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Over the last few years, fraud has become an increasing area of concern for charities, with threats coming from both internal and external sources. The increased sophistication of cyber and digital fraud, cost of living pressures and political influences have all contributed to the rise in fraud attempts on charities. 

Historically, charities often considered themselves immune from fraud attempts. However, recent high-profile instances, such as the British Library cyber attack, have challenged this assumption. 

Seven common fraud types in the charity sector

Donation fraud

Donation fraud occurs when fraudulent activities are carried out in the name of a charity to solicit donations from well-meaning supporters. This can include fake fundraising campaigns, phishing emails and fraudulent websites that mimic legitimate charities. Donors are tricked into giving money to fraudsters, believing they are supporting a genuine cause. The increase of financial-based digital fraud and social media has contributed to this type of fraud. 

Grant fraud

For charities involved in grant funding, there is a risk that dedicated funds are misused to prop up other costs or areas of the charity. Furthermore, grants may not be used for their intended purpose or may be obtained using false information. 

Misreporting expenses and inflating project costs are common tactics used in grant fraud to mask misappropriation.

Expense fraud

This is one of the most widespread types of fraud, often involving relatively small amounts over a period of time, which go undetected. This can include claiming for non-existent expenses, personal expenses disguised as business costs or exaggerating the cost of legitimate expenses. Expense fraud can be particularly damaging as it directly impacts the charity’s financial resources and undermines donor confidence that the funds are used for the benefit of the charity.

Procurement fraud

Procurement fraud involves corrupt practices in the purchasing process. A recent case in the sector involved a failure to declare a connection to a company, where kickbacks were being supplied in exchange for contracts. Related practices of bid rigging, where the procurement process is manipulated to favour a particular supplier, may also occur. This can involve large figures and we have seen cases of fraud of up to £1m in impact and reputational damage.

Payroll fraud

Payroll fraud occurs when employees manipulate the payroll system for personal gain. This can include creating fake employees (ghost employees), inflating hours worked or unauthorised salary increases. Working while sick for another employee, which often occurs in health and social care charities, can be hard to detect and manage, particularly when it may involve organisations outside the sector. 

Cyber fraud

With the increasing reliance on digital platforms, cyber fraud has become a significant threat to charities. This includes hacking, phishing and ransomware attacks that target sensitive data and financial information. Cyber fraud can lead to substantial financial losses and damage to the charity’s reputation, as we have seen with the outages and disruption in the British Library attack. 

Artificial intelligence fraud

Artificial Intelligence (AI) fraud in charities refers to the use of AI technologies to manipulate or deceive charities or their donors for financial gain. An example of this is when fraudsters create realistic-looking fundraising campaigns using AI-generated images and narratives, convincing donors to contribute to fake causes. This can involve phishing schemes where AI chatbots impersonate charity representatives to solicit donations or gather personal information from unsuspecting individuals. AI is also used by fraudsters to impersonate genuine suppliers and request changes to bank account details to divert funds from the charity that would be payable to the supplier.

Preventing fraud in the charity sector

To protect against these types of fraud, charities should implement robust internal controls and foster a culture of transparency and accountability. Here are some key approaches to help minimise the risk and impact of fraud:

• Regular audits: conduct regular internal audits to detect and prevent fraudulent activities and identify areas for improvement in the control frameworks.
• Training and awareness: educate staff and volunteers about the signs of fraud and the importance of reporting suspicious activities.
• Strong governance: establish clear policies and procedures for financial management, procurement and expense claims.
• Cybersecurity measures: implement strong cybersecurity practices, including regular software updates, secure passwords and employee training on cyber threats.
• Whistleblower policies: encourage a culture where employees feel safe to report fraudulent activities without fear of retaliation.
• Develop a fraud response plan: implement a clear action plan for dealing with fraud, including how investigations are undertaken.
• Fraud trends: stay up to date with both local and national fraud trends/emerging risks that are targeting the charity sector.

Conclusion

Fraud in the charity sector can have devastating effects, not only financially but also on the trust and support of donors and beneficiaries. By understanding the common types of fraud and implementing effective prevention strategies, charities can safeguard their resources and continue to make a positive impact. 

This article is part of our Charity trustee insights hub. It has some great insight pieces for charity trustees to consider right across the charity sector, including governance, reserves, digital transformation and finance function, to name a few.

If you would like to discuss your charity’s exposure to fraud, please contact Liz Wright or Becci Goodchild.