Charity’s Guide to Conflict of Interest & Related Party Transaction Disputes

Introduction

Maintaining public trust and safeguarding a charity’s reputation depends on transparent governance and ethical decision-making. This process requires the organisation to effectively manage conflicts of interest and every related party transaction to ensure all actions serve its charitable purpose rather than the private interests of related parties.

This guide provides essential information on identifying conflicts of interest and understanding the reporting obligations mandated by the Australian Charities and Not-for-profits Commission (ACNC). By implementing a clear conflict of interest and related party transaction policy, your charity can fulfil its duties under Governance Standard 5, manage conflicts, and manage related party transactions to prevent serious legal disputes involving interest and related party transactions.

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Conflicts of Interest & Related Party Transactions

What is a Conflict of Interest for a Charity

A conflict of interest arises when the personal interests of an individual, such as a board member, clash with their duty to act in the best interests of the charity.

These personal interests are not limited to the individual alone but can also extend to their family, friends, or other organisations they are associated with.

This situation can undermine a person’s ability to make impartial decisions, potentially leading to outcomes that are not solely for the charity’s benefit.

All conflicts of interest must be taken seriously, as they can compromise the integrity of a charity’s decision-making process. There are three distinct types of conflicts that can affect a charity:

• Actual conflict of interest: This occurs when a person is actively influenced by a competing interest. For instance, if a board member is part of a decision to award a grant to a local school that their child attends, they are facing an actual conflict of interest.
• Potential conflict of interest: This exists where a person could be influenced by a conflicting interest in the future. Imagine a scenario where a Responsible Person sits on the boards of two different charities that may eventually compete for the same funding.
• Perceived conflict of interest: This arises when it could appear to a reasonable person that an individual might be improperly influenced. For example, if a board member is reviewing service quotes and one of the submissions is from their sibling’s employer, a perceived conflict of interest exists, even if they believe they can remain impartial.

Defining Related Parties & Related Party Transactions

The Australian Charities and Not-for-profits Commission (ACNC) defines a related party based on the size of the charity, which is a key factor in determining reporting obligations.

For small charities, a related party is an individual or organisation with a connection that gives them significant influence over the charity’s strategic and financial decisions. This includes:

• A charity’s Responsible People.
• Senior management.
• Their close family members.

For medium and large charities, the definition is aligned with the Australian Accounting Standards, specifically AASB 124.

This broader definition includes any person or entity that has control, joint control, or significant influence over the charity. This can encompass a parent entity, a subsidiary, or key management personnel and their close relatives.

A related party transaction is any transfer of resources, services, or obligations between a charity and one of its related parties.

It is important to note that such a transaction does not need to involve a financial payment. These arrangements must be managed carefully as they can create a conflict of interest.

Common examples of a related party transaction include:

• Purchases, sales, or leases of property or goods between the charity and a related party.
• Loans or financial guarantees provided to or received from a related party.
• The transfer of charity assets, including valuable but complex assets such as charity intellectual property.
• A Responsible Person providing professional services, such as legal or accounting work, to the charity, even if it is at a discounted rate or for free.
• The significant use of the charity’s property or resources by a related party.

How an Undisclosed Conflict Escalates into a Dispute

The ACNC’s Red Flag: Related Party Transactions as Primary Focus

The ACNC closely scrutinises related party transactions because they present a high risk of creating a conflict of interest. While these transactions are common and can sometimes benefit a charity, they can also lead to situations where decisions are not made in the best interests of the organisation. Consequently, this risk of private benefit is why the ACNC considers them a primary focus during compliance investigations.

The ACNC has investigated charities where the failure to manage a related party transaction has led to Responsible People obtaining personal benefits. Such deficient governance can result in serious consequences, including the revocation of a charity’s registration.

To increase transparency and accountability, the ACNC now requires all charities (except Basic Religious Charities) to report related party transactions in their Annual Information Statement. This requirement reinforces that these dealings are a key area of regulatory oversight.

Common Dispute Scenarios Involving Related Parties

Disputes often arise when a conflict of interest related to a transaction is not disclosed or managed correctly. These scenarios can damage a charity’s reputation and may lead to legal challenges if decisions are not seen as being in the organisation’s best interests.

Common situations that can escalate into a dispute include:

• Awarding contracts to family members: A board member suggests their relative’s company for a service, such as web design or training. If the board member participates in the decision-making process or votes on the matter, it creates a clear conflict of interest and undermines the fairness of the procurement process.
• Leasing property from a related party: A charity pays rent for office space owned by a member of its management committee. Unless the charity can demonstrate that the lease terms are fair, at or below market rate, and in the charity’s best interests, this arrangement can be disputed.
• Employing relatives of Responsible People: The close relative of a board member is hired for a paid position within the charity. Without a transparent and competitive recruitment process, this can lead to accusations that the hiring was not based on merit but on personal connections.
• Selling charity assets to related parties: A charity sells property or other assets to an organisation controlled by one of its committee members. This becomes a significant issue if the sale price is not at fair market value, suggesting the related party received an improper benefit at the charity’s expense.

The Legal Challenge to Unwind Transactions & Recover Funds

How Members or the ACNC Can Sue to Reverse a Transaction

When a related party transaction is suspected of impropriety, legal avenues exist to challenge it and recover the charity’s funds. These challenges draw on several sources of law:

• Corporations Act 2001 (Cth) – particularly Chapter 2E for public companies.
• Relevant state-based incorporated associations legislation.

