MA 1985

Question 1

The charity

Accepted Answer

The charity, was registered on 28 October 1986. It was governed by a declaration of trust dated 30 November 1985 as amended by supplementary resolutions dated 11 December 1994, 23 January 1995, 14 February 1995, 7 May 1995, 5 January 1997 and amended by scheme dated 18 April 2013 and resolutions dated 16 October 2016.

Prior to the Charity Commission’s inquiry, the charity reported in its annual accounts that it worked internationally in 70 countries across Africa, Asia and Europe, with thirteen operational field offices ^{[footnote 1]} in addition to a further two international fundraising offices. Its income and expenditure, were as follows for the accounting years ending:

Financial year	Income	Expenditure
20013/14	£34,659,416	£31,259,196
20012/13	£26,683,444	£26,567,999
2011/12	£24,789,201	£28,167,770

In the course of this inquiry the charity was incorporated into a new Charitable Incorporated Organisation (‘the new CIO’). Assets and liabilities belonging to the charity were transferred to the new CIO (effective from 31 January 2018) and the charity, formerly known as Muslim Aid was renamed MA 1985. The charity ceased to operate and was removed from the Register of Charities (‘the Register’) on 1 February 2018. Since its registration ^{[footnote 2]}, the new CIO has been known as Muslim Aid (1176462). A new trustee board took office from 31 January 2018.

Question 2

Background and context leading up to the opening of the statutory inquiry

Accepted Answer

The charity had previously been the subject of a regulatory compliance case in 2010 and received regulatory advice and guidance. A regulatory compliance report had been published into the charity on 17 December 2010. One of the issues raised in that report related to the charity working with partners abroad and the Charity Commission (the Commission) had made a number of recommendations ^{[footnote 3]} in relation to working internationally and due diligence. It was unclear to the Commission whether the charity had fully considered and acted on the regulatory advice and guidance received and whether the trustees had taken sufficient and/or reasonable steps to protect the charity, including its reputation, assets and property.

On 17 July 2012, the charity submitted a serious incident report to the Commission in relation to various incidents and financial irregularities, and possible fraud, in the charity’s field offices in Sudan and Gambia. The charity confirmed to the Commission that they were conducting their own internal investigation, and were taking professional advice. In addition the charity informed the Commission that they were reviewing all controls in relation to the operation of their field offices.

In response to the serious incident report the Commission’s operations team engaged with the charity and requested further information in relation to the issues raised. The trustees provided the operations team with field reports in relation to the Sudan office which included a number of allegations surrounding financial malpractice, failure to comply with the charity’s policies and procedures, misuse of the charity’s name and logo and failure to declare a conflict of interest.

Further allegations were raised in respect of financial mismanagement at the Gambia office in relation to the accounting process and financial procedures.

The operations team was informed that a full investigation had been conducted by a forensic accountant and the trustees had undertaken a field visit to the Sudan field office in December 2012. The forensic accountant’s report concluded that there was insufficient evidence of criminal conduct or any evidence of improper gain, recommending that no further legal action be taken by the charity.

The charity’s own investigation into the management of the Gambia office also discovered a number of financial irregularities relating to the management of the office, including inadequate record-keeping and deficiencies in internal financial controls, which the charity, had decided were best dealt with by closing the Gambia office.

During initial engagement with the Commission, the charity stated they had no information to suggest that the charity had suffered any financial loss as a result of the above matters.

The Commission acknowledges that the trustees complied with requests for additional information regarding the serious incident report. However despite the charity providing assurances to the Commission that lessons had been learnt and the charity’s policies and procedures had been strengthened as a result of their own findings to prevent further repetition, rather than allay concerns, the additional information provided by the charity merely highlighted the sheer scale of concerns about the charity’s wider financial management, specifically its due diligence, monitoring and oversight of its field offices.

Consequently the Commission considered that the nature of these allegations and the weaknesses in monitoring and due diligence in relation to the field offices raised serious regulatory concerns which required further examination under the remit of a statutory inquiry.

On 20 November 2013 the Commission opened a statutory inquiry (‘the inquiry’) into the charity under section 46 of the Charities Act 2011 (‘the Act’).

The inquiry closed with the publication of this report.

The Commission’s regulatory concerns related to:

significant financial loss to the charity
serious governance failures
poor financial controls
loss or misuse of charitable funds for improper purpose

The original issues under investigation were:

Examining transactions between the charity and Comprehensive Care Company (“the company”) ^{[footnote 4]}
The overall governance of the charity by the trustees with specific regard to due diligence and monitoring of end use of funds with particular focus upon the charity’s international field offices and
Whether or not the trustees have complied with and fulfilled their duties and responsibilities under charity law.

