Does your charity send money overseas? If so, your staff and trustees need to be aware of the responsibilities and potential risks associated with such transfers.
Pete Marfleet is a verified ExpensePlus consultant and bookkeeper. In this blog, he highlights the potential risks for charities when sending money overseas. By being aware of these risks you can avoid the pitfalls associated with sending money abroad, especially to developing nations.
Charities sending money overseas
Many charities want to assist people in need overseas, by responding quickly to a crisis. However, you can put your charity at risk when you send financial help without appropriately considering the legal, practical, and financial risks involved.
Here are 4 pitfalls which every charity finance team and trustee should be aware of, and some suggestions for how to avoid them.
Pitfall #1 – Lack of ‘reasonable’ audit trail when sending money overseas
If a UK charity sends money abroad and subsequently this money is considered to have been spent on non-charitable aims, then HMRC may hold the charity liable for tax on the funds spent.
Stewardship writes of a UK church falling into this trap. They had sent £9,000 to a church in Nigeria but had failed to properly document how it was spent. HMRC deemed that they had not done enough to sufficiently show that the money had been spent ‘charitably’. As a result, the church had to pay a £3,000 tax bill.
Apart from the obvious financial cost, it’s likely in this scenario that the trustees will also have broken trust. This opens up other legislative and reputational problems for the charity.
Consider this: if HMRC challenged your charity regarding money sent abroad, are you able to provide sufficiently documented evidence of funds spent to the HMRC and the Charity Commission?
Evidence for your money’s audit trail
It can be a challenge to gather evidence of charitable expenditure when working with partners in different countries. They may have different practices when it comes to handling money. Therefore, it requires sensitivity to different cultural expectations. What one culture considers a normal legal requirement can seem unnecessary and irrelevant in another culture. This makes it even more important for UK charities to have an informed approach when considering sending money abroad.
These two principles guard against a lack of audit trail when planning transfers of funds overseas:
- Know who you are dealing with; and
- Adopt a risk-based approach.
1. Know who you are dealing with when sending money overseas
Can you show that you have a relationship with both the donor(s) and the people receiving the money? The better you know them, the greater the trust, and the easier it is to document the audit trail. In addition, it’s less likely the funds will be given or used for illegal or non-charitable purposes.
Trustees should be able to answer and provide sufficient evidence for the following questions from HMRC and the Charity Commission about the intended recipient of the funds:
- Who they are (e.g. individual or organisation, regulated NGO or just a ‘group’);
- What work they are involved in;
- What they intend to do with the donation or grant received; and
- How the intended use meets your own charitable purposes.
Example: Over a 3-year period, my finance team of a UK church developed a relationship with a church pastor in Kenya. Our church wanted to support an initiative by the Kenyan church to assist people in the community to help themselves out of poverty. This was also a charitable aim of our church. The initiative aimed to provide affordable loan funding to help individuals start micro businesses. It seemed well-planned and our UK church wanted to contribute to their microloan fund. Considering the first principle, ‘know who you are dealing with’, we could clearly document that the donors were trusted members of our church. The recipient, the Kenyan church pastor, was someone we knew for a number of years and had met on several occasions. Finally, we asked a trusted independent 3rd party, who was in the country, to verify the church’s plans for the project. We concluded we could document answers to the 4 questions above. We could be confident about the first principle and say, ‘we know who we are dealing with’.
2. Adopt a risk-based approach to sending money overseas
This second principle recognises that some ways of giving and using funds carry greater risks than others. Where there is low risk, less documentation detail is expected. Where there is a higher risk, this requires a more in-depth level of documentation. So how do you calculate risk?
Factors that would increase the risk include:
- the intended donor or recipient is a new relationship to your charity;
- the overseas region to which you intend to send the money is prone to corruption or has a less-developed regulatory framework than the UK;
- the amount of money you are sending is significant or is increasing;
- the gift is for general purposes rather than a specific project. The risk being the ability to sufficiently demonstrate that the funds, likely calculated within other local ‘general funds’, used for charitable purposes.
Example continued: As we considered sending the money to the church in Kenya, these questions helped us understand the risks. While the risks were not ‘low’ they were certainly not ‘high’ enough to prevent us from sending the money. The recipient was not a new relationship to the charity (low risk). Kenya is not without its corruption issues (higher risk). We were sending a one-off payment of £2,000 (not a significant amount for the charity involved – low risk). It was for a specific project for which we could ‘reasonably’ expect to track progress and expenditure (low risk). We concluded that we should send the money, but we would need to have a higher level of audit trail because of the corruption risks.
