More and more charities are looking to increase their voluntary income to allow them to meet their beneficiaries' growing needs. A significant number of charities are therefore now choosing major donors and larger gifts in a race to become sustainable.
The recent National Audit Office (NAO) best-practice report on how to manage the unique risks that larger donations present is therefore timely and, whilst aimed at museums and galleries, is equally as useful for the wider charities sector.
The NAO report recognises that some donors have motives other than the purest altruistic desire to help others, which can give rise to the following risks:
- Legal – Accepting a donation could give rise to a breach of bribery or anti-money laundering legislation. Take the Leonardo DiCaprio Foundation, for example, which was reported to have (innocently) accepted donations arising from a multi-billion dollar money laundering scheme
- Financial – Some donors may not honour their pledged donation. The failure of the Garden Bridge Project, for example, was reportedly due, in part, to the loss of major donors
- Reputational – Accepting donations that are perceived to be inappropriate or unethical could give rise to protests and unfavourable publicity. You may recall, for example, Maggie's Centres, a cancer charity, having to refuse a donation from Jerry Springer - the Opera, after a lobby group warned that the donation would "upset Christians all over the world"
- Dependency – Donations could give donors an undue level of influence over a charity and its trustees
Managing the risks
The NAO report groups its best-practice recommendations into three areas:
Governance i.e. the framework of policies and monitoring processes to oversee due diligence activity
- Charities should have written donations policies to ensure a consistent, evidence-based and ethical approach to donations management. Those policies should be published to help manage stakeholder expectations, and should be regularly kept up-to-date
- Trustees should approve their charity's donations policy
Risk management i.e. the forecasting and evaluation of risks associated with accepting donations and the internal processes supporting these
- Documented roles and procedures reduce the risk that donations due diligence procedures are reliant on key individuals' knowledge
- Effective segregation of duties reduces the risk of bias, error or fraud in decision-making
- Risk assessment procedures should include quantitative and qualitative risk factors tailored to a charity’s circumstances and ethical policies.
- Due diligence procedures should include investigation of a donor’s reputation and associations, together with the source and reliability of their funds
- A range of external sources should be used to gather complete and corroborated information on donors.
Staff and stakeholder management i.e. ongoing staff development and the ongoing review of stakeholder relationships
- Staff involved in the due diligence and decision-making processes should receive training on the charity’s processes, the legal aspects of fundraising, and key legislation such as the Bribery Act 2010 and Money-Laundering Regulations 2007
- Charities should periodically review the benefits arising from their donor relationships
- Donor relationships should start with a well-drafted agreement which:
- Mitigates the risk of donors putting pressure on charities to act inconsistently with their object
- Enables a charity to withdraw from the relationship if their donor's actions are contrary to the charity's objects, harmful to its reputation or is inconsistent with the basis for the original decision to accept the donation.
It may seem counter-intuitive to 'bite the hand that feeds you'. However, charities and trustees need to be sensible and put in place policies and processes to manage the risks that donations present. Those policies and processes will need to be implemented with respect, tact and grace, but, once in place, they can help ensure the sustainability of charities and help trustees to demonstrate compliance with their core duties, namely:
- Acting in the best interests of their charity and beneficiaries
- Promoting their charity's charitable purposes
- Acting with prudence.
No trustee board wants to be caught up in a reputational scandal.