Question 3

Conduct of the inquiry and reconstruction of the charity into a new CIO

Accepted Answer

The Commission conducted a meeting with trustees on 27 January 2014. Three books and records inspections took place between March and July 2014. A further meeting was conducted with trustees of the charity on 21 August 2014.

The Commission provided regulatory advice and guidance to assist the charity’s trustees to further strengthen the way due diligence and monitoring procedures are applied and recorded. This was achieved by delivering a presentation on “Due Diligence and Evidencing the End Use of Funds” to staff of the charity.^{[footnote 5]}

In order to assist the trustees in improving the administration and management of the charity, the trustees were referred to a wide range of Commission guidance covering governance, financial management and risk management.

This regulatory advice and guidance was provided under section 15(2) of the Act in relation to the Commission’s statutory functions to encourage and facilitate the better administration of charities and to identify and investigate apparent misconduct or mismanagement in the administration of charities, and to take remedial or protection action in connection with this. Section 15(2) advice is not regarded as a legal order or direction of the Commission, however failure to comply with such advice may be regarded by the Commission as misconduct and/or mismanagement.

On 23 January 2015 the Commission issued an order, under section 84 of the Act, directing the trustees of MA 1985, to implement a number of actions ^{[footnote 6]} aimed at, improving governance and financial management within certain timescales and report to the Commission on progress as specified below.

Actions required of the trustees of MA 1985

The section 84 order directed the charity and its trustees to carry out a governance review of the administration and management of the charity and to implement the outcome within 12 months of the date of the section 84 order.

The inquiry remained open so the Commission could monitor the trustees’ compliance with the s84 Order.

Follow-up work conducted by the inquiry

The inquiry monitored the charity’s compliance with the section 84 order and confirms that the charity provided the inquiry with interim reports as specified.

To verify submissions made and in order to inspect the charity’s financial records and related documents, the inquiry visited the charity’s offices on 23 July and 30-31 July 2015. The inquiry also met with trustees on 24 March 2016 to discuss a number of additional complaints received from the charity’s staff regarding the management and administration of the charity.

The inquiry examined substantial volumes of electronic and paper based records and submissions made by the charity in support of progress reports and designed to illustrate to the Commission their progress and/or compliance with the order.

In addition, on the 25 August 2016 the trustees informed the Commission that they had successfully appointed a new, highly experienced CEO ^{[footnote 7]} (a role that had been unfilled since January 2016).

After consideration of reports and supporting evidence, the inquiry wrote to the trustees on 6 September 2016, acknowledging the amount of effort that the charity had put into responding to the order but notifying them that the inquiry had concluded that the charity had successfully complied with only a small number of the actions specified in the order ^{[footnote 8]}.

The inquiry found that in the main there were deficiencies against most actions which meant that the charity had not reached the required standard and had not complied with the order. In written submissions made to the inquiry on 19 September 2016, the trustees accepted that the charity had not fully complied with the section 84 order but welcomed the opportunity to meet with the Commission to discuss the next steps. Additionally the trustees stated that part of the newly appointed CEO’s role would be to implement proposed initiatives which included governance improvements.

During the course of the inquiry the Commission received complaints from a variety of sources which raised further regulatory concerns regarding:

overall governance and lack of leadership from the SMT and Board Members
performance and capability of key staff related to the charity’s financial operations
lack of financial controls and fit for purpose financial systems resulting in data integrity issues and insufficient planning for the 2015 audit
conflicts of interest being correctly identified, managed and properly document by the charity

Considering the size of the charity, its worldwide presence and that it may be more at risk than other charities who did not operate in the same areas if they were unable to satisfactorily address the deficiencies, the inquiry was clear that ongoing concerns warranted further regulatory action being taken by the Commission. The inquiry requested a further meeting with the trustees on 20 September 2016 to discuss the Commission’s continuing regulatory concerns, the charity’s non-compliance with the section 84 order, the inquiry’s concerns that the improvement objectives set for the new CEO were too onerous for an individual new to the organisation, and the Commission’s use of further regulatory powers to remedy matters.

Appointment of an interim manager

The inquiry used the power in section 76(3)(g) of the Act to appoint an interim manager, to the exclusion of the trustees of MA 1985. The order to appoint Michael King of Stone King LLP as the interim manager (the IM) was made on 17 October 2016.

The scope of the IM’s appointment included taking control of the management and administration of the charity to the exclusion of trustees, reviewing its financial controls and completing, with the support of the new CEO, the governance and infrastructure review initiated by the trustees.

