Covid-19

Accounting & Finance

Charities and Banks – A difficult relationship

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Banks are the most important stakeholder for charities with international operations. The relief they provide saves lives and protects dignity of beneficiaries in the most remote and desperate places worldwide. However, they can do this properly only when the banks allow them to do so. The role of banks is often misunderstood – is it a regulator? is it an evil business? is it a money transfer agent? or is it a government spy? The answer is No, it can be all of that and more. The role of banks is often misunderstood – is it a regulator? is it an evil business? is it a money transfer agent? or is it a government spy? The answer is No, it can be all of that and more. Banks are private or public limited businesses and have all the pressures a business has – Yes, they can go bust and as we saw during the 1990s banking crisis, size did not matter. The failed banks had an effect of destroying livelihoods and dreams of many. We live in a digital world; no activity be it a noble or a criminal can exist without it. ALL use banks and the banks then suddenly become the conduits in promoting the good and the bad – this is where the government regulation comes in, mainly aimed at stopping the bad as defined by the government and backed by hefty penalty regimes and licenses. To stop the bad and to avoid penalties, the banks adjust their business practices. Each bank will have its own risk appetite, and this will dictate how they manage their customers, be it a business or a charity. International charities can be a risky business for banks as they can and have been used to launder money to fund terrorist activities, evade taxes and used to hide personal wealth. International charities can be a risky business for banks as they can and have been used to launder money to fund terrorist activities, evade taxes and used to hide personal wealth. Banks design their systems to pick up the bad and money laundering – these systems are often sophisticated and based on artificial intelligence (AI) reflecting decades of banking transactional behavior. To ensure business and commercial conflicts are managed by banks, many banks have in recent years centralised their anti money laundering checks and related decision making. As a consequence, local bank managers and relationship managers no longer have a say or control like they had in the past. International money routes Another layer of complication for international charities is the international nature of bank transfers. In between the charity’s own bank and the bank receiving funds in another country, there are different intermediary banks subject to different regulatory regimes. Each banking side (i.e. sending and receiving) does not necessarily control the banks in between. International transfers are only made possible when the intermediary banks allow them. To understand this point, staying within your own country, we don’t need visa or custom and bag checks, however travelling outside the country, we are subject to all sorts of checks and regulations and depending on what passport you hold, your treatment will differ. This is also the case with international bank transfers, like roads and flight paths there are various international money transfer routes with different intermediary banks in between. Each route is subject to its own compliance regime, regulator and political sanction regime. It is in this context of money laundering risks, international charities can struggle to open a bank account, transfer money internationally or in extreme cases have their accounts closed (de-risked) with no recourse or remedy. I see this too often. In my opinion, this necessarily is not because of a personal, an anti-charity or an anti faith agenda by the banks. It’s often a simple matter of compliance to anti-money laundering rules set by regulators and political governments. Know Your Clients (KYC) Banks need to update their systems with KYC (Know Your Client) details and below are the three main questions that they need to answer for money coming in and going out the banks: Who is donating to the charity? Does the charity itself know and make checks to ensure this is not dirty money? Who is the money transferred to? Is the bank account receiving money owned and controlled by a locally registered charity that has the permission to receive the monies by the local government or regulator? The money that is being transferred to a country, project or beneficiary – are there any sanction implications? Once the money is in the banking system and transferred abroad, the bank becomes a facilitator, so they need to know and be satisfied that these questions can be answered. Many times, charities fail to understand the importance of these questions and often lack the policies, systems and processes that can help them answer the banking concerns. In the banking world, the banks do not wait for charities to develop their system, they expect them to have all the answers before any money is put into the banking system – Banks are businesses and take a business approach to due diligence and anti-money laundering checks. If the bank feels the charity business is more risk than benefit in commercial terms, then it will simply fail the transactions or de-risk the charity. Banks are not obliged to give their custom to charities. The impact of the pandemic – worst for charities The pandemic has had the effect of escalating the move to a cashless economy. Government Covid19 grants required businesses to have bank accounts, many small businesses did not. All this created a significant backlog in banks for business accounts. With staff shortages, working from home, closed bank branches and fewer staff, this all together has compounded the issue for charities specifically. Unfortunately, it seems the banks have put charities way down down in the priority order. What was cumbersome and difficult in normal times has become impossible after the pandemic and

