Is Your Charity Safe from Fraud? What Responsible People Must Know Now

Introduction

Fraud is one of the most significant concerns for charities, posing a threat that extends beyond financial loss. These dishonest acts can severely damage an organisation’s reputation and erode the public trust and confidence that is fundamental to the charity sector’s ability to attract donations and volunteers.

The responsibility to protect a charity from fraud rests with its leaders, known as Responsible People. Good governance is crucial, as these individuals have legal duties to manage their charity’s financial affairs responsibly and protect its assets. This guide offers practical steps and outlines the policies and procedures that Responsible People can implement to safeguard their organisation.

What Constitutes Fraud for a Charity

Fraud is an act of dishonesty where an individual or group deliberately deceives others to gain a benefit or cause a loss. This can be a significant issue for any charity, undermining its mission and public trust. The act of fraud is not always about stealing money; it can manifest in several ways.

People can commit fraud through various deceptive actions, including:

• Making false representations: This involves presenting untrue information, such as exaggerating the impact of a program to secure funding.
• Failing to disclose information: Knowingly withholding critical details, for instance, not revealing a conflict of interest in a financial transaction.
• Abusing their position: Using their role within the charity for personal gain, which could involve a manager approving payments to a company owned by a family member without due process.

Fraud can be perpetrated by anyone associated with a charity, from senior leadership like Chief Executive Officers (CEOs) and board members to staff, volunteers, or other individuals with some level of responsibility. Even small fraudulent acts can cause significant harm, not just financially but also to the charity’s reputation and the morale of its team.

Distinguishing Between Internal & External Fraud

To effectively protect your charity from fraud, it is important to understand that fraudulent activities can be broadly categorised into two main types: internal fraud and external fraud. Recognising the difference is a key part of good governance and risk management.

Internal fraud is committed by someone connected to the charity, such as a staff member, volunteer, or one of the Responsible People on the board. Examples include:

• Misusing charity funds: An employee using a charity’s credit card or bank account to pay for personal expenses.
• Creating false records: An individual generating fake invoices or purchase orders to receive payments for goods or services that were never delivered.
• Claiming improper expenses: Submitting claims for expenses that were never incurred, were inflated, or are not appropriate for reimbursement.
• Theft of assets: Stealing cash donations or physical goods belonging to the charity.

External fraud involves a person or entity with no connection to the charity attempting to extract money or assets. This type of fraud often targets a charity’s financial resources through deception. Common examples are:

• Submitting fake invoices: An outside individual sending a fraudulent invoice to the charity for payment, hoping it will be processed without scrutiny.
• Identity fraud: A criminal entity hijacking the charity’s bank account or setting up a fake website to solicit donations in the charity’s name.
• Scams and cyber threats: Phishing emails that trick staff into revealing sensitive information like passwords or making urgent, unauthorised payments.

Recognising Your Charity’s Vulnerability to Fraud

The Risk of High Public Trust & Confidence

Charities often benefit from high levels of public trust and confidence, which is essential for fundraising and attracting volunteers. However, this respected status can be exploited by individuals with dishonest intentions.

The inherent goodwill and positive reputation of a charity can provide a cover of respectability for those committing fraud, making it harder for misconduct to be detected. This environment of trust can unfortunately lower the guard of stakeholders, who may not expect fraudulent activity within an organisation dedicated to a good cause.

As a result, people are often less likely to scrutinise the actions of those in positions of authority, creating an opening for fraudulent behaviour to occur without immediate suspicion. Effective governance is therefore crucial to protect your charity from this vulnerability.

The Dangers of a Trusting Culture & Insufficient Oversight

While a culture of trust is a cornerstone of the not-for-profit sector, it can become a significant vulnerability if not balanced with robust oversight. An internal culture built on shared goals and volunteerism may lead individuals to operate with less suspicion, enabling unscrupulous people to exploit this trust.

As seen in some fraud cases, a person’s likability can engender goodwill, making others less likely to challenge or scrutinise their conduct. This risk is magnified when combined with specific weaknesses in a charity’s internal controls.