The costs of the IM’s appointment were met out of the charity’s funds and are itemised as follows:

fees for acting in the role of IM - £141,896
disbursements – (expenses, e.g. travel, accommodation, etc.) - £537
VAT - £ 28,379

In addition over £120,000 of work was undertaken by the IM on a pro bono basis. The IM remained in post until 5 February 2018.

As part of his appointment, the IM, with the support of a newly appointed CEO completed a full governance and infrastructure review of the charity and its activities. His initial findings corroborated the Commission’s regulatory concerns which had “identified poor overall leadership, management and weak financial controls over its international operations”. The IM’s investigations found “systemic failings in MA 1985’s governance, leadership and management structures and personnel, including financial controls, monitoring of project outcomes and expenditure, dysfunctional relationships with country offices, staff distrust of the management structure, conflicts among the trustees”.

Remedial actions were taken to regularise the charity’s governance to ensure it was fit for purpose. This encompassed the following:

incorporation of the charity into a new CIO, which was successfully registered by the Commission on 29 December 2017
transfer of all assets and liabilities to the new CIO
recruiting a new trustee board which took office from 31 January 2018
setting up a new leadership structure and team
induction and training of new trustees and new leadership team
conducting a comprehensive review of the charity’s international operations, identifying significant management issues regarding the legal responsibility and relationship between the charity and field offices, particularly those involving intellectual property rights

The inquiry met with the incoming trustees, the new Senior Leadership Team (the SLT) and the IM on 5 October 2017 and conducted further records inspections at the charity premises over two days ^{[footnote 9]} in order to test the progress made in strengthening their governance management since January 2015. The records inspections included the examination of charity policies, handbooks, manuals, guidance, as well as ten project files detailing overseas grants to the charity’s offices and external partners ^{[footnote 10]}.

The inquiry noted the significant progress made in strengthening the SLT. It also found that the new SLT had been able to implement a number of improvements in their relatively short tenure, however a number of inherited weaknesses remained in the charity’s administration. It was accepted by the new incoming trustees and the new SLT that further improvements were required in a number of key areas which included reviews of charity policies and guidance, safeguarding, HR, financial controls and governance of field offices.

The inquiry considered submissions and further evidence from the charity following the visits inspection and accepted the incoming trustees undertaking to have oversight and responsibility for implementation of a new section 15 Action Plan.

On the 1 February 2018, the inquiry received formal notification from the IM that the Charity’s affairs had been concluded and it had been wound up. The Commission considered the IM’s submission of a dissolution application following which the charity, MA 1985 was removed from the Register on 1 February 2018 because it had ceased to operate.

The IM was discharged on 5 February 2018 by virtue of section 337(6) of the Act.

Issuing of the 2018 action plan to the new CIO

The Commission met with the new trustee board of the CIO, Muslim Aid (1176462) on 13 April 2018 to ensure that they understood their responsibilities and trustee duties.

The new trustee board confirmed to the Commission that the CIO, Muslim Aid (1176462) would be inheriting the policies, procedures, HR and financial controls and systems of MA 1985.

The Commission issued formal regulatory advice under section 15(2) of the Act to the new board of trustees in the form of a new Action Plan (the 2018 action plan). This sets out a number of steps which need to be taken by the new trustees to resolve issues of concern about the charity’s ongoing management and administration and to ensure that the new trustees comply with their legal duties and responsibilities and act in the best interests of the charity.

The Commission has made clear that if the new trustees fail to comply with the 2018 action plan within the specified timescales, they could be guilty of misconduct and/or mismanagement. The new trustees have also been put on notice that we will be monitoring the new CIO’s progress against the 2018 action plan and we will expect the new trustees to be able to evidence that they have taken steps to ensure compliance with these action points.

Question 4

Findings in respect of the original issues under investigation

Accepted Answer

Issue 1: examining transactions between the charity and the company

The inquiry, scrutinised the actions of the charity in relation to how they had managed risks identified by their internal investigations into the Sudan field office. The inquiry found that there were significant weaknesses in the charity’s internal financial controls and, a lack of financial oversight in respect of the Sudan field office. The trustees were unaware of conflicts of interest ^{[footnote 11]} and unauthorised use of the charity’s name and logo.

Prior to the opening of the inquiry, the Commission had been informed by the charity that appropriate steps had been taken to investigate allegations received concerning transactions between the charity and the company and that they had taken appropriate advice to ensure that the charity had not suffered any financial loss.

