Decision

Royal Air Force (RAF) mess charities

Published 27 June 2019

This decision was withdrawn on 18 January 2022

This Inquiry report has been archived as it is over 2 years old.

A statement of the results of a statutory class inquiry into Royal Air Force (RAF) mess charities.

The charities

There are 72 RAF mess charities in the UK and overseas. These charities are established to promote the efficiency of the armed forces through the provision and support of facilities and activities for the well-being of service personnel.

The mess charities are administered according to the Queen’s Regulations for the RAF (5th edition 1999), a standard constitution approved by the Commission, and RAF internal policies. The mess charities are unincorporated associations and are ultimately controlled by the relevant RAF Station Commander as managing trustee at each RAF base. All mess charities have standardised financial control systems and practices and assurance procedures.

Issues under Investigation

On 26 May 2016, the Commission opened a statutory class inquiry into the RAF mess charities under section 46 of the Charities Act 2011 (the ‘Act’).

The Commission’s class inquiry focused on the following principal aspects:

The RAF Honington Fraud

The inquiry examined the circumstances leading to incidents of fraud and substantial financial loss at RAF Honington Officer’s Mess (registered charity number 1131112) and Sergeant’s Mess (registered charity number 1131113).

The matter of financial controls and oversight of RAF mess charities managed by external contractors had been the subject of previous regulatory engagement by the Commission with the RAF during 2012 and 2013. Following this engagement, the RAF provided assurances to the Commission that adequate controls were in place to protect charity assets.

However, the Commission was notified in October 2014 of a serious incident within the two mess charities at RAF Honington involving suspected fraud by the mess accounts clerk. The accounts clerk was an employee of a commercial contractor providing services to the mess charities under a Super Catering, Retail and Leisure (SCRL) contract.

Such contracts are in place at a number of RAF mess charities and involve the contractor taking responsibility for the day-to-day management of certain facilities at mess charities at RAF stations across the UK.

The report from the RAF in 2014 confirmed that the serious incident had been reported to the military and civil police. Despite the initial serious incident report being incomplete, no subsequent update was provided by the RAF to the Commission until 2016.

In February 2016, the Independent Examiner (‘IE’) responsible for examining the two mess charities accounts belatedly (some 16 months after the event) reported the issue to the Commission as a matter of material significance. In that report, the IE indicated that the misappropriation of monies was still not fully known but possibly in excess of £100,000, which would potentially represent losses equivalent to around 50% of the two mess funds’ combined annual income.

The IE’s report also confirmed that accounting records at the mess charities had been destroyed or lost.

On 5 May 2016, shortly before the opening of the Commission’s inquiry, the former mess clerk pleaded guilty to fraud offences against the two mess charities involving £72,690 and was sentenced to 18 months imprisonment for these offences.

The investigation into the Honington Fraud examined:

• the management and administration of the two mess charities, in particular:
  • the extent of the financial loss to the two mess charities and the circumstances which led to the loss
  • whether adequate steps were being taken to recover the loss to the two mess charities
  • whether reasonable steps were being taken to safeguard charity funds and assets
  • the adequacy of serious incident reporting by the managing trustee(s) of the two mess charities
• the extent to which the trustees are complying with their duties under charity law, including the:
  • maintenance and preservation of accounting records, for example s.130 and s131of the Charities Act 2011)
  • preparation and transmission of annual returns, reports and accounts, for example Chapter 4 of the Charities Act 2011)
  • independent scrutiny of the charity’s annual accounts
• whether there has been any misconduct and/or mismanagement by the managing trustees and whether further actions are required by the RAF or the Commission to address the issues under investigation

Broader regulatory concerns relating to all RAF mess charities arising as a result of the RAF Honington Fraud

The Commission had serious regulatory concerns that the circumstances which allowed the fraud at RAF Honington to have occurred could be replicated in other mess charities, particularly those operated under the SCRL contracts. This was due to the fact that other mess charities operated to the same financial control and assurance procedures used by the two mess charities at RAF Honington.

The inquiry therefore examined the extent of recent losses to the other mess charities since the launch of the SCRL contracts and whether adequate steps were being taken to recover any losses which had occurred. In addition, the Commission was concerned whether losses that may have arisen within other mess charities would have been adequately reported.

