Taking on the Enemey Within
Fraud in voluntary organisations: how to prevent it, spot and stop it, and how to get your money back

The Charity Commission's annual report, published in July 2002, said that nine charity workers were imprisoned last year for theft or misappropriation of charitable funds. The Commission claims that its investigations are working, but charities remain vulnerable to people who are willing to take what does not belong to them. When an outsider commits fraud, the damage is bad enough, but when an insider commits fraud, it can be much worse. The insider has more time, more access and more information than the outsider does. The fraud may be serious enough to impair the charity's work, and may even lead to the charity being wound up. The betrayal can cause great damage beyond the money lost, as it demoralises staff, volunteers and trustees, and injures the charity's reputation with funders, the Charity Commission and the public.


Prevention
An organisation's culture is its first line of defence. The charity's culture should promote positive values, such as honesty, openness and caring.

For example if a charity tolerates dishonesty in one area of the charity's work (such as lying to funders or fiddling expenses) staff may feel that it is permissible in other areas.

Openness is important because in a healthy workplace, the staff look out for one another. Problems with relationships, addiction or money can often be spotted before they become desperate. If someone does notice something out of place, they should feel able to blow the whistle. Research shows that the risk of fraud is decreased where the workforce is reasonably content and has been treated fairly, and feels secure.

The second line of defence is the charity's systems. This begins at recruitment and goes through to termination of employment. When recruiting, references should always be taken up and qualifications checked. At interview, candidates should be asked about significant gaps in their employment history and reasons for leaving previous employers, especially where this is after a short period. A charity should be very concerned about dishonesty at interview or in a job application. A new employee should have a proper induction process and should obtain authority gradually.

Office systems should allow for effective monitoring including periodic interviews, and checks on work done and correspondence in and out. A charity should consider introducing employment terms permitting it to read e-mails and record telephone calls. Personnel records should be kept up to date.

Some areas of work need to be protected by computer passwords, locked cabinets and rules of confidentiality, others do not. Use security precautions where these are necessary, but discourage unnecessary security. Where passwords are used for security, they should be recorded in a safe place (not under the nearest mouse mat). Keys should be kept safe, and unnecessary copies should not be made.

It is dangerous for anyone, even senior and long-serving staff, to have too much authority. There should be few operations that are only understood by only one person, particularly where money, goods or contracts are concerned. No member of staff is too senior to be monitored. A charity should give careful consideration as to who can sign or countersign cheques and to what limit, who can change bank mandates and who can access computer systems handling money.


Spotting fraud
The most universal form of monitoring is the annual audit. The auditors should find inconsistencies in the accounts. A charity should make sure its auditors understand the charity and charities generally, its office systems and computers used, and should suggest improvements. The charity should act on the auditors' recommendations.

The organisation should also consider what other formal monitoring it should carry out. A very large charity may need ongoing internal audit procedures; an organisation that handles a lot of cash or stock should have regular and perhaps also random stock takes or counts of cash as appropriate.

Informal double-checks are perhaps the most valuable tool of all. A person who is required to countersign cheques or other documents, such as the payroll instruction, needs to be more than a rubber stamp. Cheques for large amounts or unusual payments should be questioned. Cheques should be complete when signed, and blank cheques or other documents with important blanks should never be signed. Without spying on staff, managers should keep an eye open. There may be legitimate reasons why an employee likes being in the office at a time when no one else is there, or for the sudden purchase of a BMW by a junior accounts clerk, but a prudent manager should ask questions.

If fraud is suspected of an employee who is in post, the charity must investigate fully. It is usually appropriate to instruct solicitors at an early stage and it may also be appropriate to use specialist accountants, enquiry agents or computer experts.

The charity needs to be careful at this stage. It needs sufficient information to make an informed decision about what has happened, who did it, and the extent of the loss, and to provide evidence to convince the court, police or other agencies to assist. It must weigh the rights of the individual employee to, for example, fair treatment and confidentiality, against the need of the charity to protect itself, its staff and funders. The investigation process must not be allowed to drag on, delaying action to prevent further fraud, recover assets or catch the fraudster.