The Commission had also been provided with a forensic accountant’s report (‘the report’) commissioned by the charity regarding alleged financial irregularities in the Sudan field office. The report included documents relating to the company and explanations in relation to the transactions between the charity and the company. It concluded that there was no documentary evidence to support a finding of financial loss suffered by the charity or that there had been irregular or improper use of the charity’s funds.

However the report did highlight there was clear evidence that proper formal procedures had not been followed in the Sudan field office, placing the charity’s assets at risk and concluded that the charity may have suffered reputational damage as a result of the irregularities found in the Sudan.

Whilst the scope of the inquiry was to examine the transactions between the charity and the company, the inquiry’s investigations into this issue highlighted serious concerns regarding the charity’s wider financial management and administration of their field offices.

Issue 2: The overall governance of the charity by the trustees with specific regard to due diligence and monitoring of end use of funds with particular focus upon the charity’s international field offices

Due diligence and monitoring

To meet their legal duty to protect charity assets with the necessary care, and properly to assess risk, trustees must carry out appropriate due diligence on those individuals and organisations that the charity receives donations from, gives money to, or closely works with, following this up by monitoring and evaluating work.

Trustees have ultimate responsibility for running a charity, its finances and property. They must always act to protect property owned by their charity and ensure its finances are used appropriately, prudently and in accordance with its charitable purposes.

The inquiry visited the charity on 10 March 2014 and met with the Senior Management Team (‘the SMT’). During the meeting the SMT outlined the charity’s due diligence and monitoring procedures.

The inquiry also conducted two records inspections at the charity’s premises over five days ^{[footnote 12]} which included examination of the charity’s policies, handbooks, manuals and other guidance as well as project folders. These project folders held significant documents relating to the charity’s overseas grant making procedures which included due diligence and monitoring of the end use of the funds. In total, one hundred and eight project folders were examined detailing overseas grants to the charity’s offices and external partners ^{[footnote 13]}.

The inquiry found inconsistencies in the quality of files and record keeping. The charity was failing to properly check relevant Home Office website to determine whether any potential partner organisation was a proscribed organisation, thereby exposing the charity to the risk of unwittingly funding a proscribed organisation. This demonstrated a clear lack of prudence which was aggravated by the failure of staff to check other websites that the SMT (in the presence of the trustees) had previously stipulated were, mandatory checks^{[footnote 14]}, applied in all instances of their due diligence process. It is of serious concern that the SMT and/ or trustees had provided the inquiry with misleading information and were failing to adhere to its own minimum standards for due diligence.

During the inquiry’s inspection on 10/11 June 2014 it was found that the charity was also failing to correctly search the HM Treasury indexes of proscribed organisations and those subject to financial sanctions for grants made between 10 March 2014 – 11 June 2014. This omission raised concerns regarding the completeness of checks carried out during the period and exposed the charity to the risk of unwittingly funding a proscribed organisation and / or one that was designated.

From scrutiny of the sample of records examined, the inquiry, has not seen any evidence to demonstrate, that the charity had made payments to any proscribed or designated organisation. However if the appropriate due diligence checks are not carried out the fact that money has not gone to such organisations is a matter of good fortune rather than good financial administration.

The inquiry found, that the charity had not fully implemented the 2010 recommendations, and further they were not fully complying with the charity’s own due diligence procedures as described by the charity at the meeting held with SMT on the 10 March 2014. The lack of action to implement the 2010 recommendations was not adequately explained to the inquiry.

The inquiry’s assessment of documents which had been provided by the charity as evidence of their due diligence processes and monitoring of the end use of funds identified a number of concerns about the adequacy of these provisions. The inquiry found limited evidence of the appropriate level of supervision and management being applied to the process and the procedure being correctly followed in respect of conflicts of interest, references and written agreements between the charity and partner organisations.

The inquiry identified that twelve of seventy eight project folders (15%) covering overseas grants made during January 2011–December 2012 failed to include a completion report evidencing the end use of charitable funds. There was some evidence that completion or interim reports had been requested but non-compliance had not been followed up.

The inquiry found that where completion statements were available submission varied significantly from country to country and in some cases there was insufficient detail to properly evidence the end use of charitable funds.

Although the inquiry identified examples of the trustees allocating funding specifically for monitoring, audit or verification purposes, the project folders examined failed to confirm that this had taken place in all instances.

Intellectual property rights

The inquiry found that the charity had allowed overseas external partners to use its intellectual property rights. It was unclear whether any formal agreements existed between the charity and external partners using its name or logo, or whether there had been any consideration as to whether the arrangements were in the best interests of the charity. The charity did not have a policy covering third party use of intellectual property. The trustees asserted that arrangements which did exist were based on local historical informal agreements. This represented a risk given the ability of the external partner to open bank accounts that included the term “Muslim Aid” in their title - as this could give the misleading impression that the entity was a charity or was controlled by the charity.

