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Funding non-charitable organisations

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On 06 May 2016 the Charity Commission finally published itsreport on the Joseph Rowntree Charitable Trust (JRCT) and theRoddick Foundation (Roddick) with regards to their providing grantsto the controversial advocacy and lobbying organisation Cage(formerly CagePrisoners). The report from the CharityCommission provides for extensive criticism of JRCT and Roddickwith regards to their monitoring and due diligence procedureconcerning the provision of grants to non-charitable organisation,especially concerning the issue of whether funds provided bycharities had been spent on non-charitable purposes. However,despite these criticisms, the Charity Commission has stepped backfrom requesting that charities give assurances that they will nolonger financially support certain organisations on the CharityCommission's recommendation.

Cage is a private company limited by guarantee whose companyobjects are stated as to "promote human rights throughout theworld" and "promote any other benevolent and philanthropicpurposes which the directors from time to time thinkfit". Established in 2003, Cage was founded with thepurpose of "working to empower communities impacted by the Waron Terror" and to defend human rights of individuals in theface of perceived threats to human rights caused by government andsecurity services policy. However, the organisation has beena controversial one, accused of being used to spread "support forjihadism, bigotry and hatred" and recently connected with MohammedEmwazi, nicknamed by the press as "Jihadi John", with whom theyworked prior to his departure from Britain and joining the IslamicState.

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

The real issue at hand faced by the Charity Commission (andfacing charities) concerned the funding of non-charitableorganisations which undertake activities which are charitable andwhich may coalesce with the charitable purposes of a charity. In this case, the key issue was concerning "human rights" and theprotection thereof. The Charity Commission noted that in someactivities, the promotion of human rights can be constituted ascharitable under charity law. However, other activatespromoting human rights do not.

The Charity Commission ultimately concluded that "they couldnot agree with the charity's assessment that all activities beingfunded were charitable. The commission's view was that some,but not all of Cage's activities might further a charitablepurpose. Cage's work on counter terrorism issues, forexample, did not appear to be limited or entirely related to humanrights issues". The Charity Commission criticised JRCTfor lacking robust monitoring procedures to ensure that the grantshad been used solely for the furthering of JRCT's charitablepurposes (in this specific instance "supporting people whoaddress the root causes of conflict and injustice").

The Commission noted that JRCT had relied on what Cage hadreported to the charity about the activities it had been involvedin and how they considered that they were using the funds tofurther JRCT's charitable purposes, although the Commission didnote that JRCT had visited the charity and attended some Cageevents as part of the charity's monitoring process. TheCommission's conclusion was that these reporting requirements werenot stringent enough, especially considering that the charity wasfunding a non-charitable organisation.

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

A number of aspects of the Charity Commission's findings are ofreal note. Firstly, the public policy reasoning behind theinvestigations is fairly clear and (by and large)non-controversial. It is clear that it is in the public'sbest interest that funds provided to charities do not ultimatelyget allocated to non-charitable purposes. Thinking ofanalogous scenarios, it would cause a significant degree of loss ofpublic confidence in the charities sector if donations to a charityfor the prevention of poverty were instead allocated to a profitmaking organisation whose aims do not further the charitiesobjectives. However, whilst the principle is generallyagreeable the application of this principle may be a little moredifficult to resolve. In the case of Cage the issue appearsto be that there was no proof that the funds were used for solelycharitable purposes, rather than there being proof that it thegrant had been applied to non-charitable goals. The burden ofproof appears to be on the side of the charity, with the trusteeshaving a duty to ensure that the funds are properly and lawfullyspent. With this in mind, charities must take care to ensurethat they keep records and impose controls on any gifts provided toother charities and non-charitable bodies. For example, inallocating the grant a charity may be wise to specify exactly whatthe funds are to be used for.

Secondly, there is the slightly amorphous issue of "damage toreputation". As raised by JRCT, some charities have theirreputation grounded on supporting unpopular causes which are oftenneglected due to public perception. Charities must be free tosupport those causes which further their charitable ends. Inthe new draft guidelines regarding grant funding an organisationwhich isn't a charity, the Charity Commission states that thetrustees should be assured that "the organisation is suitablefor your charity to work with and fund" and this involvesassessing the organisations "reputation". Thereseems to be a distinct lack of guidance as to what this actuallyinvolves.

Following the completion of the Charity Commission investigationin 2014, the Charity Commission requested (demanded?) that JRCTcease funding Cage and, crucially, would grant assurances to theCharity Commission that they would not fund Cage "in theforeseeable future". Initially, JRCT refused to providesuch assurances, holding that this would fetter the discretion ofthe trustees to allocate their grants and the charity should befree to appoint charities to receive its grants based on thecurrent, not past circumstances. The Charity Commissioncontinued to pressure JRCT until JRCT provided the guarantee. In response, Cage brought a judicial review claim against theCharity Commission saying that it had acted outside of its powersby demanding such guarantees and assurances. The judicialreview proceedings were ultimately settled outside court, with theCharity Commission withdrawing its demand for assurances.

The result of this, however, is a great deal ofuncertainty. Yes, the Charity Commission has stepped backfrom being able to demand that charities do not apply funds tocertain bodies in the future. But the Charity Commission maystill investigate charities which it considers are undesirable andfail to further charitable goals, and there is no guidance as towhat criteria the Charity Commission will use in deciding onthis. The Commission will not fetter the future exercise oftrustees fiduciary powers under its general powers to give adviceand guidance, but it does not make it clear as to when theCommission will step in when it feels that there has been atransaction with an organisation liable to damage the reputation ofcharities.

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

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.

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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