission notes that the risks to charities presented by cyber fraud are “increasing all of the time” and that “approximately 70% of all fraud is now committed online”. Cyber-crime, by virtue of its nature, is often more complex and difficult to detect, commonly involving data breaches and identify fraud. The Commission directs trustees to the ‘National Cyber Security Centre’ and ‘Get Safe Online’ websites for advice on guarding against cyber-crime.

Whilst it is important to note that cyber-crime is on the rise, trustees must not neglect other types of fraud that may pose a threat to their charity. The Commission advises that any actual, or attempted fraud, should be reported to ‘Action Fraud’, the UK’s national reporting centre for fraud, either online or via their 24 hour phone line – 0300 123 2040.

Serious fraud incidents should also be reported to the Charity Commission via email using the following email address: RSI@charitycommission.gsi.gov.uk.

Comment:

With a total annual income in excess of £69 billion, it is essential that charity trustees put the necessary safeguarding measures in place in order to protect their charities against the ever increasing threat of fraud.

As well as familiarising themselves with the Commission’s guidance and other online materials advising on fraud protection, trustees may also consider it appropriate to introduce a safeguarding and / or an insurance policy guarding against this threat.

In addition to the Commission’s guidance, The Department for Digital, Culture, Media & Sport has carried out research into UK registered charities and their awareness, attitudes and experiences with regards to cyber security, as a part of the government’s recent National Cyber Security Strategy (available at http://bit.ly/2wqgJ8f).

This research illustrates that charities are not fundamentally different from businesses in how they approach cyber security and that they can suffer substantive cyber security breaches with financial repercussions.

The outcome of this research demonstrates that it is essential for charities to consider their attitudes towards cyber security as well as other types of fraud and take preventative action.

Rebecca Tucker is a Paralegal in the Charities and Social Enterprise Department at Brabners LLP. If you would like to discuss any of the points raised in this blog please do not hesitate to contact Rebecca on 0151 600 3064 or rebecca.tucker@brabners.com.


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Serious incident reports – the Commission identifies significant under-reporting problems
Monday 2nd October 2017

Following a three month consultation, the Charity Commission has published updated guidance in relation to reporting serious incidents, to aid charities in reporting appropriate matters as soon as possible, once they have arisen.

The Commission has identified ‘significant under-reporting problems’ by charities and is concerned about the further reputational damage that may occur if this is to continue. Sarah Atkinson, Director of Policy and Communication at the Commission, advised that, “too often, casework shows that an incident could and should have been reported at a much earlier stage”. In an attempt to remedy this, the Commission, through its new guidance, urges trustees to act quickly and responsibly in reporting serious incidents.

So, what is a serious incident?

The Commission refers to a serious incident as an “adverse event, whether actual or alleged, which results in or risks significant:

  • loss of charity money or assets;
  • damage to charity property; or
  • harm to charity work, beneficiaries or reputation.

In the last year, 2,181 serious incidents were reported to the Commission, more than half of which were related to safeguarding and a third related to fraud. Despite the fact that serious incident reporting has been increasing steadily since 2011-12, under reporting remains an issue for the sector.

Who should report a serious incident?

As with the other actions of a charity, it is the trustees who hold ultimate responsibility for reporting serious incidents, whether or not the obligation has been delegated to another member of the charity, such as an employee. When reporting a serious incident, trustees must confirm that they have authority on behalf of the trustee body to report the incident, and if the incident is being reported by another member of the charity, they should declare who they are, their relationship with the charity and confirm that they have the authority of the trustees to report the incident.

The new guidance

The Commission’s updated guidance includes new tools, such as examples and checklists to make it clearer to charities what should and should not be reported as a serious incident. It also provides greater clarity on incidents resulting in “significant financial loss”. For example, the Commission now makes it clear that losing significant funding or contracts that the charity cannot replace should be reported as a serious incident.