The trustees of registered charities are under an obligation to report serious incidents to the Commission, the failure of the managing trustee(s) of the RAF Honington mess charities to adequately report the serious incidents to the Commission raised wider regulatory concerns that other mess funds may not have adequately reported serious incidents to the Commission.

The loss of accounting records at the RAF Honington mess charities also raised broader concerns for the Commission about the risk of loss of accounting records across the other mess charities and whether adequate steps were being taken by their managing trustees, and the RAF, to maintain, preserve and protect accurate accounting records.

The Commission’s inquiry therefore also examined the following matters in relation to the other 72 mess charities:

• the management and administration of the other mess funds, in particular:
  • the extent of any financial loss to other mess funds since the launch of the SCRL contracts
  • whether adequate steps were being taken to recover any losses to the other mess funds
  • whether reasonable steps were being taken to safeguard charity funds and assets
  • the adequacy of serious incident reporting by the managing trustee(s) of the other mess funds since the launch of the SCRL contracts
• the extent to which the managing trustees of the other mess funds are complying with their duties under charity law, including the:
  • maintenance and preservation of accounting records, for example s.130 and s131of the Charities Act 2011
  • preparation and transmission of annual returns, reports and accounts, for example, Chapter 4 of the Charities Act 2011
  • independent scrutiny of the charity’s annual accounts
• whether there had been any misconduct and/or mismanagement by the managing trustees on the other mess funds and whether further actions are required by the RAF or the Commission to address the issues under investigation

The inquiry closed with the publication of this report.

Findings

The RAF Honington Fraud

The extent of the financial loss to the two mess charities and the circumstances which led to the loss

As detailed above, the former mess clerk pleaded guilty to fraud offences against the two RAF Honington mess charities in May 2016. The investigation and conviction related to the period June 2012 and October 2014 and to a total of £72,690. The mess clerk was sentenced to 18 months imprisonment for these offences.

Following the opening of the Commission’s class inquiry, and in order to fully examine the causes of the fraud and how it was committed, the RAF mounted their own Service Inquiry (SI) in August 2016 to examine the management, administration and assurance at RAF Honington, prior to, during and following the investigation and conviction of the former mess clerk.

Based on the level of scrutiny and investigation undertaken by the SI, the Commission has been assured that the findings from it can be relied upon as accurate and reliable.

The SI found that the fraud against the mess charities was committed over a significant period of time, which included a period of administrative change at the mess charities. The fraud was carried out from at least 2010 until its eventual discovery in September/October 2014.

During this period, in June 2011, the administration for both mess charities, including management of the mess and non-public accounts, fell under the SCRL contractor. The mess clerk, who up to that point was a civil servant, transferred her employment to the contractor in June 2011. It is evident that the mess clerk had been misappropriating charitable funds prior to and after the implementation of this contract and so there were losses pre and post the adoption of the SCRL contract.

A Proceeds of Crime Act 2002 report relating to the conviction of the mess clerk established that the mess clerk admitted to fraudulently obtaining a total of £197,000 during the period from 2010 – 2014.

The SI found that with many records missing and the time lapse hampering the recall of events by witnesses there was insufficient evidence to determine the total extent of the unaccounted losses and methods to misappropriate funds used by the mess clerk.

Pre-contract losses

The SI uncovered evidence of funds being credited to unauthorised accounts which increased the likelihood of fraudulent activity rather than accounting errors. It was established that the mess clerk obtained £108,000 (of the total of £197,000 within the Proceeds of Crime Act report) prior to transfer of the clerk’s employment from the civil service to the contractor.

Post-contract losses

A balance of approximately £90,000 from the Proceeds of Crime Act report was found to be attributable to the messes following the clerk’s transfer to the contractor. This figure is greater than the £72,000 for which the clerk was convicted for.