Initial investigations will almost inevitably involve staff, but the investigation should pass to people with independence and relevant skills. Independence will almost always require the involvement of management committee members or trustees.

The best evidence is usually witness evidence, so potential witnesses should not be persecuted or marginalised. Solicitors or professional investigators should take written witness statements early on. All relevant documents should be kept, including files, accounts slips, invoices, meeting minutes, bank statements, diaries, manuscript notes and any other permanent record. Steps should be taken to preserve electronic records, including e-mails, particularly against automatic deletion programs or procedures. It is best to have expert assistance in accessing electronic copy records, but at least a hard copy should be printed off and a record made of who printed off what and when. Closed circuit TV tapes or audiotapes may need to be identified and stored - again the person responsible and the date should be recorded.

The charity may needs to instruct an accountant. The auditor may have a conflict of interest where the fraud predated the last audit - perhaps the fraud should have been spotted earlier. A solicitor can instruct the accountant as to what is needed for court proceedings, and can advise on the effect of legal documents (for example, the employment contract) and on timing and strategy. In complicated cases, other experts such as forensic accountants, enquiry agents, computer experts and handwriting experts may be needed. It is sensible for a solicitor to instruct the experts - both to direct their efforts to the needs of the recovery process and to ensure that "privilege" can be claimed in respect of the results (so that, for example, the conclusions of a handwriting expert do not have to be disclosed in court proceedings unless they assist the claim).


Recovery
The charity's duty is to take reasonable steps to recover what has been taken from it fraudulently. This does not require it to pursue every penny regardless of cost, but does require it to consider what it can and should recover.

The easiest form of recovery is to hold on to what has not yet gone. Cheques may be stopped, transfers cancelled, authorities and mandates rescinded, locks changed.

The charity may be able to recover money by "set off", where the charity owes the fraudster money for pay or expenses. It is prudent to take legal advice before withholding payments (especially pay), and private correspondence and possessions should not be tampered with except on legal advice.

In appropriate cases, a court can make a freezing order in days or immediately if the case is sufficiently urgent. This is an injunction that freezes the assets of the suspected fraudster, and it is particularly effective against bank accounts, shares, investments and property. It is only effective against parties who have notice of it, so the charity needs to know where the fraudster's assets are, and it is difficult to enforce against easily marketable assets such as vehicles, antiques and jewellery.

The court can make "search orders", to allow the charity's solicitors to obtain access to premises to seize evidence, especially documentary evidence, of wrongdoing. Search orders are surrounded by safeguards that make them difficult and expensive to get. For example, an order will not normally permit a raid on a private home, and an order must be carried out in the presence of an independent solicitor.

Orders may also force disclosure of material information. The suspect may be required to provide information about where the money went, or his assets. Family members or associates may be required to provide information, and a bank may be required to disclose movements on a certain account. The scope of such orders is constantly developing, and lawyers and clients should be imaginative in what they seek.

In contrast, the party applying for a court order needs to provide honest and full information. Failure to do so may lead to the order being discharged at a later date (possibly before money has been recovered), and to liability for damages or costs.

Failure to comply with a court order, if it has been properly served, is a contempt of court, which is punishable by fines or even imprisonment. Banks and other large institutions have procedures for dealing with orders, and will almost always comply. Individuals may be slower to understand what is required of them. Where the defendant has run away, serving him may be impossible, but if he is in custody his legal advisers are likely to advise him to comply with an order, or at least to apply to the court to explain why he cannot or should not do so.

In suitable cases, the court can make "world-wide" freezing orders. The effect of such orders outside England and Wales will depend on the law of the jurisdiction in question. Enforcement of such orders can be difficult, especially outside the EU and other countries that have treaties with the UK dealing with such issues. Specialist advice, usually including the advice of foreign lawyers, should be taken before embarking on international litigation and it is likely to be justified only in the largest cases.