Additionally, the new guidance no longer requires trustees to report a serious incident where the charity does not have a safeguarding policy in place, as this information is dealt with in the annual return.

The Commission is eager to convey to trustees that by reporting serious incidents they are demonstrating that they are complying with their duties and are taking the appropriate action to deal with the incident. The Commission will therefore be able to conclude that the trustees who do report serious incidents have acted responsibly in handling the situation. The guidance reminds trustees that reporting serious incidents can limit both reputational and actual harm to their charity. 

How to report a serious incident

Where a serious incident has occurred within a charity it should be reported as soon as possible using the Commission’s dedicated reporting facility at RSI@charitycommission.gsi.gov.uk. If the incident is criminal in nature, it should also be reported to the police and any other regulators the charity is accountable to.

The new guidance outlines the details that are to be provided when reporting a serious incident. Individuals must explain:

  • who they are and their connection to the charity;
  • the authority they are acting under to report the incident;
  • who in trustee body is aware of the incident;
  • what happened and when the charity first became aware;
  • any action being taken;
  • what authorities it has been reported to; and
  • any media handling lines that have been prepared.

The Commission advises trustees to err on the side of caution, if having read the guidance they are still unsure whether the incident should be reported, it is best practice to report it anyway and the Commission will then advise whether any action is necessary.

In future, trustees will also be able to report serious incidents via the Commission’s online services.

Comment

On the whole, the sector seems to have welcomed the Commission’s new guidance and it is hoped that it will enable trustees and charities to better understand their responsibilities when it comes to reporting serious incidents.

It is important however not to forget that a balance must be achieved between ensuring that the Charity Commission has the information it requires to do its job and minimising the reporting burden on the charity sector.

It will be interesting to see whether the guidance achieves the right balance and its desired impact, in that less serious incidents go unreported.

Rebecca Tucker is a Paralegal in the Charities and Social Enterprise Department at Brabners LLP. If you would like to discuss any of the points raised in this blog please do not hesitate to contact Rebecca on 0151 600 3064 or rebecca.tucker@brabners.com.


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(Old) news update…charity trustee payments
Monday 14th August 2017

One of the most read articles on the BBC’s website this morning concerns an investigation in a national breast cancer charity in relation to payments of £31,000 paid to the charity’s founder during a period where the founder was also acted as a trustee.

The article can be found here: http://www.bbc.co.uk/news/uk-england-40887949.

Firstly, it should be noted that this is old news. I discussed this case at length in my last blog (http://www.brabners.com/blogs/charities/official-warnings). This was the case during which the Charity Commission exercised the new powers granted to it in the Charities Act 2016, issuing an official warning to the charity.

Secondly, it unusual for such incidents to make national headlines. It is possible that Gina Miller’s intervention has generated some of the interest (Gina Miller being the ant-Brexit campaigner who successfully challenged the Government’s authority to trigger Article 50). Through her True and Fair Foundation, Mrs Miller described this case as “absolutely scandalous”, arguing that a minimum threshold should be introduced whereby charities have to spend at least 65% of income on charitable activities.

Finally, it is interesting to read the statement made by the lawyers acting for the founder. The statement describes the payments to the founder as having been made in “error” and that neither the founder “nor the charity were aware that this was inappropriate until they were informed by the Charity Commission”.

Comment:

Cases such as this one are littered across the Charity Commission’s website and we are regularly asked to advise upon the circumstances in which a trustee might be paid and / or employed by their charity.

Whilst softly described as an “error”, payments by charities to their trustees without appropriate authority are a fundamental breach of trust. Despite its stretched resources, the Charity Commission rightfully takes such matters very seriously and in some cases, may order a trustee who has received unauthorised payments to reimburse the charity.

A defence of ignorance will rarely generate much regulatory sympathy. In most cases, the governing document of a charity will expressly prohibit payments to charity trustees (save for expenses and other statutory exceptions). It would be a brave charity trustee to seek to rely on their failure to have read and understood their charity’s governing document as a defence to having taken unauthorised benefits.

