The former trustees of the religious charity the Kingsway International Christian Centre have been criticised by the Charity Commission for failing to exercise sufficient care when investing £5m of the charity’s funds through an unqualified trustee.
In a report published after a statutory inquiry that was launched in February 2011, the commission said the investment was made despite the trustees having "no understanding or appreciation of the high-risk nature of the investment".
The report says the commission was alerted after the charity’s accounts for the year to 31 March 2010 referred to £3m of investments made with a trustee, who the accounts said was a qualified independent trader who could act as an investment manager.
The trustee was named last year by the Insolvency Service as Richard Rufus, a former professional footballer with Charlton Athletic.
After the commission contacted the Financial Conduct Authority about the 2010 accounts, it was told Rufus was not authorised "to carry on regulated activities in a personal capacity".
The report says the commission was concerned that the money for the investments was paid into Rufus’s personal bank account and the investments "appeared speculative and high-risk in nature".
After the commission launched its statutory inquiry, it was found that £5m in total had been invested by the charity through Rufus between June 2009 and June 2010. The charity had an income of £7.8m in the year to 31 March 2015.
The investments resulted in a net loss of £3.9m, despite an investment agreement signed between the charity and Rufus promising a 5 per cent return on investment each month except August and December, when returns of 2.5 per cent were anticipated.
The report says that because the rate of return proposed was so high, independent professional advice should have been sought.
The commission’s inquiry found that there was a lack of investment experience among the charity’s board members, except for Rufus.
The report says the charity’s review of the investments was limited to checking monthly payments rather than the underlying investment.
The FSA began civil proceedings against Rufus in February 2011 and managed to freeze his assets up to the value of £6.85m.
Rufus resigned from the charity on 17 May 2011 and was declared bankrupt in 2013.
An interim manager, Helen Harvie, a consultant at the solicitors Barlow Robbins, was appointed on 31 January 2014 to review the decision-making of the trustees in relation to the £5m investment.
She remained in post until 14 May 2015.
Harvie concluded that none of the other trustees could explain why they were satisfied there was enough expertise in the charity to make the investments, and after an initial investment of £3m, a further two investments of £1m were made without seeking consent in advance from HM Revenue & Customs, which resulted in a £560,000 tax liability for the charity.
According to the report, Harvie found that conflicts of interest were not properly managed at the charity and there was too much reliance on the expertise of the trustee making the investment.
Harvie said the current trustees of the charity should consider bringing a legal claim against the trustees who made the decision to invest, all of whom have since left the charity.
A settlement was agreed with the decision-making trustees on 3 September 2015, with a payment deadline of 3 September 2017.
A statement from the charity’s trustees said they accepted the commission’s report and "robust controls" to prevent a reoccurrence had been put in place.
"With the benefit of hindsight it is clear that the former trustees’ decision to invest was not a prudent one," the statement said.
"The charity has since continued to operate and successfully carry out its charitable objectives to the community, and looks forward to continuing to do so."