Causes

The SI thoroughly investigated the circumstances in which the fraud occurred and identified the causes and contributory factors that provided the opportunity for the fraud to take place within the charities at RAF Honington. These include:

• a lack of adequate segregation of duties from December 2010 provided the mess clerk with the opportunity to manipulate the mess charities accounting records. It was also identified that there continued to be a lack of segregation of duties following the implementation of the SCRL contract in June 2011 and ineffective controls for authorisation of payments which allowed funds to be diverted
• there was ineffective application of governance and safeguards contained in the RAF’s internal policies which removed deterrents and allowed the fraud to continue over a prolonged period
• it was identified that too much trust was placed in the integrity of personnel which appears to have resulted in fraud or theft being discounted by senior staff
• it was identified that there was an overreliance by personnel on the annual Independent Examinations to detect issues and a misunderstanding as to the level of scrutiny provided by an Independent Examination
• there was a lack of suitably qualified and experienced personnel in key roles during the time the fraud took place, as well as a turnover in staff during 2010 and 2011 which contributed to the lack of adequate scrutiny and understanding of the issues
• there appears to have been a lack of urgency to resolve delays in accounts preparation and known and recurring IT issues affecting the mess charities
• there was a lack of ownership and prioritisation of service fund governance at senior levels within the RAF
• the use of cash payments provided an opportunity for fraud to be committed without an auditable trail
• there was an incomplete archive of hard copy and electronic backups of records which created difficulties in recreating accounts following repeated IT failures
• it was identified that service funds were given a low priority in the development of the SCRL contracts which led to ambiguity in responsibilities relating to mess accounting

Based on the evidence available, the inquiry found that the situation at RAF Honington was unique to this particular RAF station and that numerous causes and contributory factors led to an environment in which fraud could take place and continue to take place over a prolonged period without discovery.

Whether adequate steps were or are being taken to recover the loss to the two mess charities

The inquiry found that the mess clerk convicted of the fraud was declared bankrupt and paid just £1 under the Proceeds of Crime Act, so recovery action could not be taken against her. No recovery action took place until after a Loss Report had been produced in June 2017, in order for the RAF to identify the extent of the losses to the messes and allow an informed decision to be made on steps to recover the losses.

Despite the Commission’s concerns about the timeliness in which this was achieved, the RAF secured recovery of approximately £157,000 from Her Majesty’s Treasury (HMT) and £40,000 from the contractor in early 2019.

The RAF sought recovery of the majority of the losses from HMT as it had accepted that it was vicariously liable for the failings of the managing trustees of their legal duties as trustees.

The amount recovered from HMT was informed by the amount agreed with the contractor, £40,000, which reflects the accountability of the contractor in allowing the fraud to take place following the transfer of the mess clerk to their employment.

The RAF therefore secured recovery of the full losses (£197,000) identified in the Proceeds of Crime Act report, which is referred to above.

Whether reasonable steps were being taken to safeguard charity funds and assets

Following the removal of the individual who committed the fraud, the inquiry found that steps were taken to prevent a recurrence of the fraud at RAF Honington. This included the re-instigation of the internal audit board, the appointment of a new IE and tightened controls on bank and cheque payments.

In addition, the flow of information and relationship between the contractor and RAF Honington significantly improved and amendments were made to RAF internal policies.

The Commission is satisfied that the RAF subsequently took the situation seriously and took reasonable steps to investigate the situation and identify how the fraud had been committed following the opening of the SI in August 2016.

However, the inquiry is critical of the significant time that elapsed from the time the fraud was discovered in September 2014 to the opening of the SI by the RAF in August 2016.

It is the Commission’s view that the opening of the class inquiry focussed the RAF’s attention on the seriousness of this matter and questions whether this step would have been taken if the Commission’s class inquiry had not been opened.

The inquiry engaged with the Service Funds’ team, who hold responsibility for ensuring assurance within mess charities, following the opening of the inquiry to seek confirmation whether adequate steps were being taken to better safeguard charity funds and to mitigate the risks of misappropriation.

The Service Funds team provided the inquiry with information relating to the latest assurance visit to RAF Honington and the current and ongoing identified risks. The inquiry was satisfied that measures had been taken to safeguard charity funds and that the mess charities at RAF Honington were addressing the known issues at the station.

Following the recovery of the lost funds, the inquiry notes that the mess charities at RAF Honington have now been able to regularise their financial positions and address solvency concerns stemming from the losses.

