By Professor Michael Levi, Fraud Advisory Panel
Our attitudes to frauds and ‘abuse’ of different kinds are often challenging to explain. Charity fraud and abuse of position are particularly evocative because money and time have been given for an empathetic reason and this compounds the harm, though research tells us little systematically about the impacts of actual or perceived fraud levels on future giving by existing or potential donors. Media coverage of alleged abuses and frauds in charities often adopts a tone of outrage, whether the object of the outrage is someone giving a false explanation to family and friends – for example a false claim of devastating illness – or others, such as the alleged misconduct in the administration of the Captain Tom Foundation by the daughter and son-in-law of Captain Sir Tom Moore after his passing, which resulted in their disqualification as directors by the Charities Commission. The ‘heartlessness’ of fraudsters or of those deemed to have ‘taken advantage’ is a more generic theme in reactions to several forms of fraud and corruption in the UK, depending on attitudes to individual, corporate or government victims, but charity fraud is an exemplar of what my colleague Martin Innes terms a ‘signal crime’, evoking fears and broader concerns about societal rottenness beyond the immediate case. This strong distaste may extend to people who steal things from charity shops also, though insider or outsider frauds may be bigger symbols.
Of course, there can be broader financial abuses committed through the medium of registered charities. One of these is for financing terrorism, though some instances of this may enjoy support in some domestic and foreign communities if the cause is seen as just. Another is the abuse of tax advantages, where the charity is used to shelter assets from taxation but disburses very little of the funds on which it has received tax benefits to the good causes for which it was ostensibly created. This has received particular attention (episodically) in the US, where the regulation of the sector is not centralised.
The US is the only country so far where national representative sample surveys of victimisation include a specific question on charity fraud: the 2017 survey (Morgan, 2021) – the most recent – shows that about 340,000 adult Americans (0.14% of all persons age 18 or older) experienced charity fraud, in which they contributed to a bogus charitable organization or to a crowdfunding appeal under false pretences. (Examples given to respondents included bogus natural-disaster relief, law enforcement charity scams, and personal crowdfunding sites for bogus causes.) Such frauds constituted one in nine frauds reported in the survey. 8.9% of charity fraud victims reported it to the police, the lowest percentage of any of the frauds surveyed. Losses totalled $27 million, and the average was $70 and half the frauds were under $30, the lowest average and median of any surveyed, and the collateral emotional or psychological impacts were lowest for the charity frauds, though no impacts on the charities themselves were examined. Larger frauds were more likely to be reported, e.g. in reported charity frauds, the average was $110, though the media remained the same at $30. Though there is no equivalent in UK data yet, we can learn much from the survey work carried out by BDO, but this will be dealt with by BDO colleagues. There are also helpful insights from the Charities Commission, for example on insider frauds, though these are not from random samples of the general population as in the US study.
A different way of thinking is to look at what the potential risks are in the sector. This is a counterfactual that – however unrealistic in one sense – can give us a better sense of the proportion of risks to charities that end in fraud than we would get from the analysis of actual cases when detected. That makes us think how bad things could get and why it is that the realised risks are not that bad (and what might be going on that we are not detecting). Routine activities models used generally in criminology analyse crime rates as the combined product of ‘motivated offenders’, ‘suitable targets’ and ‘capable guardians’. But although useful as a construct to show the interaction between motivations, opportunities and offending, this can be a somewhat simplistic approach, since (as fraud triangle-type models show), motivations of individuals and the number and organisation of motivated individuals home and abroad can change over time; all charities are ‘suitable targets’; and the capabilities of guardians are varied over time and place. Some corruption, and a lack of internal or external interventions can turn a rotten apple into a rotten barrel. With drip feed frauds, the sooner we pick these things up and stop them, the less money will be lost: but clever and convincing fraudsters can delay those interventions, especially if they occupy authoritative positions in organisations.
It is not obvious how charities (or other employers) can spot what I term the ‘pre-planned’ fraudster, who takes a job with the intention of using it as a vehicle for fraud, finding and using opportunities to embezzle funds. The conviction rate is very low for fraud generally, and unless there are photographs of past dishonest employees or executives to search, or past educational and professional qualifications are rigorously searched (electronically or otherwise) before or soon after employment, the creation of a fake legend is not difficult. Historically, charities have been high-trust organisations, with a large number of volunteers who are not enthusiastic about compliance bureaucracy, and beneficial though this is for organisational morale, it carries risks. Furthermore, even if people do not begin with the intention of defrauding, they may spot opportunities and discover that there is no come back on those that are exploited. Individually or in ‘rotten pockets’ (sometimes after gauging the attitudes of fellow workers), these ‘intermediate fraudsters’ – who start honest but turn to fraud – can defraud the charities. It remains to be seen if the new legal duty to prevent fraud (and corruption) – or at least to have systems in place to do so – will have an impact on these risks in the sector for those charities large enough to be covered by the legislation; and whether these good practices spread to those without formal compliance obligations.
More egregious cases, if detected, may be exposed in the media, and though those that have a major impact on the charity’s functioning and/or involve ‘celebrities’ may be well publicised, this is not always related to the size of the fraud. As with other areas of fraud, the impacts of publicity on actual and potential charity offenders and donors are not well understood.