UK: Charity Commission freezes bank accounts pending investigation into grant-giving charities with common trustees

The Charity Commission has frozen the bank accounts of, and opened separate statutory inquiries into, two grant-giving charities, established for general charitable purposes, with common trustees: The Jalloh Charitable Trust (charity no. 1145466) and The Deacons Charitable Trust (charity no. 1142038).

The Commission opened its statutory inquiry into The Jalloh Charitable Trust first on 21 May 2019. Its initial investigations revealed that its two trustees are also the trustees of The Deacons Charitable Trust and potentially related via marriage, which the Charity Commission has said highlights "apparent unmanageable conflicts of interest and [calls] into question whether key decisions have been made in the best interests of the charities or for the private benefit of the trustees" ¹. Upon further assessment, the Commission opened its inquiry into The Deacons Charitable Trust on 14 June 2019.

Initial examination of the charities' accounts revealed a number of concerning transactions including:

• The Jalloh Charitable Trust making loans of over £500,000 to a trustee and purchasing a valuable collection of Judaica and other antique silver from a trustee; and
• The Deacons Charitable Trust making loans to a trustee of over £150,000 and multiple payments totalling over £17,000 which the inquiry is concerned may have been spent on school fees for an individual connected to the trustees.

As a result of its concerns, the Commission has taken protective action to "freeze" the charities' bank accounts.

The inquiries will examine:

• whether potential conflicts of interest and connected party transactions have been properly managed;
• whether there has been any unauthorised trustee benefit;
• the trustees' compliance with legal obligations relating to the preparation and filing of the charity's accounts and (in relation to The Jalloh Charitable Trust) other information or returns; and
• in relation to The Jalloh Charitable Trust, the extent to which the trustees have complied with previously issued regulatory guidance.

Comments

The Charity Commission's ability to "freeze" charities' bank accounts is achieved through exercising its temporary protective powers which include the powers to order a person who holds charity property from parting with it without the Charity Commission's consent (section 76(3)(d) of the Charities Act 2011); and to restrict the transactions that a charity can enter into or the nature or amounts of payments that can be made (section 76(3)(f) of the Charities Act 2011). The regulator's temporary protective powers enable it to protect charity property only while statutory inquiries under section 46 of the Charities Act 2011 are ongoing. Before exercising any of these powers, the Charity Commission must be satisfied of either of the following (section 76(1)-(2) of the Charities Act 2011):

1. that there is or has been either:

1. 1. a failure to comply with an order or direction of the Charity Commission;
   2. a failure to remedy any breach specified in an official warning; or
   3. any other misconduct or mismanagement in the administration of the charity, or

2. that it is necessary or desirable to act in order to protect the charity's property or to secure a proper application for the purposes of the charity of its property or property coming to it.

The exercise of its regulatory powers demonstrates that evidence indicating potential financial mismanagement of charity assets will be treated seriously by the Charity Commission. The Charity Commission routinely reviews trustees' annual reports and accounts, and in 2017-2018, it opened 124 inquiries into financial abuse and/or mismanagement issues ² (an increase on the number of times financial abuse and/or mismanagement issues featured in statutory inquiries in 2016-2017, which was 83).³ Indeed, the Charity Commission's research report "Focus on insider fraud" published earlier this year suggests fraud and financial mismanagement are likely to remain key areas of focus for the Charity Commission in the foreseeable future. For charities that employ a number of staff and volunteers, the findings of that research highlights the importance of effective governance and culture within charities, including ensuring adequate segregation of duties so that no one individual has unsupervised control of a charity's finances. For further information, please see the Charity Commission's report which can be found here.

For more information, please contact Richard Norridge, Jade Hu or your usual Herbert Smith Freehills contact.

Footnotes

1. https://www.gov.uk/government/news/charity-regulator-freezes-bank-accounts-as-it-opens-investigations-into-grant-giving-charities-with-common-trustees
2. https://www.gov.uk/government/publications/dealing-with-wrongdoing-and-harm-2017-18/dealing-with-wrongdoing-and-harm-statistics
3. https://www.gov.uk/government/publications/tackling-abuse-and-mismanagement-2016-17/tackling-abuse-and-mismanagement-2016-17-full-report