Decision

Charity Inquiry: Keren Shmuel

Published 18 October 2024

Applies to England and Wales

The charity

Keren Shmuel (the ‘charity’) was entered onto the Register of Charities (the ‘Register’) on 27 September 1996. It is governed by a Trust Deed (the ‘Governing Document’) dated 27 August 1996.

The charity’s purposes, as set out in the Governing Document, are:

• the advancement of the Orthodox Jewish religion
• the promotion and support of Orthodox Jewish religious education, and
• the relief of poverty among persons of the Jewish faith

In practice the charity furthers its purposes through the provision of grants to charitable organisations.

More details about the charity can be found on the Register.

Background and Issues under Investigation

On 20 September 2013, the Charity Commission (the ‘Commission’) opened a statutory class inquiry (the ‘Class Inquiry’) into charities whose trustees were in default of their statutory obligations to meet reporting requirements by failing to submit their annual accounting documents for two or more years in the last five years and met certain other criteria.

Having failed to submit its annual accounting documents to the Commission for the financial year end 31 December 2014 and 2015, the charity became part of the Class Inquiry on 15 February 2017. The Class Inquiry is ongoing.

The scope of the Class Inquiry is confined to dealing with trustees non-compliance in connection with the annual accounting documents.

On submission of the outstanding annual documents, the charity ceased to be part of the Class Inquiry on 10 March 2017 following the trustees’ (hereinafter referred to as the ‘former trustees’) submission of the outstanding annual accounting documents. On 11 May 2017, the Commission published a statement of the results of the Class Inquiry specifically in relation to the charity.

Following its exit from the Class Inquiry, the charity went into two further defaults having failed to file its annual accounting documents on time. The Register shows the charity’s annual accounting documents for the financial year end 31 December 2019 and 2021 were filed 18 days and 109 days late respectively; with the December 2021 filing being submitted on 17 February 2023.

Despite having been sent several reminders from the Commission to submit its annual accounting documents ahead of the deadlines, and the fact that the charity had previously been subject to the Class Inquiry, the charity’s former trustees defaulted again on their statutory obligations by failing to submit the required annual accounting documents to the Commission by its due date. In doing so, the former trustees also failed to comply with the charity’s governing document. These failures are misconduct and/or mismanagement in the administration of the charity.

Consequently, on 4 April 2023, the Commission opened a Statutory Inquiry (the ‘Inquiry’) into the charity under section 46 of the Charities Act 2011 (the ‘Act’) to consider the following:

• the administration, governance and management of the charity by the former trustees
• the financial controls and management of the charity
• the conduct of the former trustees

The Inquiry closed with the publication of this report.

Findings

The administration, governance and management of the charity by the trustees

Trustees have a statutory duty to prepare accounts and annual reports and, where required, submit these to the Commission within 10 months of the charity’s financial year end. Even where a charity is not automatically required to submit accounts or annual reports to the Commission, they must provide them if requested to do so. Any charity with a gross income of over £10,000 must prepare and submit an annual return to the Commission. Any charity with an income of over £25,000 must submit its accounts to the Commission. Failure to adhere to these obligations is a criminal offence and mismanagement and/or misconduct in the administration of a charity. Trustees are also accountable for their charity’s resources and should be able to demonstrate that their charity is complying with the law, is well run and effective.

The charity’s income for the financial year end 31 December 2019 and 2021 exceeded the £25,000 threshold.  

The former trustees were fully aware of the statutory obligations to submit annual accounting documents, as they were explicitly made aware of this whilst the charity was in the Class Inquiry. The former trustees also gave assurances to the Class Inquiry that future filings would be submitted on time and attributed past failings on relying on one trustee to administer the charity.

