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Financial crime risks for charities
Charities can face financial crime risks due to the nature of their activity, especially when operating internationally or in areas of economic and social upheaval. These risks must be assessed and controlled in order to avoid providing a vehicle for illicit funds or criminal activity.
Charitable organisations working internationally often face acute challenges which make them more vulnerable to financial crime including fraud, theft, looting, money laundering and terrorist financing.
All charities are at risk of fraud and cybercrime and should take practical actions to protect themselves from harm:
One in thirteen people fall victim to fraud each year (1)
Cybercrime is on the rise, exacerbated by the pandemic (2)
The average organisation loses 5% of revenue to fraud each year (3)
Under 9% of charities have fraud awareness training in place (4)
If organisations are fraud aware and resilient this helps to maintain public trust and confidence. Additionally, money which is lost to fraud and cybercrime cannot as a result be spent on charitable causes.
Types of financial crime
Fraud, theft and looting
Some charities working internationally face an increased risk of fraud, theft and looting because of the complexity of working across borders, where there may be fewer controls or where local conditions make it more challenging to apply controls.
Moving funds overseas can often increase these risks because of conversion to other currencies, conversion of cash into goods and back again and, in some areas, unregulated local customs and practices and the absence of formal banking systems.
This usually involves the receipt of illicit funds which are then paid out into the legitimate economy, perhaps in different amounts, to different people and in different forms and currencies.
For example, in order to transfer illicit funds overseas and disguise their origin, donors may make donations to charities and apply specific restrictions regarding which partner or project is to be funded. Charities can accept donations with conditions attached, but only if those conditions are compatible with the charity’s purposes, priorities and activities and are not illegal.
Charities working internationally may be operating in unstable or challenging territories, where the risks of abuse for terrorist purposes are higher. For example, proscribed groups may be active in the area or there may be financial sanctions in place.
The Terrorism Act 2000 includes duties to report any suspicions or beliefs regarding terrorist financing offences.
The UK National Risk Assessment of money laundering and terrorist financing includes a chapter covering charities: https://t.co/AWS9TGgYtu
These vulnerabilities are not spread equally across the sector. Rather, among the large number of charities which operate internationally, a significantly higher risk continues to face the small number of charities that operate in or in close proximity to conflict zones. These charities are likely to be exposed to the greatest risk of abuse through misappropriation of legitimate donations by individuals, including nationals stripped of their citizenship due to their prior or continued links or association with terrorist groups, or individuals acting as a partner to the charities themselves. Other inadvertent forms of abuse occur though skimming, incidental theft or opportunistic looting.
Working in conflict areas or unstable environments where there is little infrastructure and greater security risks.
Delivering activities across different cultures and customs, where illegal activities such as bribery may be seen as the norm.
Having more complex financial operations which may include multiple donors and currencies, often receiving and using cash or undertaking informal money transfers.
Using intermediary partner organisations to deliver services and/or working overseas directly themselves.
In the context of the global public health crisis in 2020, the Financial Action Task Force (FATF) has highlighted the crucial work of charities around the world to combat Covid-19 and its effects. The UK government also continues to recognise the work of charities in providing vital services, as well as the difficulties faced in providing that assistance.
If you suspect a fraud or other financial crime has occurred, you must act promptly.
Follow procedure and have a response plan so that everyone knows what to do and when.
Take reasonable steps to preserve evidence, as it may be needed for investigative or legal proceedings. Consider whether it is appropriate to seek professional legal advice.
Report the incident to your relevant national law enforcement agency and any local law enforcement agency (if abroad).
In the UK it may need to be reported to Action Fraud (England, Wales and Northern Ireland), Police Scotland (Scotland) and/or the National Crime Agency depending on the incident. Suspicion or belief of a money laundering or terrorist financing offence should be reported immediately.
Following these five simple steps can help you reduce the risk of falling victim to financial crime while working abroad.
Assess your risks: risks will depend on the size, nature and complexity of your activities. Risk assessments are a fundamental part of how charities plan, manage and respond to risk and should be conducted regularly.
Have internal financial controls: internal financial controls play an important part in managing risks and should be followed. When reviewing controls, you should take into account changes in the charity’s structure, activities and area of operation that could affect the risks to the charity.
Conduct due diligence on donors, beneficiaries and partners: Charities need to know where their funds come from, how they are applied and who is involved in delivering activities. Performing due diligence will help ensure that individuals and organisations are appropriate for the charity to be involved with and manage any associated risks.
Monitor the end use of funds: keeping audit trails and proper records evidencing the movement of funds helps your charity account for its income and expenditure. Proactive monitoring can help confirm that charitable funds are being used as intended.
Train staff and volunteers: training should be provided to ensure staff and volunteers are familiar with financial controls and know what actions to take if they suspect financial crime. Partners, staff or volunteers working internationally should also receive targeted training on managing risks they may face in specific territories.
Building your charity's defences
Do we understand how the social, political and economic conditions of the countries we work in might affect our exposure to financial crime risks?
Do we have robust financial controls and governance in place, or are additional safeguards required?
Is due diligence performed on donors, beneficiaries, partners and staff, and is it proportionate to the risks involved?
Do we monitor how our funds are spent and keep records of all monitoring activities, including site visits and their outcomes?
Are staff made aware of financial crime risks and how to spot and report them?
Charity Fraud Awareness Week (18 – 22 October 2021) is an award-winning campaign run by a partnership of charities, regulators, law enforcers, representative and umbrella bodies, and other not-for-profit stakeholders from across the world.
The purpose of the week is to raise awareness of fraud and cybercrime affecting the sector and to create a safe space for charities and their supporters to talk about fraud and share good practice.
(1) HM Government and UK Finance (July 2019). Economic Crime Plan 2019-22. Office for National Statistics (3 February 2021). Crime in England and Wales: year ending September 2020.