Responsible People must be aware of how these factors can create opportunities for fraud. Key vulnerabilities include:

Vulnerability	Description
A lack of segregation of duties	When one person is responsible for multiple stages of a financial process (e.g., authorising, completing, and reviewing), making it easier to conceal fraudulent activities.
Over-dependence on key individuals	Reliance on one or two people for critical functions, leading to ineffective oversight of funds and assets due to fewer checks and balances.
Irregular cash flow	Fluctuating donations and expenses can make it difficult to identify suspicious transactions that might be more obvious in a business with predictable financial patterns.

The Legal Duties of Responsible People for Fraud Governance

Upholding Australian Charities and Not-for-profits Commission Governance Standard 5

Under Australian Charities and Not-for-profits Commission (ACNC) Governance Standard 5, a charity’s leaders, known as Responsible People, have specific legal duties that are fundamental to good governance and fraud prevention. These obligations require them to act in the best interests of the charity, ensuring its resources are protected and used to further its charitable purpose.

The duties for Responsible People include the following key responsibilities:

Responsibility under Governance Standard 5	Description
Acting with reasonable care and diligence	Staying informed about the charity’s operations and making thoughtful decisions to protect its assets.
Acting honestly and fairly	Ensuring all actions are in the best interests of the charity and for its charitable purposes, avoiding personal gain.
Managing financial affairs responsibly	Ensuring proper financial controls and procedures are in place to safeguard the charity’s funds and prevent misuse.
Disclosing conflicts of interest	Declaring any potential or actual conflicts of interest to other board or committee members to maintain transparency.
Preventing insolvent trading	Ensuring the charity does not continue to operate if it is unable to pay its debts.

Complying with Australian Charities and Not-for-profits Commission External Conduct Standards for Overseas Operations

For charities that conduct activities outside of Australia, there are additional legal duties designed to promote transparency and accountability. These are outlined in the ACNC External Conduct Standards, which work to ensure that resources sent overseas are used for legitimate charitable work.

Specifically, External Conduct Standard 3 places a direct responsibility on these charities to protect against fraudulent activities. It requires them to take reasonable steps to minimise the risk of:

• Corruption
• Fraud
• Bribery
• Other forms of financial impropriety

This duty extends not only to the charity’s own staff and volunteers but also to any third-party organisations it works with overseas.

Implementing Policies & Procedures to Protect Your Charity from Fraud

Establishing Robust Financial Policies & Procedures

To protect your charity from fraud, it is essential to establish detailed and robust financial policies and procedures. The specific steps you take will depend on your charity’s size and complexity, but sound financial controls are a cornerstone of good governance. Even small charities can implement practical measures to significantly reduce risk.

Key financial procedures to consider include:

Procedure	Description / Action
Separating duties	Ensure one person is not solely responsible for authorising, completing, and reviewing financial transactions to create checks and balances.
Requiring two signatories	Mandate that at least two people sign off on all bank account activities, including online transactions and card applications.
Regularly checking bank statements	Have bank statements frequently reviewed by more than one person to verify income and identify unauthorised transactions.
Reconciling invoices and payments	Consistently reconcile supplier statements, invoices, and creditor balances to verify payments match services rendered.
Securing online banking	Limit the number of people with access to online banking passwords and ensure passwords are changed regularly.
Limiting cash handling	Implement policies and procedures to reduce the amount of physical cash that staff and volunteers handle.

Developing a Clear Fraud Prevention Policy

A formal, written fraud prevention policy is a critical tool for raising awareness and providing clear guidance to everyone involved in your charity. This document should be endorsed by the governing body and serve as a central reference for how your organisation approaches the risk of fraud. It outlines clear actions and responsibilities for preventing, identifying, and responding to any incidents.

When developing a fraud prevention policy, your charity should include several key components:

Policy Component	Description
A definition of fraud	A short statement explaining what constitutes fraud within the context of the charity’s operations.
A response plan	Details on how the charity will respond if fraud is suspected, including internal and external notification requirements.
Reporting procedures	A specific process outlining how staff, volunteers, and Responsible People can report suspicions of fraud.
Fraud prevention training	A description of how the charity will provide ongoing training to ensure everyone understands the risks and their responsibilities.
Policy review schedule	A timeline for how and when the policy will be reviewed to ensure it remains relevant and effective.

