Charity Clients: Financial Crime Risks and Due Diligence for Accountants

Charities are a special case in financial crime guidance. Most are well run and low risk, but their funds can move quickly across borders, reach people in conflict zones and come from donors nobody has met, which is why regulators pay attention to how they are protected from abuse. If you act for a charity as an accountant, bookkeeper or independent examiner, or you advise its trustees, it helps to know what the Charity Commission expects of them and what warning signs to look out for. This guide draws on the Commission's compliance toolkit on due diligence, monitoring and verifying the end use of charitable funds, which applies to charities in England and Wales. Scottish, Northern Irish and Irish charities have their own regulators, so check the position for your client. It is general information, not legal advice.

Where responsibility sits

The Commission's toolkit makes clear that trustees are legally responsible for making sure charitable funds are properly used and for safeguarding the charity's funds and property. These duties come from existing charity law, apply to all charities subject to the law of England and Wales whatever their size or whether they operate internationally, and are risk-based. In the Commission's words, the starting point is that the greater the risks, the more charity trustees need to do. Trustees cannot choose which duties to follow, but the specific steps can be proportionate.

As their accountant, you are not the trustees' compliance function. You may still be the first person to notice a payment, a donor or a partner that does not fit, so your own AML procedures apply to the work you do for the charity. Treat the charity as you would any client: identify and verify it, understand who controls it and rate its risk. Our guide to client risk rating, acceptance and exit explains how.

The minimum controls a charity should have

According to the Commission, every charity should have:

• internal and financial controls so that all funds are accounted for and spent in line with the charity's purpose;
• detailed financial records of receipts and spending, with audit trails for decisions, covering both domestic and international transactions; and
• reasonable steps to know its beneficiaries, at least in broad terms, with clear selection criteria applied consistently.

These are also the records you will want when you prepare or examine the accounts. If they are missing, say so to the trustees in writing.

Know your donors, beneficiaries and partners

The Commission sets out three "know your" principles:

• Donors. Identify substantial donors and verify their identity where the risk is high. Understand where the funds come from and any conditions attached. Anonymous donations are acceptable where suitable safeguards are in place.
• Beneficiaries. The level of detail depends on the charity's activities. The principle matters most where access is restricted or aid is distributed through third parties, and trustees should be able to confirm that beneficiaries are genuine and eligible.
• Partners. Confirm who the partner is, where it is based, and that it is a suitable and capable organisation with adequate internal controls. Check more thoroughly when the risk or the scale of the partnership is high. The Commission says a partnership agreement is good practice.

For all three, trustees should identify and, where appropriate, verify the other party, understand its business, be clear about its specific dealings with the charity, and watch for unusual activity.

Monitoring the end use of funds

Trustees must be able to show that funds were used for their intended purposes. The Commission says monitoring should confirm that funds can be accounted for, partner spending is traceable, onward transfers are documented, the project was delivered and the intended beneficiaries benefited. Verification means confirming that money physically reached the partner and was properly spent. Useful tools include progress reports from partners, receipts and invoices, and reporting back to donors.

Red flags the Commission lists

The toolkit lists these warning signs:

• loans, or funding arrangements that return money to the donor or give the donor substantial benefit;
• donations that restrict which partner or project is funded, especially where funds go overseas;
• anonymous cash donations, or donations through unreliable third parties;
• donors seeking tax relief alongside private benefit, or requiring purchases from an associated company;
• fake or non-existent beneficiaries, or applicants seeking support they do not qualify for;
• partners linked to proscribed or designated entities, or with weak financial controls; and
• missing, incomplete or disorderly records and audit trails.

Many of these overlap with the indicators in our guide to money laundering red flags for accountants, such as circular payments and payments from unrelated third parties.

What to do when you see one

The Commission's action steps are to record decisions to refuse or accept high-risk donations, carry out further checks where there is cause for concern, consider stopping a project if a partner may be bogus, and report suspected crimes to the relevant authorities, including the police. As the charity's accountant, add your own steps: raise the matter with your money laundering reporting officer (MLRO), consider whether a suspicious activity report is needed, and avoid tipping off. Overseas partners also raise sanctions questions, which our guide to UK sanctions for accountants covers.

A starter checklist for charity clients

1. Confirm the charity's registration and who its trustees are.
2. Ask what controls exist over cash, overseas payments and partners.
3. Check that substantial donations and new partners are documented.
4. Review the records for audit trails, particularly for international transfers.
5. Note any red flags from the list above and discuss them with the trustees.

Our CPD courses can help your team build confidence with not-for-profit clients.

Frequently asked questions

Who is responsible for protecting a charity from financial crime?

Trustees. The Commission says they are legally responsible for making sure funds are properly used and for safeguarding the charity's funds and property.

Do small charities need to do due diligence?

The duties apply to all charities in England and Wales whatever their size, but the Commission says the steps can be proportionate to the risk.

Can a charity accept anonymous donations?

Yes, according to the Commission, if suitable safeguards are in place.

What should I do if I suspect misuse of charity funds?

Raise it with your MLRO and the trustees, consider a suspicious activity report, and note that the Commission says suspected crimes should be reported to the relevant authorities, including the police.