The inquiry also found that the charity had registered the charity’s name and logo with the Intellectual Property Office in the UK, although took no steps to use the ® registered trademark symbol to inform the public that the name and logo were protected in the UK.

Staff loans

The inquiry found that a number of staff loans had been made in field offices contrary to the charity’s policies. These loans had been requested to be paid back to the charity although it is thought that there are a considerable number which remain unpaid. There was no apparent documentation such as repayment plans or written agreements in place to ensure that the charity could enforce recovery in the event of non-payment. The inquiry found that no disciplinary action had been considered or taken against those staff members facilitating the loans.

Assets

The inquiry also found that, trustees had failed to ensure that the charity’s assets were properly recorded on asset registers. Furthermore, where these registers did exist they were poorly maintained, and in the case of field offices, they were not independently available for scrutiny by the charity’s headquarters for oversight and management purposes, further increasing the risk of abuse of property owned by the charity.

Additionally the inquiry found, that funds were available to distressed callers to the charity offices in the UK but the charity were unable to demonstrate that a procedure existed that allowed for a full audit trial of the process of grant making.

The Commission recognises that, since the opening of the inquiry, the charity had attempted to address these weaknesses by embarking on an internal audit programme of all its field offices. This was being overseen by the charity’s Internal Audit and Risk Management function.

Charity trustees are all equally responsible for the management of their charity. It is acceptable for trustees to delegate aspects of the day to day management of their charity to one trustee, staff or others. However, charity trustees must always retain the ultimate responsibility for running the charity.

Whilst delegating tasks it is vital that adequate safeguards are in place. Trustees are under a duty to manage and supervise the activities carried out in the charity’s name and should ensure they adequately monitor and oversee the way in which their delegated powers are exercised.

The inquiry found that the charity held in excess of one hundred bank accounts in numerous countries throughout the world – some of which contained minimal funds or had not been used for significant periods of time. The charity did not have control measures in place to ensure that it had independent oversight of all the accounts held in the charity’s name or those that contained charitable funds. The latter included accounts created to facilitate local project implementation and private accounts of overseas staff, where local banking facilities were not available to the charity.

The inquiry also found evidence of the field offices benefiting from favourable currency exchange rates that enabled them to either spend excess funds or create reserve accounts without the knowledge or consent of the charity. The SMT assured the Commission during a meeting on 12 March 2014 that this practice was ending with steps being taken in the meantime to limit the occasions that payments were made in sterling and then applying staged payment on an 80/20% basis. During the inspection on 10/11 June 2014 it was noticed that the practice of payments being made in sterling was still in operation, thereby continuing to allow for benefit from favourable currency exchange rates.

Charity’s policies and guidance

The inquiry found that there were, in some field offices, significant issues of non-compliance with the charity’s policies, guidance and frameworks which exposed the charity to the risk of loss of assets or risk to reputation. Non-compliance with policies designed to reduce exposure to risks to the charity were not considered to be a key performance indicator for staff and therefore were not considered necessary for inclusion in staff/professional development reviews. Staff and trustees with operational and management responsibility for identification of risk, risk assessment and control, due diligence and monitoring processes were unaware and/or unclear of their responsibilities.

The inquiry found that the charity’s policies, handbooks, manuals and other guidance often failed to identify specific authority levels for seeking authorisations thereby creating confusion for staff in determining who the appropriate authorising officer was for a particular action.

The inquiry acknowledges that the trustees recognise the need for policies and guidance as a necessary component of good governance however further review of these policies is required to strengthen governance procedures.

Issue 3: whether or not the Trustees have complied with and fulfilled their duties and responsibilities under charity law

Trustees have and must accept ultimate responsibility for directing the affairs of a charity and ensuring that it is solvent, well run and delivering the charitable outcomes for the benefit of the public for which it has been set up. In relation to duty of care, the Commission’s essential trustee guidance^{[footnote 15]} states that trustees must:

use reasonable care and skill in their work as trustees, using their personal skills and experience as needed to ensure that the charity is well-run and efficient; and
consider getting external professional advice on all matters where there may be material risk to the charity, or where the trustees may be in breach of their duties

If things do go wrong within a charity, the trustees must take appropriate action to put things right.