Media & Insights

Webinar to simplify Covid19 Grants and Loans

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  Update on Q&A Bounce Bank Loans and Charities The condition for having more than 50% of the Business income from its trading activity does not apply to charities including Mosques.   Rental Income Rental income is generally classed as non trading income, being investment income. For Bounce back loan purposes this may not be classed as trading activity.   Webinar Speakers Nasir Rafiq BA FCA (Founder and Director @Dua Governance Chartered Accountant)   He is a widely experienced Chartered Accountant with over 20 years of professional experience. He specialises in helping organisations improve their financial governance and performance. He works with all size charities and businesses.   He graduated in Business Economics from University of Leicester and then qualified as a Chartered Accountant (ICAEW) with KPMG (UK). Having worked with PwC (UK) and KPMG (UK) for over seven years in the public sector, he later joined the world’s largest contract catering company, Compass Group PLC (FTSE 100). In his role as a Group Internal Auditor, he worked in the Middle East, South East Asia and Europe.   Nasir also worked as a Director and an Associate Partner at a Top 20 Accountancy firm in UK, leading the firms Business Governance Advisory service nationally covering the charity and business sectors.

Media & Insights

Webinar: Furlough is Changing from 1 July. Is your Mosque / Charity ready

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  Webinar Speakers Nasir Rafiq BA, FCA (Found Director @Dua Governance) Nasir is a widely experienced Chartered Accountant and an expert in Financial Governance. He has extensive experience of working with charities of all sizes. He also advises many small to medium size businesses. During the lock down crisis he has been writing blogs on www.duathoughts.com and supporting many charities as they responded to the crisis.   Omar Rashid MCIPD (Director @The HR Dept) Omar is CIPD qualified HR professional with widespread generalist and strategic experience. With a proven ability to work with senior managers to influence and integrate HR best practice into overall operational strategy. Omar has been working with charities and business during the lock down crisis, helping them to respond professionally and effectively.

Community, Governance

Governance – When it goes pear shaped

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Dominic Cummings, the former senior strategy advisor to the then newly elected Prime Minster Boris Johnson was at the heart of government when the Covid 19 crisis folded and was privy to all that went on. After being forced to leave government, he appeared before the MPs committee on 26 May 2021 to answer questions on how government responded to the Covid19 crisis, this was a fascinating and a shocking viewing. This reminded me of issues I regularly experience in charity and business organisations. I have never been a fan of the politics of Dominic Cummings but his fascinating insight and views on how the government machine worked really hit a nerve. He had many golden nuggets to share for those that understand the practicality of good governance in large and complex organisations. In crisis the cracks are all laid bare.  In this blog, I will share some of these golden nuggets: 1. The role of corporate planning Yes, its important to have crisis management plans and risk registers. These should be regularly tested. A government can have all that in place at department level, however this is still not effective unless there is a central plan that brings it all together.  In my line of work, often I see a silo working culture in large organisations. In this culture, staff in each department and division become inward looking and start to tick the box for their own sakes. They do not realise that when the organisation hits a crisis, it is not the department plans that matter anymore – the plan has to make sense in the context of corporate priorities and defense, led by the central leadership. In my line of work, often I see a silo working culture in large organisations. Organisations that often have an effective corporate strategy and plan backed by a corporate risk register are the ones that ensure work done at individual and department level is most effective for the wider organisation, its stakeholders and its beneficiaries. There is no point of having a star performing individual or department, if it does not save the overall organisation from sinking. There is no point of having a star performing individual or department, if it does not save the overall organisation from sinking. 2. Decision making in crisis Cummings in his appearance talked about finger pointing of key roles and government departments at each other. He spoke about some great work and talent at junior levels that were being ignored. All this accumulated to a culture of chaos, as the government formulated a response to the pandemic. In normal times, large and complex organisations can have conflicting priorities and policies between departments and official positions. However, in a crisis these can become a hurdle and hold back when there is culture of silo working. The one strong leader needs to become the pilot taking over the reins while switching off the auto pilot. It is at these times; the one strong leader needs to become the pilot taking over the reins while switching off the auto pilot. Those that have the titles may no longer be suitable anymore – others may need to be upgraded to speed up the decision making. Policies that governed the organisation in normal times, may now need to be flexed, removing red tape to create breathing space. All this is needed to respond to the crisis and to save the ship.   Consultation for decision making is good but it is a means to achieve a greater good not the end goal. Consultation should be meaningful in a crisis, not just for sake of it to please individual egos. The leader and the wider executive may be appointed through a robust and fair recruitment process – these are for normal times. When the crisis hits the fan, the leader is expected to rise to the challenge taking difficult decisions and making most of the tools at his / her disposal. There is no time for hiding behind or blaming others. An important consideration for those that appoint leaders and CEOs is this question: “Does this leader have the ability to steer the ship in a crisis”. Such focus can have an effect of changing the selection criteria and the value of the leader to the organisation. The leader must be a leader for all times, not just for the happy times. 3. Data does not float in air Having worked on data quality audits in the NHS and local government, I recognise the mechanism by which data is generated and checked. Data is not born from thin air, it requires fit for purpose systems, people and infrastructure. The use of data for normal times can be different from its use in abnormal times. To make the data available in abnormal times, it is not always easy to train people, install systems and infrastructure at short notice – these changes require time and investment. In my experience, organisations that invest in their IT and data infrastructure in good times are the ones that have readily available information to take the right decisions at the right time in a crisis as well as normal times. Often organisation neglect the value of investing for the bad times and end up “stop” and “searching” for solutions during a crisis – this is the worst time for investing. Often organisation neglect the value of investing for the bad times and end up “stop” and “searching” for solutions during a crisis – this is the worst time for investing. A good leader needs to be able to “see” to navigate through the storm, using the tools at his / her disposal. This is only possible with advance planning and investing. 4. Be careful on who your advisor is   A strong leader will attract strong advisors. The leader will respect them and will know how and when to use their advice, maxmising their value to the whole organisation. Whereas weak leaders either disrespect their advisors

