Two now-defunct charities spent considerably less than 1 per cent of their incomes on charitable activity, according to a Charity Commission report released on Friday.
Disability charity Dedicate and terminally ill children's charity Raise A Smile both owned trading subsidiaries that purported to raise money for them and other charities by selling advertising space on charitable publications such as calendars.
Within months of their registration in the mid-2000s, the commission began receiving complaints about the way the charities' subsidiaries were fundraising, including allegations that fundraisers were using threats to extract payments for adverts that had not been ordered.
The four organisations had a large number of trustees, directors and executives in common, so concurrent investigations were opened in 2006 after trustees failed to live up to promises to address the complaints.
The inquiries, which both closed in 2007, found that the charities spent an average of only 0.19 per cent of total funds raised on charitable purposes. Raise A Smile generated income of nearly £26,000, but the commission could identify only £905 that was spent on charitable causes.
The commission also found that the trading subsidiaries had raised more than £2m between them, but only 0.16 per cent of this was passed to the charities. The report describes this figure as "unacceptably low". It concludes: "It was difficult to see how the fundraising arrangements were in the interests of the charity."
The investigations also found that substantial amounts of funds raised by the trading companies were used to buy goods and services from other organisations connected with people connected wtih the charities, some of whom were being investigated by the Department for Business, Innovation and Skills.
The trading subsidiaries had also broken a string of fundraising laws, including failing to pass on money raised on behalf of the charities and failing to specify in fundraising agreements how much the charities would actually receive.
The commission considered removing the trustees and appointing new ones, but both charities and their subsidiaries were wound up before this could happen. Raise A Smile's closure was ordered by BIS and that of its trading subsidiary by HM Revenue & Customs. HMRC is also trying to recover more than £250,000 in Gift Aid and VAT.
Both investigations closed in 2007, but the publication of the commission's report was delayed by the investigations of the other agencies.
Phillip Bell, who was the chief executive of Dedicate and its trading subsidiary, a trustee of Raise A Smile and a director of its trading subsidiary, has been disqualified from acting as a company director or charity trustee for 11 years.