On the evidence it saw, the inquiry was not satisfied, that the charity’s trustees had adequately discharged their legal duties and responsibilities under charity law to take appropriate steps to prevent abuse of their charity. The inquiry found that the charity trustees had not:

taken adequate steps to minimise the risk to their charity coming into close contact with proscribed organisations
adequately implemented due diligence and monitoring procedures as advised in the Commission’s 2010 recommendations
maintained adequate records to verify that funds have been spent properly as intended and in a manner consistent with the purpose and objectives of the organisation
adequately managed the charity’s finances or protected the charity’s assets, including reputation despite receiving advice and guidance from the Commission
taken prudent steps to prevent and detect or deter misconduct in the charity’s field offices as demonstrated by the trustee’s lack of effective oversight of the operation of the field offices

The inquiry examined the way the charity dealt with a number instances of misconduct. There was no minimum standard applied to the charity’s enquiries and no terms of reference existed when cases were dealt with outside of the Internal Audit and Risk Management function. This created huge variations in the standard of investigation and was further aggravated by the diverse skill base of those conducting the investigation.

The report of the forensic accountant, referred to under Issue 1, indicated , that the charity may have suffered reputational damage as a result of the irregularities found in the Sudan office. It concluded that there was clear evidence that proper formal procedures had not been followed in relation to the purchase and import of two vehicles, the sale of a mobile clinic, purchase of a water tanker and the purchase, exchange and use of electricity generators.

The inquiry found no evidence that the charity had illegally funded any proscribed or designated entities. However the inquiry found that the charity was unable to demonstrate, that it had followed its own due diligence and monitoring procedures consistently.

For the above reasons the Commission considers these matters amount to serious mismanagement by the trustees of MA 1985.

Question 5

Conclusions

Accepted Answer

Charities which undertake relief work in areas of high risk must ensure that robust safeguards are in place to protect their assets, people and reputation to ensure public trust and confidence.

Charity trustees must ensure that their charity complies with charity and criminal law and the requirements of the Commission as a regulator.

The Commission recognised that vital relief work around the world, sometimes in very difficult conditions, was carried out by the charity and that the regulatory concerns in this case were brought to the attention of the Commission as a result of a serious incident report submitted to the Commission by the charity.

The Commission’s conclusions are that:

the failure of the then board of trustees of the charity, to implement the 2010 recommendations and comply with its own due diligence and monitoring procedures exposed the charity’s assets and / or reputation to undue risk
the charity was unable to demonstrate, conclusively, that it had followed its own due diligence and monitoring procedures consistently and thereby could not give the Commission appropriate assurances that all of its funds had been properly applied
that the insufficiency of the measures taken to control, monitor and document the use of charity funds prevented the charity’s trustees from being able to demonstrate that all of its funds had been used legitimately and properly in all instances and in furtherance of the charity’s purposes. It also risked the charity’s funds being misapplied without the trustees’ knowledge
some of the field offices, acted with minimal oversight and management from the charity as demonstrated by a number of examples in this report. The Commission acknowledges that the charity embarked on an internal audit programme of all the field offices by the Internal Audit and Risk Management function and now have internal audit functions operating in at least two field offices
the charity had allowed overseas external partners to use its intellectual property rights and did not have a policy covering third party use of its intellectual property. The then trustees had fallen short of ensuring that adequate safeguards were in place to protect the charity’s assets and its reputation, resulting in potential harm to the charity’s reputation and ultimately its fundraising in the future

The inquiry concluded that, for the reasons outlined in this report, that the then board of trustees fell short of the standards required and expected, particularly of a large, well known and trusted charity with substantial operations and reach. The then board of trustees did not meet with their duties to act with reasonable care and skill and fell short of their responsibilities under charity law.

Following the appointment of a new CEO, the IM, and SLT, significant progress has been made to address the governance and improve oversight and control by the new trustees. The inquiry recognises the progress made by the IM and the new SLT, including reconstructing the charity into a new CIO. Progress made has been significant enough to provide assurances needed to enable the inquiry to close. The work of the trustees and senior leadership must continue as this is not a quick fix given that the new CIO largely inherited the legacy systems and processes from the old charity – and it is vital to ensure that the new CIO continues to operate on a sound and proper footing delivering aid and assistance in hard to reach places across the world with the public’s confidence about how this is done. The Commission welcomes the commitment of the new trustees to oversee this transition.

The Commission will continue to monitor the new CIO over the next 24 months to ensure that it achieves the objectives set out in the 2018 action plan.

Question 6

Issues for the wider sector

Accepted Answer

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.

Question 7

Financial controls

Accepted Answer

Trustees must ensure that their charity has adequate financial and administrative 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 reach the places that it is intended to, this is key to ensuring public trust and confidence in charities.

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 the guidance.