Accounting & Finance

Stress testing of the 20 large Muslim charities in UK

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Ramadan this year will be like no other Ramadan before it. The virus lockdown will mean that there will be no prayers in the Mosques or community iftars (opening of the fast). Ramadan will be at home with family. Ramadan is also a month when Muslims give their Zakat and increase their Sadaqa donations. Ramadan becomes a peak and most busy period for Muslim charities to raise funds, especially those charities that have international relief operations. They raise funds in UK to deliver projects abroad. The fundraising planning for Ramadan starts three months in advance and the full year’s income’ depends on the funds raised during Ramadan. The lockdown this year during Ramadan will deprive the Muslim charities from carrying out many of their planned activities. The story of 20 Muslim charities Each year these charities collectively raise Zakat and Sadaqa monies for emergencies. This aid saves lives by providing shelter and food when local governments often fail to do so. They provide regular support to more than 100,000 orphans living in poverty. These orphans rely on this support for a better and secure future. Each Ramadan millions of food packs are distributed worldwide and to coincide with the Hajj ritual hundreds of thousands of Qurbani sacrifices are carried out and the resulting meat is distributed to the most in need and often in the the most remote and hard to reach places. In order to assess the impact of the lockdown on Muslim charities working in the international relief sector, I reviewed the latest submitted audited annual accounts of 20 mainstream Muslim charities. My objectives were to assess the following: Total income raised for International relief and how much is related to UK donors. Total staff employed and the total wage bill. The average liquidity of reserves and the ability of these charities to spend without selling assets or relying on debtors. The average level of unrestricted funds that that these charities held and the flexibility these charities had in responding to the economic downturn. The table below lists the 20 selected Muslim charities in alphabetical order. These 20 mainstream charities are responsible for a significant portion of the funds donated by the Muslim UK donor. They operate a similar business model and face similar risks and challenges. Their combined financial position can give a good indicator on the potential issues the Muslim charity sector is set to face due to the expected and forecasted economic downturn. I reviewed each of the accounts and took an average of two years – these latest accounts covered mostly the year 2018. I noticed some issues that made the comparison and the assessment challenging. So, I had to use my own professional judgement and experience to moderate the numbers so that the findings were meaningful and relevant. Below are the issues that I noted during my review of these accounts. 1. Accounts show historical position more than 12 months old Often the accounts are submitted nearer the deadline which is 9-10 months after the accounting year-end. As a result, the reported numbers represent figures that may be more than 12 months old. International relief is a fast paced sector – numbers that showed the position and performance 12 months ago may no longer be relevant. Its important International relief charities work to submit their accounts within six months after the accounting year-end. 2. Income breakdowns are not sufficiently broken down Income disclosures do not provide enough breakdown to assess the type of income and the geography it relates to. This causes issues when comparing accounts. Different types of income attract a different cost and operating model. 3. Understatement of fundraising costs Some accounts either understated their cost of fundraising by allocating most of their back-office operations to charitable activities or did not disclose them at all. Within the Muslim charity sector, the slogan of 100% donation is heavily used and it may be this is resulting in charities to understate their cost of fundraising. Although this approach may suit a certain marketing narrative, it has an effect of hiding costs and the opportunity to control such costs. You cannot fix what you can’t see. 4. Large charity size effect Islamic Relief Worldwide (IRW) reported income was £127m, the next largest Muslim charity had reported income of less than £40m. This is important to note because if IRW is considered in a similar manner to other charities then what happens at IRW can skew the averages derived from the selected sample that includes IRW. Therefore, it is important to review the averages with and without IRW to ensure the averages were meaningful and relevant. Findings – the impact of the lockdown After reviewing the 20 accounts and moderating to ensure they were comparable, my findings are as follows: I – Income – £370m raised annually of which around £80m raised in Ramadan In the last reported period these 20 charities raised a staggering sum of £370m during a 12-month period. The UK donations were £225m (61%) of this total raised. This balance included gift aid from HMRC and also included gift in kind income of around £25m – these are goods donated to charities, mainly medical from USA and food from various global Institutions. It is estimated that these charities raised around £80m (35%) of their income during the month of Ramadan in UK. Due to the lockdown this part of the income is at risk. Lockdown impact on Ramadan income Due to the lockdown these charities may not be able to raise funds from the community through Events, bucket collections or within Mosques – this will deprive them from those donors that traditionally either gave cash or pledged money at Events. The economic uncertainty, 20% salary decrease of furlough employees and a significant drop in self-employed and cash business income can have an impact of reducing the Ramadan income from the expected levels or the levels raised in the last reported accounts. If the Ramadan income drops by 50%, this can

