Find me on LinkedInCharity Law update – Summer 2020
It has been a while since I reviewed the Charity Commission’s regulatory activity and, in particular, the reports which they have published following an inquiry. I have selected a few of them which have been published since Lockdown began in March 2020 here in the UK. A summary and my commentary and opinion on each report is set out below. The reader may well disagree with my opinions!
Times are hard. Income is down, in some cases by a significant amount as a result of the pandemic. Activities have been curtailed severely and operating conditions are causing charities to struggle to deliver benefits in line with their purposes. The difficulties are compounded where a charity’s pension scheme is in deficit and a published inquiry report could be the final straw for hard pressed trustees who are fulfilling a voluntary role.
The subject matter of these inquiries ranges from serious to very serious. In all cases, the reports describe poor governance and, occasionally, criminal activities. You may conclude that the Commission should have been tougher in some instances and in others that the “punishment didn’t fit the crime”, in other words that the benefits to the public and charities from publication of a report are outweighed by the bad publicity. Arguably the Commission’s approach to the publication of these reports (it is their policy to publish the outcome of inquiries) is out of line with the tough times charities are experiencing and it may affect their ability to raise funds and lead to the redundancy of staff. In short, the timing and impact of the publication of a report by the Commission should be considered carefully. Failure to do so would be contrary to the Commission’s statutory objective of increasing public trust and confidence in charities which doesn’t necessarily happen where an inquiry report is published. Perhaps the Commission should start to issue informal and unpublished warnings to charities giving them the opportunity to improve their governance and thereby rendering it unnecessary to publish a report. In some cases, this would be a more proportionate approach.
I would also put in a plea for greater clarity. The Commission is acting in a quasi-judicial capacity when it opens an inquiry and exercises its statutory powers. The reports usually end with a final section entitled “Issues for the Wider Sector”. The quality of the published reports varies and it is sometimes difficult to discern what has really happened such that “Issues for the Wider Sector” can be more in the nature of a general rant or not very clear.
In these cases I may have misunderstood what has happened. Having said all of this, there is no doubt that charities could help themselves by seeking professional advice and focussing on their governance. It is NOT a waste of time or money to consider, from time to time, whether trustees are fulfilling their primary duties. Acting in good faith, these are:
• to observe the terms of the governing document - by furthering their purposes for the public benefit, avoiding mission drift and ensuring that the minimum number of trustees is serving and taking decisions at meetings which have been called properly,
• to preserve the assets and apply resources only for the purposes of the charity
• to avoid conflicts of interest.
GTC
GTC was registered as a charity in February 2015 and was dissolved and removed from the register of charities in April 2020 as it had ceased to operate.
In 2018 the Commissioned had opened an inquiry and found misconduct and mismanagement. Its published report on the inquiry found that
1 Whilst the governing document required there to be at least three charity trustees, the charity had only one trustee
2 The accounts for the financial years ending 31 March 2016 and 31 March 2017 lacked clarity and were not compliant with the SORP
3 The sole trustee had transferred £240,000 from the charity’s bank account to his private bank account and used the funds to purchase a property in the name of his private company. Conflicts of interest were not managed and decisions were not made in the best interests of the charity primarily because there were no trustees available to take decisions. The sole trustee received an unauthorised personal benefit
The report said that in October 2019 the sole trustee was found guilty of theft at Northampton Crown Court and received a non-custodial sentence. In consequence he was automatically disqualified from acting as a charity trustee or from holding a role with a senor management function in any charity.
The Commission concluded its report, as usual, with “Issues for the Wider Sector”, as follows:
• That a charity must prepare annual reports and submit accurate and timely accounts
• There are legal requirements for charities relating to the maintenance and retention of accounting records, the preparation of charity accounts and annual reports, the audit or independent examination of accounts and the submission of these to the Commission.
• A charity should be run by a clearly identifiable board of trustees with the minimum number of trustees as required by the governing document, acting in the best interests of the charity and who must understand their responsibilities
• A board of trustees must be effective to control and administer a charity
• Public trust and confidence depends upon the conduct of trustees and how they safeguard charity funds
Commentary
It is not clear from the report, but it would seem that the conviction related to the misappropriation of the charity’s funds. The report says nothing about any efforts to make restitution of funds to charity and given that the charity has been removed from the Register, one must conclude that the funds are lost forever – what a shocking result! On the facts given, there was never any benefit for charitable causes and it would seem that in this case at least, crime can pay!
Save the Children UK (STC UK)
STC UK is well known as one of the largest charities promoting the welfare of children both in the UK and abroad. Its consolidated accounts for the year ended 31 December 2018 record income of £303.2 million and expenditure of £314.6 million. As with all large charities which have employees, day to day management is delegated by the trustees to the Chief Executive and other senior executives.
