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  1. Wealth
February 27, 2013

What are the Big Risks Faced by Charities Today?

By Spear's

Charities often underestimate some of the risks involved when it comes to using funds abroad, or paying trustees

‘Only great souls know the grandeur there is in charity.’ So said Jacques-Bénigne Bossuet, the great seventeenth-century theologian and orator. In tough economic times, it is more important than ever that charities do what they can to maintain financial and practical support from the public and from major donors and philanthropists.

Not that it is all glum news. Although many charities are finding it difficult to keep up levels of funding, there seems to be an increasing trend for potential philanthropists to set up charities during their lifetimes. This lets them have a greater hand in the development of the charity, and really see the benefits in action.

It remains the case that many charities do not have large single donors, and will need to explore new ways of fundraising.

They face legal challenges, too. Charity law can be a minefield. On the one hand, there are the ‘red herrings’: risks that sometimes charities may overestimate (which may result in them feeling the need to turn away much-needed donations without good reason).

On the other hand, there are the ‘banana skins’: risks that may be much less obvious, but which the regulator and the courts take extremely seriously, and which can lead to very negative publicity.
IT IS MORE important than ever that charities put processes in place so that they can spot these risks before they become problems. It is equally important, particularly for larger charities, to give advance thought about how to manage reputational risk if something does go wrong. PR disasters can be more than just embarrassing. In bad cases, they can scare donors and supporters away, leading to an atrophy of funding.

An example of a ‘red herring’ type of risk is money laundering. That is not to say that anti-money laundering policies are not important. All charities should understand how the law applies to them, and understand where there may be genuine concerns that they may inadvertently be caught up in financial crime, directly or otherwise.

But the rules are not designed to force charities to reject any and all ‘unusual’ donations without good reason. It is important to monitor risk, but equally, for a charity not to cut of its nose to spite its face, as it were.
WHAT ABOUT THE banana skins? A good example is payments made to trustees. While it is quite proper to pay certain expenses to trustees — and the Charity Commission has published detailed guidance — the payment of trustee remuneration is another area altogether.
Trustees may receive payments from their charities in all innocence, which they would doubtless be surprised to find were unlawful. The regulator takes a very dim view of such payments, and they can ultimately result in personal liability for the trustee in question — as well as, potentially, an ugly breakdown in public confidence in the charity.

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Charitable work overseas — like this school built by UK charity PEAS in Uganda — is a cornerstone of the third sector, but it’s important charities monitor their grants carefully

Another example is using funds outside the UK. Charity begins at home, but doesn’t end there, and charitable work overseas is an important cornerstone of the third sector. But it is important to monitor any grants carefully and to make sure they are used for exclusively charitable purposes. Failure to get this right can lead to personal liability, Charity Commission sanctions and unexpected tax penalties.

For all of this, it is important not to focus on the negatives. By preparing themselves well to deal with risks — before they become problems — charities should be able better to deal with difficult financial times and recruit new supporters. And that has to be for everyone’s benefit.
Ed Powles is an associate at Maurice Turnor Gardner LLP

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