The failure to ensure that the charity’s annual accounting documents were filed on time (for the relevant periods) shows a repetitive failure on the part of the former trustees to comply with the duties of a trustee to be accountable and comply with the law. This is continuing evidence of the former trustees’ misconduct and/or mismanagement in the administration of the charity and is a criminal offence under section 173 of the Act. The misconduct and/or mismanagement is compounded by the fact that the charity had already been subject to the Class Inquiry and the assurances provided as part of that by the former trustees in May 2017.

In addition to the former trustees’ failure to comply with the Act, the former trustees breached clause 6(J) of the Governing Document which constitutes a breach of trust and/or duty and is evidence of misconduct and/or mismanagement in the administration of the charity. Clause 6(J) requires the trustees to “take all such actions as are necessary to comply with the accounting and reporting requirements contained in the Charities Act 1993”.

Clause 6(J) also sets out that the trustees are “to arrange for the accounts of the charity to be audited annually by a qualified accountant…” The charity’s accounts for the financial year ends December 2017, 2018, 2019, 2020, 2021 and 2022 are marked as “unaudited”. The Inquiry noted that the accounts have undergone an independent examination, but an audit is separate to this and is specifically required by the Governing Document. charity trustees are not able to choose an independent examination if their charity’s governing document, a funder, or the Commission requires an audit to be carried out. The former trustees’ failure to comply with this part of the Governing Document is further evidence of their misconduct and/or mismanagement in the administration of the charity.

During a meeting with some of the former trustees on 30 August 2023, the trustees explained that the annual accounting documents (for the financial year end 31 December 2019 and 2021) had not been submitted on time due to the delegation of all trustee duties being relied on one trustee, which mirrors what had previously been stated back in 2017 to the Class Inquiry.

The former trustees, responsible for the delayed filings, have since left their roles. Recognising the failures, one former trustee (who was the charity’s then Chair) advised it would be in the charity’s best interests for new trustees to be appointed. Subsequently, the remaining trustees resigned, and new trustees were appointed in July 2023, October 2023, and November 2023.

The financial controls and management of the charity

Trustees are under a legal duty to ensure funds are used only in furtherance of the charity’s purposes and are legally responsible and accountable for their proper use. Trustees must be able to demonstrate that funds have been used for the purposes for which they were intended. This means they need to take reasonable and proper steps to ensure that any money or resources have reached their intended beneficiaries.

A Commission accountant reviewed the accounts submitted and identified that they were deficient and did not comply with the requirements of the Statement of Recommended Practice (‘SORP’).

On 30 August 2023, the Inquiry met with the former trustees in order to examine the administration, governance and management of the charity, particularly with regards to the former trustees’ accounting obligations. In addition to this, the Inquiry also conducted a books and records inspection of the charity’s financial and other records.

At the meeting, the former trustees told the Inquiry that the charity moved large amounts of its charitable funds overseas to other entities which aligned/furthered the charity’s purposes. However, when further questioned it became clear to the Inquiry that there was a lack of policy/procedure in place with regards to due diligence and monitoring the end use of the charity’s funds.

The Inquiry’s review of the charity’s bank statements found that between 2018 and 2022 more than £550,000 of charitable funds was transferred overseas by the former trustees. The Inquiry sought to understand whether the former trustees were able to fully account for this sum. The Inquiry is of the view that whilst the former trustees have provided an explanation as to how the funds have been applied, there was insufficient evidence provided to show and explain how the majority of the charity’s funds were expended in furtherance of the purpose for which they were sent overseas.

In failing to keep adequate accounting records of how the charity’s funds have been expended, the now former trustees breached their legal obligations under the Act (sections 130 and 131). This is misconduct and/or mismanagement in the administration of the charity.

The conduct of the former trustees

The Inquiry found that the conduct of the former trustees fell below the standard that the Commission expects of trustees and that there had been misconduct and/or mismanagement in the administration of the charity.

There were failings relating to the former trustees’ financial management, to follow basic requirements in the Governing Document and in the overall governance of the charity. This includes evidence of poor management of, and lack of records of the charity’s expenditure overseas. As a result, the Inquiry found that the former trustees had not complied with or fulfilled their duties as trustees under charity law.