The adequacy of serious incident reporting by the managing trustees of the two mess charities

The inquiry found that the serious incident reporting by the managing trustee of the mess charities at the time of the fraud was deficient. The managing trustee in post at the time the fraud was discovered in September 2014 did not provide a full report on the matter and no further information was provided by the trustee or their successor until the Commission engaged with RAF Honington in February 2016, which followed a report of material significance from the IE of the two mess charities.

The inquiry received a new serious incident report from the managing trustee at RAF Honington in October 2018 which concerned the solvency of the two mess charities (recovery of funds had not been complete at this time). This detailed report and the steps described as being taken to address the issues demonstrated to the inquiry that the need to make serious incident reports in a timely manner is now fully understood by the managing trustee at RAF Honington.

The inquiry is also satisfied with the further steps taken by the RAF to ensure Station Commanders are fully aware of their duties as trustees and that adequate training and handover is provided.

The extent to which the trustees complied with their duties under charity law

The inquiry found that the mess charities, and therefore the managing trustees, failed to keep proper accounting records in accordance with the requirements of Sections 130 and 131 of the Act. The managing trustees also failed to submit the annual accounts to the Commission in breach of their statutory reporting obligations in the financial years ending May 2014, 2015, 2016 and 2017.

The inquiry found that the managing trustees charities failed to responsibly manage the mess charities funds by not ensuring that there were effective and proportionate systems of internal control which led both to the fraud being committed and going undiscovered for such a prolonged period.

The inquiry found that during the period the fraud was committed, there was no effective internal or external audit process to help the managing trustee(s) to identify and assess risks to the charities and ensure that they were being properly managed and administered.

The inquiry also found that there was inadequate communication between the managing trustee and those to whom much of the day to day responsibility had been delegated. There also appeared to be a lack of ownership of particular roles relating to the management of mess funds and undoubtedly a lack of knowledge and experience in how to properly fulfil these responsibilities.

Whether there has been any misconduct and/or mismanagement by the managing trustees and whether further actions are required by the RAF or the Commission to address the issues under investigation

Whilst the managing trustee carries ultimate responsibility for the administration and governance of the mess charities, the inquiry notes the unusual nature of the trusteeship of mess charities, with the Station Commander of RAF bases obliged to be the managing trustee of the mess charities under the Queen’s Regulations for the Royal Air Force.

Due to their other commitments, the managing trustees must rely on suitably qualified staff and experienced support to govern and administer the mess charities. The inquiry found this support was limited during the period in which the fraud was committed.

The inquiry found that the managing trustees in place during the period in which the fraud was committed were not fully aware of their responsibilities and duties as trustees prior to their appointments. The SI found that the competing demands placed on the station commander placed unrealistic expectations on the trustees’ ability to devote sufficient priority to the trustee role. As noted above, there were many contributory and casual factors which led to the fraud being committed and not all of these can be attributed to the managing trustees alone.

The inquiry did find serious mismanagement and/or misconduct in the administration of the Honington mess fund charities during the period in which the fraud was committed, although notes that there were mitigating factors which, whilst not absolving the managing trustees of responsibility, did create the environment in which the fraud could be committed and continued over a prolonged period.

The inquiry has found that the RAF has taken decisive and appropriate action to address the weaknesses and deficiencies identified as being contributory or casual factors to the fraud at RAF Honington. The inquiry has received assurances that RAF Honington’s governance and assurance processes are now operating effectively and in accordance with the RAF’s standardised policies and procedures.

It was unnecessary tor the Commission to take regulatory action due to the action taken by the RAF to remedy the issues outlined above and to put procedures in place to prevent such a situation occurring in the future.

Broader regulatory concerns relating to all RAF mess charities arising as a result of the Honington Fraud

The extent of any financial loss to other mess funds since the launch of the SCRL contracts

The inquiry requested information from the RAF regarding all financial losses and serious incidents affecting mess charities since 2011. The inquiry was provided with information relating to incidents of financial loss at two other mess charities, which had both been previously reported to the Commission.

The inquiry established that these incidents were handled appropriately and that losses were recovered in both cases.

Whether adequate steps were or are being taken to recover any losses to the other mess funds

As referred to above, the inquiry was satisfied that the other instances of financial loss were handled appropriately and losses recovered.