When making an injunction, the court needs to be satisfied by the strength of the case. At the initial stage it is necessary to show a good case, but not prove every aspect of it. The court needs an explanation of the case, some evidence of it - preferably supported by documents, and the best view available of what has been taken and where it has gone. The court will normally need information like full names, addresses and bank account numbers.

The applicant is normally expected to pay the costs of innocent third parties, like banks, and to give an undertaking to compensate the defendant if the case against him cannot later be proved.

The court needs to consider the rights of the defendant. It will make an order in the defendant's absence only where it is very urgent, where warning the defendant may allow him to take steps that will make the order pointless (like emptying a bank account) or where the defendant has a chance to appear but fails to do so.

The order is not the end of the case but the beginning. Usually it will be for a short period of one or two weeks, until a hearing can take place at which the defendant and any other parties can have their say. Court papers for a full claim must be completed and served. The case will continue much as any other major case, but with extra features. The claimant will usually be expected to proceed quickly. It may be necessary to return to court to amend the order, for example to add newly found assets to it, or to release to the defendant money to meet his living costs or legal costs.

The case may never reach trial. The defendant may have fled, or have no assets to meet any judgment. More optimistically, the fraudster may co-operate in the recovery effort, perhaps to obtain some sympathy in the criminal courts, or to reduce the civil claim against him. But if the case is not abandoned or settled, the charity will need a thoroughly prepared case to win at trial. The courts take fraud allegations seriously, and will not make findings of fraud unless the evidence is strong.

Where recovery from the fraudster is impossible or not cost-effective, a charity should consider whether another party is at fault. Perhaps the charity's bank released money in breach of mandate or honoured forged cheques. The auditors may have missed irregularities. Cases against employees who have not themselves committed fraud are usually inadvisable due to the cost involved and the damage to morale, but in some cases a claim against an employee is justified.

The charity may well be insured against fraud. One of the first steps that a charity should take is to check its insurance position, and report the fraud to its broker or insurer. If the loss is insured, then the charity should not take any steps without the approval of the insurer, except for steps that cannot be criticised, such as reporting the fraud to the police, or preserving evidence.


Police presence
The Charity Commission's expectation is that if a charity discusses evidence of criminal financial irregularity, the police should always be informed unless there are exceptional reasons not to do so, and that legal advice should be sought in cases of doubt. It is suggested that it would be inappropriate to report very small frauds, or cases where there is suspicion but little real evidence. Beyond that, it is difficult to know what "exceptional reasons" there may be not to tell the police.

The police can bring experience, equipment and powers of search and arrest to the case. A fraudster might be stopped at the airport, or his cheque books seized before he can get away with the assets.

Unfortunately, police resources are under great pressure, and frauds against employers are not necessarily high priority. The police often fail to show much interest in any but the largest or clearest frauds, and too often regard what has happened to be a civil dispute. Where the police do take an interest, it should be remembered that their aims are not necessarily those of the charity: the police want to catch a villain but the charity wants its money back. The aims usually coincide but not always and, while it will usually be appropriate to co-operate with the police, this is not always the case. For example, the police may want to leave a suspected fraudster in post in an attempt to gain further evidence against him, while the charity may consider that the risk is too high.


Examples of fraud
The following are all based on real examples:

· An employee opened a bank account in a name similar to that of the charity for whom she worked. She tampered with cheques to the charity and paid them into that account.
· Bogus employees were added to the payroll; their salaries were paid to the fraudster's bank account.
· A senior employee awarded himself a pay rise, and changed the monthly payments made.
· The finance director was asked to sign partially completed cheques: the amounts and names were altered later. The records were also altered, to hide the fraudster's tracks.

Written by Charles Robinson, a Partner in Russell-Cooke's Commercial department.
T: 020 8394 6482
E: robinsonc@russell-cooke.co.uk


An abridged version of this article first appeared in Charity Finance magazine (www.charityfinance.co.uk).