Case study: Case studies of insider fraud in charities

Insider fraud is committed by someone involved with the charity, whether a trustee, an employee or volunteer. Themes of these anonymised case studies about insider fraud include poor or non-application of financial controls, low fraud awareness and excessive trust or lack of challenge.

The actions taken by the charities demonstrate that relatively straightforward, positive steps can be very effective in strengthening fraud resilience.

Our guidance includes useful resources and advice to help you protect your charity from fraud.

Fraud by a charity employee

The charity’s office co-ordinator defrauded charitable funds to a value of over £45,000.

The fraudster was responsible for paying charity bills but was not an authorised signatory on the charity’s bank account. The fraudster was able to access one of the senior management team’s bank account login details to set up fake payees’ in the name of genuine third parties. The funds were then transferred to the fraudsters own bank account.

Bills were then falsified and the fraudster used the bank login details to authorise the false bills. When the charity conducted its weekly bank account checks they showed trusted partners being paid, although in reality these were false payments to the fraudster’s personal bank account.

The fraud was carried out over a period of 6 months and was only detected when the fraudster admitted it.

Action taken:

The charity’s bank was contacted to stop the false payees and the fraudulently accessed login details. An internal investigation was carried out on the charity’s bank account and its transactions to establish the full extent of the fraud. All payments were reviewed during the period that the fraudster was employed.

The investigation also considered the potential for wider collusion. Appropriate reports were made to the relevant authorities, including the Charity Commission and the police.

The fraudster’s employment was also terminated.

Lessons learnt and outcomes:

A review of all financial procedures was carried out which resulted in the following changes to help prevent this from happening again:

  • monthly reconciliation of transactions to be carried out by the senior management team
  • all invoices to be approved by a weekly payment board
  • charity’s bank account to be changed to an account with a secure payment authorisation system, requiring the good practice minimum requirement of two signatories
  • new processes introduced to track the receipt and expenditure of all funds within the charity

The charity had insurance cover against fraud and theft which meant compensation was received.

The individual pleaded guilty to one count of fraud by abuse of position and given a 2 year suspended sentence plus ordered to carry out 200 hours of community service.

Fraud by a charity finance director

A finance director defrauded a charity of over £900,000 over a 7 year period, which only came to light after the director had been made redundant.

A review of the charity’s transactions revealed that amounts paid through one of the charity’s accounts did not match the amounts the charity had been invoiced for. The director had attempted to cover tracks by making false journal entries in the charity’s accounts system.

Initial investigations revealed that the director had misappropriated over £200,000 of charity funds in the last 12 months. The charity also widened its investigation to include transactions made in earlier years.

The director had no access to the charity’s finances or bank accounts after leaving the charity. The investigation concluded that no further fraudulent losses were carried out after the director left the organisation.

The charity reported the fraud to the police and its banking providers, and trustees were fully informed of the situation and investigation.

Action taken:

The charity trustees:

  • reported the matter to the police and the ex-director was charged with 5 counts of theft and 1 count of fraud by abuse of position
  • conducted an investigation to quantify the losses and establish how the fraud was successfully committed for so long, and for such large sums
  • reviewed financial controls and procedures practices
  • took legal advice on recovering the defrauded funds

The charity’s banks performed their own investigations that helped the charity identify the total amount the director had stolen.

An independent financial expert was also appointed to investigate the fraud and advise the trustees on strengthening financial procedures.

Lessons learnt and outcomes:

A new finance committee was established, which meets every month. The committee included the chair of trustees and two other trustees, one of whom is a qualified accountant.

A new online accountancy package was also purchased. This had the capacity to limit access to read-only for individuals who do not need full access.

The charity re-wrote its financial procedures manual, addressing previous weaknesses, and relevant staff were trained to use it.

The charity’s ex-director was convicted of 2 charges of fraud and was sentenced to 6 years imprisonment.

Fraud by an employee of a partner organisation

A field supervisor from a partner organisation of a charity, working on an aid programme in Niger, dishonestly took charity funds totalling £46,000.

The charity funds were fraudulently diverted as a result of deliberate overpayments for goods and records showing payments that beneficiary groups did not receive. False purchases had also been charged to the charity programme.

There was insufficient oversight by the charity of its partner organisations’ field supervisors. This made the charity vulnerable to fraud.

Action taken:

The charity carried out an internal investigation into the fraud. This resulted in:

  • the member of staff involved was confronted with the evidence and admitted the offence
  • the charity seeking legal support to pursue recovery
  • the charity’s investigation identified a low level of control at project level and an insufficient level of supervision
  • the partner organisation confirmed that any fraudulent loss would be met by them, not the charity

The charity also submitted a serious incident report to the Charity Commission.

Lessons learnt and outcomes:

The loss incurred was covered by one of the charity’s overseas project partners, but the fraudster was also dismissed from their role.

Policies and procedures were amended to strengthen the charity’s resolve against further incidents of fraud. This included closer monitoring of partners’ work and strengthening its due diligence process with potential partner organisations.

Fraud by a charity chair

The chair of a Parents Teachers Association (PTA) defrauded the charity of over £35,000 over 4 years. The fraud was discovered following the appointment of new trustees who uncovered financial irregularities.

When new trustees joined the charity they discovered that there were no financial controls in place, including no recording of money raised at fundraising events. Funds raised by the charity were also not forwarded to the school at regular intervals.

Action taken:

When the trustees uncovered the financial irregularities, they carried out a review of the charity’s financial records which identified failings in the internal controls that allowed the fraud to happen.

The incident was then reported to the police who investigated the case.

The charity strengthened financial controls, including:

  • implementing a formal cash handling procedure
  • formally agreeing bank signatories each year who then have access to check bank statements
  • sending monthly bank statements to the charity treasurer processing money raised from fundraising events quickly and sending it to the school at regular intervals

Lessons learnt and outcomes:

Having weak internal financial controls and procedures made this charity susceptible to insider fraud. By strengthening these procedures and processes they are reducing the risk of this happening again.

The previous chair of the charity was convicted of 5 counts of theft. The person was sentenced to 2 years in jail, suspended for 2 years, plus 300 hours of unpaid work.

£20,000 of the stolen money was paid back to the charity.

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