The Commission opened an inquiry in 2018, after the charity came under intense public scrutiny in the press, about how it handled, reported and responded to allegations of harassment by and against senior members of staff in 2012 and 2015. The Commission’s inquiry, which was said to be focussed solely on employment and workplace culture, found that there had been misconduct and mismanagement.
During the inquiry, the Commission:
• conducted formal interviews with 37 individuals including trustees, employees and whistle-blowers.
• scrutinised documentation relating to the charity’s processes and conduct during and after internal staffing investigations had been undertaken. The Commission was aided by a 2015 report prepared by Lewis Silkin and agreed with its findings: namely, that the charity had not handled the 2012 complaint well and in some cases the trustee board was not informed about the complaint which had been made concerning the conduct of senior personnel – this was of concern as the complaint made in 2012 were about the Chief Executive. Generally, there was a lack of formality and no disciplinary hearings were held. In the case of the 2015 complaint, which concerned the behaviour of another senior employee, the complainant resigned, feeling that it was impossible to return to work.
It is a long and detailed report and is available on the Commission’s website. Commentary
The report is unclear in a number of material respects:
• the Commission’s justification, in part, is that it is a public authority and that there are limitations on what it can publish about individual allegations and the employees involved; this is at odds with the naming and shaming of the chief executive and the trustees who served on the board throughout the relevant periods;
• The inquiry did not extend to the charity’s operations; therefore, and even without the bad publicity associated with its publication, this report will be of concern to the charity’s trustees who will already be struggling to maintain income and the level of reserves needed to sustain its operations, particularly during the pandemic;
• The charity had already been the subject of adverse reports in the press – one wonders who benefitted at this late stage from the publication of the Charity Commission’s report; the Commission found no systemic failures in the handling of complaints by other staff.
• The “Wider lessons” section rightly says that to focus on avoiding negative or critical media coverage will not fulfil the trustees’ duty to protect a charity’s good name; but says nothing about how it may help to maintain good donor relations!
• The report highlights the obvious point that a relationship between the executive and the trustees should focus on open sharing of information; however, the emphasis on reporting incidents of harm to the Commission on which it insists, doesn’t necessarily lead to a better outcome for the charity’s beneficiaries and can damage a charity’s reputation, especially where, as here, the Commission has not added anything of value to the Charity’s governance.
• Undoubtedly mistakes were made and the complainants were let down by the very poor response and actions of trustees and senior staff. The trustees were and still are taking steps to remedy the earlier governance failures. However, the charity had already learned its lessons by reason of the poor publicity already generated and did not need another public telling off by the Commission.
• In my opinion, and on balance, this report seems to be of more benefit to the Charity Commission than to the charity, its staff and its beneficiaries and I can see no glaring or obvious reason in the public interest for publishing it.
Delapage Limited
The charity was registered on 14 July 1978. The Commission opened a regulatory compliance case on 1 June 2009 because of exceptionally low levels of charitable activity which contrasted sharply with the level of accumulated funds and to investigate the background to unsecured loans made by the charity to property owning companies controlled by two of the trustees (the Former Trustees). The compliance case was escalated to a statutory inquiry on 24 August 2010 so that the Commission could exercise its statutory regulatory powers.
The Former Trustees were in dispute leading to a breakdown in governance of the charity and its own subsidiaries which had previously made gift aid payments to the charity. In consequence of the dispute:
• the income of the charity and its subsidiaries had fallen from £21.2 million in 2007 to £601,000 in 2009.
• Accounts were not filed at Companies House for the charity and its subsidiaries or the Former Trustees’ companies. Had the companies and the charity’s been struck off the Register of Companies, they would have ceased to exist and the charity’s assets would pass to the Crown bona vacantia thereby representing a risk of significant loss of charitable assets
• By reason of the dispute, the trustees had had difficulty in calling and conducting proper meetings and putting the interests of the charity before their personal interests
• Only one of the Former Trustees was managing the charity; the others, including subsequently appointed trustees, had played little active role in the administration; the Commission speculated that they had not understood their fiduciary duties.
An interim manager was appointed by the Commission to take over the management and administration of the charity to the exclusion of the trustees. The Former Trustees ceased to hold office either before or at various points during the inquiry and a new board of trustees was appointed on 26 March 2018. The interim manager found that:
• There were debtor and credit balances between the charity and its subsidiaries, on the one hand and the charity and the companies owned by the Former Trustees on the other hand.
