A. INTRODUCTION
In October, 2009 the Charity Commission
of England and Wales (“the Commission”), published
what is intended to be an annual report concerning compliance
in the charitable sector entitled Charities Back on Track:
Themes and Lessons from the Charity Commissions Compliance
Work (“the Report”).
The Report provides statistical information, as well as
case studies in an effort to educate trustees of charities
in England and Wales in fulfilling their legal duties in
protecting their charitable assets. Unlike the Canada Revenue
Agency’s Charities Directorate (“CRA”), the
Commission wears the hat of being both regulator and enabler
for charities in the charitable sector. In this regard,
the Commission has been equipped with updated legislative
authority through the Charities Act, 2006, which
provides the Commission with the ability to identify and
investigate apparent misconduct or mismanagement in the
administration of charities.
Although there are obvious differences
in the extent of jurisdiction over charities between England/Wales
and Canada, there is much that Canadian charities can learn
from the findings of the Report, particularly from reviewing
the case studies discussed in the Report. To this end, this
bulletin provides a summary of key highlights from the Report
that will be of general interest to Canadian charities.
B. SUMMARY OF THE REPORT
1.
The Commissions’ Approach
to Compliance
The Report stresses that the Commission’s
priority should be to put charities back on track in meeting
their legal requirements, using remedial and protective
action in a proportional manner. The Commission works to
both detect and prevent abuse of charities in order to create
an environment where the public has trust and confidence
in the activities of charities. The majority of cases the
Commission investigates are dealt with through non-statutory
investigations where the Commission does not need to exercise
its powers but rather provides regulatory advice and guidance
to the trustees of charities. In more rare circumstances,
the Commission conducts a statutory investigation under
the U.K Charities Act, 1993,
the results of which are published in a Statement of Results
and Inquiry when the case is concluded.
For boards of Canadian charities, it
is useful to note that the Report indicates that the most
serious issues facing charities in England and Wales continue
to be;
·
Significant financial loss to the charity
·
Serious harm to beneficiaries and, in particular,
vulnerable beneficiaries
·
National security concerns and terrorism
·
Criminality and or illegal activity
·
Sham charities, or tax shelters
·
The deliberate use of charities for private
benefit
·
Issues that could damage the public reputation
of the charity or public trust
2.
Summary of the Commissions
Work for 2008-2009
One of the key themes
that comes out of the Report is that poor financial management
and reporting remain serious problems in the charitable
sector in England and Wales. The Commission reports that
it often finds a “lack of financial controls, inadequate
accounting and record keeping and failures to submit accounts.”
In addition to financial mismanagement, the Report also
notes that trustee and governance issues are a frequent
problem as well. The Commission found that some trustees
were not legally eligible to act as such, often due to conflicts
of interest and had improper controls in place to maintain
oversight of the charity. Just as the directors of charities
in Canada have a fiduciary duty to act in the best interest
of the charity, so too do trustees of English charities
have an obligation to “run it solely with the charity’s
best interests at heart.”
The Commission also
found an increase in cases where vulnerable beneficiaries,
like children, were not adequately safeguarded by charities.
The Report highlights that procedures to ensure the protection
of vulnerable beneficiaries must be in place and be “properly
and consistently applied without exception.”
As well, the problem of charities carrying out inappropriate
political activities remains a compliance issue of concern.
The Commission recognizes that a charity can undertake lawful
campaigning and political activity, but that the independence
of the charity cannot be compromised. The highlighting of
key themes in the Report concludes with the reminder that,
similar to Canada, it is “a fundamental principal of
charity law that a charity, including its trading subsidiary,
cannot make political donations or give other financial
support, or support in kind, to a political party.”
3.
Case Studies and Information
Relevant to other charities
The Report provides
examples from statutory inquiries that the Commission has
conducted in order to provide guidance for trustees in knowing
what to avoid. Since generally the duties and responsibilities
for charities in Canada are similar to those mandated under
English charity law, the case studies in the Report are
illustrative of the types of difficulties that directors
in Canada could also find themselves in.
