Carrying out due diligence as part of the grant making process might seem like a time-wasting, box-ticking exercise. You may have spent some considerable time identifying the right recipient and scoping your project and, having invested so much time, you may just want to get started. In this article Eva Abeles, Senior Solicitor in IBB Solicitors Charities team, offers some practical tips.

IBB SOLICITORS CHARITIES TEAMLaw and best practice for grant-makers

DUE DILIGEnCE

THIS BRIEFInG nOTE IS OnLy InTEnDED TO PROVIDE GEnERAL GUIDAnCE AnD IS nOT InTEnDED TO COnSTITUTE LEGAL ADVICE.

1. assess the risk

The level and intensity of the due diligence process which is appropriate for each grant will generally differ depending on factors such as:

• The identity of the donee (and whether they are an individual or an organisation);

• the size and capacity of the donee;

• whether the donee works in a “high risk” country or area, such as a war zone, where there are high levels of corruption or in a region where terrorists or drugs barons are known to operate; and

• whether the grant poses any potential reputational risk for the grant-making charity.

Grant making charities are advised to create a simple risk-assessment checklist with a scoring system, to enable them to determine the level of due diligence appropriate for each grant (i.e. low, medium and high).

Having an appropriate and proportionate due diligence process in place should minimise the chance that you find out something untoward later on – that heart-stopping moment which is usually followed by a chorus of “if only…”. Whether it is unholy alliances with inappropriate political groupings or getting caught up in a charity scandal, due diligence can help to ensure that the grant is able to achieve its purpose.

Due diligence, however tedious it may seem, is one of the key components of effective and responsible grant-making. The Charity Commission has published guidance on what is expected of charities in Chapter 2 of its Compliance Toolkit: Due Diligence, Monitoring and Verification of End Use of Charitable Funds http://goo.gl/mfnWlO and trustees of grant-making charities are strongly advised to familiarise themselves with this document.

In this article. I have focused on three key areas for trustees to consider when designing an appropriate due diligence process for prospective donees.

IBB SOLICITORS CHARITIES TEAMDue diligence

2. translating risk level intO an apprOpriate level Of due diligence prOcess

The following steps are an example of a basic level of due diligence which trustees of grant-making charities should consider implementing before making a grant to any organisation:

• check that the organisation is a registered charity with the Charity Commission/OSCR/HMRC or, if the organisation is an overseas organisation, check the donee’s legal status and whether it is registered with any relevant regulator in its country (e.g. in the US, check if it is a 501(c)(iii));

• review the charity’s governing document and latest audited accounts for the organisation, to check that it is solvent and that there are no other obvious causes for concern;

• undertake an internet name check of the organisation using a search engine (e.g. google) to check whether there are any negative press stories about it or its trustees or (senior) employees acting improperly, fraudulently or any other cause for concern is raised; and

• ensure that the proposed project that you will be funding is exclusively charitable under English law, within the grant-making charity’s objects and within the donee organisation’s objects.

If the grant scores a medium or high risk on the charity’s risk matrix, further due diligence.

3. maintain recOrds Of due diligence undertaken

The results of the due diligence checks on the donee and its accounts should be kept in a file, together with a signed copy of the grant agreement, so that it can be provided to HMRC (or the Charity Commission) should they decide to inspect or query any grants made.

Producing a stream-lined and proportionate due diligence process may take time and effort to set-up but, in the long term, it will reap rewards. If done properly it should provide peace of mind to the trustees that the funds are being properly expended and that the charity is complying with its requirements under both charity and tax law. In the worst case scenario, it can be used to demonstrate to the various regulators that the trustees have properly discharged their duties.

IBB SOLICITORS CHARITIES TEAMDue diligence

If you or your Trustees would like to talk in more detail about adapting or creating your grant making strategy and related procedures, please contact:

Eva Abeles, Senior solicitor, IBB Solicitors Charities team01895 207964 eva.abeles@ibblaw.co.uk

THIS BRIEFInG nOTE IS OnLy InTEnDED TO PROVIDE GEnERAL GUIDAnCE AnD IS nOT InTEnDED TO COnSTITUTE LEGAL ADVICE.

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