It’s unclear why the BBC have chosen to take an interest in this case, over a month since the Commission published its case report. It is however a useful reminder to charity trustees of the importance of ensuring that any payments made to a trustee by a charity are properly authorised. This is a tricky area and one where the consequences of getting things wrong can be significant.

Graeme Hughes is an Associate Solicitor in the Charities and Social Enterprise Department at Brabners LLP. If you would like to discuss any of the points raised in this blog or you have any questions concerning your charity please do not hesitate to contact Graeme on 0151 600 3079 or graeme.hughes@brabners.com.


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Charities and safeguarding
Monday 7th August 2017

The trustees of Manchester New Moston Congregation of Jehovah's Witnesses have been heavily criticised by the Charity Commission in a recently published report. The criticism stems from the trustees’ poor handling of child sex abuse allegations and their further lack of co-operation with the Commission.

The report identified both mismanagement and misconduct by the trustees following their inadequate approach in relation to the allegations of child abuse. Allegations had been made in 2012 and 2013 against a trustee, who was subsequently convicted of two counts of indecent assault. One of the allegations had in fact been dismissed by the trustees as “a matter between two teenagers”.

The trustees of the charity had allowed the victims of the sexual abuse to be questioned by their abuser at an internal disciplinary procedure following the offender’s release from prison. Whilst the Commission acknowledges in its report that the trustees did not themselves conduct the disciplinary procedure, it concluded that they bear ultimate responsibility and accountability for the impact the abuse had on the victims.

The report also highlighted that the trustees had failed to:

  • fully enforce the restrictions they had placed on the abuser’s activities at the charity;
  • adequately consider and deal with potential conflicts of loyalty within the board of trustees; and
  • keep a satisfactory written record of the decision-making process used to manage potential risks.

The trustees were further criticised for failing to co-operate openly and transparently with the Commission, it being reported that the trustees “did not provide accurate and complete answers”.

Harvey Grenville, Head of Investigations and Enforcement at the Charity Commission, stated that the victims had been “badly let down” by the charity and that the trustees “should have made the victims’ welfare their first priority”.The report does however acknowledge that since the inquiry opened in 2014, the charity has made improvements to its child safeguarding policy and its procedures for handling safeguarding allegations.

Comment

Whilst the severity of the failures in this case are hopefully rare, this report provides a good example for the wider sector in relation to what is expected of trustees with regards to safeguarding.

The Commission, in its annual report for 2016-17, in which this case features, identifies safeguarding as a priority risk area in its risk framework and as a result has increased its commitment to safeguarding vulnerable people.

There is a variety of guidance available on the Commission’s website to ensure that trustees are capable of compliance. Trustees are under a legal duty to familiarise themselves with the Commission’s guidance, implement and regularly review vulnerable persons policies and procedures, conduct the necessary DBS checks on staff and volunteers, and file serious incident reports as and when necessary. By following the Commission’s guidance, trustees are able to safeguard themselves against potential safeguarding issues.

Rebecca Tucker is a Paralegal in the Charities and Social Enterprise Department at Brabners LLP. If you would like to discuss any of the points raised in this blog please do not hesitate to contact Rebecca on 0151 600 3064 or rebecca.tucker@brabners.com.


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Trust and confidence in the Charity Commission
Monday 24th July 2017

A recent poll conducted by the independent research body Poplus revealed good news for the Charity Commission. Despite decreasing levels of trust in other industries, such as fundraising and financial markets, public trust in the Charity Commission has remained steady.

Building on a previous project from 2015, Poplus were commissioned in order to assess trust and confidence in the Charity Commission. The primary research objectives being:

  • to establish current attitudes towards the Charity Commission and charity regulation;
  • to explore the effectiveness of the Charity Commission’s relationship with charities and other key stakeholders; and
  • to explore the impact of charity regulation.