• The charity was owed £13.6 million by its subsidiaries and £90,000 by one of the Former Trustees’ private companies.
• The charity’s subsidiaries had granted security over their assets to support a facility granted to a company which was owned by a private trust of which some of the Former Trustees were beneficiaries; that company was placed in provisional liquidation after it had drawn down £5million under the facility thereby putting the charity’s assets at risk; one of the Former Trustees said that she was unaware of this arrangement; the charity’s subsidiaries also took out secured bank loans of £74 million to finance their operations; profits were donated to the charity allowing it to make unsecured loans to the companies belonging to the Former Trustees; key decisions were not recorded in the minutes of the various entities
Acting on professional advice, the interim manager decided not to pursue a restitution claim against the Former Trustees on the basis that it would not have been in the interests of the Charity to do so.
The Charity Commission concluded that there had been misconduct and/or mismanagement, poor governance and poor financial management of the charity but that it was not necessary to formally remove the Former Trustees as one of them had already been declared bankrupt during the inquiry so was automatically disqualified from being a trustee; the other Former Trustee had resigned.
The Commission’s “Issues for the Wider Sector” highlights the importance of trustees acting in a charity’s best interests and not taking part in decisions when they have a conflict of interests. This was relevant to any decisions taken by the Former Trustees as it related to transactions with their personal companies and the charity’s subsidiaries if, in fact, they were directors of those companies – it is not clear whether the latter was the case.
Commentary
There is no mention in the report of whether there were any actual financial losses to the charity and the cost of the interim manager’s appointment was very high, no doubt necessitated by the complexity of the matters which required to be unravelled. The Commission did not see fit to remove the other Former Trustee from office after he/she had resigned which would have prevented him or her from being a trustee of any other charity. Given the findings of the Inquiry, the interim manager, I find this rather strange as, in consequence, one of the Former Trustees who was responsible for this mess remains eligible to act as a trustee of another charity. Readers may take a different view! The role of the private trust isn’t clear in this report. However, overall this story is by no means unique and may have arisen, in part, to avoid tax on profits of the charitable subsidiaries and in order to benefit the Former Trustees personally.
The Public Safety Charitable Trust Limited
The charity was registered on 15 October 2010.
The objects of the charity, as set out in its constitution, so far as relevant, were “to promote, for the benefit of the public, the efficiency of the police in England and Wales and to promote good citizenship and greater public participation in the prevention and solution of crime in the area. “
The charity carried out these objects by taking on short-term leases of empty properties owned by private landlords in which it installed Bluetooth equipment from which public safety messages were transmitted to passers-by. In 2013, the charity had 2,000 leases of properties spread across 240 local authority areas.
A claim was made on behalf of the charity for exemption from 80% of the Business Rates Relief to which it would be entitled if it is in occupation “wholly or mainly for charitable purposes”. The operations were delegated by the trustees of the charity to a private company under an agreement whereby the company initially retained 95% of the profits (“the Company”). This was varied in 2013 and the Company thereafter received 60% of the profits. It is not clear in the report what the profits were derived from.
In May 2013 a court judgement established that, in relation to one particular local authority area, the installation and operation of Bluetooth transmitters in premises occupied under a lease was not sufficient to be construed as occupation wholly or mainly for charitable purposes. In consequence the charity was liable for business rates and thereafter several claims were made against the charity by various local authorities for payment of business rates leading to more court cases. Also in May 2013 an application to wind up the charity was made and the Commission opened its statutory inquiry. The Insolvency Service found that the conduct of the directors warranted their disqualification and the trustees were disqualified from being directors for a period of 9 years and 5 years respectively. The Commission found that the extent to which the trustees had delegated the administration of the charity to the Company was unacceptable. The trustees claimed that the Company had agreed to indemnify the charity against liability for payment of business rates but the agreement seen by the Commission contained no such an indemnity. The Commission found that the trustees had no control over the charity’s records and affairs and concluded that there had been evidence of misconduct and/or mismanagement due to poor financial management and governance.
Commentary
It is surprising that the Commission made no comment on whether or not the charity had been acting in furtherance of its purposes – the decision of the first court was not discussed and one would have thought that the Commission should have expressed views on this before it passed its own judgement on the trustees.
It may be that the charity was a “sham” and the trustees were not acting to fulfil a charitable purpose but rather to obtain fiscal benefits and their wholesale delegation and conduct of the charity’s operations and the litigation to a business. The report is silent on this. On the face of it, the transmission of safety messages to the public would be capable of fulfilling the charitable objects even if, as the first court initially found, this was not sufficient to qualify as “occupation solely or mainly for charitable purposes” in order to qualify for rating relief. This is an important distinction and the Commission’s failure to explain the position may cause concern for some charities operating in good faith in a similar way in the interests of promoting public safety. The Commission should remedy this flaw.
