How to avoid the risks of financial crime

Written by David McHattie

Regardless of a charity’s best intentions, involvement in financial crime, however inadvertent, can mean reputational damage, legal repercussions, fines and disruption to its financial activities. All of this will impact on a charity’s ability to fulfill its charitable goals.

Financial crime covers a number of different risks. All charities should be alert to the rules on bribery and corruption when dealing with other organisations or individuals, and of the potential for involvement in money laundering. They should also be aware of measures to stop terrorist financing and the risk of breaking rules on sanctions or export controls, particularly if their charitable work involves high-risk countries.

Charities need to recognise these dangers and have procedures to identify ‘red flags’. Trustees should set a charity’s financial crime policy, ensure that senior management understands their responsibilities and see that staff are trained to implement the policy.

Due diligence is key

Due diligence is the key to mitigating financial crime. Processes need to be in place to ensure charities know enough about donors, beneficiaries and partners, using a risk-based approach. In other words, the greater the risks, the more diligence required.

For example, charities should determine where donations come from and any conditions attached. They should know the people and organisations they work with, look out for unusual circumstances or any indications that they may be dealing with a ‘politically exposed person’.

All due diligence procedures and reasons for decisions should be recorded. For this, the Charities Commission provides a useful compliance toolkit for monitoring and verifying the end use of charitable funds.

Bribery and corruption

In most countries, it is a crime to offer, promise, give, request, accept or agree to receive a bribe of any kind, in any form, either directly or indirectly. In the UK, the key legislation is the Bribery Act 2010, but there may be additional laws depending on the jurisdiction in which a charity operates.

Bribery and corruption rules are not just aimed at cash payments, but cover gifts, travel, entertainment, training programmes, work experience, charitable contributions and sponsorships.

Charities should also have procedures to avoid falling foul of the legislation when dealing with third parties that provide services on their behalf. Fines for failure to prevent bribery can run into millions. Bear in mind that action may be taken against an organisation if it lacks sufficient anti-bribery and corruption systems and controls, regardless of whether or not bribery or corruption has actually taken place.


Sanctions restrict the activities of a person, control exports of products or apply measures against a whole country. These may be introduced by the UK, EU, US or the UN Security Council, so international charities should be aware there may be more than one set of rules.

Charities can infringe sanctions by, for example, inadvertently dealing with a restricted person or entity, conducting prohibited activity in countries subject to sanctions or exporting controlled products, or even just components of products made elsewhere.

Forewarned is forearmed

Our experience is that while charities are very good at fraud controls, awareness of international sanctions and the need for screening of suppliers, partners and staff is less well known. Greater awareness of the need for broader financial crime due diligence is required across the sector. It should be top of a charity’s action list to help identify potential risks and avoid the negative impact on its work.

David McHattie is the head of charities at Barclays

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