The breadth of work in the charity sector is considerable, and inevitably some serious incidents will occur, despite best efforts to prevent them. What is important is what a charity does to reduce the risk that an incident might occur, and how its trustees (or senior staff with delegated authority) deal with a serious incident if it does arise.
On 22 September 2017, following consultation with professionals, charities, and other relevant sector bodies, the Charity Commission published updated guidance on reporting serious incidents, together with a response on consultation feedback. On the whole the new guidance has been well received.
What is your legal duty?
There is no legal duty to declare serious incidents outside the context of a charity’s annual return. Registered charities with a gross annual income of over £25,000 in the relevant financial year must declare in their annual return that there were no serious incidents or other matters relating to the charity, over the previous financial year that they should have brought to the attention of the Charity Commission.
Notwithstanding this strict legal position, there is a clear expectation from the Charity Commission that all charities (regardless of size or income) should report serious incidents. Failure to comply with the voluntary reporting principle may be treated by the Charity Commission as evidence of mismanagement or misconduct.
Exempt charities, that is charities regulated by other statutory agencies (such as the Department for Health), have a duty to report serious incidents to their principal regulator, who would be expected to liaise with the Charity Commission on any issues of concern, under the terms of various memoranda of understanding entered into between them.
For a variety of reasons, it may not be possible or practical to report a serious incident immediately. For example, if another statutory agency has forbidden this while an incident is being investigated, or the trustees are in the process of formulating an appropriate and proportionate plan of response. The Charity Commission has accepted that trustees must exercise their discretion in terms of the timing of their report, based on reasonable judgement, having regard to all the different factors arising. If you think that a serious incident is likely to attract media attention, it is always useful to seek to inform the Charity Commission about the incident before they pick it up in the press.
Responsibility for reporting
Protecting a charity’s assets, reputation, and beneficiaries are essential trustees’ duties, and therefore, ultimately, responsibility for reporting rests with the trustees, although it can be delegated to someone senior within the charity.
Employees wishing to report any concern of serious wrongdoing should follow the Charity Commission’s charity employee whistleblowing guidance www.gov.uk/guidance/whistleblowingguidance- for-charity-employees.
Auditors and examiners have their own whistleblowing duties and procedures, covered by separate Charity Commission guidance www.gov.uk/government/publications/guidance-forauditors- and-independent-examiners-of-charities.
What is a serious incident?
A serious incident is considered by the Charity Commission to be any event (actual or alleged) which has an adverse impact upon a charity, including the loss of funds or assets, damage to a charity’s property, or harm to the work, beneficiaries or reputation of the charity.
The Charity Commission sets out in its guidance some indicative factors that a serious incident might have occurred, which are designed to help trustees and senior staff un-pick this definition, in recognition of the fact that it can be hard to identify when an incident is reportable, and when it is not.
Broadly, a serious incident may arise from financial crimes (such as fraud, theft and money laundering), large donations when the source is unidentifiable, suspicious internal financial activity, other financial loss, safeguarding issues, links to terrorism or extremism, or incidents that create a reputational risk.
There is no minimum loss figure for reporting financial crimes, and the greater the loss (pecuniary or otherwise) the more serious the incident is likely to be. Trustees will need to decide whether incidents are serious enough to report in the context of their charity’s income, taking into consideration the actual harm and potential risks posed. That said, the Charity Commission makes it clear that low value incidents can pose serious risks too, and they may be indicative of inadequate internal financial controls or procedures, or that someone is trying to avoid detection.
Some charities are more at risk of financial crime than others, due to the nature of their activities, and in recognition of this, the Charity Commission has developed a Compliance Toolkit, covering advice on protecting charities from harm, including various chapters on how to safeguard your charity from terrorism, fraud and other abuse.
Discovering financial crime can be very distressing, and the impact on a charity both emotionally and financially can be significant. Where there is evidence or suspicion of fraud (dishonesty relating to a charity’s finances, identity issues, cyber, or data breaches) or other financial crime, immediate and decisive action is required in order to mitigate financial and reputational risk.
Where there is suspicion of financial crime, the trustees will need to carry out a thorough investigation, including evidence gathering, identifying and mitigating financial risk, communicating with stakeholders, and considering whether it is appropriate to take interim measures in suspending employees whilst investigations are ongoing. Advice may be required.
Actual or suspected criminal activity should always be reported to the Charity Commission, and it may be necessary to report the incident to the police or other appropriate statutory agencies.
Significant financial losses
These include losses through insolvency, significant fines and penalties, and losses arising from funding cuts and litigation. Significant financial losses that threaten a charity’s ability to operate and to serve its beneficiaries, or where a charity’s financial reserves are insufficient to cover the loss, must be reported. As a guide, the Charity Commission would expect a charity to report any loss of funds or property with a value in excess of 20 per cent of the charity’s income, or if the total loss was over £25,000. The greater the level of loss, the more serious an incident is likely to be. Financial losses resulting from a decrease in the value of a charity’s pension fund or investments are not reportable.
Unverified or suspicious donations
The Charity Commission considers, as a guide, that suspicious donations, or donations from unverified sources, of £25,000 or more are reportable as serious incidents. Due diligence, monitoring and verifying the end use of charitable funds is fundamental to ensuring that funds donated to a charity are used in accordance with a donor’s intentions and charity law.
Due diligence exercises should include looking out for suspicious circumstances, ensuring that policies and procedures are adequate and that it is clear what volunteers and staff must do if something is suspected or poses a high risk. For example, in some circumstances it may be necessary to refuse a donation, and where this is the case this decision must be properly documented. Trustees and senior charity employees must have procedures in place to record and verify the source of substantial donations.
What can a charity do to mitigate risk?
The trustees have a legal duty to protect their charity’s funds, property, beneficiaries, and reputation, and the best way of discharging this duty is to ensure that robust internal procedures, sound financial management, and systems of strong governance are in place and strictly enforced. Procedures and policies should be reviewed regularly to ensure that they are robust and up to date.
Clear reporting lines are really important, and employees should be encouraged to ask questions early. If trustees are in any way unsure whether they should be reporting their concerns, then they should take legal advice; a charity may be exposed to reputational risk if it is not seen to be protecting its assets and beneficiaries appropriately, and it is not always clear what action would be expected.
If you do need to report an incident, you should have regard to the checklist of information the Charity Commission has identified it requires. At the same time as notifying the Charity Commission of the incident, trustees should be in a position to confirm what investigations have been carried out, what action has already been taken, and what solutions are being proposed.
It is important to remember that serious incident reporting is a key pillar of the Charity Commission’s regulatory framework, and timely reporting allows the Charity Commission to identify problems at an early stage, ultimately helping to promote public trust and confidence in the charity sector.
It is also important to note that the Charity Commission is not a prosecuting authority. It can, however, refer incidents to lead agencies such as the police and the local authority where appropriate, and it can draw on various interim and statutory powers to intervene where it considers a charity’s assets, beneficiaries, services, or reputation are at risk.
For more information, see www.gov.uk/guidance/how-to-report-a-serious-incident-in-yourcharity# what-to-report.
Joanna Blackman is a solicitor at Wrigleys Solicitors
Charity Finance wishes to thank Wrigleys Solicitors for its support with this article