Conclusions

Trustees play a crucial role in the governance of charities and are required to use their skills, knowledge, and experience to run their charity well and in its best interests. This was not the case here.

The Commission concluded that there was misconduct and/or mismanagement in the charity’s administration by the former trustees. This includes a serious disregard for, and/or a lack of understanding of, the importance of proper financial controls and accountability in respect of the charity’s funds.

Regulatory action taken

The Inquiry exercised the Commission’s regulatory powers under section 47 of the Act to obtain information and copy documents from the former trustees.

On 20 August 2024, the Inquiry exercised the Commission’s power under section 75A(1) of the Act to issue the charity with an Official Warning. The Official Warning was issued to the charity in respect of the former trustees’ failures as set out above.

In this case we do not intend to proactively publish the proposed warning on our website as reference to it has already been made in this Inquiry report.

To improve aspects of the charity’s administration and governance, the Inquiry has issued the current trustees with rectifying actions in the Official Warning which requires them to take certain actions within a specified timeframe, referring to the failures set out above. The Commission at the relevant time will monitor the trustees’ compliance with these rectifying actions.

Issues for the wider sector

The purpose of this section is to highlight the broader issues arising from the Commission’s assessment of the issues raised publicly that may have relevance for other charities. It is not intended as further comment on the charity in addition to the findings and conclusions set out in the earlier sections of this report but is included because of their wider applicability and interest to the charity sector.

Trustees’ accounting and financial duties

Trustees of charities with an income of over £25,000 are under a legal duty as charity trustees to submit annual returns, annual reports and accounting documents to the Commission as the regulator of charities. Even if the charity’s annual income is not greater than £25,000 trustees are under a legal duty to prepare annual accounts and reports and should be able to provide these on request. All charities with an income over £10,000 must submit an annual return.

In failing to keep adequate accounting records of how the charity’s funds have been expended, the now former trustees breached their legal obligations under section 130 and 131 of the Act.

Failure to submit accounts and accompanying documents to the Commission is a criminal offence. The Commission also regards it as mismanagement and misconduct in the administration of the charity.

Due diligence, monitoring and verification

Trustees must ensure that their charity has adequate financial controls in place, it is important that the financial activities of charities are properly recorded, and their financial governance is transparent. Charities are accountable to their donors, beneficiaries and the public. Donors to charity are entitled to have confidence that their money is going to legitimate causes and reaches the places that it is intended to, this is key to ensuring public trust and confidence in charities. In this case there was no clear audit trail of cash donations from donor to bank, or to expenditure.

The Commission has produced guidance to assist trustees in implementing robust internal financial controls that are appropriate to their charity. Internal Financial Controls for Charities (CC8) is available on the Commission’s website. There is also a self check-list for trustees which has been produced to enable trustees to evaluate their charity’s performance against the legal requirements and good practice recommendations set out in Internal Financial Controls for Charities.

Charity trustees should ensure that adequate records are kept of their decisions so that they can demonstrate that they have acted in accordance with the governing document and with best practice. In this case there were no records of either trustees meetings or decisions taken in relation to the charity. Such records ensure that trustees can demonstrate that they had:

• acted honestly and reasonably in what they judged to be the best interests of the charity
• taken appropriate professional or expert advice where appropriate
• based their decisions on directly relevant considerations

Governance

Trustees are jointly and equally responsible for the management of their charity. To be effective and to meet their statutory duties as charity trustees they must contribute to the management of the charity and ensure that it is managed in accordance with its governing document and general law. All charities should have appropriately tailored internal policy documents which address the specific risks associated with the kind of activities that are undertaken. Trustees should ensure that these policies are implemented and reviewed at appropriate junctures. A failure to implement internal policy documents could be evidence of mismanagement in the administration of the charity and can put assets, beneficiaries and a charity’s reputation at risk.