Due Diligence for Charities: Ensuring Transparency and Trustworthiness

How should charities be approaching due diligence?

Charitable organisations are invaluable in supporting our communities. However, if those same charity operations do not adhere to certain standards and practices for accountability, trustworthiness is weakened. Donors rightfully require that their donations be used as intended without any ethical misgivings or operational issues and charities should monitor where their donations are coming in from. Thus, it is critical for charities to undertake due diligence so they can maintain an exemplary standard of responsible management and full transparency in how resources are utilised within the charity’s framework.

What is due diligence?

Due diligence is the process of thoroughly researching and evaluating a potential donation or transaction to ensure that it is a wise decision. Careful research and evaluation are integral when considering any potential charitable donation. With due diligence comes an opportunity for increased assurance from the charity that the donor is legitimate and that this ‘relationship’ is managed with respect for the legality, ethics and the organisation’s mission. Investing extra effort up front by way of due diligence on these donors enables charities to be more confident they are making wise choices to accept monies on behalf of those who will benefit from the donations themselves.

Charities are often more focused on delivering their services and supporting local communities, but this can come at the cost of neglecting important due diligence processes. With limited resources in terms of staff and money, charities may struggle to commit time or funds towards these essential activities. That said, it is vital for charities to focus on this area as this could lead to serious reputational damage and put the charity in the media spotlight for all the wrong reasons, we will come on to a few unhappy examples shortly. This then reflects badly on the trustees and their skills in managing an ethical charity. In no other area of running the charity would such a colossal potential risk be left unmitigated.

Charities are often run by volunteers with varying levels of expertise, which can mean they struggle to understand the importance of due diligence and good governance and fail to carry out proper due diligence. Without access to professional advice or support, charities may become uninformed on how best to protect their reputation and operations from risks – jeopardising long-term sustainability and their ability to support those that rely on them in the future.

Ignorance isn’t bliss

Charities must go beyond simply being aware of due diligence too – they must proactively implement it and ensure the responsible use of resources. This can involve seeking professional advice from outside organisations, attending training workshops or partnering with specialist groups, as well as conducting internal audits to proactively challenge their operations to ensure they remain ethical.

Understanding due diligence is essential for charities to gain the trust of their stakeholders. By demonstrating transparency and responsibility, charities can cultivate lasting relationships with large donors. This not only helps foster good relations but also ensures that funds reach their intended destination efficiently and effectively. No donor, board trustee, employee or volunteer wants to be associated with a charity whose name has hit the headlines for taking monies from unethical sources.

Beneficiaries of charity services are understandably invested in the success and integrity of the charity too. Poor management or immoral actions can seriously disrupt individuals’ lives, making it essential that charities operate responsibly to ensure they remain a dependable source of support.

An example of this is The Prince of Wales Charitable Foundation, a UK-based charity founded by Prince Charles that aims to provide benefit to communities in the UK and across the world, through grant giving as well as through initiatives run by the Foundation. The charity had been embroiled in several scandals related to its donations and financial management practices.

Further reports emerged in 2020 that the charity had accepted a £1.2m donation from two of Osama bin Laden’s half-brothers in the 1990s. The charity defended its actions, stating that it had conducted due diligence at the time and that the donation was made before bin Laden became a known terrorist.

More recently, in August 2022, reports surfaced that the charity had received £3m in cash stuffed in Fortnum & Mason carrier bags from a Qatari former prime minister between 2011 and 2015. The charity again defended its actions, stating that it had complied with all legal and regulatory requirements.

In 2019, the British police launched an investigation into another of the Prince’s charities regarding accusations that a Saudi tycoon was offered a knighthood in exchange for a £1.5m donation.. The charity denied any wrongdoing, but the incident raised concerns about the ethics and transparency of its fundraising practices.

These incidents raise questions about the Prince’s charities due diligence practices and its ability to manage their finances in a responsible and ethical manner. They also highlight the importance of due diligence for charities in the UK and the need for greater transparency and accountability in their operations.

So who should be doing what? 

As most board trustees will know, the responsibility for ensuring due diligence is considered and applied sits with them; they are the ones responsible and accountable for the charity. 

When we consider what the Trustee Board should be considering some initial steps may include the following:

• Know what the charity’s purpose is and confirm it is appropriate. 

This will act as a focus or ‘red thread’ which should then run through all decision-making and also help in identifying the highest risk areas which can then be mitigated first. 

• Identify and carry out due diligence on the stakeholders with which the charity works 

This will include the Board of Trustees and its stakeholders such as suppliers, volunteers and employees. No one wants to find out about unethical or unsavoury behaviour after they have started working with these people or organisations as at this point reputations are already intertwined and reputational damage is almost inevitable.

• Identify the areas in which due diligence efforts would provide the most value.

It is not always financially viable to carry out a comprehensive due diligence program and when this is the case serious consideration should be given to the highest-risk areas. 

• Identify and mitigate any risks arising from the due diligence process (as appropriate). 

It is often best to mitigate the largest risks to the charity first but this might not be the case if circumstances have changed recently and there is an increased risk in a certain area. For instance, if the Trustee Board has been in place for many years finding out there are potentially reputationally damaging people appointed to the board may be less of a risk due to the passing of time than in a situation where the board is being refreshed. 

• Proactively keep a watchful eye out for unusual activities or requests.

It is not always sensible to wait for due diligence processes to spot issues and as such the Board of Trustees should be mindful of the need to remain focussed on unusual activity and requests as they may be able to catch an issue before it becomes a problem. For instance, early background checks (due diligence) on a potential Board Trustee can prove fruitful as the longer the charity ‘entertains’ a ‘bad egg’ as a potential trustee candidate the worse the potential fallout becomes if it is accidentally made public.

In conclusion, charities in the UK have a responsibility to practice due diligence and ensure that their resources are being used as effectively, ethically, and efficiently as possible. The Prince’s Trust scandal highlights why it is so critical for charities to undertake this process thoroughly – not only must they work transparently to safeguard stakeholders’ interests but also receive donations with integrity intact. In other words, when it comes down to protecting the reputation of the charity no one should leave stones unturned.

Erika Eliasson-Norris, CEO of Beyond Governance and Governance Professional of the Year, has always worked in the ‘eye of the storm’. Her career included navigating controversial board decisions, shareholder rebellions, a share price collapse to the brink of insolvency, high-profile anti-management stakeholder protests, survival-focused business division disposals, corporate manslaughter investigations, forced CEO and Chair removals, c-suite fraud investigations, FCA dawn raids, unexpected radio appearances, liquidation evading emergency finance and more…

These challenging and extensive experiences afforded her the top governance and legal position in a London-based FTSE 250 organisation at the age of 32 – the youngest person in the industry to take on this c-suite-level role.

Following frustrations over the lack of tailored, realistic, practical advice for c-suite Governance Professionals, Erika left her corporate career in 2019 and founded Beyond Governance.