Charities, Fraud and Civil Claims
Fraud is a serious crime, and unfortunately charities can be targets. Recently, a former finance officer at the British Society of Echocardiography was imprisoned after embezzling more than £200,000 from the charity to fund his online gambling habit.
If fraud has been committed then the charity is likely to refer it to the police for criminal prosecution. However, the charity may also consider civil action in order to attempt to recover the assets which have been taken from the charity and/or damages against the fraudster. As with any litigation, this can be costly in terms of time and legal fees and prevention through active governance reviews will undoubtedly be preferable if your charity is unlucky enough to be a victim, even if it may seem onerous at the time.
Claims - Civil Causes of Action
There is no all-encompassing civil claim of fraud. Instead, the charity will most likely plead a number of civil causes of action which may be bought together, some of which avoid having to prove a fraudulent mindset, which can be evidentially difficult, for example:
- Breach of contract - If the fraud relates to a breach of contract, this may well be the most straightforward civil claim to bring against the fraudster because you can seek to recover losses without having to prove any fraudulent intent.
- Misrepresentation - If the fraud relates to a breach of contract, the claimant charity may also have a claim in misrepresentation if the fraudster made an untrue statement which induced the charity to enter the contract causing loss.
- Negligent misstatement - in the absence of a breach of contract, the charity may be able to rely on negligent misstatement if a statement is made carelessly and the relationship between the parties is such that it gives rise to a duty of care on the part of the defendant.
- Tort of deceit/fraudulent misrepresentation - In order to bring these claims the claimant needs to show that the defendant made a false representation, knowing it to be untrue, or being reckless as to whether it is true, and he intended for the claimant to rely on it, and as a result, the claimant has suffered loss. Whilst on the face of it this may seem most akin to "fraud", the requirement to prove the defendant's subjective mental state can, as noted above, make this claim difficult to prove on the balance of probabilities.
- Claim for unjust enrichment - For this action, fraudulent intent does not need to be established. Instead, the claimant needs to show that the defendant has been enriched, the enrichment was at the claimant’s expense, and the retention of the enrichment is unjust.
- Breach of fiduciary duty or trust duty - the fraudster may also be in breach of their fiduciary duties eg not put themselves in a position of actual or potential conflict with the interests of charity, and must not derive personal profit from their position as a fiduciary.
Risks of Litigation
Even if the charity's civil claims against a fraudster have good prospects of success, the trustees will need to consider their duties. In particular, the duties to act in the best interests of the charity and to manage the charity's resources responsibly. The costs of pursing any civil claim is likely to be substantial, and if it proceeds all the way to a trial, the costs bill could be a six figure sum. From the outset, the trustees will need to consider where the dissipated assets have gone and how likely it is that a damages claim would lead to a recovery. The trustees may also need to seek the Charity Commission's consent, or a Court Order, before proceeding with the claim to approve the costs being incurred. That should help limit trustees personal exposure should eg a beneficiary claim that the costs should not have been incurred. Further, trustees should always be weary that litigation carries risk, and should the civil claims be unsuccessful, the charity could be liable for the defendant's costs in addition to its own.
It may well be that some costs protection is available, for example, the charity may be able to obtain after-the-event (ATE) insurance which can provide cover for the costs in pursuing litigation, but the premiums charged to the charity will be significant. It may also be possible to protect against the charity's own costs by obtaining funding through a commercial third party litigation funding provider.
In short, rather than considering civil options to deal with fraud after the event, without a doubt as noted above, the best strategy for all charities is to take robust and proactive steps to strengthen internal governance and finance procedures to seek to prevent fraud in the first place.