Research was carried out among three target audiences, namely, the public, charities and stakeholders, who were interviewed between February and April of this year.

The results of the project revealed that the public are now more familiar with the Charity Commission and the services it provides than they were two years ago. This can be evidenced by the considerable rise in those who acknowledge that they have received support from, or have connections with, a charity. Additionally, more than half of the public are now aware of the Charity Commission. High profile cases such as Kids Company may have contributed to this, along with the increased use of digital platforms by the Commission.

A breakdown of the main findings is as follows:

  • 31% of the public are aware that they have benefited from, or used, a charity’s services;
  • 88% of the public agree that the Charity Commission’s role is essential or very important;
  • 71% of the public agree that seeing a charity is registered reassures them;
  • 58% of the public and 77% of charities feel that charities are regulated effectively;
  • Public trust and confidence in the Charity Commission remains steady at 6.0 out of 10.

However, the increase in awareness also brings, as the report phrases, “an increasing appetite for the Commission to do more”. Although the majority of the public continue to acknowledge that charities in England and Wales are regulated effectively, this has decreased by 7% since 2015. Opinions reflect a desire for the Commission to focus on holding charities to account, enforcing compliance and enabling charities to be more effective. Despite this, qualitative data taken from stakeholders remained positive and suggested that, internationally, the results compare favourably and should set an example for other countries to follow.

The Commission was ranked highly by stakeholders across all areas of its performance, particularly in relation to making trustees aware of their responsibilities and acting with authority and expertise. That being said, some stakeholders did express concern with regards to a decline in the extent of the Commission’s engagement and the services it has to offer. This being associated with a lack of resources.

Interestingly, stakeholders also commented that they had recognised a shift in how the Commission describes its role, in that it appears to have moved from an approach centred around policing the sector towards an approach focused on providing support. This, consequently, has given rise to some confusion and the opinion that the Commission need to be clearer in relation to its direction.

On the whole, the results of the research carried out reflect quite positively on the Commission. In a recent statement however, Sarah Atkinson announced that the Commission will “still strive harder across all fronts, with greater awareness comes more demand”, there is therefore “no room for complacency”. It will be interesting to see over the coming months how the Commission responds in action to this research.

Rebecca Tucker is a Paralegal in the Charities and Social Enterprise Department at Brabners LLP. If you would like to discuss any of the points raised in this blog please do not hesitate to contact Rebecca on 0151 600 3064 or rebecca.tucker@brabners.com.


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Official Warnings
Thursday 13th July 2017

It’s here…the Official Warning

“Under the power in section 75A1(b) of the Charities Act 2011 the Charity Commission for
England and Wales (“the Commission”) issues the following

OFFICIAL WARNING

to

The National Hereditary Breast Cancer Helpline – 1150183

on the grounds that the Charity Commission considers that the trustees of the charity have committed a breach of trust or duty or misconduct or mismanagement in the administration of the charity…”

Since the Charities Act 2011 received royal assent in March 2016, the charity sector has been waiting in trepidation for the Charity Commission to deploy what many consider to be the most controversial of its new regulatory powers, the official warning.

The wait is now over and the charity that will forever be remembered as the first to find itself on the receiving end of an official warning is…

*drum roll*

The National Hereditary Breast Cancer Helpline (“the charity”).

In August 2016, the Charity Commission issued the charity with an action plan in respect of a range of concerns relating to the charity’s governance and financial controls. The Commission was particularly concerned that the charity appeared reliant on loans that had not been appropriately documented, as well as the making of unauthorised payments to one of the charity’s trustees.

Whilst the charity made some inroads into complying with the Commission’s action plan, the Commission was not satisfied that sufficient progress had been made when revisiting matters this year. As such, the Commission has chosen to flex its new muscles and an official warning has been issued to the charity.

