Why knowing your donor and fund compliance go hand in hand

Those working in the charitable and not-for-profit sector will know that ensuring compliance is not easy. In fact, it can be enormously complex and a seemingly impossible task to trace the source of every donation.

Sheldon Gillmore

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According to The Charity Commission, the ultimate responsibility for fund management sits with a charity’s trustees, who should ensure that funds are properly managed and not misused. This boils down to due diligence and performing checks on any money coming in or out of the organisation, appropriating restricted and unrestricted funds to their relevant purpose.

Basically, trustees have to ensure that any funds received by the charity are clean and legal, used properly and end up where intended. However, without any oversight of your funding’s origin, this is nigh impossible.

This is where the three principles of charitable compliance come in.

The three principles of charitable due diligence

According to the Charity Commission for England and Wales, these are:

  • Know your donor
  • Know your beneficiaries
  • Know your partner

Your beneficiaries and partners will depend on your organisation; for example, not every not-for-profit operates solely for the benefit of a closed group of beneficiaries (although some will).

However, every charity has donors, and it’s important to know where their donations come from. Is it cash or a grant? Was it donated by an individual or a larger organisation? If you don’t know the basic facts, you won’t be able to show that you practice due diligence. You need to know your donor.

In fact, it’s a legal requirement to have a robust record of your incoming finance, as stated here in the Charity Commission for England and Wales compliance toolkit:

“As an absolute minimum, they [charities] must keep proper and adequate financial records for both the receipt and use of funds and audit trails of decisions”

Naturally, financial transparency is essential and at the core of compliance. This doesn’t mean that donations can’t be anonymous, but you need to be on the lookout for anything irregular.

Financial transparency has additional benefits for charities: it encourages further donations. People love to see that their money is making a difference, such as through your annual reports.

Using technology to spot suspicious donations

The best way to unpick a complex financial situation is with robust reporting. Powerful financial and reporting systems are invaluable; in fact, government guidelines state that you must take every precaution necessary to prevent fraudulent or illegal donations, so adopting this software is well within the remit of charitable organisations.

In the immediate future, artificial intelligence may even be able to remove some of this burden from you, sifting through endless receipts so you don’t have to.

For now, robust reporting software helps you to spot the anomalies you may otherwise miss, helping you to ensure compliance and get to know your donor – even if they’re anonymous.

If you don’t yet know your donor, you can get started now with a free demonstration of PS Financials, a complete finance product suite for the third sector with robust reporting. Sign up for your free demo below.

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