Funding non-charitable organisations

On 06 May 2016 the Charity Commission finally published its report on the Joseph Rowntree Charitable Trust (JRCT) and the Roddick Foundation (Roddick) with regards to their providing grants to the controversial advocacy and lobbying organisation Cage (formerly CagePrisoners).  The report from the Charity Commission provides for extensive criticism of JRCT and Roddick with regards to their monitoring and due diligence procedure concerning the provision of grants to non-charitable organisation, especially concerning the issue of whether funds provided by charities had been spent on non-charitable purposes.  However, despite these criticisms, the Charity Commission has stepped back from requesting that charities give assurances that they will no longer financially support certain organisations on the Charity Commission's recommendation.

Cage is a private company limited by guarantee whose company objects are stated as to "promote human rights throughout the world" and "promote any other benevolent and philanthropic purposes which the directors from time to time think fit".  Established in 2003, Cage was founded with the purpose of "working to empower communities impacted by the War on Terror" and to defend human rights of individuals in the face of perceived threats to human rights caused by government and security services policy.  However, the organisation has been a controversial one, accused of being used to spread "support for jihadism, bigotry and hatred" and recently connected with Mohammed Emwazi, nicknamed by the press as "Jihadi John", with whom they worked prior to his departure from Britain and joining the Islamic State.

In 2013 the Charity Commission received a complaint concerning the awarding to Cage of a number of grants by JRCT and (later) by Roddick, which amounted to around £300,000 by JRCT and £150,000 by Roddick.  The investigations were completed in 2014, but only now have the reports been published.

The real issue at hand faced by the Charity Commission (and facing charities) concerned the funding of non-charitable organisations which undertake activities which are charitable and which may coalesce with the charitable purposes of a charity.  In this case, the key issue was concerning "human rights" and the protection thereof.  The Charity Commission noted that in some activities, the promotion of human rights can be constituted as charitable under charity law.  However, other activates promoting human rights do not. 

The Charity Commission ultimately concluded that "they could not agree with the charity's assessment that all activities being funded were charitable.  The commission's view was that some, but not all of Cage's activities might further a charitable purpose.  Cage's work on counter terrorism issues, for example, did not appear to be limited or entirely related to human rights issues".  The Charity Commission criticised JRCT for lacking robust monitoring procedures to ensure that the grants had been used solely for the furthering of JRCT's charitable purposes (in this specific instance "supporting people who address the root causes of conflict and injustice").

The Commission noted that JRCT had relied on what Cage had reported to the charity about the activities it had been involved in and how they considered that they were using the funds to further JRCT's charitable purposes, although the Commission did note that JRCT had visited the charity and attended some Cage events as part of the charity's monitoring process.  The Commission's conclusion was that these reporting requirements were not stringent enough, especially considering that the charity was funding a non-charitable organisation.

One other area of concern raised by the Commission was charities funding the general running of a non-charitable organisation.  In the report (and in the subsequent draft guidance) the Charity Commission made it clear that where a grant is given to a non-charitable organisation, those funds cannot be allocated to cover overheads, wages, or any other core costs.  A charity will therefore have to be very specific in its provision of a grant as to how the funds are to be used.

A number of aspects of the Charity Commission's findings are of real note.  Firstly, the public policy reasoning behind the investigations is fairly clear and (by and large) non-controversial.  It is clear that it is in the public's best interest that funds provided to charities do not ultimately get allocated to non-charitable purposes.  Thinking of analogous scenarios, it would cause a significant degree of loss of public confidence in the charities sector if donations to a charity for the prevention of poverty were instead allocated to a profit making organisation whose aims do not further the charities objectives.  However, whilst the principle is generally agreeable the application of this principle may be a little more difficult to resolve.  In the case of Cage the issue appears to be that there was no proof that the funds were used for solely charitable purposes, rather than there being proof that it the grant had been applied to non-charitable goals.  The burden of proof appears to be on the side of the charity, with the trustees having a duty to ensure that the funds are properly and lawfully spent.  With this in mind, charities must take care to ensure that they keep records and impose controls on any gifts provided to other charities and non-charitable bodies.  For example, in allocating the grant a charity may be wise to specify exactly what the funds are to be used for.

Secondly, there is the slightly amorphous issue of "damage to reputation".  As raised by JRCT, some charities have their reputation grounded on supporting unpopular causes which are often neglected due to public perception.  Charities must be free to support those causes which further their charitable ends.  In the new draft guidelines regarding grant funding an organisation which isn't a charity, the Charity Commission states that the trustees should be assured that "the organisation is suitable for your charity to work with and fund" and this involves assessing the organisations "reputation".  There seems to be a distinct lack of guidance as to what this actually involves.

Following the completion of the Charity Commission investigation in 2014, the Charity Commission requested (demanded?) that JRCT cease funding Cage and, crucially, would grant assurances to the Charity Commission that they would not fund Cage "in the foreseeable future".  Initially, JRCT refused to provide such assurances, holding that this would fetter the discretion of the trustees to allocate their grants and the charity should be free to appoint charities to receive its grants based on the current, not past circumstances.  The Charity Commission continued to pressure JRCT until JRCT provided the guarantee.  In response, Cage brought a judicial review claim against the Charity Commission saying that it had acted outside of its powers by demanding such guarantees and assurances.  The judicial review proceedings were ultimately settled outside court, with the Charity Commission withdrawing its demand for assurances. 

The result of this, however, is a great deal of uncertainty.  Yes, the Charity Commission has stepped back from being able to demand that charities do not apply funds to certain bodies in the future.  But the Charity Commission may still investigate charities which it considers are undesirable and fail to further charitable goals, and there is no guidance as to what criteria the Charity Commission will use in deciding on this.  The Commission will not fetter the future exercise of trustees fiduciary powers under its general powers to give advice and guidance, but it does not make it clear as to when the Commission will step in when it feels that there has been a transaction with an organisation liable to damage the reputation of charities.

The result of the whole investigation is rather toothless.  Although the Charity Commission noted some real failures on the part of JRCT no further action has been taken other than to require that the charity puts in place better monitoring procedures and control of funds.  The Charity Commission acknowledged that the trustees acted in good faith when allocating the funds.  What will be interesting, however, is whether good practice in this area will be affected on the implementation of the Charities (Protection and Social Investments) Act 2016 which was passed to give the Charity Commission more "bite" in dealing with mismanagement and misconduct in the running of a charity.  Whilst there was clearly no misconduct in this instance, it could be argued that there was mismanagement, especially given that significant funds were allocated to potentially non-charitable purposes.  Only time will tell as to how the Commission will use its new powers in such circumstances in the future.

Posted on: 13/06/2016

This article is for general guidance only. It provides useful information in a concise form. Action should not be taken without obtaining specific legal advice.

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