Whether reasonable steps were being taken to safeguard charity funds and assets

The inquiry also received information regarding the RAF’s assurance processes and its assurance regime for each mess charity.

The inquiry considers that the reduction in the resourcing of RAF’s central oversight and compliance assurance of mess funds combined with some confusion about responsibilities and accountabilities for charitable mess funds during the switchover to SCRL contracts created a heightened risk to the RAF’s charitable mess funds between 2011 and 2013 and was a contributory factor in the length of time it took for the Honington mismanagement and losses to be identified and adequately gripped.

It is the inquiry’s view that it was as much a matter of circumstance and good fortune that other significant losses did not occur in the rest of the RAF mess fund estate during this period.

Since 2014 the RAF has made significant and ongoing improvements to obtain assurance on compliance and financial risk management of its charitable mess funds.

Regular compliance and risk analysis reports are produced on each mess charity and processes are in place to identify mess charities with higher risk factors and mechanisms to address such risks in an appropriate and timely manner.

The inquiry undertook a compliance inspection at a randomly selected RAF base in March 2017 and was satisfied that the mess funds inspected were being appropriately managed and administered and that charitable funds were adequately safeguarded.

The inquiry is satisfied that the RAF now has an adequate control and assurance framework in place to safeguard charity funds and assets.

The adequacy of serious incident reporting by the managing trustee(s) of the other mess funds since the launch of the SCRL contracts

The inquiry found that serious incident reporting at other mess charities was adequate and was assured that appropriate steps were taken by the SI to ensure that managing trustees at each mess charity are fully briefed on their roles and responsibilities as trustees which is designed to ensure that serious incidents are appropriately reported.

The extent to which the managing trustees of the other mess funds are complying with their duties under charity law

The inquiry did not identify any specific instances in which the managing trustees of other bases had failed to comply with their duties.

Whether there had been any misconduct and/or mismanagement by the managing trustees on the other mess funds and whether further actions are required by the RAF or the Commission to address the issues under investigation

The inquiry did not find any instances in which further regulatory action was required.

However, the RAF have implemented significant changes to processes and policies to address the deficiencies and weaknesses identified from the incident of fraud at RAF Honington.

Conclusions

The Commission concludes that a number of factors and deficiencies in the processes and procedures at RAF Honington had the cumulative effect of creating an environment in which a significant fraud could be committed by one individual over a prolonged period. Whilst the RAF had policies and procedures in place to adequately safeguard charitable funds, it is apparent that the specific circumstances at RAF Honington did not provide an environment in which the policies, procedures and risk management controls were effectively applied and monitored either locally or centrally. The failure to ensure that financial duties were adequately segregated was a basic flaw which allowed an unscrupulous individual to exploit the use of charity funds for their own personal gain.

The Commission has concluded that there was serious mismanagement and/ or misconduct in the administration of the mess charities at RAF Honington during the period in which the fraud was committed because the charities’ assets were not responsibly and prudently managed. In particular:

• charity funds were placed at undue risk by the failure to ensure that basic financial controls were followed, which resulted in losses of around £200,000 over a period of 4 years

• a failure to comply with the legal duty to ensure that adequate accounting records were maintained and preserved, which compromised the ability to effectively manage and account for the charity funds. In addition legal reporting obligations, for example under section 130, section 131, and Chapter 4 of the Charities Act, were also breached

• although the fraud was reported to the civil and military police when it was discovered in 2014, the inquiry concludes that other reasonable steps were not taken in a timely manner at RAF Honington, or more widely across the RAF mess fund estate to address the risk and issues arising from the fraud

The managing trustees (ie the Station Commanders) who were in post bear the legal responsibility for the mismanagement at RAF Honington. However the Commission recognises the unusual nature of the trusteeship of mess charities and that their legal duty arises as a result of their employment and post.

The duty arises by virtue of their post and employment since The Queen’s Regulations of the Royal Air Force obliges Station Commanders to serve as managing trustees of their RAF Station’s charitable funds.

The Commission therefore regards the RAF as having a broader responsibility to ensure that adequate support and controls are in place to enable the prudent management of charitable mess funds and that those funds are not placed at undue risk.