Accounting & Finance

Govt support for the Self Employed

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My initial thoughts on the support for the self-employed: 1. You are eligible only if your self-assessment profits were below £50k and there is monthly limit of £2,500 – many will fall into this bracket which is good news. 2. If you have not been declaring your full income in your self-assessments, basically avoiding tax then you have a problem. I can see a large number falling victim to this. 3. HMRC will use your past three year self-assessment, being 2016-17, 2017-18 and 2018-19 to work out the average monthly income based on your average taxable profits. This will be done by HMRC. 4. HMRC will then pay 80% of this average monthly income as a grant directly to the self-employed bank account – this is not a loan and nobody will be required to pay this back. 5. People do not need to contact HMRC now, if they are eligible HMRC will contact them directly. I can see issues with many being missed due to wrong contact details. Please update your HMRC contact details. 6. The HMRC grant is taxable and you will be paying tax on this in your future self-assessments. This income should be treated same as sales in substance. 7. I don’t think there will be any VAT implications – many will not be VAT registered due to being below the threshold. 8. HMRC is sorting its house out so needs time to process this all, therefore they will make the payment in June 2020 for the past three months – the self-employed will have to survive from their own funds until then – this can create significant issues for many in the short term. 9. Those that played clever and set up companies to pay themselves dividends to save National Insurance, will now lose out as dividends are not covered by this scheme. They can only apply 80% of the minimum salary they were taking, which for many was equal to their personal allowance. All in all those that declared all their income during the past 3 years will get something, be it three months late. The Government has also delayed tax payments to help cashflow. Will this support be enough, time will tell – I am not sure. If anybody needs to pick my mind, send me a message.

Accounting & Finance

The reality of Furlough employees and Government support

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Everyone is talking about Furlough employees and the fact the Government will fund 80% of the salaries of such employees from 1 March 2020. Many think this Government scheme applies to ALL employees – this is not so and there is a small print. The Government is not compensating organisations for loss of income. These organisations can be mosques, charities or businesses – the purpose of this funding is not that and the Government will not compensate for loss of income. As a result of the current lockdown, organisations suddenly had staff that could not work anymore and businesses were at risk of going down under. The immediate response of businesses would have been to let staff go. This is when the Government stepped in and said that they will fund 80% of such staff that either have been made redundant or at risk of being made redundant. This Government support is so that staff are NOT made redundant and kept on the business or charity payroll. The Government said to treat such employees on leave “Furlough” and these employees MUST NOT work at all for their employers. If they do work, be it part time or with reduced wages that implies that they were not at risk of losing their jobs, so such employees are not covered by the scheme. In practice many employees will fall in this situation as businesses and charities will do whatever to keep the ball rolling. The Government expects each employer to determine the employees that are or should be on leave for this lock down (i.e. 3 weeks) and declare them as Furlough employees by formally writing to them. These employees must not then work for that employer during this period. Although this scheme keeps staff at risk employed, it does nothing to address the loss of income or donations in the short term or long term. The effected organisations must develop their own plans to address the impact of this interruption. The Government has asked the banks to give loans to businesses or charities, backed by Government. The banks being banks have started to pick and choose. They are applying their normal due diligence and at times are requesting personal guarantees. Not sure how far this will address the issue in its current state. There is some support for small cash donations from Local Councils – this is focused on small retail businesses and may take time to get through. I sense turbulent times and it is imperative that organisations, be it large or small, plan ahead to weather this perfect storm.

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