The reasons given by the Commission for issuing the official warning are as follows:

  • making unauthorised payments to a connected person;
  • entering into an informal loan agreement with a connected person;
  • improperly delegating the administration and management of the charity;
  • failing to keep proper minutes and other records of decision making
  • failing to properly implement and manage financial controls.

Comment

The absence of a right to appeal against a decision of the Charity Commission to issue an official warning has led to significant concern in the voluntary sector that the Commission might use official warnings as its “weapon of choice” when dealing with any issue relating to misconduct or mismanagement.

As such, it is perhaps no surprise that the Commission has taken its time in issuing the first official warning.

In this case, the failure by the trustees of the charity to comply with an action plan is interesting as this appears to have been a decisive factor in the Commission’s decision. The charity was on very clear notice that there were issues that needed to be addressed and only when insufficient steps were taken to remedy those issues did the Commission turn to its new regulatory tool.

The failure by the trustees in this case to comply with their duties and responsibilities do appear from the Commission’s report to be very serious in nature (e.g. the misapplication of charitable funds in the form of unauthorised payments to a trustee) and an official warning does appear to be a reasonable step to take.

One wonders whether the Commission might make greater use of action plans than has been the case over the past few years as this will lay the foundations for a strong case to issue further warnings where action plans are not acted upon.

As discussed in previous blogs and articles, and during our charity law seminars, the reputational damage that an official warning might result in is one of the most significant issues for charities. This first case was inevitably going to attract substantial attention and the charity may experience a loss of confidence and funding

By publishing this case report, the Commission claims it is promoting compliance by the trustees with their duties as well as accountability and transparency in the sector. If this is to be the Commission's reasoning, it is hard to see circumstances where the Commission would not publish a warning and so charities need to be particularly vigilant during any regulatory engagement with the Commission.

With the first official warning finally being issued, other charities may wish to take note of the impact such a warning has on charities and how it can be avoided. We do not expect the floodgates to open however the use of the official warning is likely to become more commonplace.

Given the absence of any meaningful right to appeal, many charities may benefit from taking a look at their governance practices so as to ensure their houses are in order.

Graeme Hughes is an Associate Solicitor in the Charities and Social Enterprise Department at Brabners LLP. If you would like to discuss any of the points raised in this blog or you have any questions concerning your charity please do not hesitate to contact Graeme on 0151 600 3079 or graeme.hughes@brabners.com.

 


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Charitable assets and...divorce cases!?
Monday 3rd July 2017

Over the past couple of weeks an interesting case arising out of the Court of Appeal, Civil Division, has been reported concerning a divorce and whether the assets of a charitable trust might fall to be considered as part of the financial settlement between the husband and wife.

The husband and wife were married in 2001 and shared an interest in the rescue and preservation of the highly endangered Chinese tiger. In 2002, a trust was established called Chinese Tigers South Africa Trust (CTSAT). CTSAT was established in the Mauritius and came to hold assets worth tens of millions of pounds.

The relationship between the parties broke down and, in August 2012, the wife petitioned for divorce which in turn, led to a claim for financial relief.

The case made it to the Court of Appeal with the key question relating to the true function of CTSAT. It was argued by those representing the wife that the assets of CTSAT should be available for settlement purposes by virtue (amongst other arguments) of those assets being a resource capable of being utilised to satisfy the wife's claims within her financial remedy proceedings.

The Court of Appeal upheld earlier decisions, ruling that CTSAT had never constituted and did not constitute a disposition which made any form of continuing provision for either of the parties. CTSAT's assets were not a resource of the husband's (or indeed the wife’s), but were available only for application in accordance with the charitable purposes of CTSAT. The assets had been impressed with charitable trusts and therefore fell outside of the parties’ personal assets.

Comment

The case itself is highly complex. The trial was long and the evidence voluminous and the Court of Appeal had to carefully assess the credibility of the parties in determining the true purpose of the charity.

It does however serve as a reminder to charities established amongst family members that any funds paid into a charity become the charity’s funds, falling outside of personal estates. Funds wholly donated to a charity lose their private nature, becoming public funds that cannot be recovered.

