Charities sending funds overseas

Arguably the most important duty of any charity trustee is to ensure that the funds of the charity are used for their intended charitable purpose.  Where a charity carries out its own activities, whether that is by conducting medical research or by running a community centre, the trustees will have clear control over how the funds are used and will be able to see the charitable work being done.  A charity that makes grants to other organisations, in contrast, will need some means of checking that each grant is used as intended.

If a grant is made to another charity within England and Wales, the trustees can in most cases rely on the fact that the recipient organisation is regulated by the Charity Commission, that its accounts will be readily available and that, if anything goes wrong, it should not be too difficult to find out and do something about it.  Even if a grant is paid to an organisation in England and Wales that is not a registered charity, there will often be enough publicly available information about the organisation to reassure the trustees that the money will be in safe hands; the key point about funding a non-charitable organisation is that it needs to be agreed between the grant-maker and the recipient what the money will be used for and possibly also what should happen if, for any reason, the project does not proceed as envisaged.

When it comes to sending money overseas, it does get slightly more complicated.  First, the distance and the involvement of a different legal system and language can make it harder to get to the stage where charity trustees are satisfied that the organisation in question is a good match, has sound governance and robust financial controls. Second, because the legal definition of what is charitable is specific to England and Wales, and other countries have their own ways of recognising voluntary organisations and their purposes, no overseas grant recipient will be a charity subject to the same rules and regulations as charities in England and Wales.  In many cases, the local law may allow voluntary organisations to use their money for purposes that would not be recognised as charitable under English law.  The trustees therefore must take positive steps to ensure that the grant is used for English charitable purposes and cannot simply hand the money over and hope for the best.

This is reflected in the rules about charitable tax relief: when charity trustees send money overseas, the law requires them to take such steps as are reasonable in the circumstances to ensure that the money is applied for English charitable purposes and, if that it not done, the grant will be treated as non-charitable expenditure.  Apart from the obvious breach of the trustees’ duty to ensure that the funds of the charity are used for their intended charitable purpose, this could result in the loss of tax relief.  It should also be noted that it is HM Revenue & Customs that gets to decide what steps are reasonable, and trustees may be required to demonstrate what steps they have taken and explain why they considered they would be sufficient.

The HMRC website provides detailed guidance on the sort of steps that might be necessary, ranging from carrying out due diligence on an overseas organisation before agreeing to send any money through to regular monitoring of the delivery of a project and formal contractual arrangements to ensure that, if the recipient organisation does not perform as intended, funds can be recovered.  The steps that need to be taken will depend on a range of factors, including:

• whether there is an existing relationship of trust between the parties based on successful past projects;
• the scale of the funding – a less formal approach can be justified where the sums involved are small; and
• whether the country in question has a well-developed legal and regulatory framework for voluntary organisations, meaning that the recipient organisation is more likely to be subject to some official oversight.

In almost all cases, it will be essential to require the overseas organisation to submit a reasonably detailed application that sets out what the money will be used for, and then to make it clear, when sending the money, that it is provided on condition that it is used only for those purposes.  That can be done through an exchange of correspondence or through a more formal grant agreement; the advantage of formality is that it will demonstrate more clearly (both to the recipient and also, if necessary, to the Charity Commission and HMRC) that the trustees have taken clear steps to protect their charity’s funds from misuse, but the trustees should bear in mind that it may be prohibitively expensive (and perhaps even impossible) to enforce their rights through international litigation.

Other critical issues

On top of these issues, there are some additional risks and possible mitigating actions that charity trustees need to bear in mind when sending funds overseas:

(a)        Is the money going to a part of the world where there is a heightened risk of money falling into the wrong hands?  This risk could be anywhere on a sliding scale from small amounts being used to make “facilitation payments” (i.e. bribes) to local officials through to it being used for terrorist purposes.

(b)        Will funds be remitted through official banking channels, or will other methods be used to get the money to where it is needed?

(c)        The trustees must keep track of where funds are going and keep comprehensive financial records so that an audit trail can be followed. Unusual local conditions (such as civil unrest, epidemics and natural disasters) may affect the type and extent of the controls and checks that can be operated in the field, however trustees should try and take reasonable steps to protect their property.

(d)        Partnering with a well-established local organisation is often the safest way to get help to beneficiaries internationally. Some of our clients provide funding for small grass-roots projects through a local NGO that can carry out its own checks on each project and provide the charity here with a degree of reassurance that the funds are in safe hands.

(e)        Where trustees think that funds may have got to the wrong hands, they should consider making a serious incident report to the Commission (https://www.gov.uk/guidance/how-to-report-a-serious-incident-in-your-charity) but should also try to learn from what has happened so that the risk of it happening again is reduced.

(f)        In the event of funds falling into the hands of terrorist or extremist organisations, it is vital that this is reported immediately to the relevant authorities both here and locally; however, the trustees should also have regard to the Commission’s guidance on this subject which touches upon cultural and legal differences and sensitivities when considering a report.

Charity Commission guidance

The Commission’s guidance on sending funds to overseas organisations now forms part of an extensive “compliance toolkit” which consists of five chapters, each containing a range of tools or methods that trustees can use to protect their charity funds from abuse. https://www.gov.uk/government/collections/protecting-charities-from-harm-compliance-toolkit

There is also an expanded body of detailed guidance on the management of risk when working internationally which includes such matters as protecting charity staff from harm as well as protecting charity funds: https://www.gov.uk/guidance/charities-how-to-manage-risks-when-working-internationally

For further information please contact our charity law solicitors on 01895 207862 or email charities@ibblaw.co.uk.