Trust Without Verifying: United Kingdom Charity Commission’s Fraud Research Study Finds Many Charities Failing to Recognize Their Own Fraud Vulnerabilities

On October 21, the United Kingdom Charity Commission published a report on the results of its research study about fraud awareness, resilience, and cybersecurity.  The Commission stated that the study’s findings, based on responses earlier this year from more than 3,000 charities, show that “charities are not always recognising how vulnerable they are, and not consistently putting basic checks and balances in place”:

• More than two-thirds of charities (69 percent) “think fraud is major risk to the charity sector and internal (insider) fraud is recognised as one of the biggest threats.” In general, “larger charities (particularly those that have suffered fraud) are more likely to acknowledge the risk of fraud.”
• One-third think that “fraud is a greater risk to the charity sector than other sectors.”
• More than half (53 percent) of charities affected by fraud in the past two years “knew the perpetrator.” In particular, in cases here the identity of the fraudster was known, 29 percent were paid staff members (40 percent in 2009), 18 percent were volunteers (11 percent in 2009), 13 percent were beneficiaries (only 5 percent in 2009), 10 percent were trustees (only 3 percent in 2009), and only 14 percent of fraudsters had no previous connection to the charity (11 percent in 2009).
• But nearly half (48 percent) believe that “they’re not vulnerable to any of the most common fraud enablers,” and more than one-third (34 percent) think that “their organisation is not vulnerable to any of the most common types of charity fraud.”
• 85 percent of charities “think they are doing everything they can to prevent fraud, but almost half don’t have any good-practice protections in place.”
• Fewer than 9 percent even have a fraud awareness training program.
• Only 30 percent have a whistleblower policy.
• 26 percent of charities believe that “they’re vulnerable to fraud because of an over-reliance on goodwill and trust.”

N.B.: These findings indicate that many in the charitable sector are just as vulnerable to overconfidence bias as commercial-sector entities.  Because charities in England and Wales reportedly spend nearly £80 billion each year, it is incumbent on those charities to look unsparingly at themselves and their fraud readiness – including defenses against charity insiders’ misconduct.  For that reason, the Commission’s report bears close reading, both for its findings and for the counter-fraud practices that the Commission recommends.