Each statute imposes duties on a charity’s Responsible People; breaching those duties can open the door to court action.

For public companies, Chapter 2E often requires member approval before any “financial benefit” to a related party is granted. Failure to follow these procedures:

• gives members a clear basis to question the transaction’s validity, and
• enables the ACNC to investigate governance failures that create conflicts of interest or private benefits.

Serious non-compliance can trigger severe enforcement actions, up to and including revocation of charity status.

Proving a Transaction Was in the Charity’s Best Interests

If a related party transaction is challenged, directors or Responsible People must prove that it was genuinely in the charity’s best interests and that they met their duties under ACNC Governance Standard 5. They strengthen their defence by showing the deal was transparent and conducted at arm’s length.

Key actions that support this defence include:

• Disclosing the conflict: The individual with the conflict of interest must declare it to the board.
• Excluding the conflicted person: The conflicted board member should not participate in discussions or vote on the matter.
• Ensuring fair value: The board should confirm the transaction is on fair, commercial terms—for example, by seeking quotes from multiple vendors.
• Keeping detailed records: All discussions, decisions and management steps should be recorded in board meeting minutes.

By rigorously following these steps, the board can present clear evidence that the transaction advanced the charity’s purpose rather than private interests.

ACNC Enforcement Action for Serious Breaches

Potential ACNC Sanctions from Agreements to Revocation

The Australian Charities and Not-for-profits Commission (ACNC) investigates charities that fail to adequately manage a conflict of interest or related party transaction, often resulting in the need for legal advice during charity dispute investigations. These investigations often reveal deficient governance, particularly in situations where Responsible People have obtained private benefits from the decisions they have made.

While such actions may not always amount to fraud, they indicate serious governance failures. In the most severe cases of non-compliance, where a charity has not properly managed a conflict of interest and related party transaction, the ACNC has the power to revoke the organisation’s charity status.

The Impact of ACNC Investigations on Your Charity’s Reputation

A charity’s reputation is one of its most valuable assets, inspiring the confidence of donors and volunteers. Failing to manage a conflict of interest can severely damage this reputation, and it can be incredibly difficult to restore public trust once it is lost.

An ACNC investigation into how your charity handles a related party transaction can have a significant negative impact on its standing and ability to operate. The potential consequences of reputational damage include:

• A decline in fundraising, donations, and grants.
• Difficulties with the recruitment and retention of staff and volunteers.
• A loss of public trust and confidence in your charity.
• The need to divert time and resources to responding to bad publicity instead of pursuing charitable purposes.

Proactive Steps to Prevent Disputes Over Conflicts of Interest

Implementing a Clear Conflict of Interest & Related Party Transaction Policy

To effectively manage any related party transaction, it is highly recommended that every charity develops and implements a formal policy. A well-defined conflict of interest policy provides clear guidance for your Responsible People and helps ensure compliance with ACNC Governance Standards.

Furthermore, it reduces the risk of mishandling situations that could lead to a dispute. This document is a cornerstone of good governance and demonstrates a commitment to transparency.

A good conflict of interest and related party transaction policy should include:

• Policy Scope: An outline of who the policy applies to, which should cover Responsible People at a minimum but can also extend to staff and volunteers.
• Clear Definitions: An explanation of what constitutes a conflict of interest, including actual, potential, and perceived conflicts within your charity’s specific context.
• Disclosure Procedures: A clear process detailing how and when a conflict of interest or a related party transaction should be disclosed.
• Management Process: A protocol for ensuring that any decisions involving a related party are made at arm’s length.
• Consequences: The policy should make clear the consequences of a failure to disclose a conflict of interest.

By setting out how your charity will manage conflicts of interest, the policy helps Responsible People fulfil their duties under Governance Standard 5. It also helps create and promote a culture of disclosure where individuals feel encouraged to be open about their personal interests.

The Importance of Maintaining Registers for Interests & Transactions

A crucial step in managing any related party transaction and any associated conflict of interest is to maintain accurate and up-to-date records. Charities should keep two separate registers:

• One for the interests of its Responsible People.
• Another for all related party transactions.

These registers are vital tools for ensuring proper disclosure and transparent management.

The register of interests helps identify a potential conflict of interest before it becomes a problem. It should record the relevant interests of your charity’s Responsible People and any steps taken to manage them. This register may include:

• The Responsible Person’s name and date of appointment.
• A record of their interests, such as other board memberships, business ownership, or relevant interests of family and friends.
• The date the interest was disclosed.
• The steps taken to prevent or manage the conflict.

The related party transaction register provides a clear record of all such dealings, which helps the charity meet its ACNC reporting requirements. For each transaction, the register should capture enough detail to demonstrate transparency, including:

• The nature of the relationship.
• A description of the transaction.
• The process for its approval.

The ACNC provides templates that charities can adapt for their own use.

Conclusion

Properly managing a conflict of interest and every related party transaction is essential for a charity to meet its governance duties, maintain public trust, and avoid serious disputes. By implementing a clear conflict of interest policy and maintaining detailed registers, your organisation can ensure all decisions are transparent, compliant with ACNC standards, and made in the best interests of the charity.

If your charity requires assistance with developing a conflict of interest and related party transaction policy or managing a potential dispute, contact LawBridge’s specialised not-for-profit lawyers today. Our experts provide tailored legal advice to help safeguard your organisation’s reputation, ensure compliance, and prevent costly legal challenges; contact our team today to discuss your charity’s specific requirements.

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