The inquiry found this support was limited during the period in which the fraud was committed.

The inquiry considers that the reduction in the resourcing of RAF’s central oversight and compliance assurance of mess funds combined with some confusion about responsibilities and accountabilities for charitable mess funds during the switchover to new contracts with third party commercial service providers created a heightened risk to the RAF’s charitable mess funds between 2011 and 2013 and was a contributory factor in the length of time it took for the Honington mismanagement and losses to be identified and adequately gripped.

It is the inquiry’s view that it was as much a matter of circumstance and good fortune that other significant losses did not occur in the rest of the RAF mess fund estate during this period.

The Commission also considers that the RAF was slow to take robust action to properly investigate the fraud, given that the fraud was discovered in September 2014 and the related RAF Service Inquiry was not opened until August 2016. It should not have taken the opening of a class inquiry by the Commission in May 2016 to mobilise an appropriate corporate response from the RAF to the issues and risks that the Honington fraud raised.

The Commission considers that since 2016 that the RAF’s response has been thorough. It acted responsibly in ensuring that identifiable losses to charity funds were recovered by the contractor and HM Treasury. It has also acted to address the local issues at Honington and the broader systematic risks identified by the RAF service inquiry.

The Commission has been provided with assurances and evidence from the RAF that they have strengthened their internal policies, procedures and assurance function to adequately mitigate operational and financial risks across all of the 72 mess charities.

However, administering charity funds is not the RAF’s ‘core business’ and clear structural and continuity risks arise from the relatively short tenure of the sole managing trustee appointments, in an era of funding and resource pressures for public bodies. It is therefore incumbent on the RAF to ensure that it maintains a sustainable governance, assurance and risk management framework for charity funds linked to its RAF stations.

Regulatory action taken

Following the opening of the Commission’s inquiry, the Commission engaged with the RAF to investigate its regulatory concerns and to identify whether the use of protective regulatory powers was necessary or proportionate.

The RAF provided assurance that charitable funds were now not at risk and provided evidence as to the systems of assurance in place to monitor the mess charities. Evidence was also provided with regard to other instances of loss across the mess charities.

In August 2016, the RAF confirmed that a Service Inquiry had been commissioned to examine the management, administration and assurance at RAF Honington, prior to, during and following the investigation and conviction of the former mess clerk.

The Commission was satisfied that the SI would examine the circumstances relating to the fraud in great depth and that the RAF were acting responsibly and robustly in seeking to understand the causes of the fraud and how systems and procedures could be improved to adequately protect charitable funds going forward.

The SI reported on its findings in July 2018 and made numerous recommendations for improvements to systems and procedures within the management and administration of mess charities. The Commission has monitored the implementation of these recommendations and is satisfied that adequate progress has been made to demonstrate that mess charities, including RAF Honington, are now operated within a robust system of assurance that mitigates risk as much as possible.

The inquiry undertook an inspection visit to a randomly selected RAF base, RAF Benson, in April 2017 to ascertain the level of confidence in the operation and management of the mess charities on site. The inquiry team were provided with appropriate information and documentation to determine that the mess charities on site were being operated effectively, that the managing trustee fully understood his role and responsibilities and that adequate records were available.

Issues for the wider sector

Trustees are responsible for the overall management and administration of a charity. Trustees should ensure that financial controls are not only adequate but provide sufficient information to satisfy the trustees that the controls are being observed.

If, due to the nature of the charity, its work, location and/or set up the trustees delegate supervision of financial arrangements to one or a small number of trustees or employees, they need to ensure that there are arrangements in place for proper reporting back to the whole trustee body.

In this way, system failures or issues can be identified at an early stage.

A serious incident is an adverse event, whether actual or alleged, which results in or risks significant:

• harm to your charity’s beneficiaries, staff, volunteers or others who come into contact with your charity through its work (who are collectively referred to throughout this guidance as people who come into contact with your charity through its work)
• loss of your charity’s money or assets
• damage to your charity’s property
• harm to your charity’s work or reputation

A serious incident should be reported to us immediately, not just on completion of the annual return.

Find out more about reporting a serious incident in your charity.