Markaz -EL Tathgheef – EL Eslami (The Centre for Islamic Enlightening)
The charity was registered in October 1989. Its objects (in abbreviated form) are the advancement of the Islamic religion, the advancement of education of the public concerning the Islamic religion and culture, the provision of recreational and other leisure time occupation in the interests of social welfare and the promotion of any charitable purpose directed to alleviating those who have lost a relative or friend through death.
On 2 August 2013, the Charity Commission opened a compliance case. A company (in liquidation) called Ahlebait Limited, showed that it was a debtor of the charity in the sum of £708,200. This was not reflected in the charity’s accounts. The company produced and broadcasted special interest television programmes and the trustees told the Commission that the charity had lent money to the company as both organisations broadly had the same purpose and objects and the charity could reach a wider audience by using the television channel to carry out its objects.
The sole director of the company was the son of one of the trustees of the charity. The Commission escalated the matter to a formal inquiry so that it could exercise its statutory regulatory powers.
It was established that the charity had not suffered financial loss – the company had made numerous payments to the charity which were identified in the accounts as donations rather than repayments on the loan in the sum of £500,000. The reason for this may have been to enable the charity to claim Gift Aid relief on the donations and would account for the failure to disclose an outstanding loan. However, the charity had failed to categorise the payments made from the company properly. The repayments were not made in compliance with the terms of a written agreement between the company and the charity and, when the company defaulted on its obligations under the agreement, the charity continued to allow the company to draw down on the loan facility.
The Commission found that the trustees had failed to manage conflicts of interest arising out of the family relationship between the trustee and his son and the trustees had not complied with their duties by advancing money to the company without considering whether the loan was in the best interests of the charity or the ability of the company to repay the loan, thereby putting the charity’s funds at risk. The Commission noted that the potentially significant loss to the charity was not reported to the Commission as a serious incident.
Commentary
There was certainly a conflict of interests. However, payments were made by the company to the charity although they were not categorised as repayments on the loan. There was a governance muddle but as far as I can tell from the report there was no actual loss to the charity.
Al-Fatiha Global
The charity was registered on 3 July 1996 with objects for the relief of sickness by the provision of free clinics for the people of Northern Pakistan. With effect from 2 July 2013 its objects have included the provision of humanitarian aid globally in areas disrupted by conflict and natural disaster.
The Commission appointed an interim manager in December 2014 on the basis that it found that there had been mismanagement and/or misconduct in the governance and administration. The appointment was not made to the exclusion of the trustees who remained in office. The interim Manager:
• took charge of the charity’s funds and had the right to veto expenditure of charitable funds.
• Was responsible for assessing the overall governance and activities of the charity
• Was discharged once he had ensured proper and adequate due diligence, monitoring and risk management procedures were in place and adopted by an expanded trustee board and that potential risks to charitable assets were being adequately managed.
In May 2013, the charity was raising funds for a convoy of aid to Syria following the humanitarian crisis which was unfolding in that country, and also for projects in Palestine and Myanmar.
The Commission was concerned that:
• The charity held insufficient records about the end use of the funds raised;
• One of the volunteers on the convoy (Volunteer A) was photographed standing next to masked gunmen inside Syria – he was said by the Sun newspaper to be the son of the chair of trustees; several individuals who had accompanied the convoy to Syria had not returned to the UK;
• the media had alleged that the charity was linked on social media with a convicted terrorist and with someone else who was being held in custody for alleged terrorism offences
• The Sun newspaper suggested that the charity’s trustees may not have exercised proper control of the charity’s affairs and funds and queried whether volunteer A was a trustee of the charity The Charity Commission found mismanagement and misconduct in that:
• The trustees had not supervised the aid convoys which, against Foreign and Commonwealth Office advice at the time, may have been in Syria
• Volunteers on the convoys each held sums of cash (£2,000 - £3,000) with no directions from the trustees as to how the money was to be spent
• The destinations of the convoys was not clear
• Volunteer A played a significant operational role in fund-raising for the charity and the photo taken with masked gunmen (where ever and whenever it may have been taken) was not behaviour appropriate for a charity to be associated with
• The trustees failed to respond effectively to manage and/or remedy adverse media reporting
• The charity had grown significantly in size by 2014 and held funds totalling circa £590,100 excluding funds held by on-line fundraising platforms and donations of goods in kind. However, the trustees did not have in place adequate internal financial and governance controls, eg, there was no delegated or authorised limit on spending the charity’s money and there was a lack of financial policies and procedures. The annual accounts in the year ending 31 December 2013 were qualified.
