Charity Insurance | Social Enterprises | Voluntary Organisations | Community Groups

The Risk of Internal Fraud at your Charity

Charities are just as vulnerable as other organisations (in some cases more vulnerable) to the risks of internal fraud.  Being aware of the risks posed by employee or volunteer dishonesty in your charity can help you put in place the controls to prevent or minimise the harm from this risk.

Fraud can range from the innocuous expense claims that would not necessarily threaten a charities stability, all the way to major internal theft such as the recent case highlighted at the South Glasgow Childcare Partnership Forum, where the Evening Times of Glasgow reported on an individual embezzling £62,000 from the charities funds to feed an addiction.

In many cases, internal fraud, by nature, is not committed by hardened lifelong criminals but rather by volunteers of staff that are presented with an opportunity and often commit these crimes for the first time.  There are examples of more serious money laundering events too but the nature of the crime being carried out by trusted individuals, often those charged with the processes to prevent such occurrences, means that management and trustees need to take a team approach to ensuring that your organisation has adequate controls in place.

Internal fraud can have devastating effects.  Undetected the worst fraudsters might cause enough damage to place the organisation at risk.  Even if that eventuality is avoided, the reputational damage to a charity of an incidence of fraud can be very harmful.

What areas should your charity consider to prevent internal fraud?

Good practice should include a rigorous analysis of the processes, controls and segregation of duties in handling financial matters.

Some common areas of fraud include:

  • The creation for opportunities of ‘over payment’, allowing an individual to pocket the difference
  • The creation of false suppliers
  • Diverting funds inappropriately
  • Purchase order fraud
  • Selling data to third parties
  • False injury in the workplace or on volunteer activities
  • Petty cash theft

Once you have acknowledged the problem, we would always recommend to our clients that they record internal fraud on their risk registers.  This will ensure a proper discussion occurs regularly at a senior level on this subject.

Employees and volunteers should be subject to appropriate vetting in the recruitment and on-boarding process.  Furthermore, training plans should include fraud as a subject.  Often it is another member of the team that blows the whistle on internal fraud, long before management might notice.  Providing the processes and confidence for this to happen in your charity might prevent a fraud event from escalating.

Financial policies and procedures should be regularly reviewed.  Payment structures should be thought through and appropriate measure in place to prevent individuals from being able to mask fraudulent activity.  the measures appropriate for your charity will likely flow from a thorough risk review.

Finally, the culture of your charity has a big role to play.  If you have ethics that flow from the management board through every level of the organisation, you will promote integrity as a core value.

Insurance for Internal Fraud at Charities

In most cases, charities will choose the above preventative measures to avoid being subject to fraud issues.  However, a number do seek to include ‘fidelity insurance’ in their insurance protection.

Insurance is available for the dishonest and fraudulent acts of volunteers or employees.  Some policies extend cover to include funds fraudulently attained through computer fraud or fraudulent transfer instructions.

If you would like some advice on your charity insurance policy and the protection it offers from the risks you face from internal fraud, please get in touch.