In 2017, the Annual Fraud Indicator published a report which highlighted that charities and charitable trusts are estimated to have lost £2.3 billion due to fraud. This is up on the £1.9 billion reported in 2016 . Reasons cited for this include a rise in expenditure on procurement which has led to an increase of almost £400 million in estimated fraud.
So what is it that makes charities an attractive target to fraudsters? The Charity Commission has provided an interesting round up of what it believes to be the main causes:
• Charities have high levels of public trust
• They often rely on the goodwill and support of employees and the notion that ‘no one would abuse a charity’
• Small finance teams often result in a lack of scrutiny and division of duties
• Having high levels of cash income that naturally fluctuates
• Using volunteers may also make it more difficult to ensure financial controls are maintained consistently.
It is important to note that fraud can take place in the form of an external attack, and from within the charity itself. Here are some examples of both internal and external fraud:
• Fraudulent cheques
• Intercepted cheque or cash donations before they are paid into the charity’s bank
• Misuse of credit cards by staff
• Staff falsely claiming expenses
• Inadvertent human error through email, file sharing or USB sticks
• Fraudulent cheques and false invoices
• Identity fraud by hijacking bank accounts or phishing emails
• Card-washing schemes
• Database hacking or theft
If you want to examine a more comprehensive list of potentially fraudulent activities, take a look at the Charity Commission’s Compliance Toolkit – Fraud and Financial Crime.
So, if fraud is something you are likely to face as a charity, how can you spot the warning signs? Most internal fraud exposures can be mitigated through internal controls and audit processes, so segregation of duties and dual controls being in place to release monies are good ways to minimise these risks. Also, be sure to look out for changes in people’s behaviour. People commit fraud for a number of reasons including greed, boredom or debt, so a change in mannerisms could be another giveaway.
As pointed out in the report above, fraud is an increasing concern amongst charities, and it is therefore imperative to consider how you can prevent such an attack happening to your organisation.
The good news is there are a number of things you can implement within your charity to aid prevention, for example the Charity Finance Group’s Charity Fraud Guide for trustees and managers suggests instilling a culture of ethical behaviour, raising awareness of social engineering fraud, developing an anti-fraud policy and implementing robust financial controls, amongst others.
However, sometimes despite your best efforts, you can still fall victim to dishonest activities. Some charities still believe that insurance is too expensive for them, or that the chance of being a victim of fraud is so remote that the premium required just isn’t worth it. Given the increase in fraud and the variety of ways that fraud can hit a charity it may now be time to reconsider this.
There are two types of insurance available: Fidelity Guarantee or Employee Crime for internal fraud only, and Crime Insurance for both internal and external fraud. Fidelity Guarantee was the first type of cover available and has been around for over 40 years. It offers protection and compensation should a charity be defrauded by its Finance Director, an employee, volunteer or trustee. The wider Crime cover extends to cover fraud involving third parties such as the public, organised crime, temporary workers and anyone else who is not part of the charity.