Strengthening Human Resources Procedures & Your Ethical Culture

Your people are your first line of defence against fraud, making strong human resources procedures and a positive ethical culture essential. These elements work together to ensure that staff and volunteers are well-vetted, properly trained, and feel empowered to speak up if they notice something wrong. Responsible People should lead by example to foster an environment of integrity and transparency.

To strengthen your charity’s resilience to fraud, consider these practical steps:

HR / Cultural Step	Description
Implement sound recruitment processes	Use clear job descriptions and application forms, and always conduct reference checks for roles with financial responsibility.
Provide ongoing training	Regularly train staff and volunteers on fraud awareness, financial controls, and how to report suspicions.
Promote a code of conduct	Display a code of conduct to set clear expectations for ethical behaviour and provide a standard for judging actions.
Foster a safe reporting culture	Have a supportive whistleblower policy and a ‘no blame’ culture to encourage individuals to voice concerns without fear of reprisal.

How Your Charity Should Respond to Suspected Fraud

A Five Step Plan for Managing a Fraud Incident

Discovering fraud can be distressing, but having a structured response plan ensures you can manage the situation rationally and effectively. A clear plan helps contain the issue and centralises your charity’s approach. The following five-step process provides a framework for getting your organisation back on track.

A comprehensive response plan should include these key stages:

1. Identify: The first step is to identify the potential issue.

• Staff and volunteers should know exactly who to report concerns to, such as a direct supervisor or a designated response coordinator.
• Early on, it is crucial to gather key information, including the time and date of the suspected fraud, the people potentially involved, and the immediate effect, such as lost money or assets.

2. Investigate: Once an issue is identified, a proper investigation must be conducted.

• This stage involves determining how the fraud occurred and the full extent of the harm.
• You’ll need to gather all available facts about the cause and its impact, not only on the charity’s finances and assets but also on any people involved.

3. Assess: After the investigation, you must assess all the information you have gathered.

• This involves determining the scale of any loss, misuse, or unauthorised disclosure of information and assets.
• A key part of this step is to understand any risks posed to individuals and what actions have already been taken to address the immediate issue.

4. Notify: At this point, your charity should consider who needs to be notified.

• This includes not only the relevant regulators but also any individuals who may have been affected by the incident.
• It is important to be aware of any specific timeframes or forms required for reporting to regulatory bodies.

5. Review: The final stage is to review your charity’s internal processes and procedures.

• This involves analysing how the fraud occurred and applying these lessons to implement policy changes that will prevent a similar incident from happening again.
• Your review should also consider how staff training could be improved to strengthen your defences.

Reporting Fraud to the Australian Charities and Not-for-profits Commission, Police & Other Regulators

If you suspect your charity has been the victim of fraudulent activity, it is vital to report it to the appropriate authorities. Prompt reporting helps protect your charity and the broader not-for-profit sector from further harm.

Authority / Regulator	Reporting Guidance
Police	Report any suspected criminal activity like theft or serious fraud. For urgent risks, contact local police; for Commonwealth law breaches, contact the Australian Federal Police.
Banks	Contact your financial institution immediately if fraud relates to bank accounts, cheques, or cards to stop access and prevent further loss.
Other Regulators	Report external scams (e.g., fake websites) to SCAMwatch (run by the ACCC) or your relevant state/territory consumer affairs regulator.
ACNC	Notify the ACNC of significant breaches. High-value fraud or incidents attracting public interest are expected to be reported immediately.

Conclusion

Protecting your charity from fraud requires Responsible People to understand key risks and their legal duties, while implementing robust policies and procedures to safeguard assets. Furthermore, having a clear plan to manage and report any suspected incidents is essential for effective fraud governance.

By taking proactive steps to strengthen your charity’s fraud governance, you can safeguard your mission and public trust. For specialised not-for-profit legal guidance tailored to your organisation’s needs, contact the expert team at LawBridge today and ensure your charity is fully protected.

Frequently Asked Questions