21st October 2021

Money laundering and the charity sector

Charities, like all organisations, are at risk of abuse for money laundering and financial crimes.

Arguably, the effects of money laundering and financial crimes are even more devastating for charities, as their funds have been raised to help the most vulnerable in society. This makes the prevention and investigation of all financial crimes against charities extremely important.

The reality for most of the 169,000 registered charities in England and Wales, along with the millions worldwide, is that they often have low levels of security to all the funds they hold and little awareness of good money laundering and financial crime prevention controls. This is demonstrated in the distressing statistic from the Charity Commission, the UK charities regulator, that an estimated £8.6 million was lost in 2020. And that’s only what has been reported.

There’s no getting away from it, financial crime in the charity sector is a serious problem and it is only getting worse.

Money laundering is defined in the Proceeds of Crime Act as “the process by which the proceeds of crime are converted into assets which appear to have a legitimate origin, so that they can be retained permanently or recycled into further criminal enterprises” and the three main stages are Placement, Layering and Integration.

How are charities used to launder money?

In a charity sector context, a really simple example could be a large donation to a charity of ‘dirty money’ or proceeds of crime which is then layered in with legitimate funds that the charity holds. A fake beneficiary is then set up as a front which will receive the freshly laundered funds from the charity, all clean and appearing legitimate. Sadly, there are many more examples of how charities have been used and abused by criminals.

A bona fide charity may have criminal employees, funnelling off hard-won monies.

As well as the charities being victims of financial crimes themselves, the actual charity entity could be a sham. In the most shocking examples, fraudsters have taken to brazenly setting up fake charities and fundraising for donations which are then simply pocketed or used for other illegitimate activities.

Critically for non-criminal (i.e. most) charity employees and trustees: if they fail to report any suspicions of money laundering, then they could be liable to prosecution or a hefty fine.

Not only is the financial loss devastating for charities, but the next biggest impact is reputational damage. Imagine hearing that a major charity had been involved, or had been used, in vast amounts of money laundering of funds… You would probably think twice about donating to that charity – if they’ve lost money previously, what’s to say it won’t happen again? Charities hugely depend on funding from donors so if those sources of income diminish or dry up, it could signal the end of that organisation.

How ESA Risk can help fight money laundering in the charity sector

At ESA Risk, we have an experienced team of risk, investigations and consulting experts that are here to help any organisations in the charity sector with carrying out due diligence checks on donors, beneficiaries and local partners, and monitoring the end use of funds.

We can undertake financial crime risk assessments, advise on Know Your Donor and Know Your Partner procedures and help you set up and maintain a Suspicious Donations Log. If you’re a trustee who’s signing up to the new Stop Fraud Pledge, we can support you with all 6 of the pledge’s steps: Appoint, Ensure, Consult, Create, Perform and Assess.

Equally, we can carry out enhanced due diligence before you make a donation to an organisation (to avoid fake charities, for example).

Please get in touch for an initial chat with our experienced consultants. You can contact Ali Twidale, Banking & Financial Fraud Consultant at ali.twidale@esarisk.com, on +44 (0)843 515 8686 or via our contact form.

This article was published as part of Charity Fraud Awareness Week 2021.

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