Trustees must comply with their statutory obligations to maintain the accounts and records of their charity. There should be a clear audit trail of where bank accounts are held, what they are held for and who has access to them. Trustees should not only ensure that financial controls are put in place but also that sufficient information is reported back at trustee meetings to satisfy them that the controls are being property observed. Such systems help prevent financial crime and ensure the charity is reporting accurately to the public and help protect the charity’s reputation.

Question 8

Application of charitable funds

Accepted Answer

Trustees have a legal duty to protect charity assets. Charity trustees must exercise sufficient control over their charity’s financial affairs both in the UK and internationally. Because of this fundamental duty, it is essential that they ensure adherence to appropriate financial and administrative controls. As an absolute minimum, they must keep proper and adequate financial records for both the receipt and use of funds and audit trails of decisions. Records of both domestic and international transactions must be sufficiently detailed to demonstrate that funds have been spent properly and in a manner consistent with the purpose and objectives of the charity.

A significant aspect of a trustees’ legal duty to protect charitable assets, and to do so with care, means carrying out proper due diligence on those individuals and organisations that give money to or receive money from or work closely with the charity.

Where charities give money to partners and beneficiaries, especially large amounts of money or in high risk situations, making sure that adequate due diligence processes are in place is crucial. This means verifying that charity funds or property reach their proper destinations and are used as the charity intended. Where partners are funded to implement a project or deliver aid, the trustees:

must carry out appropriate due diligence on individuals and organisations that the charity gives grants to or uses to carry out charitable projects and help deliver its work- this involves the trustees assessing the risks to ensure that partners are suitable and appropriate for them to work with
should also consider whether any arrangements they make, will need to comply with local laws
should properly manage the working relationship with the partner: the charity’s and partners’ goals, aims and ways of working should be compatible
must ensure that entering into the arrangement is in furtherance of the charity’s purposes – trustees should ensure they have reasonable assurance that the partner is capable of delivering the proposed activities or services and has in place appropriate systems of control
follow good practice rules for agreements that are drawn up with partners for significant projects or long term relationships, setting out what the arrangement is, when any project or work should be delivered by and how and what happens when the arrangement is comes to an end - this helps protect the charity’s position - the agreement would normally be clear about who has responsibility for what actions, how payment and financial matters of the work will be managed and reported on, and what happens should any targets not be met or the project not be delivered
must ensure it is clear how the relationship with the partner will work on a day to day basis and how on a practical level the charity will engage with the partner; these should be clearly and appropriately documented
they are given clear instructions and know what is expected of them and what procedures the charity needs them to follow-this may mean they need to see the charity’s procedure manuals, and the charity ensures they understand what they mean
must ensure appropriate and regular monitoring is carried out to ensure charity funds reach the intended beneficiaries and have been properly applied - this includes taking appropriate and reasonable steps to verify the proper end use of the charity’s funds

Trustees need to remember that they remain responsible for ensuring the legitimate and proper application of the charity’s funds even if they delegate activities and provide funding under a partnership arrangement. Whatever the nature and complexity of the arrangement between a charity and its operational partners, trustees cannot delegate their legal duty of care.

Question 9

Monitoring

Accepted Answer

Whatever the size and complexity of the proposed arrangement, trustees should ensure that they properly consider the risks involved to make certain that these have been sufficiently considered and where appropriate managed. Trustees must be able to account for the proper use of charity’s funds in order to maintain donor confidence.

Monitoring may take a variety of forms depending on the nature of the charity’s work and the amount of charitable funds involved. Monitoring will almost always include some steps to verify that funds have been passed to the partner and verify their proper end use. Monitoring processes protect the trust and confidence a charity’s donors have in it.

For a variety of reasons monitoring may not be easy and may present practical challenges. This is particularly so in certain parts of the world where access to the areas in which the charitable work is being carried out may be restricted.

Failure to carry out proper due diligence and monitoring, particularly where the risks are higher, may mean a trustee does not discharge their legal duties and this failure may be regarded by the Commission as evidence of misconduct or mismanagement.

Further information can be found in the Commission’s Compliance toolkit - Chapter 2 - Charities: due diligence, monitoring and verifying the end use of charitable funds.

Although it is legitimate for trustees to delegate the day to day management of a charity to staff and others, charity trustees retain the ultimate responsibility for running the charity and should ensure robust reporting procedures are in place.

Every charity needs an effective trustee body which has control over the administration of the charity and acts as a whole, especially because all trustees’ are equal in responsibility; lack of trust and confidence in leadership may have detrimental impact on the charity, staff morale and public confidence.