What is considered a reasonable audit trail?
It’s worth noting that UK charity trustees must be able to prove that they took ‘reasonable’ steps to meet HMRC’s criteria for how charity funds have been used. Section 9 of HMRC guidance on non-charitable expenditure clearly states that it’s not enough to have a paper audit trail of how the money was spent.
With high risk comes high expectation. Other evidence, such as pictures, can back up paper records.
Example continued: After the funds were sent to the pastor in Kenya, he provided us with a pre-agreed paper audit trail. It included a grant agreement, records of funds received into their official bank account, details of how it was divided, recipients’ names and terms of the microloans. We asked for additional evidence and received before and after photos of the projects being funded. We also planned to use an existing opportunity for one of our leaders to visit the church in Kenya. Therefore, we could show the charity was making a reasonable assessment of how the funds were being used. Shortly after this, our church was audited by the bank about this transaction, including some in-depth questions. It was good practice for the sort of questions HMRC or the Charity Commission might have asked. Having followed the two principles above, we were able to easily reach for our documented evidence and satisfy the bank’s audit without any problems.
Stewardships’ Guide to churches making payments overseas is worth reading for a more in-depth guide on avoiding this first pitfall.
Pitfall #2 – Lack of policy and procedures for sending money overseas
Having a good policy for sending money overseas will help you ensure you have a sufficient audit trail. Having clear policies in place also helps take the stress out of decision-making, especially when an urgent decision is necessary. As a minimum, you should make sure your charity has the following financial policies. You also need to make sure your team understands how they relate to overseas payments:
- Financial controls policy
- Grant making policy
- Anti-money laundering policy
Pitfall #3 – Method of transfer for sending money overseas
So, imagine you’ve made a quick and good decision about sending money overseas in line with your charity’s policy. You’ve also planned your audit trail to satisfy HMRC and the Charity Commission requirements. Now, what is the best way to send the money?
Choosing the wrong method of transfer can result in high fees, delayed transactions, or falling foul of financial regulations.
All your transfer options will have different fees. You should also consider other factors like how quickly and easily you need to get the money transferred.
You may be able to use your main bank account, however, it may not be the cheapest option.
Another option is money transfer companies. However, be aware that companies like Wise or Revolut are sometimes reluctant to accept business account applications from charities wanting to move funds to developing nations, perhaps because they are subject to Anti Money Laundering checks.
One company that currently helps charities send money overseas is Convera. You should however be prepared for the detailed application process to satisfy their Anti Money Laundering checks.
Delayed transactions & regulations
If you are considering using a transfer solution outside of the formal banking system, make sure you’re aware of the guidance given in Chapter 4, Part 5 of the Charity Commissions Compliance Toolkit here. This is particularly important if you are thinking of using a Money Service Business, another charity or an NGO to transfer the funds for you.
Example: I recently heard of a charity which needed to send a large amount of money overseas urgently to respond to a crisis. The transaction was set up through the charity’s main bank account. The transfer got ‘lost’ in the internal workings of the bank for over 3 weeks which had a substantial negative impact on the ground. Therefore, if you can foresee your charity needing to move money urgently it might be worth considering setting up and having a transfer method in place (e.g. Convera) so that it’s ready for whenever you need it.
In exceptional circumstances, the urgency and geopolitical situation of a crisis may demand a fund transfer via physical cash being carried to your partners on the ground. This is obviously a very high-risk but sometimes unavoidable solution. If you have to do this, make sure you’re aware of regulations and guidance from the Charity Commission on this page, especially this checklist for Physical Cash Transfers. Note the requirement to declare cash being taken out of the country (currently above a threshold of 10,000 euros).
Pitfall #4 – Conduit Funding
Finally, it’s worth mentioning the risk of conduit funding when sending money overseas. Conduit funding is money that is channelled through a charity but doesn’t actually belong to the charity. To learn more about conduit funding, and the risk it exposes the charity to, read this blog post.
Pete Marfleet is a verified ExpensePlus consultant and bookkeeper. He offers a range of cost-effective services, from outsourced bookkeeping and ExpensePlus training, to project managing the migration of your current accounting systems to ExpensePlus. Don’t hesitate to reach out to Pete at www.pdmarfleet.co.uk for more information.