Graeme Hughes is an Associate Solicitor in the Charities and Social Enterprise Department at Brabners LLP. If you would like to discuss any of the points raised in this blog or you have any questions concerning your charity please do not hesitate to contact Graeme on 0151 600 3079 or graeme.hughes@brabners.com.


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Misconduct and mismanagement - a catalyst for trustee disqualification
Tuesday 20th June 2017

In March 2016 the Charity Commission exercised its permanent protective powers under section 79(2)(a) of the Charities Act 2011 to remove the “principal trustee” of The Catalyst Trust following misconduct and mismanagement identified within the administration of the charity.

The initial operational compliance case was opened in October 2013, following a complaint from a member of the public that the charity's rental income was being paid to a third party, rather than to the charity itself.

The charity's objects were of a general nature and its activities included the provision of project management and advice, loans, grants and guarantees to charities.

The Commission widened the case to an inquiry on 10 June 2014 as a result of an inspection into the charity's books and records which revealed a series of unexplained transactions in excess of £60,000. This raised significant concerns given that the charity had never declared an income of more than £25,000. The objective of the inquiry was to consider the following specific matters:

  • the administration, governance and management of the charity by the trustees;
  • the management of conflicts of interest;
  • the financial controls and management of the charity;
  • the trustees' failure to maintain and submit adequate accounting records to the Commission;
  • the circumstances surrounding the charity accepting a gift of property; and
  • whether the charity had been used for unauthorised benefit.

The inquiry established that the charity was effectively being managed and administered by only one of its three trustees, and that decisions were not being made collectively. Delving deeper into the charity’s finances the Commission found that out of an income of £71,000 spanning from 2009 to 2013, only £2,217 was spent on charitable purposes, £2,050 of which being paid to a private company for the development of a software project. The Commission concluded, based on the limited information available regarding the project’s business model, that the project was not charitable and the charitable funds assigned to the project were, in fact, a misapplication of the charity’s funds.

The inquiry also revealed that the trustees of the charity had failed to recognise and adequately deal with conflicts of interest. Several investments and loans had been made by the charity to companies in which the principal trustee had either a personal interest or connection with. The trustee in question advised the Commission that the charity lacked a conflicts of interest policy as no conflicts had been identified. The investigation did however find that the principal trustee regularly participated in decision making in relation to loans and investments despite being conflicted.

The remaining two trustees also failed to fulfil their duties to identify and manage these conflicts.

Further investigations found that the charity had entered into a loan arrangement with a private individual in February 2013. It materialised that the loan had been arranged by the principal trustee and was between the charity and one of the principal trustee's associates, it was also secured against the charity’s property. The charity did not have a steady stream of income and failed to partake in fundraising activities which could have enabled effective repayment of the loan. The charity consequently defaulted on the loan during 2015 which resulted in the charity losing half of its property which was valued at £50,000.

Furthermore, the inquiry held that the acceptance of a gift of residential property from the principal trustee was not in the best interests of the charity given that the charity were liable for any repairs to the property and it did not receive any income from the property.

Conclusions

The Commission concluded from the evidence of poor governance and financial management that there had been misconduct and mismanagement in the administration of the charity. The charity failed to operate in furtherance of its charitable objects and the trustees had failed to comply with their legal duties.

The Commission made the decision to remove the principal trustee and dissolve the charity, applying the remainder of its funds to a charity with similar purposes.

As a consequence of the removal order under section 178 of the Charities Act 2011 (amended by the Charities (Protection and Social Investment) Act 2016), the principal trustee is now permanently disqualified from acting as a trustee. Harvey Grenville, Head of Investigations and Enforcement at the Commission, stressed the importance that trustees must “act collectively together and avoid one individual taking sole, or inappropriate control of a charity”. In this case, the trustees failed to recognise and manage conflicts of interest and allowed “improper loans and investments to be made by one individual”. Finally, it was noted, taking into account the wider implications for the sector that a charity’s funds are only ever to be spent in furtherance of its purposes and trustees are under a duty to make reasonable decisions in the best interests of the charity.