In terms of governance
issues, the case studies demonstrate that discretion regarding
how a charity’s assets are to be used cannot be delegated
to another organization. Executing an agreement that fetters
the discretion of the board will lead to a breach of fiduciary
duty by the trustees in failing to comply with their responsibility
to ensure assets are spent to support their charities purposes.
Likewise, the Report indicates that trustees cannot defer
to the opinions of a dominant trustee in making financial
decisions. The Commissions position when a dominant trustee
effectively deprives the other trustees of their input into
decision making is that it will constitute mismanagement
of the charity.
An effective complaints
procedure is also a necessary accountability mechanism to
ensure that the charity is managed effectively. The Report
explains that part of a trustee’s duty to manage the
risks to their charity also includes risks to their beneficiaries,
particularly if vulnerable young people are involved. The
Commission also states that trustees failing, without a
good reason, to address allegations of abuse will be considered
to be a breach of their duty to the charity. Lastly, with
respect to case studies involving the duties of trustees,
the Report remarks that trustees must act at all times in
compliance with the terms of their governing documents and
the law, and therefore must stay aware of their legal requirements
in order to exercise responsible decision making.
The case studies also
deal with issues involving improper fundraising and political
activities. The Report reminds trustees that organizations
carrying out fundraising which claim to be registered charities
but are not are in fact breaking the law. As a matter of comparison,
a recent release by the Ontario Public Guardian and Trustee
in July, 2009 on fundraising also highlights this same point
for charities in Ontario.
The Report goes on
to indicate that charities that use a professional fundraiser
must have a proper agreement in place, and are expected
to tell potential donors that such fundraisers are paid
and are authorized to answer questions regarding the fees
paid to fundraisers. In addition, the case
studies in the Report illustrate that charities cannot directly
promote government policy, or the policies of a political
party for any advantage. The Commission does permit, however,
the support of policies which will contribute to the delivery
of a charitie’s purpose.
Finally, the Report
indicates that the Commission takes seriously any allegations
of a link between a charity and terrorism. Trustees must
have adequate safeguards and robust due diligence procedures
in place to mange these risks. In a case study regarding
Palestinians Relief and Development Fund, allegations arose
whether or not the charity and its partners had promoted
the ideology of Hamas, a designated terrorist organization
by the European Union, the U.K and also Canada. The Commission
found that the charity did not have adequate due diligence
and monitoring procedures to satisfy themselves that their
partners overseas were not directly or indirectly promoting
terrorism. While the Commission does not wish to dissuade
charities from carrying on humanitarian work overseas, it
does expect the trustees to ensure that its facilities,
employees and other resources are not, or do not appear
to be, used to support terrorism.
4.
Other Developments
The Report goes on
to review the Commissions policies, as well as new developments.
In this regard, the Commission has taken a four strand approach
to identifying and minimizing the risk of terrorist abuse
of charities by promoting awareness, being more proactive
in oversight, co-operating with the sector and other government
regulators and intervening where necessary. The Commission
is expected to publish in late 2009 a summary of feedback
on it’s guidance to charities to understand their obligations
in relation to terrorism. The Commission reports that they
have continued to strengthen their ties with other government
agencies in England and Wales, but from their experience,
the most effective way for charities to minimise their exposure
is through “implementing robust governance arrangements,
financial controls and risk management procedures and policies.”
C. CONCLUSION
The key priorities for
the Commission for the 2009-2010 period are to continue
to ensure that their work is effective and proportional
to the outside observer, to improve the quality of the work
of the Commission and to provide a high standard of service
with everyone whom the Commission comes into contact with.
Although the regulation of charities in England/Wales compared
to Canada are different in many respects, Canadian charity
law has its source in the English common law. As such, many
of the common law concerns raised by the Commission are
similar to those that arise in Canada, particularly with
regard to the fiduciary duties of directors. Directors of
Canadian charities and their legal advisors will therefore
find the Report, particularly the instructive case studies
contained within the Report, to be a useful reference tool.
