The Charity Commission of England and Wales recently published an Inquiry Report into a former charity named REDAID. It is well worth reading. In Canada, directors of registered charities sometimes focus too much on the Income Tax Act requirements of a charity and ignore or are unaware of their fiduciary obligations. Directors of registered charities have fiduciary duties that in some cases can be at a much higher standard than that which is provided under the Income Tax Act.
A few highlights of the Inquiry Report are:
1) Charity did not act within its objects
“The charity was an unincorporated body and governed by a constitution dated 1 January 2005 (‘the governing document’). The charity’s objects were ‘the relief of financial need and suffering among victims of natural or other kinds of disaster in the form of money (or other means deemed suitable) for persons, bodies, organisations and/ or countries affected (including the provision of medical aid)’ and ‘the relief and assistance of people in any part of the world who are the victims of war or natural disaster, trouble or catastrophe in particular by the supply of medical aid to such persons’.”
The inquiry found little evidence that the charity was being operated exclusively in furtherance of its objects. The inquiry found that the charity was advertising another loan to charity scheme on its website called ‘Re-Give’. This scheme had been set up as an Industrial and Provident Society and registered with the Financial Services Authority. In practice it was intended to be an online platform where UK organisations with a social purpose could publicise their activities and invite ‘returnable donations’ or loans directly from the public. These organisations would register on a website and, although there would be no joining fee, there would be a transaction fee of 3% of the amount of each loan. The inquiry was told the transaction fee was to be used to administer, advertise and expand the Re-Give initiative. However the inquiry found that any activity in support of Re-Give’s development may not have been exclusively charitable. The chair told the inquiry that, over the previous 2 years, the charity had not directly run any projects and current projects had not been progressed.
2) Misleading fundraising messaging
…Another requirement of the action plan was to ensure any future fundraising was clear, accurate and in the best interests of the charity. This was because the charity’s proposed ‘lend to charity programme’ (‘the programme’) was misleading to the public in assurances it gave about the safety of any funds held. The programme was advertised to the public on the charity’s website as an ‘opportunity to help less fortunate people’ whilst ‘earning up to 10% per annum’. However misleading assurances were given that, if REDAID defaulted on a loan, legal action could be taken to recover the money ‘with the help of the Charity Commission’.
…the chair told the inquiry that funds paid into the charity account were mainly to show a cash flow so they could apply for grants and funding from third parties.
…The inquiry referred the case to the police due to concerns about personal funds being used to show cash flow when applying for grants and due to the unsatisfactory final accounts.
3) Concern about use of cash transactions.
The chair told the inquiry that the trustees did not claim expenses and they were not paid, however the inquiry’s inspection of charity bank statements showed 4 cash withdrawals totalling £14,500. The commission’s guidance makes clear that payments in cash should be kept to an absolute minimum due to the greater risk that handling cash presents and difficulties that can arise in establishing correctness and control over significant cash transactions. Where payments are made in cash they should only be for small amounts, supporting documentation for the cash payment should be authorised by someone other than the person making the payment and cash withdrawals should be reviewed for authorisation and correctness by someone other than the person who withdrew the cash. The chair’s explanation for these cash withdrawals was that the money was used to research and develop Re-Give. However he was unable to provide invoices and gave unsatisfactory and/or confused reasons for this, explaining that the work was arranged informally and was not invoice based.
4) Lack of governance
The inquiry found little evidence to suggest that anyone other than the chair had made decisions in relation to the governance and management of the charity. The chair was the only trustee to attend a meeting with the inquiry and advised that the other current trustees had only been asked to act as such because the charity needed 3 trustees to function.
5) Lack of books and records
The inquiry found evidence of a failure of governance and management within the charity. The trustees failed to produce books and records to the inquiry when required to do so. The chair’s explanation to the inquiry was that this was due to records being held on a corrupted laptop computer which was in the possession of a former trustee who was overseas. The chair conceded that books and records had not been properly kept. The chair told the inquiry, although he knew the charity was required to put plans in place, the action plan had not been complied with because actions had been delegated to people who had not carried them out to a satisfactory standard.
Trustees have a number of legal duties that must be met in relation to accounting and financial reporting. These include:
• keeping ‘sufficient’ accounting records to explain all transactions and show the charity’s financial position
• preparing an annual report and statutory accounts meeting legal requirements
6) Lack of financial controls
The inquiry found the trustees were unable to provide satisfactory evidence of adequate financial controls for the charity. For example, the chair told the inquiry that funds paid into the charity account were mainly to show a cash flow so they could apply for grants and funding from third parties. The inquiry found the trustees did not adequately segregate charitable funds from other funds, for example the chair admitted he had kept about £1,000 of charitable funds in a personal bank account. The inquiry found the trustees were unable to provide invoices to prove legitimate expenditure. In the inquiry’s view, the chair gave unsatisfactory and/or confused reasons for this. For example, he said that many deals were made on the telephone by way of verbal quotes from companies so invoices had not been issued.
It is interesting that if this is what is expected a charity with tens of thousands of dollars in revenues, what are the expectations for charities with tens of millions of dollars in revenue. This report also adds to my general concerns about certain online fundraising portals which are not well managed, which may employ certain techniques to deliberately inflate the amount they are receiving in revenue and which may not have good systems to ensure funds are used for charitable purposes. It is not that hard to set up a charity and essentially it is buyer beware as to whether there is any relationship between what a charity says it is doing and what it is actually doing.
Do you require legal advice with respect to Canadian or Ontario non-profits or charities?
Mark Blumberg is a partner at the law firm of Blumberg Segal LLP in Toronto and works almost exclusively in the areas of non-profit and charity law.