Fraud, breach of trust, embezzlement: misuse of funds in charitable organisations

Phase 1: Acute crisis management following initial suspicion or findings

Objective: to establish the facts, stabilise the situation and prevent further damage.

1. Quick assessment of the situation: What has happened? Which amounts, time periods and areas are affected? Who might be held responsible?
2. Investigation:
   • Review of documents, accounts and financial statements
   • Interviews with staff and managers
   • Where necessary, in-depth accounting analyses, forensic analysis of digital data and contracts, and analysis of cash flows
3. Immediate measures to mitigate damage:
   • Blocking access points and accounts
   • Changes to authorisation and disposal rights
   • Organisational segregation of critical tasks
   • Where necessary, obtaining injunctions against suspicious individuals
4. Advising board members and senior management on their current obligations and on how to protect themselves, for example in dealings with supervisory bodies and the tax authorities (voluntary disclosure or correction notices).
5. Ensuring that the Executive Board, management and committees are able to function effectively; where necessary, providing support with new appointments or replacements.

Consider filing a criminal complaint from the outset In such cases, filing a criminal complaint is often not a ‘last resort’, but an important tool to be used at an early stage:

• Assessing whether and when it is appropriate to file a criminal complaint, and preparing a structured account of the facts for the Crown Prosecution Service
• Objective: To enable the Crown Prosecution Service to make the best possible use of its investigative powers (searches, seizures, confiscations, freezing of assets, etc.) before assets and evidence disappear.
• Close cooperation with a network of specialist criminal law firms to coordinate criminal law and civil/tax law strategies.

In Phase 1, mistakes that could prove costly later on are avoided – and the foundations are laid for successfully enforcing claims.

Phase 2: Legal classification of charitable status and financial entitlements

Objective: To understand the risks – and make use of all financial measures to minimise losses. – flat-rate payroll tax

1. Charitable status: What has happened? Which sums, time periods and areas are affected? Who might be held responsible?
   • Assessment of the impact on charitable status
   • Evaluation of whether there is a risk of revocation   
   • Development of arguments and measures to avoid or limit the consequences
2. Additional tax assessments:
   • Calculation of potential liabilities (corporate tax, business rates, VAT, liability for donations)
   • Often covering a period of up to 10 years or more, with retroactive effect
   • Transparent reporting to management and governing bodies
3. Duties of the governing bodies:
   • Specific guidance on the steps that executive boards, managing directors and supervisory bodies must take now to avoid personal liability and to ensure that the organisation’s charitable status is not further jeopardised

Claims for damages as an active tool for stabilisation

• Systematic identification of claims for damages:
  • against those directly responsible/perpetrators
  • against supervisory and control bodies in the event of breaches of duty
  • against external advisers (e.g. tax advisers, auditors) where they have contributed to the damage
  • against insurance companies (e.g. D&O, own-loss insurance)
• Legal and financial preparation of claims; out-of-court and court enforcement.
• Objective: to recover as much of the misused or embezzled funds as possible and thereby relieve the organisation of financial burden – where necessary, also with a view to maintaining its charitable status.

Dealing with donors and funding bodies

• Assessing the extent to which donors and funding bodies (e.g. health insurance funds, the public sector, other grant providers) are entitled to claim back funds.
• Developing a strategy for dealing with such claims:
  • Defending against unjustified claims for repayment
  • Negotiating reductions or deferrals
  • Coordinated communication to maintain or restore trust.
• In parallel: communication with the tax authorities (and, where applicable, tax courts) to challenge unfavourable tax assessments and make use of tax allowances.

Phase 2 looks not only at the risks, but also deliberately at the opportunities – every claim that is successfully pursued helps your organisation emerge from the crisis.

Phase 3: Financial stabilisation and restructuring (including StaRUG)

Objective: To stabilise the organisation financially and ensure its continued existence – despite tax losses and outstanding debts.

• Preparation of a comprehensive financial overview:




  • immediate losses
  • expected back tax payments
  • potential claims for repayment from donors and funding bodies
  • further consequential costs
• Development of specific business continuity scenarios, e.g.:
  • payment plans
  • restructuring agreements
  • Adjustment of structures or areas of activity
• Negotiations with tax authorities, banks and other creditors regarding deferrals, instalment payments or settlements.
• Review of insurance policies (D&O, own loss, etc.) and enforcement of existing claims

Restructuring under the StaRUG
If insolvency is imminent, we assess the use of restructuring tools such as the StaRUG procedure. This enables

• to restructure debts and claims in an orderly manner
• to isolate certain losses to a specific part of the assets
• to preserve the rest of the organisation – particularly its non-financial assets and ongoing projects – rather than losing everything as a result of insolvency.

Phase 3 focuses on financial rescue and stabilisation.

Phase 4: Restructuring, Prevention & Governance

Objective: To restore trust and prevent future incidents.

• Revision of the articles of association, rules of procedure and internal guidelines to eliminate structural weaknesses (e.g. excessive individual powers, lack of control levels).
• Ensuring that the structures comply with the requirements of charity law – also with a view to future audits by the tax authorities or audit offices.
• Implementation of clear control and approval processes:
  • immediate damage
  • expected tax arrears
  • possible claims for repayment from donors and funding bodies
  • further consequential costs
• Support with communication to members, donors, staff and the public to regain trust.
• Training for board members, senior management and supervisory bodies on their duties, how to avoid liability and how to handle suspected cases.
• Development of a contingency plan for future suspected cases – so that, in the event of an emergency, it is clear who is responsible for what and when.

The aim of Phase 4 is for your organisation to emerge from the crisis stronger than before – with robust structures and an effective early warning system.