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Insider fraud in the charity sector

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Charity Commission reveals that almost half of insider fraud cases in the third sector are not reported.

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Insider fraud poses a huge risk to charities; the sector generates an annual income of nearly £76 billion, making it an attractive target for crime. In its latest study, the Charity Commission has found that 43% of insider fraud cases committed in the last five years were not reported.

The report, published last month, looks at how insider fraud affects charities. Although not proven, it has been argued that there are certain factors which make the charity sector more susceptible to this type of crime than others.

The findings show that the vast majority of insider fraud cases (nearly 70%), occur because too much responsibility is placed on one individual. In almost half of cases (43%) this individual is an employee of the organisation, and in over a third (33%) it is a trustee.

The main reason why fraud is able to take place is due to a lack of oversight from the organisation. The second most common cause is either the absence or poor application of controls.

The biggest impact of insider fraud is on beneficiaries who receive reduced services as a result. Loss of income was the second highest impact, followed by negative effects on an organisation’s reputation. Insider fraud  can also damage company morale and in the worst case, charity’s can be forced to close.

Advice on how to tackle insider fraud varies depending on the size of charity and where the risk may be greater. However, generally the same rule applies that no one person should have unsupervised control of a charity’s finances.

In terms of financial controls there is no one-size-fits-all. Policies should be fixed according to a charity’s size and income,  once in place staff, volunteers and trustees should be trained across the organisation. Regular reviews must be held to ensure the policies are being followed correctly and are up to date.

Larger charities could consider appointing a trustee with specific responsibility for risk management and preferably knowledge of counter fraud, which would prioritise the issue at Board level.

All trustees and staff should have an awareness and be responsible for implementing fraud policies. The Charity Commision report identifies that where there is a limited number of trustees or staff, fraud awareness is likely to be low, and a charity is at its most vulnerable. In this case the Commission recommends organisations adopt a strong counter fraud culture, which is established at the top and filtered down. This should empower staff and volunteers to raise their concerns about fraud and take the right steps to report any incidents to the authorities such as Action Fraud, the Police and the Charity Commission.

Having risk management strategies in place and a transparent recruitment process will help to protect a charity’s reputation and keep levels of fraud down.

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