Charity Commission Inquiries: themes from recent cases

Charity trustees are perhaps under more pressure now than they have ever been: the Covid-19 pandemic threw many charities into crisis, with difficulties arising in relation to finances, staffing and volunteer numbers; followed by the cost of living crisis, which has resulted in large drops in charitable giving.

It is within this difficult backdrop that the Charity Commission – regulator and registrar of charities in England and Wales – exercised its regulatory power to carry out statutory inquiries into charities on 18 occasions in 2022 and has published 6 reports so far this year. The Commission has the power to open a statutory inquiry where is has identified serious cases of abuse and/or regulatory concern. The purpose of a statutory inquiry is to determine the extent of the alleged abuse, identify the risks posed to the charity and its beneficiaries, and decide what action is required to resolve the situation.

We have considered the Commission’s reports in detail and have found that there are two stand-out recurring themes: conflicts of interest and financial controls.

Managing conflicts of interest

Poor management of conflicts of interests is, year on year, one of the most common themes arising out of the Charity Commission’s statutory inquiries. Poorly managed conflicts of interests of trustees can lead to a range of serious issues for charities and the wider sector: decisions which are not in the best interests of a charity can be left open to challenge; and public trust and confidence in charities can be negatively impacted.

Examples of poorly managed conflicts included in the Commission’s statutory inquires includes:

• A charity agreeing to sell a property to person who was both a family member of one of the trustees, and the owner of a charge against the property. The charity in question did not have a conflicts of interest policy place, nor did the trustees understand how to identify a conflict of interest. See: Charity Inquiry: Beth Yosef Foundation.
   
• A charity entering into complex transactions with companies owned personally by the charity’s trustees, with no effective management of the conflicts of interest which arose in the transactions. See: Charity Inquiry: Achiezer.
   
• A chair of a trustee board transferring funds from the charity’s bank account to their own personal bank account to reimburse themselves for money spent on behalf of the charity, without the supervision or authorisation of another trustee. See: Charity Inquiry: One Community Organisation.

These mistakes highlight how important it is that trustees familiarise themselves with their legal obligations in respect of conflicts of interest, ensure that they are aware of the provisions for identifying, preventing and recording potential conflicts within their governing document or a separate conflicts of interest policy and, where appropriate, to seek professional advice. Trustees can familiarise themselves with their legal obligations in relation to conflicts of interest by reading the relevant Charity Commission guidance.

Financial controls

The exercise of proper financial controls and accountability in respect of charity finances are key duties of a charity trustee. Unfortunately, all too often we see the Commission making findings against charities in respect of poor financial management (in fact, our analysis would suggest that it was the most common recurring theme).

Examples of poor financial controls and management of charity finances in the Commission’s recent statutory inquiries include:

• Failing to keep adequate accounting records when sending millions of pounds in aid abroad. See: Charity Inquiry: Assyrian Church of the East Relief Organization.
• Failing to fulfil their duties and obligations and demonstrate effective oversight of senior staff – the charity had little to no policies or procedures to safeguard its funds and operation which put funds at unnecessary risk.  Failure to ensure adherence to those policies and procedures. See: Charity Inquiry: Rhema Church London
• Holding hundreds of thousands of pounds worth of cash at the charity’s premises instead of paying the cash into the charity’s bank account, breaching of the charity’s governing document. See: Charity Inquiry: Darul-Uloom School London
• A charity significantly increasing its expenditure without any financial planning, budgeting or long-term plan. See: Charity Inquiry: The Everlasting Arms Ministries.

These are but a few examples in the Commission’s inquiry reports. Charity trustees should appreciate that they are ultimately responsible and accountable for the charity’s financial controls – even if they delegate financial matters to others. They need to make sure that their charity has adequate financial controls in place and their financial governance is transparent.  Trustees are strongly advised to familiarise themselves with the Commission’s relevant guidance and seek expert independent advice when necessary.

Other key themes

A number of other key findings can be identified from the Commission’s recent statutory inquiries, including:

• Compliance with governing document: There are a number of examples of instances where charity trustees have not complied with the provisions set out in the charity’s governing document. For example, trustees of a charity not being able to prove that they were validly appointed under the charity’s constitution. See: Charity Inquiry: Beth Yosef Foundation.
   
• Compliance with trustees’ duties: Failing to comply with or fulfil their duties as trustees under charity law – for example, trustees had failed to: ensure the charity carried out its purposes for the public benefit, act with reasonable care and skill in the execution of their roles and to manage the charity’s resources responsibly in the best interests of the charity; ensure the charity was accountable and follow proper decision-making processes. See: Charity Inquiry: Newham Community Leisure Trust
   
• Compliance with wider law: Many charities’ operations span the legal and regulatory framework of other areas of law. In these circumstances, the Commission expects trustees to comply with all of their legal obligations. Non-compliance with the legal requirements of another regulator may be considered by the Commission as misconduct and/or mismanagement of the charity. An example of the Commission considering the regulatory actions of another regulator would be where a charity that operated an independent school failed to comply with obligations imposed by both the Department for Education and Ofsted. See: Charity Inquiry: The Albayan Education Foundation Limited.
   
• Working with non-charities: Trustees must be able to demonstrate that everything the charity does helps to further the charity’s objects. Whilst a charity can keep a close connection with a non-charitable organisation, the purpose of the relationship between the two entities must be to make a positive difference for the charity’s beneficiaries. A striking example of a poorly managed relationship with a non-charity can be found in Charity Inquiry: Islamic Research Foundation International, where a charity was found to be contributing towards the running costs of a non-charity TV channel.

Conclusion

This article provides only a brief overview of some of the key themes arising out of the Commission’s recent statutory inquiries. A full list of the statutory inquiries, along with their corresponding reports, can be found on the Commission’s website.

Charity trustees are ultimately responsible for the operation of a charity. Trustees are subject to a number of legal duties which they must strive to understand to ensure that their charities comply with the law. Trustee boards are most effective when they are made up of individuals with a range of different, complementary skills and experience. Trustees need to access appropriate trustee training to provide a basic level of knowledge to allow them to carry out their role effectively and to enable them to identify areas of concern where they need to obtain professional advice.