How to identify fraud and tips to avoid it in your charity
Originally published: July 2017 | Last reviewed: July 2018
With the charity sector in the UK worth £45.5 billion, it’s no wonder that charities are susceptible to fraud and also seen as easy targets by criminals. The high level of cash flow in some charities makes suspicious transactions harder to identify. Sometimes a lack of auditing processes in place can also make fraud difficult to spot.
Trustees have a duty to manage their charity’s finances and resources and ensure that its funds are both protected and accounted for. The Charity Commission has a compliance toolkit for trustees that has guidance and top tips to avoid fraud.
What should you look out for?
According to charity insurers Markel, these are the two most common forms of internal charity fraud:
- Misuse of charity money. While it may be unthinkable that someone working for a charity could steal from it, unfortunately there are unscrupulous people in every sector. Finance teams should regularly carry out audits to ensure that the risk of fraud is minimised. Credit card transactions by one person should also be capped at a certain amount.
- False expenses. Another common method of internal fraud is claiming expenses or overtime which are over-inflated, non-existent or inappropriate. To avoid this, ensure all expense claims are exactly how they are described on the claim form and accompanied by a receipt. Expenses should also be submitted within a set time period, such as within one month. In regards to overtime, ensure that any additional work time is signed off by a manager.
Another area to consider is gift aid fraud, for example if a charity accepts goods in a charity shop and completes a gift aid form (the taxpayer him or herself must complete the form).
The most common forms of external fraud are:
- False invoices. This is a common type of fraud whereby criminals issue charities with false invoices. These will usually contain fake supplier identities and purchase order numbers, with the objective of obtaining payment for goods or services that have not actually been delivered or received. In many cases these invoices are just paid without question because staff assume that goods received are genuine. To prevent this kind of fraud, all invoices should be signed off by an authorising manager who can verify that the services or goods have been received; this step (a physical signature) provides an important audit trail. Larger organisations should have a purchase order system to verify orders.
- Fundraising scams. These scams occur when people fundraise in your charity’s name, and are commonly linked to something high profile, such as a natural disaster. Scammers will try different methods, such as sending an email where the donor will pay a donation by card or fundraising using a collection box in a public place. According to Markel, in an increasing number of cases these fraudsters misuse the name of other charities and then pocket the money for themselves. To avoid this, the Charity Commission recommends that trustees take appropriate steps to stop unauthorised fundraising, which includes taking legal action if necessary and ensure that all donations are passed on to their charity.
- Credit card scams. Beware of fraudsters posing as major donors. In 2016, the Charity Commission warned of a scam in which fraudsters made donation pledges but convinced the charity to transfer half the pledged amount to another (fake) organisation's account. Beware of complex conditions being made by donors and don’t agree to transfer your own money.
All fundraisers and charity staff should familiarise themselves with the Fundraising Code of Practice and the section on Handling Donations in particular to avoid the potential for fraud.
This article draws on the expertise of Nishka Smith, a chartered management accountant and founder of the London-based Visual Finance Ltd., which supports charities to strengthen their financial management and planning capabilities.