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Cost-of-living crisis ‘catalyst’ for fraud risk as more charities fall victim of fraud

28 Nov 2023 News

By Thaut Images, Adobe

The cost-of-living crisis has increased the risk of fraud as more charities fell victim to fraud or attempted fraud last year, according to new research.

The Charity Fraud Report 2023, released today by BDO and the Fraud Advisory Panel, shows that 43% of charities have reported fraud or attempted fraud in the last 12 months. 

The survey of 121 UK-based charities reveals that the majority (67%) identified the cost-of-living crisis and economic downturn “as potential catalysts” for an increase in fraud risk.

Meanwhile, new data from Action Fraud finds that fraudsters diverted more than £2.7m from charities in the last year, with 501 charity fraud crime reports between 1 November 2022 and 31 October 2023.

The report coincides with Charity Fraud Awareness Week, which takes place from 27 November to 1 December. 

Four in 10 charities experienced fraud last year 

BDO and the Fraud Advisory Panel’s report says that the respondents “recognised a more significant internal impact of fraud than in prior years, reporting a loss of staff or volunteer morale as the most common non-financial impact of fraud”. 

Some 36% of charities agreed or strongly disagreed that they had experienced more instances of fraud in the last 12 months, compared with the previous 12 months, while 26% disagreed. 

This, the report says, “suggests a disconnect with the actual experience of fraud, which shows that instances of fraud, both in terms of volume and value, have increased”. 

Indeed, the report finds that 43% of charities reported fraud or attempted fraud, an increase from 36% last year.

Most charities who reported fraud or attempted fraud this year experienced between one and five frauds while 17% suffered more than 10, compared with 9% in 2022.

Cost-of-living crisis ‘a catalyst’ to fraud risk

The majority of respondents (67%) agreed or strongly agreed that the cost-of-living crisis increased the risk of fraud to their charities, “as demand for their services spikes and more individuals and organisations come under financial pressure”, the report says.

Speaking at a BDO event yesterday, Rui Domingues, director of finance and operations at Charity Finance Group, acknowledged that there are “more and more attempts and creative ways to extract money from people” during the cost-of-living crisis. 

“I’m surprised it’s only 67% who identified the economic downturn and cost-of-living crisis as a catalyst for increased risk. It’s a major risk the whole sector needs to be cognizant of and fighting against.”

Domingues said that “we’re seeing increased difficulty in responding to those frauds” as charities deal with “increased financial pressure and rising demand for their services”.

“Financial strain can lead to desperation and desperate measures being taken, both internally and externally. When you’ve got the pressure to try and maintain operations to support beneficiaries, it’s really easy to be tempted into cutting corners or doing something that isn’t quite right. 

“We don’t have infinite numbers of staff members, volunteers, financial expertise or technology and therefore, we might have things stopping us from implementing robust internal controls and oversight.”

He added that the absence of “those checks and balances, governance and oversight creates an environment where fraud can just continue and increase” and that cutting budgets “can be a false economy during a cost-of-living crisis”. 

Half of detected fraud perpetrated by internal members 

This year, half of the detected frauds were conducted by staff members, volunteers or trustees.

On average, charities experienced three types of fraud, namely misappropriation of cash or assets by staff and volunteers (42%), fraudulent staff expenses (35%) and payment diversion fraud, also known as authorised push payment fraud, (33%). 

The report notes that fraud-related financial losses are on the rise, with 92% of charities suffering a financial loss compared with 69% the previous year. 

The majority of charities lost between £1 and £99,999, with 23% experiencing losses between £100,000 and over £1m. 

In addition to financial losses, 45% of charities suffered a loss of morale among staff, volunteers or trustees while 24% reported a loss of reputation. 

When asked about the obstacles faced in preventing fraud, respondents cited an “overreliance on trust” as the most common barrier, followed by a “lack of internal resources” and “lack of fraud awareness”.  

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