The pandemic, the war in Ukraine, the cost of living. A lot has weighed upon charitable donations recently. Many charities have been struggling to survive as they are squeezed between lower income and higher costs.
Imagine then, a scenario in which a charity has overcome all these obstacles and raised funds they need, but suddenly loses access to them for no apparent reason.
Back in September 2023, the BBC Radio 4 programme, Moneybox, featured a discussion about charities whose accounts had been frozen or closed, leaving them without access to their funds – a process known as ‘debanking’.
At one small charity, the senior leadership team paid over £40,000 of their own funds to keep operations going, after a High Street bank suddenly – without prior notice – suspended the charity’s account, trapping funds indefinitely.
They are not alone. One survey revealed that more that one in 20 charities [SW1] [AMH2] had experienced account freezes or been blocked out of their accounts over the past year.
This isn’t just an administrative nightmare. There is a real cost to real lives: without access to funds, charities are left in limbo, unable to support those in need – often at a time of crisis. In some extreme cases, trustees have used their personal accounts to keep services running[AMH3] .
A lot of these issues stem from the fact that banks don’t really understand how charities operate, and the contexts in which they work. But we can’t just lay this at the door of the banks. They are operating in a particular regulatory environment, which is – unintentionally – [SW4] [AMH5] the source of the problem.
Banks have to follow anti-fraud, anti-money laundering, and anti-terrorism regulations. And with good reason too. According to UK Finance’s 2023 report, UK customers lost a combined £1.2 billion across all fraud types last year. And the last thing we want is for criminals to be able to launder their loot with impunity, or for terrorists to get funding for their awful schemes. These regulations are designed to protect everyone, and banks are becoming more robust in highlighting transactions that don’t fit a “normal” spending pattern.
The problem is that these regulations are set up for individuals and for businesses. They are not set up for charities and consequently, it is really easy for a charity to fall outside what banks consider “normal”. Think of a business that displayed the characteristics below, and you can see why they could bee raising red flags:
- A director is based overseas, and is apparently uncontactable.
- Another director has a criminal record.
- The organisation gets almost all its income in a single lump sum, perhaps from overseas, and maybe in a foreign currency.
- The organisation spends almost all of this income in one big block, by transferring it to another organisation in a “grey” country – perhaps due to sanctions, or possibly [SW6] [AMH7] one with human rights issues – and that partner is hard to verify.
- The payment is in a currency that the bank considers ‘unusual’.
A business that did this would rightly be seen a suspicious. But now imagine you’re a human rights charity, and you work to help protect political prisoners overseas. You are going to want directors who are knowledgeable on the subject. One of them might be a campaigner, who needs to be on the ground in a difficult country to understand the situation in real-time. Another might well have been a political prisoner, and been convicted of a crime that wouldn’t exist in the UK. You might get your funding in a single block grant from an overseas donor, and you may be working with a partner organisation in that country, because that is where the need is. And of course, that partner may need to work anonymously to not fall foul of the government there. From a charity’s perspective, it all makes perfect sense.
But the regulations don’t allow for this nuance. This charity would need to have a really good relationship with their bank to allow them to operate. But this is usually impossible, as most banks only have relationship managers for organisations with high levels of turnover – some need nearly £1m a year for this. The vast majority of charities, however, have incomes of less than £100,000.
Thus, the result is inevitable. In 2021-2022, UK banks closed 343,000 accounts, as they couldn’t meet the standards set by the regulations. Not all of these are charities, of course. But this is the scale of the problem we are facing.
This is if charities can open a bank account in the first place. Part of the “Know Your Customer” checks that banks undertake is to confirm the identity of directors. The directors of charities are the Board of Trustees, because they are charged with the legal responsibility for the organisation. So, if you’re the human rights charity above, the bank would need to confirm the identity of the overseas trustee you can’t contact because they are campaigning on the ground, and the one with the overseas criminal record because they’d been a political prisoner. If you manage to get through the tortuous six-month process, you might just be able to open an account. Or, they might just say no.
The frustrating thing is that the bank is often checking the wrong people. Trustees are, by and large, non-executive roles in a lot of charities. Day-to-day powers are delegated to the CEO and senior management. They are the ones who decide where the funds go. The trustees oversee the general strategy, not the minutiae. But the regulations still say that the banks have to scrutinise the trustees.
To add insult to injury, many charities who have been victims of debanking are not even given a reason for their account closures. This is often one of the most annoying parts about the whole thing. But again, this is down to the law, not the banks. Tipping off, where a bank warns someone that they might be under investigation for something, is a criminal offence – and again with good reason, because we don’t want criminals disappearing on us. But this is a blunt instrument applied to all circumstances where things become high risk for the bank.
We’ve come up with a temporary solution. As a professional accountancy firm, we can open up client accounts for charities, where the account is in our name, but the funds are completely ringfenced for the use of the charity, and otherwise it acts like a normal bank account. We can do this because we have an agreement with our bank that we do the checks, and we can take the time to be a lot more nuanced. We are still robust with our checks, but we know charities, and we understand what they do.
But this is no more than a sticking plaster. The ultimate solution is to revisit the regulations, and make them much more charity-friendly. So that in the future, banks can meet charities on their own ground.
