Last September, Southwark Council in south London finally gave up an attempt to recover £70,000 it had awarded by mistake to the Federation of Black and Asian Drug and Alcohol Workers. After six years of trying, it had failed to trace the trustees and the costs threatened to outgrow the debt.
During its inquiry, the council discovered that the federation last filed its annual accounts to the Charity Commission in 2002 and had been inactive for two years before the grant was made in 2004. But it had remained on the regulator's register of charities until 2010.
An investigation by Third Sector has revealed that the time it took the commission to strike off this defunct charity is not unusual. At least one charity that has not filed its documents for more than five years is still on the register, and three more were removed shortly after Third Sector made enquiries, when the commission says it received confirmation they had closed.
- CASE STUDY ONE: Sunderland Voluntary and Community Sector Partnership
Last filed accounts: No accounts filed since at least 2006
Charitable purpose: The charity was registered in 2001. Its objectives included providing "facilities for public recreation" and "promoting a coordinated approach to community development in Sunderland"
Current status: The commission removed the charity from the register on 19 January, soon after Third Sector queried its presence on the list, on the basis that it had ceased to exist. The charity had remained registered for so long because one of its objects was to "provide facilities for public recreation", which indicated that it might have had functional assets.
The delay in removing inactive or defunct charities is a result of the way the commission runs the register, which currently lists 161,000 charities. When a charity has failed to meet the deadline for filing its accounts (10 months after the end of its financial year), a red line is placed around its entry on the online register. Charities are sent a default notice one month after the deadline and a reminder three months later.
Charities that do not comply within six months are then considered for removal, and this happened without further ado in 4,166 cases in the year to March 2011. Crucially, however, the commission does not remove charities it considers to be 'high risk', such as those holding considerable assets or doing certain kinds of work, until it has made further inquiries in order to make sure there are no risks to donors or beneficiaries and that charitable assets are not used for non-charitable purposes.
After repeated requests, the commission did a special search of its database that showed that 873 such high-risk charities with incomes of more than £25,000 are currently on the register, even though they have not filed their required documents for the past two years, and that 2,789 that are six months late are also still listed.
- CASE STUDY TWO: Family Service Units
Last filed accounts: Financial year to 2004
Charitable purpose: The organisation's charitable objectives included providing relief for families living in poverty or experiencing sickness or distress. It largely did this by providing social care services to children and families through local authorities
Current status: The organisation was struck off the commission's register on 10 January, soon after Third Sector queried its presence on the list. The commission says it was removed after it received confirmation that the charity's liquidation had been completed.
In the year to March 2011, the commission reported last year, 108 such high-risk charities that were six months overdue were investigated. Of these, 74 eventually submitted their accounts, 29 were removed from the register and five referred for further inquiries. Such inquiries, however, can take time and involve waiting for action by others, including the formal winding-up of charities. Some trustees also neglect their duty to tell the commission when their charity has been wound up.
"The issue of resources comes into play when making these further inquiries," the commission says. "Because our resources are limited, it takes us a while to do this. However, we consider it preferable for these high-risk charities to remain on the register while we make these further inquiries before the charities are removed."
So how much does it matter if inactive or defunct charities remain on the register? Wise donors or funders would be unlikely to give money to a charity that was red-lined. But some charity accountants think that such charities could be easy targets for fraud and that their presence on the register gives the public a false sense of assurance that they exist. They would favour other approaches, such as suspending a charity's registration until the investigations have been completed.
- CASE STUDY THREE: Choices Independent Living and Community Support Service
Last filed accounts: Financial year to 2004
Charitable purpose: The organisation was created in 1996 "to provide relief for persons with physical, mental or sensory impairment" in the London borough of Lambeth
Current status: The commission says that the charity, which had an income of £3.7m in 2003/04, is currently going through liquidation, and it receives regular updates from the liquidator about the process. Once that process has been completed, it will be removed from the register.
Peter Gotham, partner at charity accountancy firm MHA MacIntyre Hudson, believes there is a strong case for suspending all charities from the register that have not filed their accounts six months after their deadline.
"It's a privilege to be on the register and it carries with it a degree of responsibility on behalf of the charity," he says. "There's nothing stopping fraudsters from getting a box and collecting money on behalf of one of these charities. They could also potentially apply to a local authority for a street collection licence."
Nick Brooks, head of not-for-profit at accountancy company Kingston Smith, agrees: "If you were clever, you could go through the register and find organisations that have ceased operating and use their charity numbers or details."
- CASE STUDY FOUR: The Children's Literary Trust
Last filed accounts: Financial year to 2007
Charitable purpose: The charity was created in 2006 to promote literacy and develop reading and other literacy skills in children and young people, and to promote an appreciation of children's literature among young people
Current status: The trust was removed from the register on 9 January, soon after Third Sector asked the commission why it was still listed. The commission says it removed the charity on the basis that it had received confirmation that it had ceased to exist.
Tom Murdoch, a charity law specialist at Stone King, believes the commission is correct to keep tabs on inactive charities that might be sitting on important assets. But he quotes a recent book by his colleague Robert Meakin that called for the commission's powers of removal to be clarified, and says: "There's clearly a case for looking at both the commission's powers and its policies for removing charities."
He says this might involve an indication on the register, in addition to the red line for late filing, that further inquiries are being made. A system of this kind is used in Scotland.
The commission, however, does not believe the current system requires reform. "Our approach reflects our careful consideration of the risks, balancing both the need to maintain the accuracy of the register and the need to protect charitable assets," says a spokeswoman. "By making it very clear on the register where a charity is late with its accounts and potentially inactive, we are able to mitigate the risks of keeping such charities on the register while we ensure charitable assets are protected."
- Read Andy Hillier's blog to find out how the story developed
- Find out more about the defunct charities by reading our news story
THE SCOTTISH SYSTEM
The Office of the Scottish Charity Regulator has a system different from that of the Charity Commission for dealing with organisations that fail to submit their documents on time.
Each charity on the 23,411-strong Scottish register is required to submit an annual return and accounts each year. Those with annual gross incomes of £25,000 or more are also required to submit a nine-page supplementary monitoring return giving more details. These documents must be submitted within nine months of the end of the charity's financial year.
If the charity fails to provide a document by the deadline, its entry on the register is amended to indicate that the annual return is "overdue". At this stage in England and Wales, a red border is placed around a charity's entry on the online register and its listing states the number of days the accounts are overdue.
But the main difference between the OSCR system and that of the Charity Commission comes when charities fail to provide documents 10 weeks after the deadline. At that point, the charity's entry in the Scottish register is changed to read "passed to compliance" in place of "active", and the case is referred to the compliance support team. In England, nothing is added to the register, although the red border remains around the charity's name.
Charities in Scotland that have not provided the required documents within six months of the deadline for submission are listed as "defaulting charities". Those that fail to provide the necessary documents within a year are considered for removal from the register.
The OSCR also has powers to appoint an accountant to prepare accounts for a charity.