Why the charity sector is not immune from fraud and why some charities are seen as "easy targets"

Charity Fraud Awareness Week - Day 4

We explore below why charities are often targeted and the types of frauds that charities should be paying attention to.

Lastly, we take a quick look at some of things that charities should be doing to protect themselves, their reputation and third parties.

Understanding the problem

According to the Charity Fraud Report 2024:

Nearly half of charities (42%) were victims of fraud in 2024
84% of charities experienced financial loss as a result of the fraud committed
50% of detected fraud cases were committed by individuals within the charity (including staff, volunteers, and trustees)
29% of charities suffered fraud relating to expenses.

Charities are not therefore immune to the threat from fraudsters (including the often forgotten threat of insider fraud). Fraud is unfortunately prevalent in the charities sector.

Why is this? We could go into a lot of detail analysing this particularly as charities, by their nature, vary dramatically across their charitable aims and their funding. There are a few core reasons though that make the charitable sector attractive to fraudsters.

Charities vary dramatically with their organisational structures, their policies and procedures and their culture (particularly when it comes to counter-fraud). Whilst many charities will have (and are obliged to have) processes and procedures in place to effectively mitigate their fraud risk, many charities will not have such policies and procedures in place. This may be due to a number of factors such as limited resources or pressure to maximise funds for their cause. This might in turn mean that they do not have fraud policies and procedures in place nor will they have fraud prevention systems or a compliance function. In charities where some or all of these are missing, this presents an easy opportunity for fraudsters with minimal risk of detection of any such fraud at the time.

Further, trust and reputation are integral to the success of many charitable organisations. A charity's respectability and almost automatic assumption of trust and confidence is obviously well-earned and represents a great asset to many charities but it can also present a real danger area for them and for third parties too. For example:

Fraudsters might impersonate charity representatives and therefore misappropriate funds from the public that they thought they were paying to the charity. Not only is the donor defrauded but so is the charity as it has been deprived of funds that it could have received. The charity is also likely to suffer an impact on its reputation.
The trust within charities can also be exploited internally. Dishonest employees or volunteers may misuse their access to funds, resources, or donor data for personal gain. This might be more of a risk if charities are reliant on volunteers and where they might not have the same level of training, vetting or oversight (which could lead to volunteers committing insider fraud or simply being targets for fraudsters because they might present an opportunity for fraudsters to take advantage).

Whilst large charities which are victims of fraud will not fall foul of the failure to prevent legislation under s199 of the Economic Crimes and Corporate Transparency Act 2023 (ECCTA), it is imperative that charities consider the risks of fraud and implement robust policies and procedures to prevent fraudulent acts which benefit the charity.

Examples of charity fraud risks

In the light of the above, charities might encounter the following types of fraud risks:

Payroll/ expenses fraud. This can involve regular small amounts which in isolation are not noticeable but create a pattern (irrespective of the size of the amount taken, it is still fraud) and ultimately results in a large sum being defrauded over time
Impersonation of the charity (including through the use of AI and phishing scams)
Misappropriation of donations by dishonest charity staff (skimming off the top and then misrepresenting the donated sums)
Fake invoice fraud where charities might pay fraudulent invoices for services that have not been provided
Cyber fraud
Procurement fraud where fraudulent third parties inflate invoices or deliver substandard products or services

Charities might also encounter the possibility of donors claiming that how their donations were to be used was fraudulently misrepresented to them. The risk to (large) charities here is that they derive a benefit from any such misrepresentation and the charity then might face the risk of having failed to prevent fraud (within the meaning of s199 of the Economic Crime and Corporate Transparency Act 2023).

What should charities do?

The Charity Commission has been clear on its requirement for charities, especially registered companies, to ensure the implementation of robust policies and procedures to prevent fraud, further reporting that significant sanctions may follow for those charities which fail to adhere to these requirements.

Furthermore, charities are well advised to consider the potential for the above types of frauds (particularly given the unique nature of their own operations) and to consider measures that they can put in place to try and prevent them occurring.

Large charities should, if they have not done so already, undertake a fraud audit to identify their fraud risks and then design and implement reasonable fraud prevention measures. See our earlier articles this week for more information.

This will include having robust policies and procedures and ensuring that staff and other relevant partners are aware of the charity's anti-fraud stance and procedures and trained where appropriate.

With fraud being prevalent within the charity sector, and criminal corporate liability under section 199 of ECCTA representing an additional risk to charities, it is imperative that charities are proactive in protecting their organisations and associated parties.

If you would like more information about how fraud affects charities and the above affects your charity then please feel free to contact Kellie Thatcher or Ben Hay.