To be effective and to meet their statutory duties as charity trustees they must 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 and ensure compliance with 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. The Commission expects trustees to make conscientious and continuing efforts to ensure that they resolve the issues that have already been raised with them by the Commission. Where a previous commitment has been given, the Commission will view non-compliance as evidence of misconduct or mismanagement.

The courts have held that charity trustees have a duty to cooperate with the Commission. Whether they do so or not is a relevant factor in assessing whether misconduct or mismanagement has occurred in the administration of a charity. The level of cooperation the Commission received from charity trustees may be a relevant factor in the Commission’s consideration of whether regulatory action is proportionate. This is particularly relevant where the Commission has opened statutory inquiries.

Question 10

Appendix I – 2010 Recommendations

Accepted Answer

On 17 December 2010, the Charity Commission (the Commission) issued a regulatory case report of an investigation into the charity following allegations that the charity had made payments to partner organisations that were allegedly linked to terrorist groups.

During the investigation the Commission conducted an inspection of the charity’s books and records to review how the charity’s due diligence and monitoring procedures were applied in 2005, when the payments were initially considered, through to 2010.

The Commission concluded from its examination of a number of project files, that inconsistencies existed in the extent of information held about different funding applications and projects. However, it was not clear whether the variations were the result of short falls in the application of the charity’s due diligence and monitoring procedures or inconsistencies in record keeping.

The Commission found no evidence that the charity had illegally funded any proscribed or designated entities. However, the investigation found that the charity were unable to demonstrate conclusively that it had followed its own due diligence and monitoring procedures consistently.

The regulatory case report recommended (the 2010 recommendations) that the trustees conduct due diligence checks to ensure:

a) the activities they intend to carry out through their local partners are in furtherance of the charity’s purposes

b) their partners are and continue to be appropriate for the charity to work with; and

c) the trustees have taken reasonable steps to monitor the end use of funds to make sure that:

i. their partners can and will apply their funds for proper charitable purposes; and

ii. the funds reach their partners and end beneficiaries

Furthermore, it was recommended that in order for trustees to fulfil their duties, the charity’s due diligence processes should include:

d) realistic and reasonable risk management strategies and procedures to identify and mitigate risks to the proper use of funds

e) a comprehensive and consistently applied selection process. This includes checks to be conducted on prospective and existing partners to enable the trustees to satisfy themselves that that their relationship with an organisation would not expose the charity’s assets or reputation to undue risks

f) a written agreement, to be put in place before any funding is sent. This is to set out how the partnership will work and how results will be demonstrated and monitored

g) properly implemented methods to monitor how partners operate and demonstrate that money or resources given have reached their partners and beneficiaries as intended

Question 11

Appendix II – section 84 Order

Accepted Answer

On 23 January 2015, the Charity Commission (the Commission served a section 84 Order on the charity, specifying a number of actions that the charity was required to take in order to improve its governance and financial management within 12 months of the date of the Order.

The action points required the trustees to take all reasonable steps to improve and strengthen the following areas:

Action 1: Governance – Due Diligence

To ensure that due diligence is robustly undertaken on partner organisations and individuals that the charity supports with project funding and that full audit trails evidencing the process exist

Action 2: Governance – Monitoring

To ensure that monitoring of the end use of funds is robustly conducted and full audit trails evidencing the process exist

Action 3: Governance – Managing Risk

To manage risk within the charity

Action 4: Governance – Audit

To ensure that the overseas officers are fully compliant with all charity HQ policies (subject to local legal frameworks), guidance and frameworks

Action 5: Governance – Anti-Fraud, Bribery and Corruption

To ensure that effective policies exist that deal with anti-fraud, bribery and corruption issues and that all trustees, staff and volunteers are aware of the policies

Action 6: Governance – Intellectual Property

To protect the intellectual property of the charity

Action 7: Governance – Professional Development and Review

To ensure compliance by staff with all legal and regulatory requirements, policies and guidance

Action 8: Governance – Investigations into mismanagement and/or misconduct

To ensure that any investigation into mismanagement or misconduct by a trustee, staff member or volunteer is fit for purpose

Action 9: Governance – Whistleblowing

To further staff confidence in the charity’s whistleblowing policy and that it is fit for purpose

Action 10: Governance – Policies (General)

To ensure that the charity’s policies, handbooks, manuals and other guidance accurately reflect authority levels to be applied across the Charity

Action 11: Financial Management – Overseas Bank Accounts

To review all overseas banks accounts to ensure that they have been opened and maintained in accordance with policy and that full audit trials evidencing the control of these accounts exists

Action 12: Financial Management – Transfer of funds overseas

To ensure that robust financial controls are in place and that full audit trails evidencing the controls exists

Action 13: Financial Management – Staff Loans