A lot can be taken from this case for both current and future trustees and it provides a useful example of how not to behave. In particular, it acts as a warning against allowing a single trustee to dominate the board. Even in cases where a dominant trustee is behaving entirely correctly, such circumstances will almost always lead to difficulties. It is essential that charity trustees are familiar and comply with their legal duties and responsibilities, as set out in the Commission’s guidance – CC3 The Essential Trustee.

Rebecca Tucker is a Paralegal in the Charities and Social Enterprise Department at Brabners LLP. If you would like to discuss any of the points raised in this blog please do not hesitate to contact Rebecca on 0151 600 3064 or rebecca.tucker@brabners.com.


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The Cup Trust…5 years on
Friday 16th June 2017

It has been around five years since the The Cup Trust story broke, the effects of which are still being seen today in the form of the Charity Commission’s more “robust” approach to regulation and the introduction of new regulatory powers in the Charities (Protection and Social Investment) Act 2016 (some of which are discussed in an earlier blog available here: http://www.brabners.com/blogs/charities/charities-and-statutory-warnings).

The Cup Trust was a registered charity with a sole corporate trustee (known as Mountstar) established in the British Virgin Islands. It was used as a large-scale and complex tax avoidance scheme. Whilst registered with the Commission the charity received more than £176 million which it used to purchase government bonds. The charity donated only £55,000 to good causes but put in claims for £46 million of Gift Aid. It should be noted that these Gift Aid claims did not succeed.

The Cup Trust case led to significant criticism of the Commission. The then Chair of the Public Accounts Committee, Margaret Hodge MP – now Dame Margaret Hodge – was particularly scathing of the Commission’s role and the National Audit Office queried the Commission’s fitness to regulate charities. This was perhaps the beginning of the road that has led to the 2016 Act and the extensive new powers afforded to the Commission.

Using powers contained in the Charities Act 2011, the Commission opened an investigation into The Cup Trust and appointed interim managers. The Financial Reporting Council (“the FRC”) launched an investigation of its own in 2013. The charity has been wound up and was removed from the Central Register of Charities earlier this year but during the course of the last week, further sanctions have been announced.

  • The Commission has used new powers in the 2016 Act to disqualify Mountstar from being a charity trustee for the maximum permissible period of 15 years;
  • Further steps may also be taken by the Commission in respect of Mountstar’s directors;
  • The FRC has banned one of Mountstar’s directors from the accountancy profession for ten years and fined him £70,000 as a result of his role in the scheme. The director in question has also paid a further £80,000 towards the cost of the proceedings;
  • The charity’s auditor has received a personal fine of £20,000 and his company has also been fined £100,000 in addition to their contributions towards the costs.

Comment:

The Charity Commission’s published report is expected later this year and should make for very interesting reading.

Michelle Russell of the Charity Commission has stated that the Commission’s action here is intended to have sent “a strong message to all those whose actions harm charities: that they will be held accountable and that we will protect other charities from those who pose a risk to them”.

However long it may have taken, a “robust” response from the Commission to the issues that arose in The Cup Trust case was to be expected given the level of tax avoidance that was attempted in the name of charity. It is a matter of interest for practitioners to see the Commission exercising its new powers and we await further examples in the coming months. To date, we are still to see reports of the Commission using the most controversial of its new powers – the official warning – but what we have seen here is that the Commission may, eventually, catch up with charities behaving badly.

Graeme Hughes is an Associate Solicitor in the Charities and Social Enterprise Department at Brabners LLP. If you would like to discuss any of the points raised in this blog or you have any questions concerning your charity please do not hesitate to contact Graeme on 0151 600 3079 or graeme.hughes@brabners.com.


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