• All responsibility for volunteer recruitment and “partnership” working had been delegated to a convoy leader and Volunteer A with no substantive evidence of control or oversight by the trustees; the record keeping did not demonstrate that the aid had been received by the intended beneficiaries; the trustees could not demonstrate what money the charity had spent in Syria and how it had been authorised, recorded and monitored.
• No due diligence or risk assessment was undertaken in relation to “partners” also working in Turkey and Syria.
• It was reported that a volunteer on the charity’s December 2013 aid convoy had been murdered. The trustees failed to submit a Serious Incident Report to the Commission and did not liaise with the Foreign and Commonwealth Office or other local authorities.
• Whilst the quorum for trustee decision-making was three, the charity had only two trustees. Several volunteers had attended the trustee meetings and took part in the vote on decisions made.
The Commission concluded that there had been serious mismanagement and misconduct: the trustees had failed
• to act reasonably and exercise sound judgements to ensure that the charity’s funds were applied only for charitable purposes
• to protect the charity’s property, assets and people
• to safeguard volunteers and provide them with adequate training and guidance
• to put in place adequate internal financial and governance controls
• to fully account for income and expenditure
• to exercise oversight and control over “partner” organisations;
• to comply with the terms of the governing document.
Commentary
The report is unsatisfactory:
• It says that the board of trustees was strengthened but the Commission did not remove the trustees from office notwithstanding this litany of failures and the death and disappearance of volunteers;
• the role of Volunteer A and his relationship to the chair (if any) is not mentioned
• the fate of the volunteer who was murdered isn’t mentioned in the findings and neither is the whereabouts of the volunteers who did not return with the convoy to England – a glaring omission! At least the report could have said if the matter is the subject of investigation by other agencies of the state and falls outside the remit of the Commission’s inquiry
Jewish Seminary for Girls
The charity was registered in April 1972. So far as relevant, Its objects are to promote the Jewish faith amongst Jewish girls and women between the ages of 15 and 25 by providing religious education in accordance with traditional Judaism.
The Commission opened a statutory inquiry in May 2016. It found that there had been misconduct and mismanagement and, in December 2019, two former trustees who served from March 2014 until October 2018 and July 2019 respectively were disqualified from acting as trustees by the Charity Commission (the former trustees).
The Commission found that:
• the charity had made a loan to a company belonging to one of the former trustees in the sum of £472,394;
• one of the former trustees signed the loan agreement on behalf of the charity. The other trustee signed it on behalf of the company (Mr K). This was in breach of the charity’s constitution which required there to be three trustees to form a quorum when taking decisions. However, Mr K was not present whilst the other former trustee made the decision on behalf of the charity; as a part of that decision-making process, he required high interest rates to be paid and sought advice from the accountant as to the financial health of the charity who advised that a debenture be given to the charity to secure repayment of the loan; at the time of the loan being made the net assets of the company were less than £6,000; the Commission found that there had been inadequate due diligence on behalf of the charity; that Mr K received an unauthorised benefit from the loan; the Commission doubted that a high street lender would have made a loan on such favourable terms
• There was no requirement to repay the principal on the loan until October 2030 – this was changed after the Commission’s inquiry began when the agreement was varied to require repayments at a rate of £3,500 per month. The loan agreement was not secured until 36 months after it had been signed.
• When capital repayments were made (following the variation to the terms of the agreement), they were paid direct to Rabbi A (£2,500 per month) and Rabbi B (£1,000 per month) to meet the costs of delivering lectures to the charity’s beneficiaries
• There had been no competitive recruitment process or policies in place in relation to the engagement of Rabbi A and Rabbi B. Rabbi A was related to one of the former trustees. The trustees failed, however, to comply with the legal limitations on payment of a connected party and, therefore, the payments to Rabbi A were unauthorised. The Commission found that the trustees had failed to manage the charity’s resources responsibly and that the trustees could not demonstrate how the employment of Rabbi A and Rabbi B was in the best interests of the charity without satisfying themselves that the remuneration package was reasonable.
• Neither the trustees nor the Rabbis could produce appropriate documentation or invoices relating to the educational lectures; this was a breach of the requirement to keep accounting records; the Commission established, however, that some of the lectures were taking place
Commentary
Evidently, the Commission was not impressed with the former trustees’ and the poor governance of the charity. However, it is right to question why the former trustees were removed from office when trustees in some of the earlier cases cited above, which seemed equally if not more serious, were not removed.
Moira Protani Summer 2020 www.moiraprotani.com
Notes