Making grants to non-charitable organisations – The dangers and pitfalls that you need to be aware of
If your charity provides grants to non-charitable organisations, or intends to do so in the future, this article is for you.
Many charities pursue their purpose by providing grants to non-charitable organisations to fund certain programmes or projects. However, not all charities consider or manage the risks of doing so. What happens if the organisation doesn’t use the grant funding properly? What happens if the organisation is defunct or corrupt? What if a scandal effects the organisation and your charity is tied to it? These risks exist and it is the role and responsibility of the trustees to ensure these risks are mitigated.
Important Differences between Charities & Non-Charitable Organisations
To understand the risks associated with providing grants to non-charitable organisations, it is first necessary to understand the important differences between charities and non-charitable organisations.
Unlike charities, non-charitable organisations are not restricted by charitable purposes or public benefit. As a result, non-charitable organisations have the ability to do a lot of things that charities cannot. For example, they can:
- pay dividends to their shareholders;
- provide private benefit to stakeholders; and
- undertake activities that are aimed at non-charitable purposes.
On the other hand, charities are required to carry out activities in line with their charitable purpose for the public benefit. As a consequence, when providing grant funding, charities need to ensure the grant will only be used by non-charitable organisations to fund projects or activities that are intended to further the charity’s purpose for a public benefit. Significantly, if grant funding is used inappropriately by a non-charitable organisation, there is a risk that the charity might lose its charitable status. Therefore, it is crucial that charities and their trustees take steps to mitigate these risks.
We have summarised the key ways to do so below.
Before providing a non-charitable organisation with a grant, you want to make sure you have undertaken sufficient due diligence on the organisation. Depending on the circumstances, you may want to look at:
- The nature of the organisation (e.g. is it incorporated, who are its directors, where does it operate, what does its ordinary business entail).
- The financial stability of the organisation.
- Whether the organisation has undertaken similar projects or programmes in the past, and if so, whether they have been successful.
- The organisation’s mission statement and values.
- The organisation’s reputation.
- How decisions within the organisation are made.
There are many advantages to undertaking due diligence. It should help assure you and your co-trustees that:
- The organisation is genuine, reliable and competent to carry out the project or activity being funded.
- The organisation is suitable for your charity to work with and fund.
- You will be able to check and confirm that your charity’s funds have been properly used in line with its purposes.
Overall, the trustees of a charity need to be satisfied that awarding the grant is in the best interests of the charity. Due diligence provides an opportunity to expose any potential issues that trustees might have been otherwise unaware of. In this way, it is an extremely important undertaking as if the due diligence reveals concerns, the trustees may decide against awarding the grant to that specific organisation due to it not being in the charity’s best interests.
Trustees should ensure they record the findings of their due diligence and the reasons for choosing a particular organisation because if something goes wrong, the trustees may need to be able to explain and justify the decisions they made.
Charities should consider whether a policy should be adopted that outlines the due diligence requirements, especially if the charity often provides grants to organisations.
Once your charity has identified a suitable recipient of the grant, the next step is ensuring the grant will be governed by an appropriate agreement. This agreement should be in writing and should contain (amongst other things):
- A requirement for the organisation to only use the grant in specific ways, which must be in line with your charity’s purpose for the public benefit.
- A requirement for the organisation to account for how the funds have been used and report on the progress of the project/program.
- A requirement for the grant funds to be returned to the charity if the organisation fails to comply with the requirements of the agreement.
Failure to formalise a grant agreement can lead to misunderstandings around how the grant should be used, and may lead to the funding being misappropriated for non-charitable purposes. Therefore, it is of great importance that charities have written grant agreements that are properly executed by both the charity and the organisation.
Moreover, it is of importance to have a well-drafted grant agreement in place as the Charity Commission may request to see it to verify that funds are being used appropriately.
Once a grant is provided, monitoring should then take place as charities need to ensure that the grant is used for the purposes specified in the grant agreement. Monitoring can take a variety of forms and depending on the requirements in the grant agreement, may include (amongst other things):
- The organisation providing receipts showing how the grant was spent.
- The organisation providing photographic evidence of the project or programme funded by the grant.
- The organisation providing a report describing how the project or programme achieved the specific purpose.
- The charity visiting the organisation’s premises to witness the project or programme.
It is important for charities to carry out monitoring both to ensure legal compliance with their charitable purpose, but also to maintain the confidence of their donors.
If your charity needs help with its grant-giving policies, procedures or agreements, please reach out to our specialist charities team. We can help in a variety of ways, including by drafting your grant-related policies, drafting your due-diligence procedures, and preparing a template or bespoke grant agreement.
Please contact Katherine Pipe on firstname.lastname@example.org or call 020 3831 2666 to discuss your charity’s requiements.